UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

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

EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017March 31, 2018

OR

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

EXCHANGE ACT OF 1934

Commission File Number1-11758

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(Exact Name of Registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

  

1585 Broadway

New York, NY 10036

(Address of principal executive offices, including zip code)

  

36-3145972

(I.R.S. Employer Identification No.)

  

(212)761-4000

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer    ☒

  

Accelerated Filer  ☐

Non-Accelerated Filer       ☐

  

Smaller reporting company  ☐

(Do not check if a smaller reporting company)

  

Emerging growth company  ☐

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of July 31, 2017,April 30, 2018, there were 1,836,580,6911,770,260,439 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

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QUARTERLY REPORT ON FORM10-Q

For the quarter ended June 30, 2017March 31, 2018

 

Table of Contents Part  Item   Page 

Financial Information

  I        1 

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

      2    1 

Introduction

           1 

Executive Summary

           2 

Business Segments

           7 

Supplemental Financial Information and Disclosures

           18 

Accounting Development Updates

           18 

Critical Accounting Policies

           19 

Liquidity and Capital Resources

           19 

Quantitative and Qualitative Disclosures about Market Risk

      3    31 

Controls and Procedures

      4    41 

Report of Independent Registered Public Accounting Firm

           42 

Financial Statements

      1    43 

Consolidated Financial Statements and Notes

           43 

Consolidated Income Statements (Unaudited)

           43 

Consolidated Comprehensive Income Statements (Unaudited)

           44 

Consolidated Balance Sheets (Unaudited at June 30, 2017)

           45 

Consolidated Statements of Changes in Total Equity (Unaudited)

           46 

Consolidated Cash Flow Statements (Unaudited)

           47 

Notes to Consolidated Financial Statements (Unaudited)

           48 

   1. Introduction and Basis of Presentation

           48 

   2. Significant Accounting Policies

           49 

  3. Fair Values

           50 

   4. Derivative Instruments and Hedging Activities

           62 

  5. Investment Securities

           67 

  6. Collateralized Transactions

           71 

   7. Loans and Allowance for Credit Losses

           73 

  8. Equity Method Investments

           76 

  9. Deposits

           76 

10. Long-Term Borrowings and Other Secured Financings

           77 

11. Commitments, Guarantees and Contingencies

           77 

12. Variable Interest Entities and Securitization Activities

           82 

13. Regulatory Requirements

           85 

14. Total Equity

           87 

15. Earnings per Common Share

           89 

16. Interest Income and Interest Expense

           90 

17. Employee Benefit Plans

           90 

18. Income Taxes

           90 

19. Segment and Geographic Information

           91 

20. Subsequent Events

           92 

Financial Data Supplement (Unaudited)

           93 

Other Information

  II        96 

Legal Proceedings

      1    96 

Unregistered Sales of Equity Securities and Use of Proceeds

      2    98 

Exhibits

      6    98 

Signatures

           99 

Exhibit Index

           E-1 

Table of Contents

   Part    Item    Page 
Financial Information   I         1 
Management’s Discussion and Analysis of Financial Condition and Results of Operations   I    2    1 

Introduction

             1 

Executive Summary

             2 

Business Segments

             6 

Supplemental Financial Information and Disclosures

             14 

Accounting Development Updates

             15 

Critical Accounting Policies

             15 

Liquidity and Capital Resources

             15 
Quantitative and Qualitative Disclosures about Market Risk   I    3    29 
Report of Independent Registered Public Accounting Firm             39 
Financial Statements   I    1    40 
Consolidated Financial Statements and Notes             40 

Consolidated Income Statements (Unaudited)

             40 

Consolidated Comprehensive Income Statements (Unaudited)

             41 

Consolidated Balance Sheets (Unaudited at March 31, 2018)

             42 

Consolidated Statements of Changes in Total Equity (Unaudited)

             43 

Consolidated Cash Flow Statements (Unaudited)

             44 

Notes to Consolidated Financial Statements (Unaudited)

             45 

1. Introduction and Basis of Presentation

             45 

2. Significant Accounting Policies

             46 

3. Fair Values

             48 

4. Derivative Instruments and Hedging Activities

             57 

5. Investment Securities

             61 

6. Collateralized Transactions

             64 

7. Loans, Lending Commitments and Allowance for Credit Losses

             65 

8. Equity Method Investments

             67 

9. Deposits

             68 

10. Borrowings and Other Secured Financings

             68 

11. Commitments, Guarantees and Contingencies

             68 

12. Variable Interest Entities and Securitization Activities

             72 

13. Regulatory Requirements

             76 

14. Total Equity

             78 

15. Earnings per Common Share

             80 

16. Interest Income and Interest Expense

             80 

17. Employee Benefit Plans

             80 

18. Income Taxes

             81 

19. Segment and Geographic Information

             81 

20. Revenues from Contracts with Customers

             82 

21. Subsequent Events

             83 
Financial Data Supplement (Unaudited)             84 
Glossary of Common Acronyms             86 
Other Information   II         88 
Legal Proceedings   II    1    88 
Unregistered Sales of Equity Securities and Use of Proceeds   II    2    89 
Controls and Procedures   I    4    90 
Exhibits   II    6    90 
Exhibit Index             E-1 
Signatures             S-1 

 

i

Available Information

We file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission (the “SEC”).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 (the “Exchange(“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 Communication with the Board of Directors;

Policy Regarding Director Candidates Recommended by Shareholders;

Policy Regarding Corporate Political Activities;

Policy Regarding Shareholder Rights Plan;

Equity Ownership Commitment;

Code of Ethics and Business Conduct;

Code of Conduct;

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.

 

ii

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Financial Information

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

Introduction

 

Morgan Stanley a financial holding company, is a global financial services firm that maintains significant market positions in each of its business segments—Institutional Securities, Wealth Management and Investment Management. Morgan Stanley, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Unless the context otherwise requires, the terms “Morgan Stanley,” “Firm,” “us,” “we,”“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 definitions of certain acronyms used throughout thisForm 10-Q.

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 services include originating and/or purchasing corporate loans, commercial and residential mortgage lending, asset-backed lending, financing extended to equities and commodities customers, and loans to municipalities. Other servicesactivities include investmentinvestments 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, financial and wealth planning services, annuity and insurance products, credit and other lending 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 serviced 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” immediately preceding Part I, Item 1,Statements,” “Business—Competition” and “Business—Supervision and Regulation” in Part I, Item 1,Regulation,” “Risk Factors” in Part I, Item 1A of our Annual Report onthe 2017 Form10-K for the year ended December 31, 2016 (the “2016 Form10-K”) and “Liquidity and Capital Resources—Regulatory Requirements” herein.

 

 

  1  June 2017March 2018 Form 10-Q

Management’s Discussion and Analysis  LOGOLOGO

 

Executive Summary

Overview of Financial Results

Consolidated Results

Net Revenues

($ in millions)

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Net Income Applicable to Morgan Stanley

($ in millions)

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Earnings per Common Share1

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1.

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

We reported net revenues of $9,503$11,077 million in the three monthsquarter ended June 30, 2017March 31, 2018 (“current quarter,” or “2Q 2017”“1Q 2018”), compared with $8,909$9,745 million in the three monthsquarter ended June 30, 2016March 31, 2017 (“prior year quarter,” or “2Q 2016”“1Q 2017”). For the current quarter, net income applicable to Morgan Stanley was $1,757$2,668 million, or $0.87$1.45 per diluted common share, compared with $1,582$1,930 million, or $0.75$1.00 per diluted common share, in the prior year quarter.

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

Non-interest Expenses

($ in millions)

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Compensation and benefits expenses of $4,252$4,914 million in the current quarter and $8,718 million in the current year period increased 6% and 13%, respectively,10% from $4,015$4,466 million in the prior year quarter, and $7,698 million in the prior year period, primarily due to increases in discretionary incentive compensation driven mainly byacross segments, the formulaic payout to Wealth Management representatives linked to higher revenues and salaries, partially offset by a decrease in the fair value of investments to which certain deferred compensation plans are referenced.

•

Non-compensation expenses were $2,743 million in the current quarter compared with $2,471 million in the prior year quarter representing an 11% increase. This increase was primarily a result of higher volume-related expenses and the gross presentation of certain expenses due to the adoption of the accounting updateRevenue from Contracts with Customers (see Notes 2 and 20 to the financial statements for further information). These results were partially offset in the current quarter by the reversal of a portion of previously recorded provisions related to U.K. VAT matters.

 

 

June 2017March 2018 Form 10-Q  2  

Management’s Discussion and Analysis  LOGO

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

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

Expense Efficiency Ratio1

 

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

Return on Average Common Equity2

 

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Return on Average Tangible Common Equity2

 

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

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1.

year period. The annualized ROE was 8.3% in the prior year quarter and 7.2% in the prior year period (seeexpense efficiency ratio represents totalnon-interest expense as a percentage of net revenues.

2.

Represents anon-GAAP measure. See “SelectedNon-Generally Accepted Accounting Principles(“Non-GAAP”)Non-GAAP Financial Information” herein).herein.

Business Segment Results

Net Revenues by Segment1, 2

($ in millions)

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3June 2017 Form 10-Q

Management’s Discussion and AnalysisLOGO

Net Income Applicable to Morgan Stanley by Segment2,1, 3

($ in millions)

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1.

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

2.

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

2.

The total amount of Net Revenues by Segment also includes intersegment eliminations of $(115) million and $(74) million in the current quarter and prior year quarter, respectively.

3.

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

 

Institutional Securities net revenues of $4,762$6,100 million in the current quarter and $9,914 million in the current year period increased 4%18% from the prior year quarter, and increased 20% from the prior year period. The current quarter results primarily reflectedreflecting higher revenues from underwriting and strength in equity sales and trading. The current year period results primarily reflected higher revenues from fixed income sales and trading and underwriting.Investment banking revenues across all regions.

 

Wealth Management net revenues of $4,151$4,374 million in the current quarter and $8,209 million in the current year period increased 9%8% from the prior year quarter, and increased 10% from the prior year period. The currentprimarily reflecting growth in Asset management revenues.

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

 

Investment Management net revenues of $665$718 million in the current quarter and $1,274 million in the current year period increased 14%18% from the prior year quarter, and increased 20%primarily reflecting higher revenues from the prior year period. The current quarter results primarily reflected higher investment gains and carried interest and growth in asset management fee revenues. Current year period results primarily reflected investment gains compared with losses in the prior year period and positive carried interest in the current year period.Asset management.

3March 2018 Form 10-Q

Management’s Discussion and AnalysisLOGO

Net Revenues by Region1

($ in millions)

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EMEA—Europe, Middle East and Africa

1.

For a discussion of how the geographic breakdown for net revenues is determined, see Note 2119 to the consolidated financial statements in Item 8 of the 2016 Form10-K.statements.

June 2017 Form 10-Q4

Management’s Discussion and AnalysisLOGO

Selected Financial Information and Other Statistical Data

 

 Three Months Ended
June 30,		 Six Months Ended
June 30,		   Three Months Ended
March 31,		 
$ in millions 2017 2016 2017 2016       2018           2017     

Income from continuing operations applicable to Morgan Stanley

 $1,762  $1,586  $3,714  $2,723   $2,670   $    1,952 

Income (loss) from discontinued operations applicable to Morgan Stanley

  (5)  (4)   (27)  (7)    (2)    (22) 

Net income applicable to Morgan Stanley

  1,757  1,582   3,687  2,716    2,668    1,930 

Preferred stock dividends and other

  170  157   260  235    93    90 

Earnings applicable to Morgan Stanley common shareholders

 $1,587  $1,425  $3,427  $2,481   $2,575   $1,840 

Effective income tax rate from continuing operations

  32.0%  33.5%   30.5%  33.4% 

 

   

At June 30,

2017

  

At December 31,

2016

 

Capital ratios (Transitional-Advanced)1

 

Common Equity Tier 1 capital ratio

  16.6%   16.9% 

Tier 1 capital ratio

  19.0%   19.0% 

Total capital ratio

  21.9%   22.0% 

Capital ratios (Transitional-Standardized)1

 

Tier 1 leverage ratio2

  8.5%   8.4% 

in millions, except per share and
employee data		  At June 30,
2017		   At December 31,
2016		  At March 31,
2018		 At December 31,
2017		 

Loans3

  $97,639   $94,248 

GLR1

 $206,463  $    192,660 

Loans2

 $109,135  $104,126 

Total assets

  $841,016   $814,949  $858,495  $851,733 

Global Liquidity Reserve4

  $188,296   $202,297 

Deposits

  $144,913   $155,863  $160,424  $159,436 

Long-term borrowings

  $184,112   $164,775 

Borrowings

 $194,964  $192,582 

Common shareholders’ equity

  $70,306   $68,530  $69,514  $68,871 

Common shares outstanding

   1,840    1,852   1,774  1,788 

Book value per common share5

  $38.22   $36.99 

Book value per common share3

 $39.19  $38.52 

Worldwide employees

   56,187    55,311   57,810  57,633 
in millions, except per share and
employee data		 At March 31,
2018		  At December 31,
2017		 

Capital ratios4

  

Common Equity Tier 1 capital ratio

  15.5%   16.5% 

Tier 1 capital ratio

  17.7%   18.9% 

Total capital ratio

  20.3%   21.7% 

Tier 1 leverage ratio

  8.2%   8.3% 

 

1.

For a discussion of our regulatory capital ratios,the GLR, see “Liquidity“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements” herein.Liquidity Risk Management Framework—Global Liquidity Reserve” in the 2017Form 10-K.

2.

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

3.

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

4.

For a discussion of Global Liquidity Reserve, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” in Part II, Item 7 of the 2016 Form10-K.

5.3.

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

4.

Beginning in 2018, our capital ratios are based on the Standardized Approach fullyphased-in rules. At December 31, 2017, our capital ratios were based on the Standardized Approach transitional rules. For a discussion of our regulatory capital ratios, see “Liquidity and Capital Resources—Regulatory Requirements” herein.

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

We prepare our consolidated financial statements using accounting principles generally accepted in the United States of America (“U.S. GAAP”).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.

Non-GAAP Financial Measures by Business Segment

   Three Months Ended
June 30,		  Six Months Ended
June 30,		 
$ in billions  2017  2016  2017  2016 

Pre-tax profit margin1

     

Institutional Securities

   30%   33%   32%   29% 

Wealth Management

   25%   23%   25%   22% 

Investment Management

   21%   20%   19%   15% 

Consolidated

   28%   28%   28%   25% 

Average common equity2

 

  

Institutional Securities

  $40.2  $43.2  $40.2  $43.2 

Wealth Management

   17.2   15.3   17.2   15.3 

Investment Management

   2.4   2.8   2.4   2.8 

Parent Company

   10.1   7.7   9.7   7.3 

Consolidated average common equity

  $69.9  $69.0  $69.5  $68.6 

Return on average common equity2

 

  

Institutional Securities

   8.5%   8.0%   9.9%   6.4% 

Wealth Management

   14.6%   12.9%   14.6%   12.7% 

Investment Management

   16.3%   10.6%   13.7%   8.8% 

Consolidated

   9.1%   8.3%   9.9%   7.2% 
 

 

March 2018 Form 10-Q  54  June 2017 Form 10-Q

Management’s Discussion and Analysis  LOGOLOGO

 

Reconciliations from U.S. GAAP toNon-GAAP Consolidated Financial Measures

 

   Three Months Ended
June 30,		  Six Months Ended
June 30,		 

$ in millions, except per

share data

  2017  2016  2017  2016 

Net income applicable to Morgan Stanley

 

 

 

U.S. GAAP

  $1,757  $1,582  $3,687  $2,716 

Impact of discrete tax provision3

   4   —   18   — 

Net income applicable to Morgan Stanley, excluding discrete taxprovision—non-GAAP

  $1,761  $1,582  $3,705  $2,716 

Earnings per diluted common share

 

 

 

U.S. GAAP

  $0.87  $0.75  $1.87  $1.30 

Impact of discrete tax provision3

   —   —   0.01   — 

Earnings per diluted common share, excluding discrete taxprovision—non-GAAP

  $0.87  $0.75  $1.88  $1.30 

Effective income tax rate

 

     

U.S. GAAP

   32.0%   33.5%   30.5%   33.4% 

Impact of discrete tax provision3

   (0.1)%   —   (0.4)%   — 

Effective income tax rate from continuing

 

   

operations, excluding discrete

taxprovision—non-GAAP

   31.9%   33.5%   30.1%   33.4% 
   Three Months Ended
March 31,		 
$ in millions, except per share data      2018           2017     

Net income applicable to Morgan Stanley

  $2,668   $    1,930 

Impact of adjustments

   —    14 

Adjusted net income applicable to MorganStanley—non-GAAP1

  $2,668    1,944 

Earnings per diluted common share

  $1.45   $1.00 

Impact of adjustments

   —    0.01 

Adjusted earnings per diluted commonshare—non-GAAP1

  $1.45   $1.01 

Effective income tax rate

   20.9%    29.0% 

Impact of adjustments

   —%    (0.5)% 

Adjusted effective income tax rate—non-GAAP1

   20.9%    28.5% 

        Average Monthly
Balance		 
  At March 31,
2018		  At December 31,
2017		  Three Months
Ended March 31,		 
$ in millions   2018  2017 

Tangible Equity

                

U.S. GAAP

    

Morgan Stanley shareholders’ equity

 $78,034  $77,391  $77,507  $77,259 

Less: Goodwill and net intangible assets

  (9,129)   (9,042)   (9,043)   (9,262) 

Morgan Stanley tangible shareholders’equity—non-GAAP

 $68,905  $68,349  $68,464  $67,997 

U.S. GAAP

    

Common equity

 $69,514  $68,871  $68,987  $68,989 

Less: Goodwill and net intangible assets

  (9,129)   (9,042)   (9,043)   (9,262) 

Tangible commonequity—non-GAAP

 $60,385  $59,829  $    59,944  $    59,727 

ConsolidatedNon-GAAP Financial Measures

   Three Months Ended
March 31,		 
$ in billions  2018   2017 

Average common equity

    

Unadjusted

  $69.0   $69.0 

Adjusted1

   69.0    69.0 

ROE2

 

  

Unadjusted

   14.9%        10.7% 

Adjusted1, 3

       14.9%    10.7% 

Average tangible common equity

 

  

Unadjusted

  $59.9   $59.7 

Adjusted1

   59.9    59.7 

ROTCE2

 

  

Unadjusted

   17.2%    12.3% 

Adjusted1, 3

   17.2%    12.4% 

    At March 31,
2018		   

At December 31,

2017

 

Tangible book value per common share4

  $34.04   $33.46 

Non-GAAP Financial Measures by Business Segment

   Three Months Ended
March 31,		 
$ in billions  2018   2017 

Pre-tax profit margin5

    

Institutional Securities

   35%    34% 

Wealth Management

   27%    24% 

Investment Management

   21%    17% 

Consolidated

   31%    29% 

Average common equity6

    

Institutional Securities

  $            40.8   $            40.2 

Wealth Management

   16.8    17.2 

Investment Management

   2.6    2.4 

Parent Company

   8.8    9.2 

Consolidated average
common equity

  $69.0   $69.0 

Average tangible common equity6

 

  

Institutional Securities

  $40.1   $39.6 

Wealth Management

   9.2    9.3 

Investment Management

   1.7    1.6 

Parent Company

   8.9    9.2 

Consolidated average
tangible common equity

  $59.9   $59.7 

ROE2, 7

 

  

Institutional Securities

   15.2%    11.4% 

Wealth Management

   21.3%    14.6% 

Investment Management

   19.3%    11.1% 

Consolidated

   14.9%    10.7% 

ROTCE2, 7

 

  

Institutional Securities

   15.5%    11.5% 

Wealth Management

   38.9%    27.0% 

Investment Management

   30.3%    16.3% 

Consolidated

   17.2%    12.3% 

 

1.

Adjusted amounts exclude intermittent net discrete tax provisions (benefits). 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 quarter. For further information on the net discrete tax provisions (benefits), see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

2.

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, on a consolidated basis as indicated. When excluding intermittent net discrete tax provisions (benefits), both the numerator and denominator are adjusted.

3.

The calculations used in determining the Firm’s “ROE and ROTCE Targets” referred to below are the Adjusted ROE and Adjusted ROTCE amounts shown in this table.

4.

Tangible book value per common share equals tangible common equity divided by common shares outstanding.

5.

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

2.6.

Average common equity and average tangible common equity for each business segment isare determined at the beginning of each year using our Required Capital framework an internal capital adequacy measure (see “Liquidity and Capital Resources—Regulatory Requirements—Attribution of Average Common Equity According to the Required Capital Framework” herein).

7.

The calculation of ROE and will remain fixed throughout the year until the next annual reset. Each business segment’s return on average common equity equals annualizedROTCE by segment uses net income applicable to Morgan Stanley by segment less an allocation of preferred dividends allocated to each segment as a percentage of average common equity for that segment. Consolidated return on average common equity equals annualized consolidated net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity.

3.

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

ConsolidatedNon-GAAP Financial Measures

  Three Months Ended
June 30,		  Six Months Ended
June 30,		 
$ in billions 2017  2016  2017  2016 

Average common equity1, 2, 3

 

 

   

Unadjusted

 $69.9  $69.0  $69.5  $68.6 

Excluding DVA

  70.5   69.1   70.1   68.7 

Excluding DVA and discrete tax provision (benefit)

  70.5   69.1   70.1   68.7 

Return on average common equity1, 2, 4, 5

 

 

  

Unadjusted

  9.1%   8.3%   9.9%   7.2% 

Excluding DVA

  9.0%   8.3%   9.8%   7.2% 

Excluding DVA and discrete tax provision (benefit)

  9.0%   8.3%   9.8%   7.2% 

Average tangible common equity1, 2, 3, 6

 

 

  

Unadjusted

 $60.7  $59.5  $60.2  $59.1 

Excluding DVA

  61.3   59.6   60.8   59.2 

Excluding DVA and discrete tax provision (benefit)

  61.3   59.6   60.8   59.2 

Return on average tangible common equity1, 2, 5

 

 

 

Unadjusted

  10.4%   9.6%   11.4%   8.4% 

Excluding DVA

  10.3%   9.6%   11.3%   8.4% 

Excluding DVA and discrete tax provision (benefit)

  10.4%   9.6%   11.3%   8.4% 

Expense efficiency ratio7

  72.2%   72.1%   71.7%   74.7% 

   At June 30,
2017		   At December 31,
2016		 

Tangible book value per common share6

 $33.24   $31.98 

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

1.

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

2.

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

3.

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

4.

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

5.

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

 

 

June 20175March 2018 Form 10-Q6

Management’s Discussion and Analysis

  LOGOLOGO

 

6.

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

7.

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

Return on Equity Targetand Tangible Common Equity Targets

We haveIn January 2018, we established an ROE Target of 9%10% to 11%13% for the medium term, which is equivalent to be achieved by 2017. an ROTCE Target of 11.5% to 14.5%.

Our ROE Target and the related strategies and goalsROTCE 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; outsize legal expenses or penalties and the ability to reduce expenses in general;maintain a reduced level of expenses; capital levels; and intermittent discrete tax items. For further information on our ROE Targetand ROTCE Targets and related assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Return on Equity Target”and Tangible Common Equity Targets” in Part II, Item 7 of the 20162017 Form10-K.

Business Segments

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

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

Net Revenues, Compensation Expense and Income Taxes

For discussionsan overview of the components of our net revenues, compensation expense and income taxes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues by Segment”Segments” in Part II, Item 7 of the 2016 Form10-K. For a discussion of our compensation expense, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Compensation Expense” in Part II, Item 7 of the 2016 Form10-K. For a discussion of our Income Tax expense, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Income Taxes” in Part II, Item 7 of the 20162017 Form10-K.

 

 

March 2018 Form 10-Q  76  June 2017 Form 10-Q

Management’s Discussion and Analysis  LOGOLOGO

 

Institutional Securities

Income Statement Information

 

   Three Months Ended
June 30,		    
$ in millions      2017          2016      % Change 

Revenues

    

Investment banking

  $1,413  $1,108   28% 

Trading

   2,725   2,498   9% 

Investments

   37   76   (51)% 

Commissions and fees

   630   607   4% 

Asset management, distribution and administration fees

   89   69   29% 

Other

   126   138   (9)% 

Totalnon-interest revenues

   5,020   4,496   12% 

Interest income

   1,243   966   29% 

Interest expense

   1,501   884   70% 

Net interest

   (258)   82   N/M 

Net revenues

   4,762   4,578   4% 

Compensation and benefits

   1,667   1,625   3% 

Non-compensation expenses

   1,652   1,447   14% 

Totalnon-interest expenses

   3,319   3,072   8% 

Income from continuing operations before income taxes

   1,443   1,506   (4)% 

Provision for income taxes

   413   453   (9)% 

Income from continuing operations

   1,030   1,053   (2)% 

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

   (5)   (4)   (25)% 

Net income

   1,025   1,049   (2)% 

Net income applicable to noncontrolling interests

   33   61   (46)% 

Net income applicable to Morgan Stanley

  $992   988   —% 

   Six Months Ended
June 30,		    
$ in millions      2017          2016      % Change 

Revenues

    

Investment banking

  $2,830  $2,098   35% 

Trading

   5,737   4,389   31% 

Investments

   103   108   (5)% 

Commissions and fees

   1,250   1,262   (1)% 

Asset management, distribution and administration fees

   180   142   27% 

Other

   299   142   111% 

Totalnon-interest revenues

   10,399   8,141   28% 

Interest income

   2,367   2,019   17% 

Interest expense

   2,852   1,868   53% 

Net interest

   (485)   151   N/M 

Net revenues

   9,914   8,292   20% 

Compensation and benefits

   3,537   3,007   18% 

Non-compensation expenses

   3,204   2,871   12% 

Totalnon-interest expenses

   6,741   5,878   15% 

Income from continuing operations before income taxes

   3,173   2,414   31% 

Provision for income taxes

   872   728   20% 

Income from continuing operations

   2,301   1,686   36% 

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

   (27)   (7)   N/M 

Net income

   2,274   1,679   35% 

Net income applicable to noncontrolling interests

   68   100   (32)% 

Net income applicable to Morgan Stanley

  $2,206  $1,579   40% 

N/M—Not Meaningful

June 2017 Form 10-Q8

Management’s Discussion and AnalysisLOGO

  Three Months Ended
March 31,		    
$ in millions 2018  2017  % Change 

Revenues

   

Investment banking

 $        1,513  $        1,417   7% 

Trading

  3,643   3,012   21% 

Investments

  49   66   (26)% 

Commissions and fees

  744   620   20% 

Asset management

  110   91   21% 

Other

  136   173   (21)% 

Totalnon-interest revenues

  6,195   5,379   15% 

Interest income

  1,804   1,124   60% 

Interest expense

  1,899   1,351   41% 

Net interest

  (95)   (227)   58% 

Net revenues

  6,100   5,152   18% 

Compensation and benefits

  2,160   1,870   16% 

Non-compensation expenses

  1,828   1,552           18% 

Totalnon-interest expenses

  3,988   3,422   17% 

Income from continuing operations before income taxes

  2,112   1,730   22% 

Provision for income taxes

  449   459   (2)% 

Income from continuing operations

  1,663   1,271   31% 

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

  (2)   (22)   91% 

Net income

  1,661   1,249   33% 

Net income applicable to
noncontrolling interests

  34   35   (3)% 

Net income applicable to
Morgan Stanley

 $1,627  $1,214   34% 

Investment Banking

Investment Banking Revenues

 

   Three Months Ended
June 30,		     
$ in millions  2017   2016   % Change 

Advisory

  $504   $497    1% 

Underwriting revenues:

      

Equity

   405    266    52% 

Fixed income

   504    345    46% 

Total underwriting

   909    611    49% 

Total investment banking

  $1,413   $1,108    28% 

  Six Months Ended
June 30,		       Three Months Ended
March 31,		     
$ in millions  2017   2016   % Change   2018   2017   % Change 

Advisory

  $1,000   $1,088    (8)%   $574   $496    16% 

Underwriting revenues:

      

Underwriting:

      

Equity

   795    426    87%    421    390    8% 

Fixed income

   1,035    584    77%    518    531    (2)% 

Total underwriting

   1,830    1,010    81%    939    921    2% 

Total investment banking

  $2,830   $2,098    35%   $        1,513   $        1,417    7% 

Investment Banking Volumes

 

  Three Months Ended
June 30,		  Six Months Ended
June 30,		 
$ in billions 20171  20161  20171  20161 

Completed mergers and acquisitions2

 $  205  $  241  $  356  $  538 

Equity and equity-related offerings3

  20   14   30   21 

Fixed income offerings4

  67   62   142   113 
   Three Months Ended
March 31,		 
$ in billions  2018   2017 

Completed mergers and acquisitions1

  $        145   $        163 

Equity and equity-related offerings2, 3

   21    10 

Fixed income offerings2, 4

   54    75 

Source: Thomson Reuters, data as of April 2, 2018. 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.

Source: Thomson Reuters, data at July 12, 2017.Amounts include transactions of $100 million or more. Completed mergers and acquisitions volumes are based on full credit to each of the advisors in a transaction.

2.

Equity and equity-related offerings and fixed income offerings are based on full credit for single book managers and equal credit for joint book managers. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal or change in the value of a transaction.

2.

Amounts include transactions of $100 million or more.

3.

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

4.

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

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

Investment banking revenues of $1,413$1,513 million in the current quarter and $2,830 million in the current year period increased 28% and 35%7% from the comparable prior year periods.quarter. The adoption of the accounting updateRevenue from Contracts with Customers had the effect of increasing the revenues reported in investment banking by approximately $60 million compared with the prior year quarter (see Notes 2 and 20 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 in the current quarter primarily reflectedreflecting higher underwriting revenues. The increase in the current year period was due to higher underwriting revenues, partially offset by lower advisory revenues.

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

 

Equity underwriting revenues increased in the current quarter and current year periodprimarily as a result of higher global market volumes in bothfollow-on and initial public offerings (see Investment Banking Volumes table). In, partially offset by the current year period, equity underwriting revenues also increased as a resulteffect of higherlower fee realizations.

Fixed income underwriting revenues increaseddecreased in the current quarter and current year period primarily due to lower market volumes, which resulted in lower bond fees, partially offset by highernon-investment grade loan fees and bond fees.

7March 2018 Form 10-Q

Management’s Discussion and AnalysisLOGO

Sales and Trading Net Revenues

By Income Statement Line Item

 

   Three Months Ended
June 30,		    
$ in millions  2017  2016   % Change

Trading

  $  2,725  $  2,498   9%

Commissions and fees

   630   607   4%

Asset management, distribution and administration fees

   89   69   29%

Net interest

   (258)   82   N/M

Total

  $3,186  $3,256   (2)%

   Six Months Ended
June 30,		    
$ in millions  2017  2016   % Change

Trading

  $  5,737  $  4,389   31%

Commissions and fees

   1,250   1,262   (1)%

Asset management, distribution and administration fees

   180   142   27%

Net interest

   (485)   151   N/M

Total

  $6,682  $5,944   12%

N/M—Not Meaningful

9June 2017 Form 10-Q

Management’s Discussion and AnalysisLOGO

   Three Months Ended
March 31,		     
$ in millions  2018   2017   % Change 

Trading

  $        3,643   $        3,012    21% 

Commissions and fees

   744    620    20% 

Asset management

   110    91    21% 

Net interest

   (95)    (227)    58% 

Total

  $4,402   $3,496    26% 

By Business

 

   Three Months Ended
June 30,		   
$ in millions    2017      2016    % Change

Equity

  $2,155  $2,145  —%

Fixed income

   1,239   1,297  (4)%

Other

   (208)   (186)  (12)%

Total

  $3,186  $3,256  (2)%

   Six Months Ended
June 30,		   
$ in millions    2017      2016    % Change

Equity

  $4,171  $4,201  (1)%

Fixed income

   2,953   2,170  36%

Other

   (442)   (427)  (4)%

Total

  $6,682  $5,944  12%

Sales and Trading Activities—Equity and Fixed Income

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

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

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

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

•

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

•

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

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

•

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

   Three Months Ended
March 31,		     
$ in millions  2018   2017   % Change 

Equity

  $        2,558   $        2,016    27% 

Fixed income

   1,873    1,714    9% 

Other

   (29)    (234)    88% 

Total

  $4,402   $3,496    26% 

Sales and Trading Net Revenues—Equity and Fixed Income

 

  Three Months Ended
June 30, 2017		   Three Months Ended
March 31, 2018		 
$ in millions  Trading   Fees1   Net
Interest2		 Total   Trading   Fees1   Net
Interest2		   Total 

Financing

  $1,166   $88   $(227)  $1,027   $1,234   $107   $(146)   $1,195 

Execution services

   601    580    (53)   1,128    791    664    (92)    1,363 

Total Equity

  $1,767   $668   $(280)  $2,155   $2,025   $    771   $(238)   $    2,558 

Total Fixed Income

  $1,114   $48   $77  $1,239 

Total Fixed income

  $    1,715   $83   $          75   $1,873 

 

   Three Months Ended
June 30, 2016		 
$ in millions  Trading   Fees1   Net
Interest2		  Total 

Financing

  $1,039   $90   $(82)  $1,047 

Execution services

   576    549    (27)   1,098 

Total Equity

  $1,615   $639   $(109)  $2,145 

Total Fixed Income

  $1,018   $37   $242  $1,297 

   Six Months Ended
June 30, 2017		 
$ in millions  Trading   Fees1   Net
Interest2		  Total 

Financing

  $2,097   $177   $(415)  $1,859 

Execution services

   1,265    1,148    (101)   2,312 

Total Equity

  $3,362   $1,325   $(516)  $4,171 

Total Fixed Income

  $2,712   $102   $139  $2,953 

  Six Months Ended
June 30, 2016		   Three Months Ended
March 31, 2017		 
$ in millions  Trading   Fees1   Net
Interest2		 Total   Trading   Fees1   Net
Interest2		   Total 

Financing

  $1,925   $176   $(42)  $2,059   $931   $89   $(188)   $832 

Execution services

   1,085    1,149    (92)  2,142    664    568    (48)    1,184 

Total Equity

  $3,010   $1,325   $(134)  $4,201   $1,595   $    657   $(236)   $2,016 

Total Fixed Income

  $1,573   $77   $520  $2,170 

Total Fixed income

  $    1,598   $54   $      62   $    1,714 

 

1.

Includes Commissions and fees and Asset management distribution and administration fees.revenues.

2.

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

June 2017 Form 10-Q10

Management’s Discussion and AnalysisLOGO

WeAs discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues by Segment” in the 2017Form 10-K, we manage each of the sales and trading businesses based on its aggregate net revenues, which are comprised of the consolidated income statement line items quantified in the previous table. Trading revenues are affected by a variety of market dynamics, including volumes,bid-offer spreads, and inventory prices, as well as impacts from hedging activity, which are interrelated.revenues. We provide qualitative commentary in the discussion of results that follow on the key drivers of period over period variances, as the quantitative impact of the various market dynamics typically cannot be disaggregated.

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

Sales and Trading Net Revenues during the Current Quarter

Equity

Equity sales and trading net revenues of $2,155$2,558 million in the current quarter were relatively unchangedincreased 27% from the prior year quarter, reflecting higher results in execution services, offset by lower results inboth our financing business.businesses and execution services.

 

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

Execution services increased 3% from the prior year quarter, primarily reflecting higher client activity across all products as reflected in Trading revenues.

Execution services increased from the prior year quarter, primarily reflecting higher Trading revenues from derivative products and improved commissionsdriven by higher client activity in derivatives products. In addition, Commissions and fees driven by increased from higher client activity partially offset by higher net interest costs.in cash equities products.

Fixed Income

Fixed income net revenues of $1,239$1,873 million in the current quarter were 4% lower9% higher than in the prior year quarter, driven by a decreasehigher results in Net interest revenues across all three product areas,global macro products and commodities products and other, partially offset by an increase in Trading revenues.

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

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

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

Sales and Trading Net Revenues during the Current Year Period

Equity

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

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

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

Fixed Income

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

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

 

Global macro products increased due to a more favorable environment across products compared with the prior year period when results were impactedhigher Trading revenues in foreign exchange driven by inventory losses. This wasmanagement and client activity, partially offset by higher interest costslower client activity in structured rates.

Credit products Trading revenues decreased primarily due to the current year period which resulted from interest rate productseffect of the widening of corporate credit spreads on inventory management.prices.

 

Commodities products and Otherother increased primarily due to improved energyhigher Trading revenues from hedging counterparty risk and increased Commodities structured transactions and customer flow in power and natural gas products.

Other

Other sales and trading net losses of $29 million in the current quarter decreased from the prior year quarter, primarily reflecting higher revenues on economic hedges related to our long-term debt and lower losses associated with corporate loan hedging activity.

March 2018 Form 10-Q8

Management’s Discussion and AnalysisLOGO

Investments, Other Revenues andNon-interest Expenses

Investments

Net investment gains of $49 million in the absencecurrent quarter decreased from the prior year quarter as a result of losses from counterparty risk management incurredon investments to which certain deferred compensation plans are referenced in the current quarter compared with gains in the prior year period.quarter.

Other Revenues

Other revenues of $136 million in the current quarter decreased from the prior year quarter, primarily reflecting lower gains associated withheld-for-sale corporate loans.

Non-interest Expenses

Non-interest expenses of $3,988 million in the current quarter increased from the prior year quarter, primarily reflecting a 16% increase in Compensation and benefits expenses and an 18% increase inNon-compensation expenses in the current quarter.

Compensation and benefits expenses increased in the current quarter, primarily due to increases in discretionary incentive compensation driven by higher revenues and salaries.

•

Non-compensation expenses increased in the current quarter, primarily as a result of higher volume-related expenses and the gross presentation of certain expenses due to the adoption of the accounting updateRevenue from Contracts with Customers (see Notes 2 and 20 to the financial statements for further information). These results were partially offset in the current quarter by the reversal of a portion of previously recorded provisions related to U.K. VAT matters.

 

 

  119  June 2017March 2018 Form 10-Q

Management’s Discussion and Analysis  LOGOLOGO

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

Investments

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

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

Other

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

Non-interest Expenses

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

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

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

Other Items

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

June 2017 Form 10-Q12

Management’s Discussion and AnalysisLOGO

 

Wealth Management

Income Statement Information

 

  Three Months Ended
June 30,		  

% Change

 
$ in millions 2017  20161  

Revenues

   

Investment banking

 $135  $123   10% 

Trading

  207   252   (18)% 

Investments

  1   —     N/M 

Commissions and fees

  424   423   —% 

Asset management, distribution and administration fees

  2,302   2,082   11% 

Other

  73   102   (28)% 

Totalnon-interest revenues

  3,142   2,982   5% 

Interest income

  1,114   920   21% 

Interest expense

  105   91   15% 

Net interest

  1,009   829   22% 

Net revenues

  4,151   3,811   9% 

Compensation and benefits

  2,297   2,152   7% 

Non-compensation expenses

  797   800   —% 

Totalnon-interest expenses

  3,094   2,952   5% 

Income from continuing operations before income taxes

  1,057   859   23% 

Provision for income taxes

  392   343   14% 

Net income applicable to Morgan Stanley

 $665  $516   29% 
  Six Months Ended
June 30,		  

% Change

 
$ in millions 2017  20161  

Revenues

   

Investment banking

 $280  $244   15% 

Trading

  445   446   —% 

Investments

  2   (2)   200% 

Commissions and fees

  864   835   3% 

Asset management, distribution and administration fees

  4,486   4,136   8% 

Other

  129   160   (19)% 

Totalnon-interest revenues

  6,206   5,819   7% 

Interest income

  2,193   1,834   20% 

Interest expense

  190   174   9% 

Net interest

  2,003   1,660   21% 

Net revenues

  8,209   7,479   10% 

Compensation and benefits

  4,614   4,240   9% 

Non-compensation expenses

  1,565   1,594   (2)% 

Totalnon-interest expenses

  6,179   5,834   6% 

Income from continuing operations before income taxes

  2,030   1,645   23% 

Provision for income taxes

  718   636   13% 

Net income applicable to Morgan Stanley

 $1,312  $1,009   30% 

N/M – Not Meaningful

1.

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

Statistical Data

  Three Months Ended
March 31,		    
$ in millions     2018          2017      % Change 

Revenues

   

Investment banking

 $140  $145   (3)% 

Trading

  109   238   (54)% 

Investments

  —   1   N/M 

Commissions and fees

  498   440   13% 

Asset management

  2,495   2,184   14% 

Other

  63   56   13% 

Totalnon-interest revenues

  3,305   3,064   8% 

Interest income

  1,280   1,079   19% 

Interest expense

  211   85   148% 

Net interest

  1,069   994   8% 

Net revenues

  4,374   4,058   8% 

Compensation and benefits

  2,450   2,317   6% 

Non-compensation expenses

  764   768   (1)% 

Totalnon-interest expenses

  3,214   3,085   4% 

Income from continuing operations before income taxes

  1,160   973   19% 

Provision for income taxes

  246   326   (25)% 

Net income applicable to Morgan Stanley

 $914  $647   41% 

Financial Information and Statistical Data

 

$ in billions  At
June 30,
2017		   At
December 31,
2016		   At
March 31,
2018		   At
December 31,
2017		 

Client assets

  $2,239   $2,103   $2,371   $2,373 

Fee-based client assets1

  $962   $877   $1,058   $1,045 

Fee-based client assets as a percentage of total client assets

   43%    42%    45%    44% 

Client liabilities2

  $77   $73   $80   $80 

Bank deposit program

  $139   $153 

Investment securities portfolio

  $53.5   $63.9   $60.7   $59.2 

Loans and lending commitments

  $74.2   $68.7   $78.7   $77.3 

Wealth Management representatives

   15,777    15,763    15,682    15,712 

 

   Three Months Ended
June 30,		 
      2017         2016     

Annualized revenues per representative

    

(dollars in thousands)3

  $1,052   $959 

Client assets per representative

    

(dollars in millions)4

  $142   $128 

Fee-based asset flows5

    

(dollars in billions)

  $19.9   $12.0 
   Six Months Ended
June 30,		 
    2017   2016 

Annualized revenues per representative

    

(dollars in thousands)3

  $1,041   $941 

Client assets per representative

    

(dollars in millions)4

  $142   $128 

Fee-based asset flows5

    

(dollars in billions)

  $38.7   $17.9 
   Three Months Ended
March 31,		 
        2018           2017     

Per representative:

    

Annualized revenues ($ in thousands)3

  $1,115   $1,029 

Client assets ($ in millions)4

  $151   $139 

Fee-based asset flows ($ in billions)5

  $18.2   $18.8 

 

1.

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

2.

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

3.

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

4.

Client assets per representative equal totalperiod-end client assets divided byperiod-end representative headcount.

5.

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

Transactional Revenues

   Three Months Ended
March 31,		     
$ in millions  2018   2017   % Change 

Investment banking

  $140   $145    (3)% 

Trading

   109    238    (54)% 

Commissions and fees

   498    440    13% 

Total

  $747   $823    (9)% 

Transactional revenues as a % of Net revenues

   17%    20%   

Net Revenues

Transactional Revenues

Transactional revenues of $747 million in the current quarter decreased 9% from the prior year quarter primarily as a result of decreased Trading revenues, partially offset by increased Commissions and fees.

Investment banking revenues were relatively unchanged in the current quarter compared with prior year quarter.

Trading revenues decreased in the current quarter primarily as a result of losses related to investments associated with certain employee deferred compensation plans and lower client activity in fixed income products.

Commissions and fees increased in the current quarter primarily as a result of higher client trading activity in equities.

 

 

March 2018 Form 10-Q  1310  June 2017 Form 10-Q

Management’s Discussion and Analysis  LOGOLOGO

 

Transactional Revenues

  Three Months Ended
June 30,		  

% Change

 
$ in millions 2017  2016  

Investment banking

 $135  $123   10% 

Trading

  207   252   (18)% 

Commissions and fees

  424   423   —% 

Total

 $766  $798   (4)% 
  Six Months Ended
June 30,		  

% Change

 
$ in millions 2017  2016  

Investment banking

 $280  $244   15% 

Trading

  445   446   —% 

Commissions and fees

  864   835   3% 

Total

 $1,589  $1,525   4% 

Net Revenues

Transactional RevenuesAsset Management

TransactionalAsset management revenues of $766$2,495 million in the current quarter decreased 4%increased 14% from the prior year quarter primarily reflecting lower Trading revenues, partially offset by higher Investment banking revenues.

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

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

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

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

Asset Management

Asset management, distribution and administration feeseffect of $2,302 million in the current quarter and $4,486 million in the current year period increased 11% from the prior year quarter and increased 8% from the prior year period. The increase in each respective period is primarily due to market appreciation and net positive flows partially offset by loweron averagefee-based client fee rates. assets.

See“Fee-Based Client Assets Activity and Average Fee Rate by Account Type”Rollforwards” herein.

Net Interest

Net interest of $1,009$1,069 million in the current quarter and $2,003 million in the current year period increased 22% and 21%, respectively,8% from the comparable prior year periodsquarter primarily due toas a result of higher interest rates and higher loan balances, partially offset by lower investment portfolio balances.

Other

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

Non-interest Expenses

Non-interest expenses of $3,094$3,214 million in the current quarter and $6,179 million in the current year period increased 5% and 6%, respectively,4% from the comparable prior year periods.quarter.

 

Compensation and benefits expenses increased in the current quarter and current year period increased primarily due to the formulaic payout to Wealth Management representatives linked to higher revenues and increases in salaries, partially offset by decreases in the fair value of investments to which certain deferred compensation plans are referenced.

 

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

June 2017 Form 10-Q14

Management’s Discussion and AnalysisLOGO

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

For a description offee-based client assets, including descriptions forof the fee based client asset types and rollforward items in the following tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—WealthManagement—Fee-Based Client Assets Activity and Average Fee Rate by Account Type”Assets” in Part II, Item 7 of the 20162017 Form10-K.

Fee-Based Client Assets Rollforwards

 

  

At
March 31,

2017

  Inflows  Outflows  

Market

Impact

  

At
June 30,

2017

  Average for the
Three Months Ended
June 30, 2017
$ in billions, Fee Rate in bps      Fee Rate1
                       

Separately managed accounts2, 3

 $230  $8  $(7)  $6  $237  17

Unified managed accounts3

  217   13   (7)   5   228  98

Mutual fund advisory

  21   —   (1)   1   21  118

Representative as advisor

  133   10   (8)   3   138  84

Representative as portfolio manager

  305   23   (11)   4   321  96

Subtotal

 $906  $54  $(34)  $19  $945  77

Cash management

  21   2   (6)   —   17  6

Totalfee-based client assets

 $927  $56  $(40)  $19  $962  75
  

At
March 31,

2016

  

Inflows

  

Outflows

  

Market

Impact

  

At
June 30,

2016

  Average for the
Three Months Ended
June 30, 2016
$ in billions, Fee Rate in bps      Fee Rate1
                       

Separately managed accounts2

 $278  $9  $(7)  $(1)  $279  37

Unified managed accounts

  112   11   (5)   2   120  106

Mutual fund advisory

  24   —   (1)   —   23  119

Representative as advisor

  114   8   (8)   3   117  85

Representative as portfolio manager

  255   17   (12)   5   265  99

Subtotal

 $783  $45  $(33)  $9  $804  78

Cash management

  15   4   (3)   —   16  6

Totalfee-based client assets

 $798  $49  $(36)  $9  $820  76
  

At
December 31,

2016

  

Inflows

  

Outflows

  

Market

Impact

  

At
June 30,

2017

  Average for the
Six Months Ended
June 30, 2017
$ in billions, fee rate in bps      Fee Rate1
                       

Separately managed accounts2, 3

 $222  $16  $(11)  $10  $237  16

Unified managed accounts3

  204   25   (15)   14   228  98

Mutual fund advisory

  21   1   (3)   2   21  118

Representative as advisor

  125   19   (14)   8   138  85

Representative as portfolio manager

  285   42   (21)   15   321  97

Subtotal

 $857  $103  $(64)  $49  $945  76

Cash management

  20   5   (8)   —   17  6

Totalfee-based client assets

 $877  $108  $(72)  $49  $962  75
  

At
December 31,

2015

  

Inflows

  

Outflows

  

Market

Impact

  

At
June 30,

2016

  Average for the
Six Months Ended
June 30, 2016
$ in billions, Fee Rate in bps      Fee Rate1
                       

Separately managed accounts2

 $283  $17  $(17)  $(4)  $279  37

Unified managed accounts

  105   21   (9)   3   120  107

Mutual fund advisory

  25   1   (3)   —   23  119

Representative as advisor

  115   13   (14)   3   117  86

Representative as portfolio manager

  252   31   (22)   4   265  100

Subtotal

 $780  $83  $(65)  $6  $804  77

Cash management

  15   7   (6)   —   16  6

Totalfee-based client assets

 $795  $90  $(71)  $6  $820  76
$ in billions 

At

December 31,
2017

  Inflows  Outflows  Market
Impact		  

At

March 31,
2018

 

Separately managed1

 $252  $10  $(6)  $4  $260 

Unified managed

  250   14   (8)   (2)   254 

Mutual fund advisory

  21   —   (1)       —   20 

Advisor

  149   9   (9)   (2)   147 

Portfolio manager

  353   21   (12)   (6)   356 

Subtotal

 $1,025  $54  $(36)  $(6)  $1,037 

Cash management

  20   4   (3)   —   21 

Totalfee-based client assets

 $1,045  $    58  $    (39)  $(6)  $    1,058 

bps—Basis points

$ in billions 

At

December 31,
2016

  Inflows  Outflows  Market
Impact		  

At

March 31,
2017

 

Separately managed1

 $222  $9  $(5)  $4  $230 

Unified managed

  204   13   (9)   9   217 

Mutual fund advisory

  21   —   (1)   1   21 

Advisor

  125   10   (7)   5   133 

Portfolio manager

  285   20   (11)   11   305 

Subtotal

 $857  $    52  $    (33)  $    30  $    906 

Cash management

  20   3   (2)   —   21 

Totalfee-based client assets

 $877  $55  $(35)  $30  $927 

Average Fee Rates

   Three Months Ended
March 31,		 
Fee rate in bps      2018           2017         

Separately managed

   16    16 

Unified managed

   98    100 

Mutual fund advisory

   119    120 

Advisor

   85    86 

Portfolio manager

   96    98 

Subtotal

   76    77 

Cash management

   6    6 

Totalfee-based client assets

   75    75 

1.

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

2.

Includesnon-custody account values reflecting priorquarter-end balances due to a lag in the reporting of asset values by third-party custodians.

3.

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

 

  1511  June 2017March 2018 Form 10-Q

Management’s Discussion and Analysis  LOGOLOGO

 

Investment Management

Income Statement Information

 

  Three Months Ended
June 30,		     
$ in millions 2017  2016  % Change 

Revenues

   

Trading

 $(3)  $5   (160)% 

Investments

  125   50   150% 

Asset management, distribution and administration fees

  539   517   4% 

Other

  4   9   (56)% 

Totalnon-interest revenues

  665   581   14% 

Interest income

  1   3   (67)% 

Interest expense

  1   1   —% 

Net interest

  —   2   (100)% 

Net revenues

  665   583   14% 

Compensation and benefits

  288   238   21% 

Non-compensation expenses

  235   227   4% 

Totalnon-interest expenses

  523   465   12% 

Income from continuing operations before income taxes

  142   118   20% 

Provision for income taxes

  41   37   11% 

Net income

  101   81   25% 

Net income applicable to noncontrolling interests

  1   3   (67)% 

Net income applicable to Morgan Stanley

 $100  $78   28% 
  Six Months Ended
June 30,		     
$ in millions 2017  2016  % Change 

Revenues

   

Investment banking

 $—  $1   (100)% 

Trading

  (14)   (5)   (180)% 

Investments

  223   (14)   N/M 

Commissions and fees

  —   3   (100)% 

Asset management, distribution and administration fees

  1,056   1,043   1% 

Other

  8   31   (74)% 

Totalnon-interest revenues

  1,273   1,059   20% 

Interest income

  2   4   (50)% 

Interest expense

  1   3   (67)% 

Net interest

  1   1   —% 

Net revenues

  1,274   1,060   20% 

Compensation and benefits

  567   451   26% 

Non-compensation expenses

  462   447   3% 

Totalnon-interest expenses

  1,029   898   15% 

Income from continuing operations before income taxes

  245   162   51% 

Provision for income taxes

  71   47   51% 

Net income

  174   115   51% 

Net income (loss) applicable to noncontrolling interests

  7   (13)   (154)% 

Net income applicable to Morgan Stanley

 $167  $128   30% 

N/M – Not Meaningful

  Three Months Ended
March 31,		    
$ in millions     2018          2017      % Change 

Revenues

   

Trading

 $5  $(11)   145% 

Investments

  77   98   (21)% 

Asset management

  626   517   21% 

Other

  10   4   150% 

Totalnon-interest revenues

  718   608   18% 

Interest income

  1   1   —% 

Interest expense

  1   —   N/M 

Net interest

  —   1   N/M 

Net revenues

  718   609   18% 

Compensation and benefits

  304   279   9% 

Non-compensation expenses

  266   227   17% 

Totalnon-interest expenses

  570   506   13% 

Income from continuing operations before income taxes

  148   103   44% 

Provision for income taxes

  19   30   (37)% 

Net income

  129   73   77% 

Net income (loss) applicable to noncontrolling interests

  2   6   (67)% 

Net income applicable to
Morgan Stanley

 $127  $67   90% 

Net Revenues

Investments

Investments gains of $125$77 million in the current quarter compared with Investment gains of $50 million indecreased 21% from the prior year quarter reflected higher realized gains and higherprimarily as a result of lower carried interest in Infrastructure and Private Equity investments.certain private equity funds.

Asset Management

Investments gainsAsset management revenues of $223$626 million in the current year period reflected gains and positive carried interest in all Alternative/Other products. Investments losses in the prior year period reflected losses and the reversal of previously accrued carried interest in certain Private Equity and Real Estate investments.

Asset Management, Distribution and Administration Fees    

Asset management, distribution and administration fees of $539 millionquarter increased 4% in the current quarter compared to21% from the prior year quarter primarily as a result of higher average assets underAUM across all asset classes. In addition, Asset management or supervision (“AUM”) in Equityrevenues increased as a result of the gross presentation of distribution fees due to the adoption of the accounting updateRevenue from Contracts with Customers (see Notes 2 and Fixed income products, with higher20 to the financial statements for further details).

In addition to the gross presentation described above, the timing of the recognition of certain performance fees partially offset by lower fee rates in Liquidity products and Alternative/Other products.

Asset management, distribution and administration fees of $1,056 million were relatively unchangednot in the form of carried interest is generally expected to be deferred within a fiscal year until the fees are no longer probable of being reversed. Thus, the recognition of a greater portion of such revenues is expected to be recognized in the second half of each fiscal year based on current year period, reflecting higher average AUM in Equity and Fixed income products, essentially offset by lower fee rates in Alternative/Other products.arrangements.

See “AUM and Average Fee Rate by Asset Class”“Assets Under Management or Supervision” herein.

Non-interest Expenses

Non-interest expenses of $523$570 million in the current quarter and $1,029 million in the current year period increased 12% and 15%13% from the comparable periodsprior year quarter primarily due to higheras a result of increases in both Compensation and benefitbenefits expenses andNon-compensation expenses.

 

Compensation and benefits expenses increased in the current quarter primarily as a result of increases in discretionary incentive compensation driven mainly by higher revenues, increases in salaries, and current year period principally due to an increase in deferred compensation associated with carried interest.

 

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

June 2017 Form 10-Q• 16

Non-compensation expenses increased in the current quarter primarily as a result of the gross presentation of distribution fees due to adoption of the accounting updateRevenue from Contracts with Customers along with higher fee sharing on increased AUM balances. See Asset Management above.

Management’s Discussion and AnalysisLOGO

Assets Under Management or Supervision

AUM and Average Fee Rate by Asset Class

For a description of the asset classes and rollforward items in the following tables, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Investment Management—Assets Under Management or Supervision” in Part II, Item 7 of the 20162017 Form10-K.

AUM Rollforwards

  

At

March 31,
2017

   Inflows   Outflows  

Market

Impact

   Other1  

At

June 30,
2017

  

Average for the

Three Months Ended

June 30, 2017

 
$ in billions, Fee Rate in bps          

Total

AUM

  

Fee

Rate

 
                                    

Equity

 $87   $6   $(5)  $5   $1  $94  $91   73 

Fixed income

  62    8    (6)   1    1   66   64   33 

Liquidity

  153    308    (308)   —      1   154   153   17 

Alternative / Other products

  119    6    (6)   3    (1)   121   120   70 

Total assets under management or supervision

 $421   $328   $(325)  $9   $2  $435  $428   46 

Shares of minority stake assets

  7                      8   8     
  

At

March 31,

2016

   Inflows   Outflows  Market
Impact		   Other1  

At

June 30,
2016

  

Average for the

Three Months Ended

June 30, 2016

 
$ in billions, Fee Rate in bps          

Total

AUM

  

Fee

Rate

 
                                    

Equity

 $81   $5   $(6)  $1   $—  $81  $81   74 

Fixed income

  62    7    (8)   —    —   61   61   32 

Liquidity

  146    291    (289)   1    —   149   146   19 

Alternative / Other products

  116    9    (10)   1    (1)   115   116   74 

Total assets under management or supervision

 $405   $312   $(313)  $3   $(1)  $406  $404   48 

Shares of minority stake assets

  8                      8   8     
  

At

December 31,
2016

   Inflows   Outflows  Market
Impact		   Other1  

At

June 30,
2017

  

Average for the

Six Months Ended

June 30, 2017

 

$ in billions, Fee Rate in bps

          

Total

AUM

  

Fee

Rate

 
                                    

Equity

 $79   $11   $(10)  $13   $1  $94  $87   74 

Fixed income

  60    13    (11)   2    2   66   63   33 

Liquidity

  163    636    (646)   —    1   154   155   18 

Alternative / Other products

  115    13    (10)   4    (1)   121   119   70 

Total assets under management or supervision

 $417   $673   $(677)  $19   $3  $435  $424   46 

Shares of minority stake assets

  8                      8   8     
  

At

December 31,
2015

   Inflows   Outflows  Market
Impact		   Other1  

At

June 30,
2016

  

Average for the

Six Months Ended

June 30, 2016

 

$ in billions, Fee Rate in bps

          

Total

AUM

  

Fee

Rate

 
                                    

Equity

 $83   $10   $(12)  $—    —  $81  $80   73 

Fixed income

  60    12    (14)   2    1   61   60   32 

Liquidity

  149    627    (627)   —    —   149   148   18 

Alternative / Other products

  114    14    (14)   1    —   115   115   77 

Total assets under management or supervision

 $406   $663   $(667)  $3    1  $406  $403   48 

Shares of minority stake assets

  8                      8   8     

bps—Basis points

$ in billions At
December 31,
2017		  Inflows  Outflows  Market
Impact		  Other1  At
March 31,
2018		 

Equity

 $105  $9  $(7)  $1  $1  $109 

Fixed income

  73   7   (8)   (1)   1   72 

Alternative/Other

  128   4   (4)   —   3   131 

Long-term AUM subtotal

  306   20   (19)   —   5   312 

Liquidity

  176   325   (344)   —   —   157 

Total AUM

 $482  $345  $(363)  $—  $5  $469 

Shares of minority stake assets

  7                   7 
$ in billions At
December 31,
2016		  Inflows  Outflows  Market
Impact		  Other1  At
March 31,
2017		 

Equity

 $79  $5  $(5)  $8  $—  $87 

Fixed income

  60   5   (5)   1   1   62 

Alternative/Other

  115   7   (4)   1   —   119 

Long-term AUM subtotal

  254   17   (14)   10   1   268 

Liquidity

  163   328   (338)   —   —   153 

Total AUM

 $417  $345  $(352)  $10  $1  $421 

Shares of minority stake assets

  8                   7 

1.

Includes distributions and foreign currency impact.impact for both periods and the impact of the Mesa West Capital, LLC acquisition in the current quarter.

 

March 2018 Form 10-Q  1712  June 2017 Form 10-Q

Management’s Discussion and Analysis  LOGOLOGO

Average AUM

   Three Months Ended
March 31,		 
$ in billions            2018                       2017           

Equity

  $109   $83 

Fixed income

   73    62 

Alternative/Other

   129    117 

Long-term AUM subtotal

   311    262 

Liquidity

   163    157 

Total AUM

  $474   $419 

Shares of minority
stake assets

   7    7 

Average Fee Rate

   Three Months Ended
March 31,		 
Fee rate in bps            2018                       2017           

Equity

   76    74 

Fixed income

   35    33 

Alternative/Other

   68    71 

Long-term AUM

   63    63 

Liquidity

   18    18 

Total AUM

   47    46 

13March 2018 Form 10-Q

Management’s Discussion and AnalysisLOGO

 

Supplemental Financial Information and Disclosures

Income Tax Matters

Effective Tax Rate from Continuing Operations

   Three Months Ended
March 31,		 
        2018           2017     

U.S. GAAP

   20.9%    29.0% 

Adjusted effective income taxrate—non-GAAP1

   20.9%    28.5% 

1.

Adjusted amounts exclude an intermittent net discrete tax provision of $14 million in the prior year quarter. 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 quarter. For further information onnon-GAAP measures, see “SelectedNon-GAAP Financial Information” herein.

The effective tax rates include recurring-type discrete tax benefits associated with employee share-based payments of $147 million and $112 million in the current quarter and prior year quarter, respectively.

The effective tax rate reflects our current assumptions, estimates and interpretations related to the U.S. Tax Cuts and Jobs Act (“Tax Act”) and other factors. 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.

Our estimates may change as additional clarification and implementation guidance continue to be received from the U.S. Treasury Department and as the interpretation of the Tax Act evolves over time. Taking into account continuing developments related to provisions of the Tax Act such as the modified territorial tax system and GILTI, we expect our effective tax rate from continuing operations for 2018 to be approximately 22% to 25% (see “Forward-Looking Statements” in the 2017 Form10-K).

U.S. Bank Subsidiaries

We provide loans to a variety of customers, from large corporate and institutional clients to high net worth individuals, primarily through our U.S. bank subsidiaries, Morgan Stanley Bank N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”). The lending activities in the Institutional Securities business segment primarily include loans orand lending commitments to corporate clients. The lending activities in the Wealth Management business segment primarily includeinclude: securities-based lending, thatwhich allows clients to borrow money against the value of qualifying securitiessecurities; and also include residential real estate loans.

We expect our lending activities to continue to grow through further market penetration of the Wealth Management business segment’s client base. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk.” For further discussion about loans and lending commitments, see Notes 7 and 11 to the consolidated financial statements.

U.S. Bank Subsidiaries’ Supplemental Financial Information Excluding Transactions with the Parent Company1

 

$ in billions  

At
June 30,

2017

   At
December 31,
2016		   

At
    March 31,    

2018

   At
  December 31,  
2017		 

U.S. Bank Subsidiaries assets

  $175.4   $180.7 

U.S. Bank Subsidiaries investment securities portfolio:

    

Assets

  $188.3   $185.3 

Investment securities portfolio:

    

Investment securities—AFS

   38.3    50.3    43.1    42.0 

Investment securities—HTM

   15.3    13.6    18.0    17.5 

Total

  $53.6   $63.9 

Wealth Management U.S. Bank Subsidiaries data

 

Securities-based lending and other loans1

  $39.4   $36.0 

Total investment securities

  $61.1   $59.5 

Deposits2

  $160.1   $159.1 

Wealth Management

Wealth Management

 

Securities-based lending and other loans3

  $41.7   $41.2 

Residential real estate loans

   25.7    24.4    26.6    26.7 

Total

  $65.1   $60.4   $68.3   $67.9 

Institutional Securities U.S. Bank Subsidiaries data

 

Institutional Securities

Institutional Securities

 

Corporate loans

  $20.0   $20.3   $27.4   $24.2 

Wholesale real estate loans

   10.7    9.9    12.4    12.2 

Total

  $30.7   $30.2   $39.8   $36.4 

AFS—Available for sale

HTM—Held to maturity

1.

Amounts exclude transactions with the Parent Company and between the bank subsidiaries.

2.

For further information on deposits, see “Liquidity and Capital Resources—Funding Management—Unsecured Financing” herein.

3.

Other loans primarily include tailored lending.

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

Income Tax Matters

Effective Tax Rate

 

   Three Months Ended
June 30,		     Six Months Ended
June 30,		 
    2017   2016      2017    2016 

From continuing operations

   32.0%   33.5%      30.5%    33.4% 
March 2018 Form 10-Q14

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

Management’s Discussion and AnalysisLOGO

Accounting Development Updates

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

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

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

 

• 

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

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

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

June 2017 Form 10-Q18

Management’s Discussion and AnalysisLOGO

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

•

Leases. This accounting update requires lessees to recognize onin the balance sheet all leases with terms exceeding one year, which results in the recognition of a right of use asset and corresponding lease liability, including for those leases that we currently classify as operating leases. The accounting for leases where we are the lessor is largely unchanged.

The right of use asset and lease liability will initially be measured using the present value of the remaining rental payments. TheThis change to the accounting for leases where we are lessee requires modifications to our lease accounting systems and determining the lessor is largely unchanged.present value of the remaining rental payments. Key aspects of the latter include concluding upon the discount rate and determining whether to include non-lease components in rental payments. This update is effective as of January 1, 2019.2019 with early adoption permitted.

 

• 

Financial Instruments–Credit Losses. This accounting update impacts the impairment model for certain financial assets measured at amortized cost such as loans held for investment and HTM securities. The amendments in this update will accelerate the recognition of credit losses by replacing the incurred loss impairmentrequiring a CECL methodology with a current expected credit loss (“CECL”) methodology that requires anto estimate of expected credit losses over the entire life of the financial asset. Additionally, althoughasset, recorded at inception or purchase. CECL will replace the CECL methodology will not applyloss model currently applicable to AFS debtloans held for investment, HTM securities theand other receivables carried at amortized cost.

The update will require establishment of an allowance to reflect impairment of these securities, thereby eliminatingalso eliminates the concept of other-than-temporary impairment for AFS securities. Impairments on AFS securities will be required to be recognized in earnings through an allowance, when the fair value is less than amortized cost and a permanent write-down.credit loss exists or the securities are expected to be sold before recovery of amortized cost.

Under the update, there may be an ability to determine there are no expected credit losses in certain circumstances,e.g., based on collateral arrangements for lending and financing transactions or based on the credit quality of the borrower or issuer.

Overall, the amendments in this update are expected to accelerate the recognition of credit losses for portfolios

where the CECL models will be applied. This update is effective as of January 1, 2020.2020 with early adoption permitted as of January 1, 2019.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions (see Note 1 to the consolidated financial statements). We believe that of our significant accounting policies (see Note 2 to the consolidated financial statements in Item 8 of the 20162017 Form10-K and Note 2 to the consolidated financial statements), the fair value, goodwill and intangible assets, legal and regulatory contingencies and income taxes policies involve a higher degree of judgment and complexity. For a further discussion about our critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in Part II, Item 7 of the 20162017 Form10-K.

Liquidity and Capital Resources

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

The Balance Sheet

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

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

15March 2018 Form 10-Q

Management’s Discussion and AnalysisLOGO

Total Assets by Business Segment

 

  At June 30, 2017 

$ in millions

 Institutional
Securities		  Wealth
Management		  Investment
Management		  Total 

Assets

    

Cash and cash equivalents1

 $30,203  $14,391  $65  $44,659 

Trading assets at fair value

  288,255   77   2,470   290,802 

Investment securities

  18,077   53,499   —   71,576 

Securities purchased under agreements to resell

  90,490   6,918   —   97,408 

Securities borrowed

  126,428   294   —   126,722 

Customer and other receivables

  35,954   18,380   583   54,917 

Loans, net of allowance

  32,528   65,106   5   97,639 

Other assets2

  43,668   12,070   1,555   57,293 

Total assets

 $665,603  $170,735  $4,678  $841,016 
  At March 31, 2018 
$ in millions IS  WM  IM  Total 

Assets

    

Cash and cash equivalents1

 $74,096  $13,173  $75  $87,344 

Trading assets at fair value

  269,200   85   3,759   273,044 

Investment securities

  19,913   60,728   —   80,641 

Securities purchased under agreements to resell

  72,460   7,786   —   80,246 

Securities borrowed

  135,608   227   —   135,835 

Customer and other receivables

  48,257   17,973   605   66,835 

Loans, net of allowance2

  40,804   68,326   5   109,135 

Other assets3

  14,447   9,305   1,663   25,415 

Total assets

 $  674,785  $  177,603  $  6,107  $  858,495 
  At December 31, 2017 
$ in millions IS  WM  IM  Total 

Assets

    

Cash and cash equivalents1

 $63,597  $16,733  $65  $80,395 

Trading assets at fair value

  295,678   59   2,545   298,282 

Investment securities

  19,556   59,246   —   78,802 

Securities purchased under agreements to resell

  74,732   9,526   —   84,258 

Securities borrowed

  123,776   234   —   124,010 

Customer and other receivables

  36,803   18,763   621   56,187 

Loans, net of allowance2

  36,269   67,852   5   104,126 

Other assets3

  14,563   9,596   1,514   25,673 

Total assets

 $664,974  $182,009  $4,750  $851,733 

19June 2017 Form 10-Q

Management’s Discussion and AnalysisLOGO
IS—Institutional Securities

WM—Wealth Management

  At December 31, 2016 
$ in millions Institutional
Securities		  Wealth
Management		  Investment
Management		  Total 

Assets

    

Cash and cash equivalents1

 $25,291  $18,022  $68  $43,381 

Trading assets at fair value

  259,680   64   2,410   262,154 

Investment securities

  16,222   63,870   —   80,092 

Securities purchased under agreements to resell

  96,735   5,220   —   101,955 

Securities borrowed

  124,840   396   —   125,236 

Customer and other receivables

  26,624   19,268   568   46,460 

Loans, net of allowance

  33,816   60,427   5   94,248 

Other assets2

  45,941   13,868   1,614   61,423 

Total assets

 $629,149  $181,135  $4,665  $814,949 

IM—Investment Management

1.

Cash and cash equivalents include cashincludes Cash and due from banks, and interestInterest bearing deposits with banks.banks and Restricted cash.

2.

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).

3.

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

A substantial portion of total assets consists of liquid marketable securities and short-term receivables arising principally from sales and trading activities in the Institutional Securities business segment. Total assets increased to $841.0$858.5 billion at June 30, 2017March 31, 2018 from $814.9$851.7 billion at December 31, 2016,2017, primarily driven by an increase in tradingCustomer and other receivables and growth within the Institutional Securities loan portfolios. Trading Assets within the Institutional Securities business segment declined as we sold inventory within Institutional Securities. The increase reflects higher market values for corporate equities compared with December 31, 2016, along within Equities to support increased trading activity across fixed income products including U.S. governmentdemand and agency securitieschanges in client positioning. This was offset by increases in Securities borrowed and Other sovereign government obligations.GLR cash deposits. For further information regarding our GLR, see “Global Liquidity Reserve” herein.

Securities Repurchase Agreements and Securities Lending

Securities borrowed or securities purchased under agreements to resell and securities loaned or securities sold under agreements to repurchase are treated as collateralized financings (see Note 2 to the consolidated financial statements in the 20162017 Form10-K and Note 6 to the consolidated financial statements).

Collateralized Financing Transactions

 

$ in millions  At
June 30,
2017		   At
December 31,
2016		 

Securities purchased under agreements to resell and Securities borrowed1

  $224,130   $227,191 

Securities sold under agreements to repurchase and Securities loaned1

  $67,559   $70,472 

Securities received as collateral2

  $14,408   $13,737 
$ in millions  At
March 31,
2018		   At
December 31,
2017		 

Securities purchased under agreements to resell and Securities borrowed

  $        216,081   $        208,268 

Securities sold under agreements to repurchase and Securities loaned

  $65,131   $70,016 

Securities received as collateral1

  $8,693   $13,749 
   Average Daily Balance
Three Months Ended		 
$ in millions           March 31,
         2018		   December 31,
2017		 

Securities purchased under agreements to resell and Securities borrowed

  $211,753   $214,343 

Securities sold under agreements to repurchase and Securities loaned

  $65,684   $66,879 

 

   

Daily Average Balance

Three Months Ended

 

$ in millions

  June 30,
2017		   December 31,
2016		 

Securities purchased under agreements to resell and Securities borrowed1

  $220,045   $224,355 

Securities sold under agreements to repurchase and Securities loaned1

  $72,040   $68,908 
1.

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

2.

Included in Trading assets in the consolidated balance sheets.

Customer Securities Financing

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

Liquidity Risk Management Framework

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

The core components of our Liquidity Risk Management Framework are the Required Liquidity Framework, Liquidity Stress Tests and the Global Liquidity Reserve (“GLR”),GLR, which support our target liquidity profile. For further discussion about the Firm’s Required Liquidity Framework and Liquidity Stress Tests, see “Management’s Discussion and Analysis of Financial

March 2018 Form 10-Q16

Management’s Discussion and AnalysisLOGO

Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework” in Part II, Item 7 of the 20162017 Form10-K.

At June 30, 2017March 31, 2018 and December 31, 2016,2017, we maintained sufficient liquidity to meet current and contingent funding obligations as modeled in our Liquidity Stress Tests.

Global Liquidity Reserve

We maintain sufficient global liquidity reserves pursuant to our Required Liquidity Framework. For further discussion of our GLR, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” in Part II, Item 7 of the 2016 2017Form10-K.

June 2017 Form 10-Q20

Management’s Discussion and AnalysisLOGO

GLR by Type of Investment

 

$ in millions

  

At

June 30,

2017

   

At

December 31,
2016

   

At

March 31,
2018

   At
December 31,
2017		 

Cash deposits with banks

  $10,057   $8,679 

Cash deposits with central banks

   29,427    30,568 

Cash deposits with banks1

  $9,930   $7,167 

Cash deposits with central banks1

   37,243    33,791 

Unencumbered highly liquid securities:

        

U.S. government obligations

   71,336    78,615    84,155    73,422 

U.S. agency and agency mortgage-backed securities

   52,967    46,360    51,805    55,750 

Non-U.S. sovereign obligations1

   21,290    30,884 

Non-U.S. sovereign obligations2

   20,334    19,424 

Other investment grade securities

   3,219    7,191    2,996    3,106 

Total

  $188,296   $202,297   $        206,463   $        192,660 

 

1.

Primarily included in Cash and due from banks and Interest bearing deposits with banks in the balance sheets.

2.

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

GLR Managed by Bank andNon-Bank Legal Entities

 

   

At

June 30,
2017

   

At

December 31,
2016

   Daily Average
Balance
Three Months
Ended		 
$ in millions      June 30,
2017		 

Bank legal entities

      

Domestic

  $62,897   $74,411   $65,976 

Foreign

   4,145    4,238    3,949 

Total Bank legal entities

   67,042    78,649    69,925 

Non-Bank legal entities

      

Domestic:

      

Parent Company

   48,987    66,514    56,070 

Non-Parent Company

   32,953    18,801    31,557 

Total Domestic

   81,940    85,315    87,627 

Foreign

   39,314    38,333    42,620 

TotalNon-Bank legal entities

   121,254    123,648    130,247 

Total

  $188,296   $202,297   $200,172 

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

  

At
March 31,

2018

 

  

At
December 31,

2017

 

  

Average Daily     
Balance     
Three Months Ended     

 

 
$ in millions   March 31, 2018      

Bank legal entities

            

Domestic

 $68,826  $70,364  $69,955 

Foreign

  4,602   4,756   4,263 

Total Bank legal entities

  73,428   75,120   74,218 

Non-Bank legal entities

 

  

Domestic:

   

Parent Company

  48,998   41,642   44,184 

Non-Parent Company

  32,415   35,264   32,356 

Total Domestic

  81,413   76,906   76,540 

Foreign

  51,622   40,634   44,216 

TotalNon-Bank legal entities

  133,035   117,540   120,756 

Total

 $    206,463  $    192,660  $    194,974 

Regulatory Liquidity Framework

Liquidity Coverage Ratio

We and our U.S. Bank Subsidiaries are subject to the LCR requirements including a requirement to calculate each entity’s LCR on each business day. The Basel Committee on Banking Supervision’s (“Basel Committee”) Liquidity Coverage Ratio (“LCR”) standard isrequirements are designed to ensure that banking organizations have sufficient high-quality liquid assets (“HQLA”)HQLA to cover net cash outflows arising from significant stress over 30 calendar days. The standard’s objective is to promotedays, thus promoting the short-term resilience of the liquidity risk profile of banking organizations. We and our U.S. Bank Subsidiaries are subject tocompliant with the minimum required LCR requirements issued by U.S. banking regulators (“U.S. LCR”), which are based on the Basel Committee’s LCR, including a requirement to calculate each entity’s U.S. LCR on each business day.of 100%.

HQLA by Type of Asset and LCR

 

$ in millions  At
June 30,
2017		   At
December 31,
2016		 

Cash1

  $29,608   $30,569 

Securities2

   138,666    129,524 

Total3

  $168,274   $160,093 
   Average Daily Balance
Three Months Ended		 
$ in millions      March 31, 2018   December 31, 2017 

HQLA

    

Cash deposits with central banks

  $33,350   $33,450 

Securities1

   125,015    125,269 

Total

  $158,365   $158,719 

LCR

   121%    128% 

 

1.

Cash on deposit with central banks.

2.

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

3.

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

The decrease in the LCR in the current quarter is due to an increase in net outflows (the denominator of the ratio) driven by the impact of an increase in lending commitments, primarily within the Institutional Securities business segment.

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

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

Net Stable Funding Ratio

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

The Basel Committee on Banking Supervision (“Basel Committee”) has previously finalized the NSFR framework in 2014.framework. In May 2016, the U.S. banking regulatorsagencies issued a proposal to implement the NSFR in the U.S. If adopted as proposed, the requirements, which would apply to us and our U.S. Bank Subsidiaries beginning January 1, 2018. We continue to evaluate the potential impact of the proposal, which is subject to further rulemaking procedures following the closing of the public comment period in August 2016.Subsidiaries. Our preliminary estimates, based on the current proposal, indicate that actions will be necessary to meet the requirement, which we would expect to

17March 2018 Form 10-Q

Management’s Discussion and AnalysisLOGO

accomplish by the effective date of any final rule. Our preliminary estimates are subject to risks and uncertainties that may cause actual results based on the final rule.rule to differ materially from estimates. For an additional discussion of the NSFR, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Liquidity Framework—Net Stable Funding Ratio” in Part II, Item 7 of the 2016 2017Form10-K.

21June 2017 Form 10-Q

Management’s Discussion and AnalysisLOGO

Funding Management

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

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

Secured Financing

For a discussion of our secured financing activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Funding Management—Secured Financing” in Part II, Item 7 of the 20162017 Form10-K.

At June 30, 2017March 31, 2018 and December 31, 2016,2017, the weighted average maturity of our secured financing of less liquid assets was greater than 120 days.

Unsecured Financing

For a discussion of our unsecured financing activities, see “Management’s Discussion and Analysis of FinancingFinancial Condition and Results of Operations—Liquidity and Capital Resources—Funding Management—Unsecured Financing” in Part II, Item 7 of the 20162017 Form10-K and see Note 4 to the consolidated financial statements.

Deposits

 

$ in millions  At June 30, 2017   At December 31, 2016   At March 31,
2018		   At
December 31,
2017		 

Deposits

  $144,913   $155,863 

Savings and demand deposits:

    

Brokerage sweep deposits1

  $129,177   $135,946 

Savings and other

   9,181    8,541 

Total Savings and demand deposits

   138,358    144,487 

Time deposits2

   22,066    14,949 

Total

  $        160,424   $        159,436 

The majority of deposits in our U.S. Bank Subsidiaries

1.

Represents balances swept from client brokerage accounts.

2.

Certain time deposit accounts are carried at fair value under the fair value option (see Note 3 to the financial statements).

Deposits are primarily sourced from our retail brokerage accountsWealth Management clients and are considered to have stable,low-cost funding characteristics. Available funding sources to our U.S. Bank Subsidiaries include demand deposit accounts, money market deposit accounts, timeTotal deposits repurchase agreements, federal funds purchased and Federal Home Loan Bank advances. The reduction in Deposits as of June 30, 2017at March 31, 2018 were up slightly compared with December 31, 2016 was2017, primarily driven by measures to increase Time deposits and Savings and other deposits, partially offset by a reduction in Brokerage sweep deposits due to client deployment of cash into the markets and typical seasonal client tax payments.

Short-Term Borrowingsinvestments.

$ in millions  

At

June 30, 2017

   

At

December 31, 2016

 

Short-term borrowings

  $916   $941 

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

Long-Term Borrowings

We believe that accessing debt investors through multiple distribution channels helps provide consistent access to the unsecured markets. In addition, the issuance of long-term borrowings with original maturities greater than one year allows us to reduce reliance on short-term credit sensitive instruments. Long-term borrowingsBorrowings with original maturities greater than one year are generally managed to achieve staggered maturities, thereby mitigating refinancing risk, and to maximize investor diversification through sales to global institutional and retail clients across regions, currencies and product types. Availability

The availability and cost of financing to us can vary depending on market conditions, the volume of certain trading and lending activities, our credit ratings and the overall availability of credit.

We mayalso engage in, various transactionsand may continue to engage in, repurchases of our borrowings in the credit markets (including, for example, debt retirements) that we believe are in our investors’ best interests.

Long-term Borrowings by Maturity at June 30, 2017

$ in millions  Parent
Company		   Subsidiaries   Total 

2017

  $8,742   $4,079   $12,821 

2018

   18,532    2,044    20,576 

2019

   21,738    1,567    23,305 

2020

   19,238    1,860    21,098 

2021

   15,826    1,350    17,176 

Thereafter

   80,485    8,651    89,136 

Total

  $164,561   $19,551   $184,112 

Maturities over next 12 months

 

       $28,823 

Approximate net increase in long-term borrowingsJune 30, 2017throughJuly 28, 2017

 

  $7,518 

Includes:

 

  

Senior debt issuance onJuly 24, 2017

 

   7,000 

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

 

 

June 2017March 2018 Form 10-Q  2218  

Management’s Discussion and Analysis  LOGOLOGO

Borrowings by Remaining Maturity at March 31, 20181

 

$ in millions  Parent
Company		   Subsidiaries   Total 

Original maturities of one year or less

  $—     $1,256   $1,256 

Original maturities greater than one year

 

  

2018

  $12,783   $3,318   $16,101 

2019

   21,765    3,769    25,534 

2020

   18,775    2,284    21,059 

2021

   20,163    2,650    22,813 

2022

   15,261    1,985    17,246 

Thereafter

   78,873    12,082    90,955 

Total

  $167,620   $26,088   $193,708 

Total Borrowings

  $      167,620   $      27,344   $      194,964 

Maturities over next 12 months2

 

  $23,029 

1.

Original maturity in the table is generally based on contractual final maturity. For Borrowings with put options, remaining maturity represents the earliest put date.

2.

Includes only borrowings with original maturities greater than one year.

Borrowings increased to $194,964 million as of March 31, 2018 compared with $192,582 million at December 31, 2017. This increase is a result of issuances, partially offset primarily by maturities and retirements as presented in the following table.

$ in millions  Three Months Ended
March 31, 2018		 

Issued

  $15,370 

Matured or retired

   11,377 

For further information on Borrowings, see Note 10 to the financial statements.

Credit Ratings

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

Our credit ratings do not include any uplift from perceived government support from any rating agency given the significant progress of the U.S. financial reform legislation and regulations. Some rating agencies have stated that they

currently incorporate various degrees of credit rating uplift fromnon-governmental third-party sources of potential support.

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

 

Parent Company and MSBNA Senior Unsecured Ratings at April 30, 2018

  Parent Company
   Short-termShort-Term
Debt		 Long-termLong-Term
Debt		 Rating
Outlook

DBRS, Inc.

 R-1 (middle) A (high) Stable

Fitch Ratings, Inc.

 F1 A Stable

Moody’s Investors Service, Inc.

 P-2 A3 Stable

Rating and Investment Information, Inc.

 a-1 A- Stable

Standard & Poor’sS&P Global Ratings

 A-2 BBB+ Stable

 

   Morgan Stanley Bank, N.A.MSBNA
    Short-termShort-Term
Debt		  Long-termLong-Term
Debt		  Rating
Outlook

Fitch Ratings, Inc.

  F1  A+  Stable

Moody’s Investors Service, Inc.

  P-1  A1  Stable

Standard & Poor’sS&P Global Ratings

  A-1  A+  Stable

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

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

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

Incremental Collateral or Terminating Payments upon

Potential Future Rating Downgrade

 

$ in millions  

At

June 30, 2017

   

At

December 31, 2016

   

At
March 31,

2018

   

At
December 31,

2017

 

One-notch downgrade

  $950   $1,292   $806   $822 

Two-notch downgrade

   720    875    611    596 

19March 2018 Form 10-Q

Management’s Discussion and AnalysisLOGO

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

Capital Management

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

Common Stock

We repurchased approximately $500 million of

   Three Months Ended
March 31,		 

$ in millions

   2018    2017 

Repurchases of common stock under our share repurchase program

  $        1,250   $        750 

From time to time we repurchase our outstanding common stock, including as part of our share repurchase program duringprogram. As previously announced, on April 18, 2018, we entered into a sales plan with Mitsubishi UFJ Financial Group, Inc. (“MUFG”) whereby MUFG will sell shares of the current quarter and $1,250 million during the current year period. We repurchased approximately $625 million during the prior year quarter and $1,250 millionFirm’s common stock to us, as part of our share repurchase program. The sales plan is only intended to maintain MUFG’s ownership percentage below 24.9% in the prior year period (see Note 14order to comply with MUFG’s passivity commitments to the consolidated financial statements).

Federal Reserve and will have no impact on the strategic alliance between MUFG and us, including the joint venture in Japan. For a description of our share repurchase program, see “Unregistered Sales of Equity Securities and Use of Proceeds.”

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

Common Stock Dividend Announcement

 

Announcement date

  23April 18, 2018

Amount per share

  June 2017 Form 10-Q$0.25

Date to be paid

May 15, 2018

Shareholders of record as of

April 30, 2018

Preferred Stock

Preferred Stock Dividend Announcement

Management’s Discussion and Analysis

Announcement date

  LOGOMarch 15, 2018

Date paid

April 16, 2018

Shareholders of record as of

March 29, 2018

Preferred Stock

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

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

Tangible Equity

   

At
June 30,
2017

  

At
December 31,
2016

  Monthly Average
Balance
Three Months Ended		 
$ in millions    June 30, 2017 

Common equity

  $70,306  $68,530  $69,916 

Preferred equity

   8,520   7,520   8,520 

Morgan Stanley shareholders’ equity

   78,826   76,050   78,436 

Less: Goodwill and net intangible assets

   (9,156)   (9,296)   (9,194) 

Morgan Stanley tangible shareholders’ equity1

  $69,670  $66,754  $69,242 

Common equity

  $70,306  $68,530  $69,916 

Less: Goodwill and net intangible assets

   (9,156)   (9,296)   (9,194) 

Tangible common equity1

  $61,150  $59,234  $60,722 

1.

Morgan Stanley tangible shareholders’ equity and tangible common equity arenon-GAAP financial measures.

Regulatory Requirements

Regulatory Capital Framework

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

The Basel Committee has recently published revisions to certain standards in its capital framework, and is actively considering potential revisions to other capital standards, that, if adopted by the U.S. banking agencies, could substantially change the U.S. regulatory capital framework. For additional discussion of regulatory capital framework, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Capital Framework” in Part II, Item 7 of the 2016 Form10-K.

Regulatory Capital Requirements

We are required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. A summary of the calculations ofFor more information on our regulatory capital risk-weighted assets (“RWAs”)requirements, see “Management’s Discussion and transition provisions follows.Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Regulatory Capital Requirements” in the 2017 Form10-K.

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

March 2018 Form 10-Q20

Management’s Discussion and AnalysisLOGO

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

 

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

 

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

 

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

In 2017 thephase-in amount forand 2018, each of the buffers is 50% and 75%, respectively, of the fullyphased-in buffer requirement.2019 requirement noted above. Failure to maintain the buffers would result in restrictions on our ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers. For a further discussion of theG-SIB capital surcharge, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—RegulatoryRequirements—G-SIB Capital Surcharge” in Part II, Item 7the 2017Form 10-K.

Our risk-based capital ratios for purposes of determining regulatory compliance are the lower of the 2016 Form10-K.capital ratios computed under (i) the standardized approaches for calculating credit risk and market risk RWA (“Standardized Approach”) and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWA (“Advanced Approach”). At March 31, 2018 and December 31, 2017, our ratios are based on the Standardized Approach rules.

Effective January 1, 2019, Common Equity Tier 1 capital, Tier 1 capital and Total capital requirements, inclusive of buffers, will increase to 10.0%, 11.5%, and 13.5%, respectively.

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

Risk-Weighted Assets.RWAs reflect both ouron- andoff-balance sheet risk as well as capital charges attributable to the risk of loss arising from the following:Regulatory Capital Ratios

 

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

   At March 31, 2018 
       FullyPhased-In 
$ in millions  Required
Ratio		   Standardized   Advanced 

Risk-based capital

      

Common Equity Tier 1 capital

    $60,568   $60,568 

Tier 1 capital

        69,213    69,213 

Total capital

        79,363    79,138 

Total RWA

        390,390    378,442 

Common Equity Tier 1 capital ratio

   8.6%    15.5%    16.0% 

Tier 1 capital ratio

   10.1%    17.7%    18.3% 

Total capital ratio

   12.1%    20.3%    20.9% 

Leverage-based capital

      

Adjusted average assets1

       $      846,868    N/A 

Tier 1 leverage ratio

   4.0%    8.2%    N/A 

 

June 2017 Form 10-Q24

Management’s Discussion and AnalysisLOGO

  At December 31, 2017 
     Transitional2  FullyPhased-In 
$ in millions Required
Ratio		  Standardized  Advanced  Standardized  Advanced 

Risk-based capital

     

Common Equity

     

Tier 1 capital

     $61,134  $61,134  $60,564  $60,564 

Tier 1 capital

      69,938   69,938   69,120   69,120 

Total capital

      80,275   80,046   79,470   79,240 

Total RWA

      369,578   350,212   377,241   358,324 

Common Equity Tier 1 capital ratio

  7.3%   16.5%   17.5%   16.1%   16.9% 

Tier 1 capital ratio

  8.8%   18.9%   20.0%   18.3%   19.3% 

Total capital ratio

  10.8%   21.7%   22.9%   21.1%   22.1% 

Leverage-based capital

     

Adjusted average assets1

     $    842,270   N/A  $    841,756   N/A 

Tier 1 leverage ratio

  4.0%   8.3%   N/A   8.2%   N/A 

 

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

•

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

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

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

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

Minimum Risk-Based Capital Ratios: Transitional Provisions

LOGO

1.

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

Transitional and FullyPhased-In Regulatory Capital Ratios

 

 

   At June 30, 2017 
   Transitional  Pro Forma Fully Phased-In 
$ in millions  Standardized  Advanced  Standardized  Advanced 

Risk-based capital

     

Common Equity Tier 1 capital

  $61,604  $61,604  $60,862  $60,862 

Tier 1 capital

   70,380   70,380   69,603   69,603 

Total capital

   81,302   81,025   80,537   80,261 

Total RWAs

   368,963   370,679   379,191   381,520 

Common Equity Tier 1 capital ratio

   16.7%   16.6%   16.1%   16.0% 

Tier 1 capital ratio

   19.1%   19.0%   18.4%   18.2% 

Total capital ratio

   22.0%   21.9%   21.2%   21.0% 

Leverage-based capital

     

Adjusted average assets1

  $828,365   N/A  $827,842   N/A 

Tier 1 leverage ratio2

   8.5%   N/A   8.4%   N/A 

   At December 31, 2016 
   Transitional   Pro Forma Fully Phased-In 
$ in millions  Standardized  Advanced  Standardized  Advanced 

Risk-based capital

     

Common Equity Tier 1 capital

  $60,398  $60,398  $58,616  $58,616 

Tier 1 capital

   68,097   68,097   66,315   66,315 

Total capital

   78,917   78,642   77,155   76,881 

Total RWAs

   340,191   358,141   351,101   369,709 

Common Equity Tier 1 capital ratio

   17.8%   16.9%   16.7%   15.9% 

Tier 1 capital ratio

   20.0%   19.0%   18.9%   17.9% 

Total capital ratio

   23.2%   22.0%   22.0%   20.8% 

Leverage-based capital

     

Adjusted average assets1

  $811,402   N/A  $810,288   N/A 

Tier 1 leverage ratio2

   8.4%   N/A   8.2%   N/A 

N/A—Not Applicable

1.

Adjusted average assets represent the denominator of the Tier 1 leverage ratio and are composed of the average daily balance of consolidatedon-balance sheet assets under U.S. GAAP during the calendarcurrent quarter and the quarter ended June 30, 2017 and December 31, 20162017 adjusted for disallowed goodwill, transitional intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other adjustments.

2.

The minimum Tier 1 leverage ratio requirement is 4.0%.Regulatory compliance was determined based on capital ratios calculated under transitional rules until December 31, 2017.

TheAt December 31, 2017, the pro formafully phased-in estimated amounts utilize fullyphased-in Tier 1 capital, including the fullyphased-in Tier 1 capital deductions that applied beginning January 1, 2018. These pro formafully phased-in estimates inwere non-GAAP financial measures because the previous tables arerelated capital rules were not yet effective at December 31, 2017. These estimates were based on our current understanding of the capital rules and other factors which may be subject to change as we receive additional clarification and implementation guidance fromat the Federal Reserve and as the interpretation of the regulations evolves over time. These fullyphased-in pro forma estimates arenon-GAAP financial measures because they were not yet effective at June 30, 2017. These preliminary estimates are subject to risks and uncertainties that may cause actual results to differ materially and should not be taken as a projection of what our capital, capital ratios, RWAs, earnings or other results will actually be at future dates. For a discussion of risks and uncertainties that may affect our future results, see “Risk Factors” in Part I, Item 1A of the 2016 Form10-K.

 

 

  2521  June 2017March 2018 Form 10-Q

Management’s Discussion and Analysis  LOGOLOGO

 

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

 

    At June 30, 2017March 31, 2018 

Common Equity Tier 1 risk-based capital ratio

   6.5% 

Tier 1 risk-based capital ratio

   8.0% 

Total risk-based capital ratio

   10.0% 

Tier 1 leverage ratio

   5.0% 

SLR

6.0%

For us to remain a financial holding company,an FHC, our U.S. Bank Subsidiaries must qualify as well-capitalized by maintaining the minimum ratio requirements set forth in the previous table. The Federal Reserve has not yet revised the well-capitalized standard for financial holding companiesFHCs to reflect the higher capital standards required forof us under the capital rules. Assuming that the Federal Reserve would apply the same or very similar well-capitalized standards to financial holding companies,FHCs, each of our risk-based capital ratios, and Tier 1 leverage ratio and SLR at June 30, 2017March 31, 2018 would have exceeded the revised well-capitalized standard. The Federal Reserve may require usan FHC to maintain risk- and leverage-based capital ratios substantially in excess of mandated minimumwell-capitalized levels, depending upon general economic conditions and a financial holding company’sthe FHC’s particular condition, risk profile and growth plans.

Regulatory compliance was determined based on capital ratios including regulatory capital and RWA calculated under the transitional rules until December 31, 2017. The regulatory capital analyses in the following tables are presented using pro forma fullyphased-in estimates as of December 31, 2017, which are equivalent to amounts calculated as of March 31, 2018.

FullyPhased-InRegulatory Capital Calculated under Transitional Rules

 

$ in millions  

At

June 30, 2017

 

At

December 31,

2016

  

At

March 31, 2018

 

At

December 31, 20171

 

Common Equity Tier 1 capital

     

Common stock and surplus

  $              16,469  $              17,494  $12,911  $14,354 

Retained earnings

   56,325  53,679   60,009  57,577 

AOCI

   (2,488)  (2,643)   (3,406)  (3,060) 

Regulatory adjustments and deductions:

     

Net goodwill

   (6,532)  (6,526)   (6,716)  (6,599) 

Net intangible assets (other than goodwill and mortgage servicing assets)

   (2,051)  (1,631)   (2,424)  (2,446) 

Other adjustments and deductions1

   (119)  25 

Other adjustments and deductions2

  194  738 

Total Common Equity Tier 1 capital

  $61,604  $60,398  $60,568  $60,564 

Additional Tier 1 capital

     

Preferred stock

  $8,520�� $7,520  $8,520  $8,520 

Noncontrolling interests

   489  613   482  415 

Other adjustments and deductions2

   (66)  (246) 

Other adjustments and deductions

  (23)  (23) 

Additional Tier 1 capital

  $8,943  $7,887  $8,979  $8,912 

Deduction for investments in covered funds

   (167)  (188)   (334)  (356) 

Total Tier 1 capital

  $70,380  $68,097  $69,213  $69,120 

Standardized Tier 2 capital

     

Subordinated debt

  $10,351  $10,303  $9,612  $9,839 

Noncontrolling interests

   80  62   113  98 

Eligible allowance for credit losses

   493  464   448  423 

Other adjustments and deductions

   (2)  (9)   (23)  (10) 

Total Standardized Tier 2 capital

  $10,922  $10,820  $10,150  $10,350 

Total Standardized capital

  $81,302  $78,917  $79,363  $79,470 

Advanced Tier 2 capital

     

Subordinated debt

  $10,351  $10,303  $9,612  $9,839 

Noncontrolling interests

   80  62   113  98 

Eligible credit reserves

   216  189   223  193 

Other adjustments and deductions

   (2)  (9)   (23)  (10) 

Total Advanced Tier 2 capital

  $10,645  $10,545  $9,925  $10,120 

Total Advanced capital

  $81,025  $78,642  $79,138  $              79,240 
 

 

June 2017March 2018 Form 10-Q  2622  

Management’s Discussion and Analysis  LOGOLOGO

 

FullyPhased-InRegulatory Capital Rollforward Calculated under Transitional Rules

 

$ in millions Six Months Ended
June 30, 2017		  Three Months Ended
March 31, 2018		 

Common Equity Tier 1 capital

  

Common Equity Tier 1 capital at December 31, 2016

 $60,398 

Common Equity Tier 1 capital at December 31, 20171

 $60,564 

Change related to the following items:

  

Value of shareholders’ common equity

  1,776   643 

Net goodwill

  (6)   (117) 

Net intangible assets (other than goodwill and mortgage servicing assets)

  (420)   22 

Other adjustments and deductions1

  (144) 

Common Equity Tier 1 capital at June 30, 2017

 $61,604 

Other adjustments and deductions2

  (544) 

Common Equity Tier 1 capital at March 31, 2018

 $60,568 

Additional Tier 1 capital

  

Additional Tier 1 capital at December 31, 2016

 $7,887 

New issuance of qualifying preferred stock

  1,000 

Additional Tier 1 capital at December 31, 20171

 $8,912 

Change related to the following items:

  

Noncontrolling interests

  (124)   67 

Other adjustments and deductions2

  180 

Additional Tier 1 capital at June 30, 2017

  8,943 

Deduction for investments in covered funds at December 31, 2016

  (188) 

Other adjustments and deductions

  — 

Additional Tier 1 capital at March 31, 2018

  8,979 

Deduction for investments in covered funds at December 31, 2017

 (356) 

Change in deduction for investments in covered funds

  21   22 

Deduction for investments in covered funds at June 30, 2017

  (167) 

Tier 1 capital at June 30, 2017

 $70,380 

Deduction for investments in covered funds at March 31, 2018

  (334) 

Tier 1 capital at March 31, 2018

 $69,213 

Standardized Tier 2 capital

  

Tier 2 capital at December 31, 2016

 $10,820 

Tier 2 capital at December 31, 20171

 $10,350 

Change related to the following items:

  

Eligible allowance for credit losses

  29   25 

Other changes, adjustments and deductions3

  73   (225) 

Standardized Tier 2 capital at June 30, 2017

 $10,922 

Total Standardized capital at June 30, 2017

 $81,302 

Standardized Tier 2 capital at March 31, 2018

 $10,150 

Total Standardized capital at March 31, 2018

 $79,363 

Advanced Tier 2 capital

  

Tier 2 capital at December 31, 2016

 $10,545 

Tier 2 capital at December 31, 20171

 $10,120 

Change related to the following items:

  

Eligible credit reserves

  27   30 

Other changes, adjustments and deductions3

  73   (225) 

Advanced Tier 2 capital at June 30, 2017

 $10,645 

Total Advanced capital at June 30, 2017

 $81,025 

Advanced Tier 2 capital at March 31, 2018

 $9,925 

Total Advanced capital at March 31, 2018

 $79,138 

 

1.

The pro forma fullyphased-in estimates as of December 31, 2017 arenon-GAAP financial measures. See “SelectedNon-GAAP Financial Information” herein.

2.

Other adjustments and deductions used in the calculation of Common Equity Tier 1 capital include credit spread premium over risk-free rate for derivative liabilities, net deferred tax assets, netafter-tax DVA and adjustments related to AOCI.

2.

Other adjustments and deductions used in the calculation of Additional Tier 1 capital include credit spread premium over risk-free rate for derivatives liabilities, net deferred tax assets and netafter-tax DVA.

3.

Other changes, adjustments and deductions used in the calculations of Standardized and Advanced Tier 2 capital include changes in subordinated debt and noncontrolling interests.

RWAsFullyPhased-In RWA Rollforward Calculated under Transitional Rules

 

  

Six Months Ended

June 30, 20171

   Three Months Ended
March 31, 20181		 
$ in millions  Standardized Advanced   Standardized   Advanced 

Credit risk RWAs

   

Balance at December 31, 2016

  $278,874  $169,231 

Credit risk RWA

    

Balance at December 31, 20172

  $301,946   $170,754 

Change related to the following items:

       

Derivatives

   3,799   1,896    (229)    3,568 

Securities financing transactions

   4,406   1,719    177    2,242 

Securitizations

   1,362   992    (357)    (1,277) 

Investment securities

   (3,025)   (1,593)    (270)    320 

Commitments, guarantees and loans

   40   228    12,934    15,090 

Cash

   (452)   (520)    784    294 

Equity investments

   (933)   (991)    2,726    2,887 

Other credit risk2

   1,141   622 

Total change in credit risk RWAs

  $6,338  $2,353 

Balance at June 30, 2017

  $285,212  $171,584 

Market risk RWAs

   

Balance at December 31, 2016

  $61,317  $60,872 

Other credit risk3

   634    236 

Total change in credit risk RWA

  $16,399   $23,360 

Balance at March 31, 2018

  $318,345   $194,114 

Market risk RWA

    

Balance at December 31, 20172

  $75,295   $74,907 

Change related to the following items:

       

Regulatory VaR

   2,366   2,366    1,187    1,187 

Regulatory stressed VaR

   14,279   14,279    235    235 

Incremental risk charge

   2,448   2,448    2,968    2,968 

Comprehensive risk measure

   (1,935)   (1,670)    (2,135)    (1,947) 

Specific risk:

         

Non-securitizations

   2,138   2,138    (2,590)    (2,590) 

Securitizations

   3,138   3,175    (2,915)    (2,917) 

Total change in market risk RWAs

  $22,434  $22,736 

Balance at June 30, 2017

  $83,751  $83,608 

Operational risk RWAs

   

Balance at December 31, 2016

  $N/A  $128,038 

Change in operational risk RWAs3

   N/A   (12,551) 

Balance at June 30, 2017

  $N/A  $115,487 

Total RWAs

  $368,963  $370,679 

Total change in market risk RWA

  $(3,250)   $(3,064) 

Balance at March 31, 2018

  $72,045   $71,843 

Operational risk RWA

    

Balance at December 31, 20172

  $N/A   $112,663 

Change in operational risk RWA

   N/A    (178) 

Balance at March 31, 2018

  $N/A   $112,485 

Total RWA

  $390,390   $    378,442 

Regulatory VaR—Value-at-Risk

N/A—Not ApplicableVaR for regulatory capital requirements

1.

The RWAsRWA for each category in the table reflectreflects bothon- andoff-balance sheet exposures, where appropriate.

2.

The pro forma fullyphased-in estimates as of December 31, 2017 arenon-GAAP financial measures. See “SelectedNon-GAAP Financial Information” herein.

3.

Amount reflects assets not in a defined category,non-material portfolios of exposures and unsettled transactions, as applicable.

3.

Amount reflects a reduction in the internal loss data related to litigation utilized in the operational risk capital model.

Regulatory stressed VaRCredit risk RWA increased $14,279 million in the current year periodquarter under both the Standardized and Advanced Approaches primarily due to increased exposures in corporate lending within the Institutional Securities business segment. Credit risk RWA also increased under the Advanced approaches. These increases wereApproach due to increased exposures in derivatives.

Market risk RWA decreased in the current quarter under the Standardized and Advanced Approaches primarily driven by increasesdue to a decrease in trading inventory across the equities, global macro, and credit businesses within Institutional Securities, in response to client demand.standardized specific risk charges.

 

 

  2723  June 2017March 2018 Form 10-Q

Management’s Discussion and Analysis  LOGOLOGO

 

The decrease in operational risk RWA under the Advanced Approach reflects a reduction in the internal loss frequency related to litigation utilized in the operational risk capital model.

Supplementary Leverage Ratio

We and our U.S. Bank Subsidiaries are required to publicly disclose our supplementary leverage ratios, which will become effective as a capital standard on January 1, 2018. By January 1, 2018, we must also maintain a Tier 1 supplementary leverage capital buffer of at least 2% in addition to the 3% minimum supplementary leverage ratio (for a total of at least 5%), in order to avoid limitations on capital distributions, including dividends and stock repurchases, and discretionary bonus payments to executive officers. In addition, beginning in 2018, our U.S. Bank Subsidiaries must maintain a supplementary leverage ratio of 6% to be considered well-capitalized.

Pro Forma Supplementary Leverage Exposure and Ratio

 

  At June 30, 2017  At December 31, 2016 

$ in millions

 Transitional
basis		  Fully
phased-in1		  Transitional
basis		  Fully
phased-in1		 

Average total assets2

 $837,875  $837,875  $820,536  $820,536 

Adjustments3, 4

  241,726   241,203   242,113   240,999 

Pro forma supplementary leverage exposure

 $1,079,601  $1,079,078  $1,062,649  $1,061,535 

Pro forma supplementary leverage ratio

  6.5%   6.5%   6.4%   6.2% 
   At March 31,
2018		   At December 31, 2017 

$ in millions

  Fully Phased-in   Transitional
Basis1		   Fully
Phased-in2		 

Average total assets3

  $856,738   $851,510   $851,510 

Adjustments4, 5

   234,780    231,173    230,660 

Supplementary leverage exposure

  $1,091,518   $      1,082,683   $      1,082,170 

SLR

   6.3%    6.5%    6.4% 

 

1.

Transitional provisions applied until December 31, 2017.

2.

Estimated amounts utilize fullyphased-in Tier 1 capital, and take into considerationincluding the fullyphased-in Tier 1 capital deductiondeductions that would be applicable in 2018 after thephase-in period has ended.apply beginning January 1, 2018.

2.3.

Computed as the average daily balance of consolidated total assets under U.S. GAAP during the calendarcurrent quarter and the quarter ended June 30, 2017 and December 31, 2016.2017.

3.4.

Computed as the arithmetic meanaverage of themonth-end balances over the calendarcurrent quarter and the quarter ended June 30, 2017 and December 31, 2016.2017.

4.5.

Adjustments are to: (i) incorporate derivative exposures, including adding the related potential future exposure (including for derivatives cleared for clients), grossing up cash collateral netting where qualifying criteria are not met and adding the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) reflect the counterparty credit risk for repo-style transactions; (iii) add the credit equivalent amount foroff-balance sheet exposures; and (iv) apply other adjustments to Tier 1 capital, including disallowed goodwill, transitional intangible assets, certain deferred tax assets and certain investments in the capital instruments of unconsolidated financial institutions.

Pro forma fullyphased-inThe SLR became effective as a capital standard on January 1, 2018. We are required to maintain a Tier 1 supplementary leverage exposureratio of 3% as well as an enhanced SLR capital buffer of at least 2% (for a total of at least 5%) in order to avoid limitations on capital distributions, including dividends and ratio are based onstock repurchases, and discretionary bonus payments to executive officers. In addition, our current understandingU.S. Bank Subsidiaries must maintain an SLR of rules and other factors.6% to be considered well-capitalized.

U.S. Subsidiary Banks’ Pro FormaBank Subsidiaries’ FullyPhased-In Supplementary Leverage Ratios on a Transitional Basis

 

  At June 30, 2017 At December 31, 2016   At March 31, 2018   At December 31, 20171 

MSBNA

   8.8%  7.7%    9.0%    9.1% 

MSPBNA

   9.9%  10.2%    9.3%    9.3% 

1.

Estimated amounts utilize fullyphased-in Tier 1 capital, including the fullyphased-in Tier 1 capital deductions that apply beginning January 1, 2018.

The pro forma transitional andfully phased-in supplementary leverage exposures and pro forma supplementary leverage ratios both on transitional and fullyphased-inare non-GAAP financial bases, arenon-GAAP financial measures because they havewere not yet become effective. Our estimates are subject to risks and uncertainties that may cause actual results to differ materially from estimates based on these regulations. Further, these expectations should not be taken as projections of what our supplementary leverage ratios, earnings, assets or exposures will actually beeffective at future dates. For aDecember 31, 2017.

discussion of risks and uncertainties that may affect our future results, see “Risk Factors” in Part I, Item 1A of the 2016 Form10-K.

Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements

On December 15, 2016, the Federal Reserve adopted a final rule fortop-tier bank holding companiesBHCs of U.S.G-SIBsG-SIB (“covered BHCs”BHC”), including the Parent Company, that establishes external total loss-absorbing capacity (“TLAC”),TLAC, long-term debt (“LTD”) and clean holding company requirements. The final rule contains various definitions and restrictions, such as requiring eligible LTD to be issued by the covered BHC and be unsecured, have a maturity of one year or more from the date of issuance and not have certain derivative-linked features typically associated with certain types of structured notes. We expect to be in compliance with all requirements of the rule by January 1, 2019, the date that compliance is required.

The Federal Reserve’s proposed modifications to the enhanced SLR would also make corresponding changes to the calibration of the TLAC leverage-based requirements, as well as certain other technical changes to the TLAC rule. For a further discussion of the enhanced SLR, see “Regulatory Developments—Proposed Modifications to the Enhanced SLR and to the SLR Applicable to Our U.S. Bank Subsidiaries” herein.

For a further discussion of TLAC and LTD requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements” in Part II, Item 7 of the 20162017 Form10-K. For discussions about the interaction between the single point of entrySPOE resolution strategy and the TLAC and LTD requirements, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning” in Part I, Item 1 and “Risk Factors—Legal, Regulatory and Compliance Risk” in Part I, Item 1A of the 20162017 Form10-K.

Capital Plans and Stress Tests

Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements for large bank holding companies,BHCs, including us, which form part of the Federal Reserve’s annual Comprehensive Capital Analysis and Review (“CCAR”)CCAR framework.

We submitted our 2017 capital plan2018 Capital Plan (“Capital Plan”) andcompany-run stress test results to the Federal Reserve on April 5, 2017. On June 22, 2017,2018. We expect that the Federal Reserve publishedwill provide its response to our 2018 Capital Plan by June 30, 2018. There could be a range of potential outcomes to our Capital Plan whereby the Federal Reserve could object to, or otherwise require us to modify, such plan. See “Risk Factors” in the 2017 Form 10-K. The Federal Reserve is expected to publish summary results of the CCAR and Dodd-Frank Act supervisory stress tests of each large bank holding company,BHC, including us. On June 28, 2017, the Federal Reserve published summary results of CCAR and announced that they did not object to our 2017 Capital Plan (“Capital Plan”). The Capital Plan includes the repurchase of up to $5.0 billion of outstanding common stock for the period beginning July 1, 2017 through June 30, 2018, an increase from $3.5 billion in the 2016 Capital Plan. Additionally, the Capital Plan includes an increase in our quarterly commonus, by

 

 

June 2017March 2018 Form 10-Q  2824  

Management’s Discussion and Analysis  LOGOLOGO

 

stock dividendJune 30, 2018. We are required to $0.25 per share from $0.20 per share, beginning with the common stock dividend declared on July 19, 2017. We discloseddisclose a summary of the results ofourcompany-run stress tests within 15 days of the date the Federal Reserve discloses the results of the supervisory stress tests on June 23, 2017 on our Investor Relations website.tests. In addition, we must submit the results ofourmid-cyclecompany-run mid-cycle company-run stress stress test to the Federal Reserve by October 5, 20172018 and disclose a summary of the results between October 5, 20172018 and November 4, 2017.2018.

The Dodd-Frank Act also requires each of our U.S. Bank Subsidiaries to conduct an annual stress test. MSBNA and MSPBNA submitted their 20172018 annualcompany-run stress tests to the OCC on April 5, 20172018 and publishedmust publish a summary of their stress test results onbetween June 23, 2017 on our Investor Relations website.15, 2018 and July 15, 2018.

For a further discussion of our capital plans and stress tests, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests” in Part II, Item 7 of the 20162017 Form10-K.

Attribution of Average Common Equity According to the Required Capital Framework

Our required capital (“Required Capital”) estimation is based on the Required Capital framework, an internal capital adequacy measure. Common equity attribution to the business segments is based on capital usage calculated byunder the Required Capital framework, as well as each business segment’s relative contribution to our total Required Capital. Required Capital is assessed for each business segment and further attributed to product lines. This process is intended to align capital with the risks in each business segment in order to allow senior management to evaluate returns on a risk-adjusted basis.

The Required Capital framework is a risk-based and leverageuse-of-capital measure, which is compared with our regulatory capital to ensure that we maintain an amount of going concern capital after absorbing potential losses from stress events, where applicable, at a point in time. We define the difference between our total average common equity and the sum of the average common equity amounts allocated to our business segments as Parent Company equity. We generally hold Parent Company equity for prospective regulatory requirements, organic growth, acquisitions and other capital needs.

Common equity estimation and attribution to the business segments are based on our pro forma fullyphased-in regulatory capital estimates, including supplementary leverage, and incorporates our internal stress tests.rules. The amount of capital allocated to the business segments is generally set at the beginning of each year and remains fixed throughout the year until the next

annual reset.reset unless a significant business change occurs (e.g., acquisition or disposition). Differences between available and Required Capital are attributed to Parent Company equity during the year.

The Required Capital framework is expected to evolve over time in response to changes in the business and regulatory environment.environment, for example, to incorporate changes in stress

testing or enhancements to modeling techniques. We will continue to evaluate the framework with respect to the impact of future regulatory requirements, as appropriate.

Average Common Equity Attribution1

 

  Three Months Ended
June 30,		   Six Months Ended
June 30,		   Three Months Ended
March 31,		 
$ in billions  2017   2016   2017   2016   2018   2017 

Institutional Securities

  $40.2   $43.2   $40.2   $43.2       $40.8   $40.2 

Wealth Management

   17.2    15.3    17.2    15.3    16.8    17.2 

Investment Management

   2.4    2.8    2.4    2.8    2.6    2.4 

Parent Company

   10.1    7.7    9.7    7.3    8.8    9.2 

Total1

  $69.9   $69.0   $69.5   $68.6 

Total

      $            69.0   $            69.0 

 

1.

Average common equity is anon-GAAP financial measure. See “SelectedNon-GAAP Financial Information” herein.

Regulatory Developments

Resolution and Recovery Planning

Pursuant to the Dodd-Frank Act, we are required to periodically submit to the Federal Reserve and the Federal Deposit Insurance Corporation (“FDIC”) an annualFDIC 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 a single point of entryan SPOE strategy. We submitted our full 2017 resolution plan on June 30, 2017. We previously submitted a status report in respect of certain shortcomings identified in our 2015 resolution plan on September 30, 2016. As indicated in our 2017 resolution plan and anticipated in our 2016 status report, theThe Parent Company has amended and restated its support agreement with its material subsidiaries.entities, as defined in our 2017 resolution plan. Under the secured amended and restated support agreement, upon the occurrence of a resolution scenario, the Parent Company would 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 receivables, to provide capital and liquidity, as applicable, to our material subsidiaries. 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 subsidiariesentities against the assets of the Parent Company (other than shares in subsidiaries of the

29June 2017 Form 10-Q

Management’s Discussion and AnalysisLOGO

Parent Company) are effectively senior to unsecured obligations of the Parent Company.

In September 2016, the OCC issued final guidelines that establish enforceable standards for recovery planning by national banks and certain other institutions with total consolidated assets of $50 billion or more, calculated on a rolling four-quarter average basis, including MSBNA and MSPBNA. The guidelines were effective on January 1, 2017; MSBNA must be in compliance by January 1, 2018 and MSPBNA must be in compliance by October 1, 2018.

For more information about resolution and recovery planning requirements and our activities in these areas, including the implications of such activities in a resolution scenario, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning” in Part I, Item 1,and “Risk Factors—Legal, Regulatory and Compliance Risk” in Part I, Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Developments—Resolution and Recovery Planning” in Part II, Item 7 of the 20162017 Form10-K.

25March 2018 Form 10-Q

Management’s Discussion and AnalysisLOGO

Legacy Covered Funds 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. In June 2017, we received approval from the Federal Reserve of our application for a five-year extension of the transition period to conform investments in certain legacy Volcker covered funds that are also illiquid funds. The approval covers essentially all of ournon-conforming investments in, and relationships with, legacy covered funds subject to the Volcker Rule.

For more information about the Volcker Rule, requirements and our activities in these areas, including the conformance periods applicable to certain covered funds and our application for a statutory extension, see “Business—Supervision and Regulation—Financial Holding Company—Activities Restrictions under the Volcker Rule” in Part I, Item 1 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Developments—Legacy Covered Funds under the Volcker Rule” in Part II, Item 7 of the 20162017 Form10-K.

U.S. Department of Labor Conflict of Interest Rule and SEC Standards of Conduct for Investment Professionals

The U.S. Department of Labor’sDOL’s final Conflict of Interest Rule under ERISA went into effect on June 9, 2017, with certain aspects subject tophased-in compliance. Full compliance and full compliancewith the rule’s related exemptions was scheduled to be required by JanuaryJuly 1, 2018. The2019. However, on March 15, 2018, the U.S. DepartmentCourt of Labor is undertaking an examinationAppeals for the Fifth Circuit vacated the Conflict of Interest Rule and accompanying exemptions in their entirety. While the U.S. DOL could appeal to the U.S. Supreme Court, the order to vacate the rule which may result in changes to the rule or related exemptions or a change in the January 1, 2018 full compliance date.could take effect as soon as May 7, 2018. For a discussion of the U.S. Department of LaborDOL Conflict of Interest Rule, see “Business—Supervision and Regulation—Institutional Securities and Wealth Management” in Part I, Item 1the 2017 Form 10-K.

On April 18, 2018, 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 2016 Formproposals, entitled “Regulation Best Interest,” would require broker-dealers to act in the “best interest” of retail customers at 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 proposed a new requirement for both broker-dealers and investment advisers to provide a brief relationship summary to retail investors with information intended to clarify the relationship between the parties. Finally, the SEC issued a proposed interpretation regarding the fiduciary duty that investment advisers owe their clients. We are reviewing the SEC’s package of proposed rules.

Proposed Stress Buffer Requirements

On April 10, 2018, the Federal Reserve issued a proposal to integrate its annual capital planning and stress testing requirements with certain ongoing regulatory capital requirements. The proposal, which would apply to certain BHCs, including us, would introduce a stress capital buffer and a stress leverage buffer (collectively, “Stress Buffer

Requirements”) and related changes to the capital planning and stress testing processes. Under the proposal, Stress Buffer Requirements would apply only with respect to the Standardized Approach and Tier 1 leverage regulatory capital requirements and would generally be effective on October 1, 2019.

In the Standardized Approach, the stress capital buffer would replace the existing Common Equity Tier 1 capital conservation buffer, which will be 2.5% as of January 1, 2019. The Standardized Approach stress capital buffer would equal the greater of (i) the maximum decline in our Common Equity Tier 1 capital ratio under the severely adverse scenario over the supervisory stress test measurement period, plus the sum of the ratios of the dollar amount of our planned common stock dividends to our projected RWA for each of the fourth through seventh quarters of the supervisory stress test projection period, and (ii) 2.5%. Regulatory capital requirements under the Standardized Approach would include the stress capital buffer, as summarized above, as well as our Common Equity Tier 110-K.G-SIB capital surcharge and any applicable Common Equity Tier 1 CCyB.

Like the stress capital buffer, the stress leverage buffer would be calculated based on the results of our annual supervisory stress tests. The stress leverage buffer would equal the maximum decline in our Tier 1 leverage ratio under the severely adverse scenario, plus the sum of the ratios of the dollar amount of our planned common stock dividends to our projected leverage ratio denominator for each of the fourth through seventh quarters of the supervisory stress test projection period. No floor would be established for the stress leverage buffer, which would apply in addition to the current minimum Tier 1 leverage ratio of 4%.

The proposal would make related changes to capital planning and stress testing processes for BHCs subject to the Stress Buffer Requirements. In particular, the proposal would limit projected capital actions to planned common stock dividends in the fourth through seventh quarters of the supervisory stress test projection period and would assume that BHCs maintain a constant level of assets and RWA throughout the supervisory stress test projection period.

The proposal does not change regulatory capital requirements under the Advanced Approach or the SLR, although the Federal Reserve and the OCC have separately proposed to modify the enhanced SLR requirements, as summarized below. If the proposal is adopted in its current form, limitations on capital distributions and discretionary bonus payments to executive officers would be determined by the most stringent limitation, if any, as determined under the Standardized Approach or the Tier 1 leverage ratio, inclusive of Stress Buffer Requirements, or the Advanced Approach or SLR or TLAC requirements, inclusive of applicable buffers.

March 2018 Form 10-Q26

Management’s Discussion and AnalysisLOGO

Proposed Modifications to the Enhanced SLR and to the SLR Applicable to Our U.S. Bank Subsidiaries

On April 11, 2018, the Federal Reserve proposed modifications to the enhanced SLR that would replace the current 2% enhanced SLR buffer applicable to U.S.G-SIBs, including us, with a leverage buffer equal to 50% of our Common Equity Tier 1G-SIB capital surcharge, which is currently 3%. Under the proposal, our enhanced SLR buffer would become 1.5%, for a total enhanced SLR requirement of 4.5%, assuming that ourG-SIB capital surcharge remains the same when the proposal becomes effective, which may be as early as 2018 under the proposal.

As part of the same proposal, the Federal Reserve and the OCC also proposed to align the well-capitalized SLR standard applicable to our U.S. Bank Subsidiaries with the proposed enhanced SLR buffer applicable to the Firm. Under the proposal, the well-capitalized SLR requirement for our U.S. Bank Subsidiaries would change from the current 6% to 3% plus 50% of our current Common Equity Tier 1G-SIB capital surcharge, for a total well-capitalized SLR requirement of 4.5%, assuming that ourG-SIB capital surcharge remains the same when the proposal becomes effective.

Proposed Regulatory Capital Adjustments Related to Implementation of the Current Expected Credit Losses Methodology

On April 17, 2018, the U.S. banking agencies issued a proposal to revise the regulatory capital framework applicable to banking organizations, including us and our U.S. Bank Subsidiaries, to address the new accounting standard for credit losses, known as a CECL methodology. For a further discussion of CECL, see “Accounting Development Updates— Financial Instruments—Credit Losses” herein.

The proposal modifies the regulatory capital rules to identify which credit loss allowances under the new accounting standard are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in, over a three-year period, the adverse effects on regulatory capital that may result from the adoption of the new accounting standard. The proposal requires a banking organization that has adopted a CECL methodology to include the provision for credit losses beginning in the 2020 stress test cycle.

U.K. ReferendumWithdrawal from the E.U.

Following the U.K. electorate vote to leave the European Union,E.U., the U.K. invoked Article 50 of the Lisbon Treaty on March 29, 2017.2017, 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 has been negotiating its withdrawal agreement with the E.U. For further discussion of U.K. referendum’sthe potential impact of the U.K.’s withdrawal from the E.U. on our operations, see “Risk Factors—International Risk” in Part I, Item 1A of the 20162017 Form10-K. For further information regarding our exposure to the U.K., see also “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Country Risk Exposure.”

Off-Balance Sheet ArrangementsExpected Replacement of London Interbank Offered Rate

We enter into variousoff-balance sheet arrangements,Central banks around the world, including through unconsolidated special purpose entities (“SPEs”)the Federal Reserve, have commissioned working groups of market participants and lending-related financial instruments (e.g., guarantees and commitments), primarily in connectionofficial sector representatives with the Institutional Securitiesgoal of finding suitable replacements for LIBOR based on observable market transactions. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next few years. The U.K. Financial Conduct Authority (“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 such rates 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 (“SOFR”), which has been recommended as an alternative to U.S. dollar LIBOR by the Alternative Reference Rates Committee. Further, the Bank of England has commenced publication of a reformed Sterling Overnight Index Average (“reformed SONIA”), comprised of a broader set of overnight Sterling money market transactions, as of April 23, 2018. Reformed SONIA has been recommended as the alternative to Sterling LIBOR by the Working Group on Sterling Risk-Free Reference Rates.

Although the full impact of such reforms and Investment Management business segments.

We utilize SPEs primarilyactions, together with any transition away from LIBOR, including the potential or actual discontinuance of LIBOR publication, remains unclear, these changes may have an adverse impact on the value of, return on and trading markets for a broad array of financial products, including any LIBOR-based securities, loans and derivatives that are included in connection with securitization activities. For information on our securitization activities, see Note 12financial assets and liabilities. Such reforms and actions may also require extensive changes to the consolidated financial statements.contracts that govern these LIBOR-based products, as well as our systems and processes.

27March 2018 Form 10-Q

For information on our commitments, obligations under certain guarantee arrangements and indemnities, see Note 11 to the consolidated financial statements. For further information on our lending commitments, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Lending Activities.”

Management’s Discussion and AnalysisLOGO

Effects of Inflation and Changes in Interest and Foreign Exchange Rates

For a discussion of the effects of inflation and changes in interest and foreign exchange rates on our business and financial results and strategies to mitigate potential exposures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Effects of Inflation and Changes in Interest and Foreign Exchange Rates” in Part II, Item 7the 2017 Form10-K.

Off-Balance Sheet Arrangements and Contractual Obligations

Off-Balance Sheet Arrangements

We enter into variousoff-balance sheet arrangements, including through unconsolidated SPEs and lending-related financial instruments (e.g., guarantees and commitments), primarily in connection with the Institutional Securities and Investment Management business segments.

We utilize SPEs primarily in connection with securitization activities. For information on our securitization activities, see Note 12 to the financial statements.

For information on our commitments, obligations under certain guarantee arrangements and indemnities, see Note 11 to the financial statements. For further information on our lending commitments, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Lending Activities Included in Loans and Trading Assets.”

Contractual Obligations

For a discussion about our contractual obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations” in the 20162017 Form10-K.

 

 

June 2017March 2018 Form 10-Q  3028  

Quantitative and Qualitative Disclosures about Market Risk  LOGOLOGO

Quantitative and Qualitative Disclosures about Market Risk

 

Risk Management

Management believes effective risk management is vital to the success of our business activities. For a discussion of our risk management functions, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management” in Part II, Item 7A of the 20162017 Form10-K.

Market Risk

Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, implied volatilities, (the price volatility of the underlying instrument imputed from option prices), correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio. Generally, we incur market risk as a result of trading, investing and client facilitation activities, principally within the Institutional Securities business segment where the substantial majority of ourValue-at-Risk (“VaR”) VaR for market risk exposures is generated. In addition, we incur market risk within the Wealth Management and Investment Management business segments. The Wealth Management business segment primarily incursnon-trading market risk from lending and deposit-taking activities. The Investment Management business segment primarily incursnon-trading market risk from capital investments in real estate fundsalternative and investments in private equity vehicles.other funds. For a further discussion of market risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk” in Part II, Item 7A of the 20162017 Form10-K.

VaRValue-at-Risk    

We use theThe statistical technique known as VaR asis one of the tools usedwe use to measure, monitor and review the market risk exposures of our trading portfolios. The Market Risk Department calculates and distributes dailyVaR-based risk measures to various levels of management.

VaR Methodology, Assumptions and Limitations.    For information regarding our VaR methodology, assumptions and limitations, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk—Sales and Trading and Related Activities—VaR Methodology, Assumptions and Limitations” in Part II, Item 7A of the 20162017 Form10-K.

We utilize the same VaR model for risk management purposes as well asand for regulatory capital calculations. Our regulators have approved our VaR model has been approved by our regulators for use in regulatory calculations.

The portfolio of positions used for our VaR for risk management purposes (“Management VaR”) differs from that used for regulatory capital requirements (“Regulatory VaR”).

Management VaR contains certain positions that are excluded from Regulatory VaR. Examples include counterparty credit valuation adjustment (“CVA”)CVA and related hedges, as well as loans that are carried at fair value and associated hedges.

The following table presents the Management VaR for the Trading portfolio, on aperiod-end, quarterly average and quarterly high and low basis. To further enhance the transparency of the traded market risk, the Credit Portfolio VaR has been disclosed as a separate category from the Primary Risk Categories. The Credit Portfolio includes counterparty CVA and related hedges, as well as loans that are carried at fair value and associated hedges.

Trading Risks

95%/One-Day Management VaR

 

  95%/One-Day VaR for the 
  Three Months Ended 
  June 30, 2017  95%/One-Day VaR for
the Three Months Ended
March 31, 2018		 

$ in millions

  

Period

End

 Average High   Low  

    Period    

End

 Average High Low 

Interest rate and credit spread

  $35  $35  $44   $27      $41  $35  $46  $30 

Equity price

   15   18   26    15   16   14   17   11 

Foreign exchange rate

   10   11   15    8   10   9   13   7 

Commodity price

   9   9   10    8   10   9   11   7 

Less: Diversification benefit1, 2

   (27)   (27)   N/A    N/A   (27)   (25)   N/A   N/A 

Primary Risk Categories

  $42  $46  $60   $36      $50  $    42  $  51  $  36 

Credit Portfolio

   11   12   14    11   11   10   11   9 

Less: Diversification benefit1, 2

   (7)   (7)   N/A    N/A   (7)   (6)   N/A   N/A 

Total Management VaR

  $46  $51  $64   $41      $54  $46  $55  $40 
  

 

95%/One-Day VaR for the

 
  Three Months Ended  95%/One-Day VaR for
the Three Months Ended
December 31, 2017		 
  March 31, 2017 

$ in millions

  

Period

End

 Average High   Low  

Period

End

 Average High Low 

Interest rate and credit spread

  $40  $30  $40   $23      $32  $29  $36  $24 

Equity price

   19  15  26    12  11  13  15  10 

Foreign exchange rate

   11  11  18    7  9  8  11  6 

Commodity price

   8  8  11    7  7  8  11  6 

Less: Diversification benefit1, 2

   (26)  (25)  N/A    N/A  (20)  (23)  N/A  N/A 

Primary Risk Categories

  $52  $39  $52   $28      $39  $  35  $   41  $   30 

Credit Portfolio

   14  15  17    14  9  9  10  8 

Less: Diversification benefit1, 2

   (9)  (10)  N/A    N/A  (5)  (6)  N/A  N/A 

Total Management VaR

  $57  $44  $57   $33      $43  $38  $44  $34 

N/A—Not Applicable

1.

Diversification benefit equals the difference between the total Management VaR and the sum of the component VaRs. This benefit arises because the simulatedone-day losses for each of the components occur on different days; similar diversification benefits also are taken into account within each component.

2.

The high and low VaR values for the total Management VaR and each of the component VaRs might have occurred on different days during the quarter, and therefore, the diversification benefit is not an applicable measure.

Average total Management VaR and average Management VaR for the Primary Risk Categories of $46 million and $42 million, respectively, increased from the three-months ended December 31, 2017, primarily as a result of increases in trading inventory across the Fixed Income Macro and Credit trading businesses in the Institutional Securities business segment and increased market volatility, particularly in Equities.

 

 

  3129  June 2017March 2018 Form 10-Q

Risk Disclosures  LOGOLOGO

 

The average total Management VaR for the three months ended June 30, 2017 (“current quarter”) was $51 million compared with $44 million for the three months ended March 31, 2017 (“last quarter”). The average Management VaR for the Primary Risk Categories for the current quarter was $46 million compared with $39 million for the last quarter. These increases were primarily driven by increases in trading inventory across the equities, global macro, and credit businesses within Institutional Securities, in response to client demand.

Distribution of VaR Statistics and Net Revenues for the Current Quarter.current quarter.    One method of evaluating the reasonableness of our VaR model as a measure of our potential volatility of net revenues is to compare VaR with corresponding actual trading revenues. Assuming no intraday trading, for a95%/one-day VaR, the expected number of times that trading losses should exceed VaR during the year is 13, and, in general, if trading losses were to exceed VaR more than 21 times in a year, the adequacy of the VaR model would be questioned.

We evaluate the reasonableness of our VaR model by comparing the potential declines in portfolio values generated by the model with corresponding actual trading results for the Firm, as well as individual business units. For days where losses exceed the VaR statistic, we examine the drivers of trading losses to evaluate the VaR model’s accuracy relative to realized trading results. During the current quarter, we experienced net trading losses on one day, which was not in excess of the95%/one-day Total Management VaR.

The distribution of VaR Statisticsstatistics and Net Revenuesnet revenues is presented in the following histograms for the Total Trading populations.

Total Trading.    As shown in the95%/One-Day Management VaR table, on the preceding page, the average95%/one-day total Management VaR for the current quarter was $51$46 million. The following histogram presents the distribution of the daily95%/one-day total Management VaR for the current quarter, which wasquarter.

Daily95%/One-Day Total Management VaR for the Current Quarter

($ in a range between $40 million and $60 million for approximately 95% of trading days during the current quarter.millions)

 

LOGOLOGO

The following histogram shows the distribution for the current quarter of daily net trading revenues, including profits and losses from Interest rate and credit spread, Equity price, Foreign exchange rate, Commodity price, and Credit Portfolio positions and intraday trading activities, for our

Trading businesses. Daily net trading revenues also include intraday trading activities but exclude certain items not captured in the VaR model, such as fees, commissions and net interest income. Daily net trading revenues differ from the definition of revenues required for Regulatory VaR backtesting, which further excludes intraday trading. During

Daily Net Trading Revenues for the current quarter, we experienced net trading losses on one day, which was notCurrent Quarter

($ in excess of the95%/one-day Total Management VaR.millions)

 

LOGOLOGO

Non-Trading Risks

We believe that sensitivity analysis is an appropriate representation of ournon-trading risks. Reflected below is this analysis coveringThe following sensitivity analyses cover substantially all of thenon-trading risk in our portfolio.

Counterparty Exposure Related to Our Own Credit Spread.The credit spread risk sensitivity of the counterparty exposure related to our own credit spread corresponded to an increase in value of approximately $6 million for each 1 basis point widening in our credit spread level at both June 30, 2017 and March 31, 2017.

Funding Liabilities.The credit spread risk sensitivity of ourmark-to-market funding liabilities corresponded to an increase in value of approximately $26 million and $19 million for each Credit Spread Risk Sensitivity1 basis point widening in our credit spread level at June 30, 2017 and March 31, 2017, respectively.

$ in millions  At
March 31, 2018		   At
December 31, 2017		 

Derivatives

  $6   $6 

Funding liabilities2

   31    29 

1.

Amounts represent the increase in value for each 1 bps widening of our credit spread.

2.

Relates to structured note liabilities carried at fair value.

Interest Rate Risk Sensitivity.    The following table presents an analysis of selected instantaneous upward and downward parallel interest rate shocks on net interest income over the next 12 months for our U.S. Bank Subsidiaries. These shocks

June 2017 Form 10-Q32

Risk DisclosuresLOGO

are applied to our12-month forecast for our U.S. Bank Subsidiaries, which incorporates market expectations of interest rates and our forecasted business activity, including our deposit deployment strategy and asset-liability management hedges.

March 2018 Form 10-Q30

Risk DisclosuresLOGO

U.S. Bank Subsidiaries’ Net Interest Income Sensitivity Analysis

 

$ in millions  At June 30, 2017 At March 31, 2017   

At

March 31, 2018

   

At

December 31, 2017

 

Basis point change

       

+200

  $716  $537   $438   $489 

+100

   413  332    226    367 

-100

   (577)  (569)    (464)    (500) 

We do not manage to any single rate scenario but rather manage net interest income in our U.S. Bank Subsidiaries to optimize across a range of possible outcomes.outcomes, includingnon-parallel rate change scenarios. The sensitivity analysis assumes that we take no action in response to these scenarios, assumes there are no changes in other macroeconomic variables normally correlated with changes in interest rates, and includes subjective assumptions regarding customer and marketre-pricing behavior and other factors. The increasechange in positive sensitivity to interest rates arising in the +200 and +100 basis points scenarios between March 31, 20172018 and June 30,December 31, 2017 is related to overall changes in our asset-liability positioning, primarily lower holdings of fixed-rate AFS Investment securities.profile and higher market rates.

Investments.We have exposure to public and private companies through direct investments, as well as through funds that invest in these assets. These investments are predominantly equity positions with long investment horizons, a portion of which are for business facilitation purposes. The market risk related to these investments is measured by estimating the potential reduction in net income associated with a 10% decline in investment values and related impact on performance fees.

Investments Sensitivity, Including Related Performance Fees

 

  10% Sensitivity   Loss from 10% Decline 
$ in millions  

At

June 30,

2017

   

At

March 31,

2017

   

At

March 31,

2018

   

At

December 31,

2017

 

Investments related to Investment Management activities

  $326   $337 

Investments related to Investment

    

Management activities

  $321   $316 

Other investments:

        

Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.

   171    171 

MUMSS

   172    168 

Other Firm investments

   151    151    187    178 

MUMSS—Mitsubishi UFJ Morgan Stanley Securities Co., LTD.

Equity Market Sensitivity.    In the Wealth Management and Investment Management business segments, certainfee-based revenue streams are driven by the value of clients’ equity holdings. The overall level of revenues for these streams also depends on multiple additional factors that include, but are not limited to, the level and duration of the equity market increase or decline, price volatility, the geographic and

industry mix of client assets, the rate and magnitude of client investments and redemptions, and the impact of such market

increase or decline and price volatility on client behavior. Therefore, overall revenues do not correlate completely with changes in the equity markets.

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. We primarily incur credit risk exposure to institutions and individuals through our Institutional Securities and Wealth Management business segments. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Market Risk–Risk Management–Credit Risk” in Part II, Item 7A of the 20162017 Form10-K. Also, see Notes 7 and 11 to the consolidated financial statements for additional information about our loans and lending commitments, respectively.

Lending Activities Included in Loans and Trading Assets

We provide loans and lending commitments to a variety of customers, from large corporate and institutional clients to high net worth individuals. In addition, we purchase loans in the secondary market. In the consolidated balance sheets, these loans and lending commitments are carried at either fair value with changes in fair value recorded in earnings;as held for investment, which are recorded at amortized cost; oras held for sale, which are recorded at the lower of cost or fair value.value; or at fair value with changes in fair value recorded in earnings. Loans held for investment and loans held for sale are classified in Loans, and loans held at fair value are classified in Trading assets in the consolidated balance sheets. See Notes 3, 7 and 11 to the consolidated financial statements for further information.

Loan and Lending Commitment Portfolio by Business Segment

  At June 30, 2017 

$ in millions

 Institutional
Securities		  Wealth
Management		  Investment
Management1		  Total 

Corporate loans

 $13,730  $13,096  $5          $26,831 

Consumer loans

  —   26,354   —           26,354 

Residential real estate loans

  —   25,646   —           25,646 

Wholesale real estate loans

  8,482   —   —           8,482 

Loans held for investment, gross of allowance

  22,212   65,096   5           87,313 

Allowance for loan losses

  (266)   (40)   —           (306) 

Loans held for investment, net of allowance

  21,946   65,056   5           87,007 

Corporate loans

  9,394   —   —           9,394 

Residential real estate loans

  10   50   —           60 

Wholesale real estate loans

  1,178   —   —           1,178 

Loans held for sale

  10,582   50   —           10,632 

Corporate loans

  6,755   —   20           6,775 

Residential real estate loans

  662   —   —           662 

Wholesale real estate loans

  1,788   —   —           1,788 

Loans held at fair value

  9,205   —   20           9,225 

Total loans2

  41,733   65,106   25           106,864 

Lending commitments3,4

  88,739   9,110   —           97,849 

Total loans and lending commitments2,3,4

 $130,472  $74,216  $25          $204,713 
 

 

  3331  June 2017March 2018 Form 10-Q

Risk Disclosures  LOGOLOGO

Loans and Lending Commitments

 

 At December 31, 2016  At March 31, 2018 

$ in millions

 Institutional
Securities		 Wealth
Management		 Investment
Management1		 Total  IS WM IM1 Total 

Corporate loans

 $13,858  $11,162  $5          $25,025  $17,005  $14,893  $5  $31,903 

Consumer loans

  —  24,866   —          24,866   —   26,877   —   26,877 

Residential real estate loans

  —  24,385   —          24,385   —   26,566   —   26,566 

Wholesale real estate loans

 7,702   —   —          7,702   10,021   —   —   10,021 

Loans held for investment, gross of allowance

 21,560  60,413  5          81,978   27,026   68,336   5   95,367 

Allowance for loan losses

 (238)  (36)   —          (274)   (201)   (42)   —   (243) 

Loans held for investment, net of allowance

 21,322  60,377  5          81,704   26,825   68,294   5   95,124 

Corporate loans

 10,710   —   —          10,710   12,000   —   —   12,000 

Residential real estate loans

 11  50   —          61   1   32   —   33 

Wholesale real estate loans

 1,773   —   —          1,773   1,978   —   —   1,978 

Loans held for sale

 12,494  50   —          12,544   13,979   32   —   14,011 

Corporate loans

 7,199   —  18          7,217   9,323   —   23   9,346 

Residential real estate loans

 966   —   —          966   706   —   —   706 

Wholesale real estate loans

 519   —   —          519   1,770   —   1,171   2,941 

Loans held at fair value

 8,684   —  18          8,702   11,799   —   1,194   12,993 

Total loans2

 42,500  60,427  23          102,950 

Lending commitments3,4

 90,143  8,299   —          98,442 

Total loans and lending commitments2,3,4

 $    132,643  $       68,726  $23          $     201,392 

Total loans

  52,603   68,326   1,199   122,128 

Lending commitments2, 3

  109,025   10,404   187   119,616 

Total loans and lending commitments2, 3

 $    161,628  $    78,730  $    1,386  $    241,744 

  At December 31, 2017 
$ in millions IS  WM  IM  Total 

Corporate loans

 $15,332  $14,417  $5  $29,754 

Consumer loans

  —   26,808   —   26,808 

Residential real estate loans

  —   26,635   —   26,635 

Wholesale real estate loans

  9,980   —   —   9,980 

Loans held for investment, gross of allowance

  25,312   67,860   5   93,177 

Allowance for loan losses

  (182)   (42)   —   (224) 

Loans held for investment, net of allowance

  25,130   67,818   5   92,953 

Corporate loans

  9,456   —   —   9,456 

Residential real estate loans

  1   34   —   35 

Wholesale real estate loans

  1,682   —   —   1,682 

Loans held for sale

  11,139   34   —   11,173 

Corporate loans

  8,336   —   22   8,358 

Residential real estate loans

  799   —   —   799 

Wholesale real estate loans

  1,579   —   —   1,579 

Loans held at fair value

  10,714   —   22   10,736 

Total loans

  46,983   67,852   27   114,862 

Lending commitments2, 3

  92,588   9,481   —   102,069 

Total loans and lending commitments2, 3

 $    139,571  $    77,333  $        27  $    216,931 

 

1.

Loans in Investment Management business segment loans are entered into in conjunction with certain investment advisory activities. The increase in fair value loans in the current quarter is a result of the consolidation of a fund managed by Mesa West Capital, LLC that primarily invests in commercial real estate loans with remaining maturities of less than 5 years.

2.

Amounts exclude $27.7 billion and $24.4 billion related to margin loans and $4.2 billion and $4.7 billion related to employee loans at June 30, 2017 and December 31, 2016, respectively. See Notes 6 and 7 to the consolidated financial statements for further information.

3.

Lending commitments represent the notional amount of legally binding obligations to provide funding to clients for all lending transactions. Since commitments associated with these business activities may expire unused or may not be utilized to full capacity, they do not necessarily reflect the actual future cash funding requirements.

4.3.

For syndications led by us, theany lending commitments accepted by the borrower but not yet closed are net of the amounts agreed to by counterparties that will participate in the syndication.syndicated. For syndications that we participate in and do not lead, any lending commitments accepted by the borrower but not yet closed include only the amount that we expect will be allocated from the lead syndicate bank. Due to the nature of our obligations under the commitments, these amounts include certain commitments participated to third parties.

Total loans and lending commitments increased by approximately $25 billion in the current quarter, primarily due to increases in Corporate lending commitments within the Institutional Securities business segment.

Our credit exposure from our loans and lending commitments is measured in accordance with our internal risk management standards. Risk factors considered in determining the aggregate allowance for loan and commitment losses include the borrower’s financial strength, seniority of the loan, collateral type, volatility of collateral value, debt cushion,loan-to-value ratio, debt service ratio, covenants and counterparty type. Qualitative and environmental factors such as economic and business conditions, nature and volume of the portfolio and lending terms, and volume and severity of past due loans may also be considered.

At June 30, 2017Allowance for Loans and December 31, 2016, the allowanceLending Commitments Held for loan losses related to loans that were accounted for as held forInvestment

investment was $306 million and $274 million, respectively, and the allowance for commitment losses related to lending commitments that were accounted for as held for investment was $186 million and $190 million, respectively.

$ in millions  At
March 31,
2018		   At
December 31,
2017		 

Loans

  $                243   $224 

Lending commitments

   205    198 

The aggregate allowance for loanloans and lending commitment losses increased during the current year periodquarter primarily due to updates to model parameters used in determiningoverall portfolio changes and qualitative and environmental factors impacting the inherent allowance.allowance within the Institutional Securities business segment. See Note 7 to the consolidated financial statements for further information.

Status of Loans Held for Investment

   At March 31, 2018   At December 31, 2017 
        IS             WM               IS             WM     

Current

   99.7%    99.9%    99.5%    99.9% 

Non-accrual1

   0.3%    0.1%    0.5%    0.1% 

1.

These loans are on nonaccrual status because the loans were past due for a period of 90 days or more or payment of principal or interest was in doubt.

March 2018 Form 10-Q32

Risk DisclosuresLOGO

Institutional Securities Lending Activities. 

In connection with certain Institutional Securities business segment activities, we provide loans and lending commitments to a diverse group of corporate and other institutional clients. These activities include originating and purchasing corporate loans, commercial and residential mortgage lending, asset-backed lending, financing extended to equities and commodities customers and loans to municipalities. These loans and lending commitments may have varying terms; may be senior or subordinated; may be secured or unsecured; are generally contingent upon representations, warranties and contractual conditions applicable to the borrower; and may be syndicated, traded or hedged by us.

We also participate in securitization activities, whereby we extend short-term or long-term funding to clients through loans and lending commitments that are secured by the assets of the borrower and generally provide for over-collateralization, including commercial real estate loans, loans secured by loan pools, commercial companycorporate loans and secured lines of revolving credit. Credit risk with respect to these loans and lending commitments arises from the failure of a borrower to perform according to the terms of the loan agreement or a decline in the underlying collateral value. See Note 12 to the consolidated financial statements for information about our securitization activities. In addition, a collateral management group monitors collateral levels against requirements and oversees the administration of the collateral function. See Note 6 to the consolidated financial statements for additional information about our collateralized transactions.

Institutional Securities loans and lending commitments are mainly related to relationship-based and event-driven lending to select corporate clients. Relationship-based loans and lending commitments are used for general corporate purposes, working capital and liquidity purposes by our investment banking clients and typically consist of revolving lines of credit, letter of credit facilities and term loans. In connection with the relationship-based lending activities, we had hedges (which included single-name, sector and index hedges) with a notional amount of $15.2 billion and $20.2 billion at June 30, 2017 and December 31, 2016,

June 2017 Form 10-Q34

Risk DisclosuresLOGO

respectively. Event-driven loans and lending commitments are associated with a particular event or transaction, such as to support client merger, acquisition, recapitalization and project finance activities. Event-driven loans and lending commitments typically consist of revolving lines of credit, term loans and bridge loans.

Institutional Securities Loans and Lending Commitments by Credit Rating1

 

 At June 30, 2017  At March 31, 2018 
 Years to Maturity     Years to Maturity   
$ in millions Less than 1 1-3 3-5 Over 5 Total  Less than 1 1-3 3-5 Over 5 Total 

Loans

          

AA

 $—  $450  $28  $5  $483 

A

  1,435   2,262   1,287   389   5,373 

BBB

  3,626   8,398   3,709   875   16,608 

NIG

  6,213   10,940   7,521   3,199   27,873 

Unrated2

  59   98   262   1,847   2,266 

Total loans

  11,333   22,148   12,807   6,315   52,603 

Lending commitments

Lending commitments

 

    

AAA

 $—  $—  $—  $—  $—   —   165   —   —   165 

AA

  —   —   34   187   221   3,127   1,348   2,707   —   7,182 

A

  800   2,018   860   781   4,459   4,374   14,521   11,316   425   30,636 

BBB

  2,213   4,505   2,737   590   10,045   4,865   14,276   18,546   166   37,853 

NIG

  5,314   13,016   4,275   2,246   24,851   1,436   11,241   13,636   6,801   33,114 

Unrated2

  320   129   430   1,278   2,157   1   25   10   39   75 

Total Loans3

  8,647   19,668   8,336   5,082   41,733 

Lending Commitments

     

AAA

  —   165   —   —   165 

AA

  3,885   614   3,620   4   8,123 

A

  2,976   4,704   11,749   759   20,188 

BBB

  2,680   10,216   17,070   208   30,174 

NIG

  3,677   11,065   12,378   2,855   29,975 

Unrated2

  41   46   4   23   114 

Total Lending Commitments

  13,259   26,810   44,821   3,849   88,739 

Total Exposure

 $    21,906  $    46,478  $    53,157  $    8,931  $    130,472 

Total lending
commitments

  13,803   41,576   46,215   7,431   109,025 

Total exposure

 $25,136  $    63,724  $    59,022  $    13,746  $    161,628 

 

  At December 31, 2016 
  Years to Maturity    
$ in millions Less than 1  1-3  3-5  Over 5  Total 

Loans

     

AAA

 $—  $—  $—  $—  $— 

AA

  —   —   38   —   38 

A

  235   775   1,391   552   2,953 

BBB

  1,709   6,473   2,768   1,362   12,312 

NIG

  4,667   12,114   5,629   2,304   24,714 

Unrated2

  699   126   175   1,483   2,483 

Total Loans3

  7,310   19,488   10,001   5,701   42,500 

Lending Commitments

     

AAA

  50   105   50   —   205 

AA

  3,724   451   3,989   —   8,164 

A

  1,994   4,610   11,135   392   18,131 

BBB

  6,261   9,006   18,148   653   34,068 

NIG

  2,839   8,934   14,267   3,418   29,458 

Unrated2

  107   6   —   4   117 

Total Lending Commitments

  14,975   23,112   47,589   4,467   90,143 

Total Exposure

 $    22,285  $    42,600  $    57,590  $    10,168  $    132,643 
  At December 31, 2017 
  Years to Maturity    
$ in millions Less than 1  1-3  3-5  Over 5  Total 

Loans

     

AA

 $14  $503  $30  $5  $552 

A

  1,608   1,710   1,235   693   5,246 

BBB

  2,791   6,558   3,752   646   13,747 

NIG

  4,760   12,311   4,480   3,245   24,796 

Unrated2

  243   291   621   1,487   2,642 

Total loans

  9,416   21,373   10,118   6,076   46,983 

Lending commitments

 

    

AAA

  —   165   —   —   165 

AA

  3,745   1,108   3,002   —   7,855 

A

  3,769   5,533   11,774   197   21,273 

BBB

  3,987   12,345   16,818   1,095   34,245 

NIG

  4,159   9,776   12,279   2,698   28,912 

Unrated2

  9   40   42   47   138 

Total lending
commitments

  15,669   28,967   43,915   4,037   92,588 

Total exposure

 $25,085  $    50,340  $    54,033  $    10,113  $    139,571 

 

NIG–Non-investment

grade

1.

Obligor credit ratings are determined by the Credit Risk Management Department.department.

2.

Unrated loans and lending commitments are primarily trading positions that are measured at fair value and risk managed as a component of Market Risk. For a further discussion of our Market Risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk” herein.

3.

At June 30, 2017 and December 31, 2016, approximately 99% of loans held for investment were current, while approximately 1% were on nonaccrual status because the loans were past due for a period of 90 days or more or payment of principal or interest was in doubt.

Event-Driven Loans and Lending Commitments

$ in millions  At
June 30,
2017		   At
December 31,
2016		 

Loans

  $4,777   $5,097 

Lending commitments

   9,685    16,252 

Total

  $14,462   $21,349 

Loans and lending commitments to non-investment grade borrowers

  $11,550   $15,339 

 

Maturity Profile of Event-Driven Loans and Lending Commitments

 

 

    At
June 30,
2017		   At
December 31,
2016		 

Less than 1 year

   22%    34% 

1-3 years

   34%    14% 

3-5 years

   21%    28% 

Over 5 years

   23%    24% 

Institutional Securities Credit Exposure from Loans and Lending Commitments by Industry

 

$ in millions  At
June 30,
2017		   At
December 31,
2016		   

At

March 31,

2018

   

At

December 31,

2017

 

Industry1

    

Industry

    

Real estate

  $23,794   $19,807   $28,847   $28,426 

Financials

   27,224    22,112 

Consumer discretionary

   13,171    12,059    15,706    11,555 

Funds, exchanges and other financial services2

   12,382    11,481 

Industrials

   13,768    11,090 

Information technology

   12,434    11,862 

Insurance

   10,747    4,739 

Healthcare

   10,456    9,956 

Energy

   11,572    11,757    10,354    10,233 

Industrials

   11,049    11,465 

Utilities

   9,515    9,216    10,296    9,592 

Healthcare

   9,185    11,534 

Information technology

   8,138    8,602 

Consumer staples

   7,707    7,329    10,054    8,315 

Mortgage finance

   5,553    6,296 

Materials

   5,283    7,630    5,123    5,069 

Telecommunications services

   4,437    6,156    4,533    4,172 

Insurance

   3,510    4,190 

Consumer finance

   2,572    2,847 

Other

   2,604    2,274    2,086    2,450 

Total

  $130,472   $132,643   $        161,628   $        139,571 

Institutional Securities business segment loans and lending commitments are mainly related to relationship-based and event-driven lending to select corporate clients. Relationship-based loans and lending commitments are used for general corporate purposes, working capital and liquidity purposes by our investment banking clients and typically consist of

1.

Industry categories are based on the Global Industry Classification Standard®.

2.

Includes mutual funds, pension funds, private equity and real estate funds, exchanges and clearinghouses, and diversified financial services.

 

 

  3533  June 2017March 2018 Form 10-Q

Risk Disclosures  LOGOLOGO

 

Institutional Securitiesrevolving lines of credit, letter of credit facilities and term loans. In connection with the relationship-based lending activities, we enter into hedges, as detailed below.

Relationship-based Lending Exposures Related to the Energy Industry.At June 30, 2017, Institutional Securities’Activities Hedges—Notional Amounts

$ in billions

  

At

March 31,

2018

   

At

December 31,

2017

 

Single-name and index CDS

  $15.0   $16.6 

Event-Driven Loans and Lending Commitments

  At March 31, 2018 
  Years to Maturity    
$ in millions   Less than 1  1-3  3-5  Over 5  Total 

Loans

   $2,631  $689  $518  $1,835  $5,673 

Lending commitments

  2,902   11,963   3,262   3,982   22,109 

Total loans and lending commitments

   $5,533  $  12,652  $  3,780  $  5,817  $  27,782 

  At December 31, 2017 
  Years to Maturity    
$ in millions   Less than 1  1-3  3-5  Over 5  Total 

Loans

   $1,458  $1,058  $639  $2,012  $5,167 

Lending commitments

  1,272   3,206   2,091   1,874   8,443 

Total loans and lending commitments

   $2,730  $  4,264  $  2,730  $  3,886  $  13,610 

Event-driven loans and lending commitments relatedare associated with a particular event or transaction, such as to the energy industry were $11.6 billion, of which approximately 67% are accounted for as held for investmentsupport client merger, acquisition, recapitalization and 33% are accounted for as either held for sale or at fair value. Additionally, approximately 56% of the total energy industryproject finance activities. Event-driven loans and lending commitments were to investment grade counterparties.

At June 30, 2017, the energy industry portfolio included $1.1 billion intypically consist of revolving lines of credit, term loans and $2.1 billionbridge loans. The increase in event-driven lending commitments in the current quarter is primarily due to Oil and Gas Exploration and Production (“E&P”) companies. The E&P loans were tonon-investment grade counterparties, which are generally subject to periodic borrowing base reassessments based onan increase in held-for-sale commitments driven by new client transactions in the valuelatter part of the underlying oil and gas reserves pledged as collateral. In limited situations, we may extend the period related to borrowing base reassessments typically in conjunction with taking certain risk mitigating actions with the borrower. Approximately 52% of the E&P lending commitments were to investment grade counterparties. To the extent oil and natural gas prices remain atquarter-end levels, or deteriorate further, we may incur additional lending losses.

Institutional Securities Margin Lending.    In addition to the activities noted above, Institutional Securities provides margin lending, which allows the client to borrow against the value of qualifying securities. At June 30, 2017 and December 31, 2016, the amounts related to margin lending were $15.4 billion and $11.9 billion, respectively, which were classified within Customer and other receivables in the consolidated balance sheets.quarter.

Wealth Management Lending Activities.    

The principal Wealth Management lending activities include securities-based lending and residential real estate loans.

Securities-based lending provided to our retail clients is primarily conducted through our Portfolio Loan Account (“PLA”) and Liquidity Access Line (“LAL”) platforms, which had an outstanding loan balance of $31.6 billion and $29.7 billion at June 30, 2017 and December 31, 2016, respectively.platform. For more information about our securities-based lending and residential real estate loans, see “Quantitative and Qualitative Disclosures about Market Risk–Risk Management–Credit Risk–Lending Activities” in Part II, Item 7A of the 20162017 Form10-K.

Wealth Management Loans and Lending Commitments

  At March 31, 2018 
  Contractual Years to Maturity    
$ in millions   Less than 1  1-3  3-5  Over 5  Total 

Securities-based lending and other loans1

   $34,730  $3,789  $1,849  $1,382  $41,750 

Residential real estate loans

  —   30   10   26,536   26,576 

Total loans

   $34,730  $3,819  $1,859  $27,918  $68,326 

Lending commitments

  7,392   2,283   444   285   10,404 

Total loans and lending commitments

   $42,122  $  6,102  $  2,303  $  28,203  $  78,730 

  At December 31, 2017 
  Contractual Years to Maturity    
$ in millions   Less than 1  1-3  3-5  Over 5  Total 

Securities-based lending and other loans1

   $34,389  $3,687  $1,899  $1,231  $41,206 

Residential real estate loans

  —   24   15   26,607   26,646 

Total loans

   $34,389  $3,711  $1,914  $27,838  $67,852 

Lending commitments

  7,253   1,827   120   281   9,481 

Total loans and lending commitments

   $41,642  $  5,538  $  2,034  $  28,119  $  77,333 

1.

The Liquidity Access Line platform had an outstanding loan balance of $32.1 billion and $32.2 billion at March 31, 2018 and December 31, 2017, respectively.

For the current quarter, loans and lending commitments associated with the Wealth Management business segment lending activities increased by approximately 6%2%, mainlyprimarily due to growth in securities-based lending and other loans.

Wealth Management Lending Activities by Remaining Contractual Maturity

  At June 30, 2017 
  Years to Maturity    
$ in millions Less than 1  1-3  3-5  Over 5  Total 

Securities-based lending and other loans

 $34,048  $3,208  $1,196  $979  $39,431 

Residential real estate loans

  —   9   35   25,631   25,675 

Total1

 $34,048  $3,217  $1,231  $26,610  $65,106 

Lending commitments

  6,484   1,903   458   265   9,110 

Total loans and lending commitments

 $    40,532  $    5,120  $    1,689  $    26,875  $    74,216 

  At December 31, 2016 
  Years to Maturity    
$ in millions Less than 1  1-3   3-5  Over 5  Total 

Securities-based lending and other loans

 $30,547  $2,983   $1,304  $1,179  $36,013 

Residential real estate loans

  —   —    45   24,369   24,414 

Total1

 $30,547  $2,983   $1,349  $25,548  $60,427 

Lending commitments

  6,372   1,413    268   246   8,299 

Total loans and lending commitments

 $    36,919  $    4,396   $    1,617  $    25,794  $    68,726 

1.

At June 30, 2017 and December 31, 2016, greater than 99% of the Wealth Management business segment loans held for investment were current, while less than 1% were on nonaccrual status because the loans were past due for a period of 90 days or more or payment of principal or interest was in doubt.

Wealth Management Loans includedIncluded in Customer and Other Receivables

Margin Loans

 

$ in millions  At
June 30,
2017		  At
December 31,
2016		 

Net customer receivables representing margin loans

  $12,328  $12,483 

Employee loans1:

   

Balance

  $4,323  $4,804 

Allowance for loan losses

   (83)   (89) 

Balance, net

  $4,240  $4,715 
   At March 31, 2018 
$ in millions  IS   WM   Total 

Net customer receivables
representing margin loans

  $    22,396   $    11,986   $    34,382 

   At December 31, 2017 

$ in millions

  IS   WM   Total 

Net customer receivables
representing margin loans

  $    19,977   $    12,135   $    32,112 

The Institutional Securities and Wealth Management business segments provide margin lending arrangements which allow the client to borrow against the value of qualifying securities. Margin lending activities generally have minimal credit risk due to the value of collateral held and their short-term nature.

 

1.

Granted in conjunction with programs established by us to retain and recruit certain employees. These loans are full recourse and generally require periodic payments. At June 30, 2017, these loans have repayment terms ranging from 1 to 20 years. We establish an allowance for loan amounts to terminated employees that we do not consider recoverable, which is recorded in Compensation and benefits expense.

March 2018 Form 10-Q34

Risk DisclosuresLOGO

Employee Loans

$ in millions

  

At

March 31,

2018

   

At

December 31,

2017

 

Employee loans:

    

Balance

  $3,687   $    4,185 

Allowance for loan losses

   (75)    (77) 

Balance, net

  $3,612   $4,108 

Repayment term range, in years

   1 to 20    1 to 20 

Employee loans are generally granted to retain and recruit certain employees, are full recourse and generally require periodic repayments. We establish an allowance for loan amounts to terminated employees that we do not consider recoverable, which is recorded in Compensation and benefits expense. See Note 7 to the financial statements for a further description of our employee loans.

Credit Exposure—Derivatives

We incur credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instruments arises from the possibility that a counterparty may fail to perform according to the terms of the contract. In connection with our OTC derivative activities, we generally enter into master netting agreements and collateral arrangements with counterparties. These agreements provide us with the ability to demand

June 2017 Form 10-Q36

Risk DisclosuresLOGO

collateral, as well as to liquidate collateral and offset receivables and payables covered under the same master netting agreement in the event of counterparty default.

We manage our trading positions by employing a variety of risk mitigation strategies. These strategies include diversification of risk exposures and hedging. Hedging activities consist of the purchase or sale of positions in related securities and financial instruments, including a variety of derivative products (e.g.(e.g., futures, forwards, swaps and options). For credit exposure information on our OTC derivative products, see Note 4 to the consolidated financial statements. For a discussion of our credit exposure and related credit derivative contracts, see “Quantitative and Qualitative Disclosuresdisclosures about Market Risk—Risk–Risk Management—Management–Credit Risk—Risk–Credit Exposure—Exposure–Derivatives” in Part II, Item 7Athe 2017 Form10-K.

Fair values as shown below represent the Firm’s net exposure to counterparties related to its OTC derivative products. Obligor credit ratings are determined internally by the Credit Risk Management department.

Counterparty Credit Rating and Remaining Contractual Maturity of the 2016 Form 10-K.

CreditOTC Derivative Portfolio by Counterparty TypeAssets at Fair Value

 

   At June 30, 2017 
   Fair Values1  Notionals 
$ in millions  Receivable   Payable   Net  Protection
Purchased		   Protection
Sold		 

Banks and securities firms

  $5,870   $6,293   $(423)  $222,828   $195,023 

Insurance and other financial institutions

   3,563    4,022    (459)   156,758    154,604 

Non-financial entities

   39    90    (51)   3,586    1,189 

Total

  $9,472   $10,405   $(933)  $383,172   $350,816 
  Credit Rating    
              Non-    
              investment    
$ in millions AAA  AA  A  BBB  grade  Total 

At March 31, 2018

 

    

< 1 year

 $543  $5,281  $37,768  $12,570  $6,192  $62,354 

1-3 years

  690   3,687   22,356   7,981   4,425   39,139 

3-5 years

  767   2,907   15,236   5,093   4,989   28,992 

Over 5 years

  4,813   11,955   77,582   36,990   12,395   143,735 

Total, gross

 $  6,813  $  23,830  $  152,942  $  62,634  $    28,001  $  274,220 

Counterparty Netting

  (3,339)   (15,278)   (123,256)   (44,638)   (15,195)   (201,706) 

Cash and Securities collateral

  (3,158)   (6,512)   (24,812)   (12,055)   (9,077)   (55,614) 

Total, net

 $316  $2,040  $4,874  $5,941  $3,729  $16,900 

 

   At December 31, 2016 
   Fair Values1  Notionals 
$ in millions  Receivable   Payable   Net  Protection
Purchased		   Protection
Sold		 

Banks and securities firms

  $8,516   $9,397   $(881)  $319,830   $273,462 

Insurance and other financial institutions

   3,619    3,901    (282)   144,527    151,999 

Non-financial entities

   94    127    (33)   5,832    4,269 

Total

  $12,229   $13,425   $(1,196)  $470,189   $429,730 
  Credit Rating1    
$ in millions AAA  AA  A  BBB  

Non-

investment

grade

  Total 

At December 31, 2017

 

    

< 1 year

 $356  $5,302  $36,001  $11,577  $5,904  $59,140 

1-3 years

  558   4,118   23,137   8,887   4,827   41,527 

3-5 years

  702   3,183   15,577   5,489   4,879   29,830 

Over 5 years

  5,470   11,667   78,779   37,286   12,079   145,281 

Total, gross

 $  7,086  $  24,270  $  153,494  $  63,239  $  27,689  $  275,778 

Counterparty Netting

  (3,018)   (15,261)   (125,378)   (45,421)   (15,828)   (204,906) 

Cash and Securities collateral

  (3,188)   (6,785)   (23,257)   (12,844)   (9,123)   (55,197) 

Total, net

 $880  $2,224  $4,859  $4,974  $2,738  $15,675 

 

1.

Our Credit Default Swaps (“CDS”) are classified in either Level 2 or Level 3 of the fair value hierarchy. Approximately 4% of receivable fair values, and 6% and 7%, respectively, of payable fair values represented Level 3Prior period amounts at June 30, 2017 and December 31, 2016 (see Note 3have been revised to conform to the consolidated financial statements).current presentation.

The fair values shown in the previous table are before the application of contractual netting or collateral. For additional credit exposure information on our credit derivative portfolio, see Note 4 to the consolidated financial statements.

OTC Derivative Products at Fair Value, Net of Collateral, by Industry

 

$ in millions  At June 30,
2017		   At December 31,
20161		   

At

March 31,

2018

   

At

December 31,

2017

 

Industry2

  

Industry

  

Utilities

  $4,052   $4,184   $4,912   $4,382 

Funds, exchanges and other financial services3

   3,145    2,756 

Financials

   4,245    3,330 

Industrials

   1,269    1,644    1,335    1,124 

Regional governments

   1,144    1,352    1,002    1,005 

Information technology

   869    715 

Healthcare

   842    882 

Energy

   656    646 

Not-for-profit organizations

   633    703 

Sovereign governments

   1,104    709    502    1,084 

Banks and securities firms

   949    1,485 

Healthcare

   930    1,103 

Not-for-profit organizations

   730    830 

Hedge funds

   542    233 

Consumer discretionary

   392    590    463    464 

Information technology

   366    267 

Real estate

   378    374 

Materials

   348    235    276    329 

Insurance

   279    570    243    206 

Energy

   267    533 

Consumer staples

   243    567    118    161 

Special purpose vehicles

   229    821 

Other

   166    256    426    270 

Total4

  $16,155   $18,135 

Total1

  $16,900   $    15,675 

 

1.

The amounts included in the December 31, 2016 industry categories have been revised due to previous misclassifications. The total remains unchanged.

2.

Industry categories are based on the Global Industry Classification Standard®.

3.

Amounts include mutual funds, pension funds, private equity and real estate funds, exchanges and clearinghouses, consumer finance, mortgage finance and other diversified financial services.

4.

For further information on derivative instruments and hedging activities, see Note 4 to the consolidated financial statements.

 

 

  3735  June 2017March 2018 Form 10-Q

Risk Disclosures  LOGOLOGO

 

For additional credit exposure information on our credit derivative portfolio, see Note 4 to the financial statements.

Country Risk Exposure

Country risk exposure is the risk that events in, or that affect, a foreign country (any country other than the U.S.) might adversely affect us. We actively manage country risk exposure through a comprehensive risk management framework that combines credit and market fundamentals and allows us to effectively identify, monitor and limit country risk. Country risk exposure before and after hedging is monitored and managed. For a further discussion of our country risk exposure see, “Quantitative and Qualitative Disclosures about Market Risk—Risk–Risk Management—Management–Country Risk Exposure” in Part II, Item 7A of the 20162017 Form10-K.

Our sovereign exposures consist of financial instruments entered into with sovereign and local governments. Ournon-sovereign exposures consist of exposures tofinancial instruments

entered into primarily with corporations and financial institutions. The following table shows our 10 largestnon-U.S. country risk net exposures at June 30, 2017.March 31, 2018. Index credit derivatives are included in the country risk exposure table. Each reference entity within an index is allocated to that reference entity’s country of risk. Index exposures are allocated to the underlying reference entities in proportion to the notional weighting of each reference entity in the index, adjusted for any fair value receivable/payable for that reference entity. Where credit risk crosses multiple jurisdictions, for example, a CDS purchased from an issuer in a specific country that references bonds issued by an entity in a different country, the fair value of the CDS is reflected in the Net Counterparty Exposure column based on the country of the CDS issuer. Further, the notional amount of the CDS adjusted for the fair value of the receivable/payable is reflected in the Net Inventory column based on the country of the underlying reference entity.

 

 

June 2017March 2018 Form 10-Q  3836  

Risk Disclosures  LOGOLOGO

 

Top Ten Country Exposures at June 30, 20171March 31, 2018

 

$ in millions  Net Inventory2 

Net

Counterparty

Exposure3,4

   Loans   Lending
Commitments		   Exposure
Before Hedges		   Hedges5 Net Exposure   Net Inventory1   

Net

Counterparty

Exposure2

   Loans   Lending
Commitments		   Exposure
before Hedges		   Hedges3   Net Exposure 

Country

                          

United Kingdom:

            

U.K.:

              

Sovereigns

  $(836)   $53   $—   $—   $(783)   $(357)   $(1,140) 

Non-sovereigns

   1,003    10,249    2,533    7,022    20,807    (1,875)    18,932 

Total

  $167   $    10,302   $    2,533   $    7,022   $    20,024   $(2,232)   $    17,792 

Germany:

              

Sovereigns

  $1,645   $460   $—   $—   $2,105   $(858)   $1,247 

Non-sovereigns

   328    2,200    1,132    3,787    7,447    (1,317)    6,130 

Total

  $1,973   $2,660   $1,132   $3,787   $9,552   $(2,175)   $7,377 

France:

              

Sovereigns

  $(924)   $2   $—   $—   $(922)   $(50)   $(972) 

Non-sovereigns

   9    1,862    294    4,100    6,265    (748)    5,517 

Total

  $(915)   $1,864   $294   $4,100   $5,343   $(798)   $4,545 

Spain:

              

Sovereigns

  $1,444  $92   $            —    $            —   $1,536   $            (254)  $1,282   $(1,648)   $—   $—   $—   $(1,648)   $            —   $(1,648) 

Non-sovereigns

   595   9,995    2,050    5,630    18,270    (1,824)   16,446    54    283    3,249    2,748    6,334    (193)    6,141 

Total

  $2,039  $10,087   $2,050   $5,630   $19,806   $(2,078)  $17,728   $(1,594)   $283   $3,249   $2,748   $4,686   $(193)   $4,493 

Japan:

                          

Sovereigns

  $2,205  $            76   $—   $—   $2,281   $(82)  $2,199   $164   $84   $— �� $—   $248   $(118)   $130 

Non-sovereigns

   512   3,161    95    —    3,768    (144)   3,624    476    3,783    —    —    4,259    (118)    4,141 

Total

  $2,717  $3,237   $95   $—   $6,049   $(226)  $5,823   $640   $3,867   $—   $—   $4,507   $(236)   $4,271 

Brazil:

            

Sovereigns

  $4,088  $—   $—   $—   $4,088   $(12)  $4,076 

Non-sovereigns

   52   568    955    68    1,643    (511)   1,132 

Total

  $4,140  $568   $955   $68   $5,731   $(523)  $5,208 

Germany:

            

Sovereigns

  $1,237  $772   $—   $—   $2,009   $(908)  $1,101 

Non-sovereigns

   144   1,359    526    3,256    5,285    (1,370)   3,915 

Total

  $1,381  $2,131   $526   $3,256   $7,294   $(2,278)  $5,016 

Canada:

                          

Sovereigns

  $182  $100   $—   $—   $282   $—  $282 

Non-sovereigns

   276   1,619    155    1,465    3,515    (356)   3,159 

Total

  $458  $1,719   $155   $1,465   $3,797   $(356)  $3,441 

United Arab Emirates:

            

Sovereigns

  $(25)  $831   $—   $—   $806   $(24)  $782   $(326)   $48   $—   $—   $(278)   $—   $(278) 

Non-sovereigns

   5   191    28    1,983    2,207    (15)   2,192    574    2,033    92    1,417    4,116    (278)    3,838 

Total

  $(20)  $1,022   $28   $1,983   $3,013   $(39)  $2,974   $248   $2,081   $92   $1,417   $3,838   $(278)   $3,560 

China:

                          

Sovereigns

  $(45)  $213   $—   $—   $168   $(249)  $(81)   $659   $188   $—   $—   $847   $(54)   $793 

Non-sovereigns

   1,032   157    759    515    2,463    (10)   2,453    737    228    1,291    434    2,690    (10)    2,680 

Total

  $987  $370   $759   $515   $2,631   $(259)  $2,372   $1,396   $416   $1,291   $434   $3,537   $(64)   $3,473 

Brazil:

              

Sovereigns

  $2,561   $—   $—   $—   $2,561   $(12)   $2,549 

Non-sovereigns

   69    167    26    451    713    (16)    697 

Total

  $2,630   $167   $26   $451   $3,274   $(28)   $3,246 

Netherlands:

              

Sovereigns

  $(75)   $—   $—   $—   $(75)   $(20)   $(95) 

Non-sovereigns

   374    733    1,150    1,153    3,410    (305)    3,105 

Total

  $299   $733   $1,150   $1,153   $3,335   $(325)   $3,010 

India:

                          

Sovereigns

  $1,157  $—   $—   $—   $1,157   $—  $1,157   $1,744   $—   $—   $—   $1,744   $—   $1,744 

Non-sovereigns

   562   507    —    —    1,069    —   1,069    696    534    —    —    1,230    —    1,230 

Total

  $            1,719  $507   $—   $—   $2,226   $—  $2,226   $2,440   $534   $—   $—   $2,974   $—   $2,974 

Ireland:

            

Sovereigns

  $13  $5   $—   $—   $18   $(82)  $(64) 

Non-sovereigns

   122   399    1,671    74    2,266    —   2,266 

Total

  $135  $404   $1,671   $74   $2,284   $(82)  $2,202 

Singapore:

            

Sovereigns

  $1,482  $149   $—   $—   $1,631   $—  $1,631 

Non-sovereigns

   50   228    29    117    424    —   424 

Total

  $1,532  $377   $29   $117   $2,055   $—  $            2,055 

 

1.

At June 30, 2017, we had exposure to these countries for overnight deposits with banks of approximately $14.6 billion.

2.

Net inventory represents exposure to both long and short single-name and index positions (i.e., bonds and equities at fair value and CDS based on a notional amount assuming zero recovery adjusted for any fair value receivable or payable). As a market maker, we may transact in these CDS positions to facilitate client trading. At June 30, 2017, gross purchased protection, gross written protection, and net exposures related to single-name and index credit derivatives for those countries shown in the previous table were $(55.7) billion, $53.5 billion and $(2.2) billion, respectively.

3.2.

Net counterparty exposure (i.e., repurchase transactions, securities lending and OTC derivatives) takes into consideration legally enforceable master netting agreements and collateral.

4.

At June 30, 2017, the benefit of collateral received against counterparty credit exposure was $7.9 billion in the U.K. with 96% of collateral consisting of cash and government obligations of the U.K., the U.S. and France, and $9.3 billion in Germany, with 95% of collateral consisting of cash and government obligations of France, Belgium and Germany. The benefit of collateral received against counterparty credit exposure in the other countries totaled approximately $7.2 billion, with collateral primarily consisting of cash and government obligations of Japan. These amounts do not include collateral received on secured financing transactions.

5.3.

Amounts represent CDS hedges (purchased and sold) on net counterparty exposure and lending executed by trading desks responsible for hedging counterparty and lending credit risk exposures for us. Amounts are based on the CDS notional amount assuming zero recovery adjusted for any fair value receivable or payable. For a further description of the contractual terms for purchased credit protection and whether they may limit the effectiveness of our hedges, see “Credit Exposure—Derivatives” herein.

 

  3937  June 2017March 2018 Form 10-Q

Risk Disclosures  LOGOLOGO

As a market maker, we may transact in CDS positions to facilitate client trading. Exposures related to single-name and index credit derivatives for those countries shown in the previous table were as follows:

Credit Derivatives Included in Net Inventory

 

$ in millions

  

At

March 31,

2018

 

Gross purchased protection

  $(78,994) 

Gross written protection

           76,135 

Net exposure

  $(2,859) 

Net counterparty exposure shown in the Top Ten Country Exposures table above are net of the benefit of collateral received, which is typically composed of cash and government obligations.

Benefit of Collateral Received against Counterparty Credit Exposure

$ in millions

  

Collateral1

  

At

March 31,

2018

 

Counterparty credit exposure

    

U.K.

  U.K., U.S. and Japan  $9,215 

Germany

  Belgium and Germany   9,193 

Other

  Japan, France and Spain   14,696 

1.

Collateral primarily consists of cash and government obligations.

Country Risk Exposures Related to the United Kingdom.U.K. At June 30, 2017,March 31, 2018, our country risk exposures in the U.K. included net exposures of $17,728$17,792 million as shown in the previousTop Ten Country Exposures table, and overnight deposits of $6,657$7,047 million. The $16,446$18,932 million of exposures tonon-sovereigns were diversified across both names and sectors. Of this exposure $14,162these exposures, $6,168 million waswere to investment gradeU.K.-focused counterparties withthat generate more thanone-third of their revenues in the largest single component ($5,334 million)U.K., $5,562 million were to geographically diversified counterparties, and $6,248 million were to exchanges and clearing houses.clearinghouses.

Country Risk Exposures Related to Brazil. At June 30, 2017,March 31, 2018, our country risk exposures in Brazil included net exposures of $5,208$3,246 million as shown in the previousTop Ten Country Exposures table. Our sovereign net exposures in Brazil were principally in the form of local currency government bonds held onshore to support client activity. The $1,132$697 million of exposures tonon-sovereigns were diversified across both names and sectors.

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., 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., sales and trading) and support and control groups (e.g., information technology and trade processing). For a further discussion about our operational risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Operational Risk” in Part II, Item 7A of the 20162017 Form10-K.

Model Risk

Model risk refers to the potential for adverse consequences from decisions based on incorrect or misused model outputs. Model risk can lead to financial loss, poor business and strategic decision making, or damage to the Firm’s reputation. The risk inherent in a model is a function of the materiality,

complexity and uncertainty around inputs and assumptions. Model risk is generated from the use of models impacting financial statements, regulatory filings, capital adequacy assessments and the formulation of business strategies.strategy. For a further discussion about our model risk, see “Quantitative and Qualitative Disclosures about Market Risk–Risk Management–Model Risk” in Part II, Item 7A of the 20162017 Form10-K.

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. For a further discussion about our liquidity risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Liquidity Risk” in Part II, Item 7A of the 20162017 Form10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in Part I, Item 2.Resources.”

Legal and Compliance Risk

Legal 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 that we may suffer as a result of 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 anti-money launderingAML and terrorist financing rules and regulations. For a further discussion about our legal and compliance risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Legal and Compliance Risk” in Part II, Item 7A of the 20162017 Form10-K.

 

 

June 2017March 2018 Form 10-Q  4038  

LOGO

Controls and Procedures

Under the supervision and with the participation of the Firm’s management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the Firm’s disclosure controls and procedures (as defined in Rule13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

No change in the Firm’s internal control over financial reporting (as defined in Rule13a-15(f) of the Exchange Act) occurred during the period covered by this report that materially affected, or is reasonably likely to materially affect, the Firm’s internal control over financial reporting.

41June 2017 Form 10-Q

  

 

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Morgan Stanley:

Results of Review of Interim Financial Information

We have reviewed the accompanying condensed consolidated balance sheet of Morgan Stanley and subsidiaries (the “Firm”) as of June 30, 2017,March 31, 2018, and the related condensed consolidated income statements, and comprehensive income statements, for the three-month andsix-month periods ended June 30, 2017 and 2016, and the cash flow statements and statements of changes in total equity for thesix-month three-month periods ended June 30,March 31, 2018 and 2017, and 2016. Thesethe related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim condensed consolidated financial statements areinformation for it to be in conformity with accounting principles generally accepted in the responsibilityUnited States of the management of the Firm.America.

We conducted our reviewshave previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the consolidated balance sheet of the Firm as of December 31, 2017, and the related consolidated income statement, comprehensive income statement, cash flow statement and statement of changes in total equity for the year then ended (not presented herein) included in the Firm’s Annual Report on Form10-K; and in our report dated February 27, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2017 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

This interim financial information is the responsibility of the Firm’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Firm in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States),PCAOB, the objective of which is the expression of an opinion regarding

the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed interim consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Firm as of December 31, 2016, and the consolidated income statement, comprehensive income statement, cash flow statement and statement of changes in total equity for the year then ended (not presented herein) included in the Firm’s Annual Report on Form10-K; and in our report dated February 27, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2016 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

 

/s/ Deloitte & Touche LLP

New York, New York

August 3, 2017May 4, 2018

 

June 201739March 2018 Form 10-Q42

Financial Statements

Consolidated Financial Statements and Notes

Consolidated Income Statements

(Unaudited)

  LOGOLOGO

 

Consolidated Income Statements

(Unaudited)

   Three Months Ended
March 31,		 
in millions, except per share data          2018                   2017         

Revenues

    

Investment banking

  $1,634   $        1,545 

Trading

   3,770    3,235 

Investments

   126    165 

Commissions and fees

   1,173    1,033 

Asset management

   3,192    2,767 

Other

   207    229 

Total non-interest revenues

   10,102    8,974 

Interest income

   2,860    1,965 

Interest expense

   1,885    1,194 

Net interest

   975    771 

Net revenues

   11,077    9,745 

Non-interest expenses

    

Compensation and benefits

   4,914    4,466 

Occupancy and equipment

   336    327 

Brokerage, clearing and exchange fees

   627    509 

Information processing and communications

   478    428 

Marketing and business development

   140    136 

Professional services

   510    527 

Other

   652    544 

Total non-interest expenses

   7,657    6,937 

Income from continuing operations before income taxes

   3,420    2,808 

Provision for income taxes

   714    815 

Income from continuing operations

   2,706    1,993 

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

   (2)    (22) 

Net income

  $2,704   $1,971 

Net income applicable to noncontrolling interests

   36    41 

Net income applicable to Morgan Stanley

  $2,668   $1,930 

Preferred stock dividends and other

   93    90 

Earnings applicable to Morgan Stanley common shareholders

  $2,575   $1,840 

Earnings per basic common share

    

Income from continuing operations

  $1.48   $1.03 

Income (loss) from discontinued operations

   —    (0.01) 

Earnings per basic common share

  $1.48   $1.02 

Earnings per diluted common share

    

Income from continuing operations

  $1.46   $1.01 

Income (loss) from discontinued operations

   (0.01)    (0.01) 

Earnings per diluted common share

  $1.45   $1.00 

Dividends declared per common share

  $0.25   $0.20 

Average common shares outstanding

    

Basic

   1,740    1,801 

Diluted

   1,771    1,842 

 

   Three Months Ended
June 30,		  Six Months Ended
June 30,		 
in millions, except per share data        2017              2016              2017              2016       

Revenues

     

Investment banking

  $1,530  $1,224  $3,075  $2,331 

Trading

   2,931   2,746   6,166   4,811 

Investments

   163   126   328   92 

Commissions and fees

   1,027   1,020   2,060   2,075 

Asset management, distribution and administration fees

   2,902   2,637   5,669   5,257 

Other

   199   243   428   323 

Totalnon-interest revenues

   8,752   7,996   17,726   14,889 

Interest income

   2,106   1,667   4,071   3,414 

Interest expense

   1,355   754   2,549   1,602 

Net interest

   751   913   1,522   1,812 

Net revenues

   9,503   8,909   19,248   16,701 

Non-interest expenses

     

Compensation and benefits

   4,252   4,015   8,718   7,698 

Occupancy and equipment

   333   329   660   658 

Brokerage, clearing and exchange fees

   525   484   1,034   949 

Information processing and communications

   433   429   861   871 

Marketing and business development

   155   154   291   288 

Professional services

   561   547   1,088   1,061 

Other

   602   468   1,146   955 

Totalnon-interest expenses

   6,861   6,426   13,798   12,480 

Income from continuing operations before income taxes

   2,642   2,483   5,450   4,221 

Provision for income taxes

   846   833   1,661   1,411 

Income from continuing operations

   1,796   1,650   3,789   2,810 

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

   (5)   (4)   (27)   (7) 

Net income

  $1,791  $1,646  $3,762  $2,803 

Net income applicable to noncontrolling interests

   34   64   75   87 

Net income applicable to Morgan Stanley

  $1,757  $1,582  $3,687  $2,716 

Preferred stock dividends and other

   170   157   260   235 

Earnings applicable to Morgan Stanley common shareholders

  $1,587  $1,425  $3,427  $2,481 

Earnings per basic common share

     

Income from continuing operations

  $0.89  $0.77  $1.92  $1.33 

Income (loss) from discontinued operations

   —   (0.01)   (0.01)   (0.01) 

Earnings per basic common share

  $0.89  $0.76  $1.91  $1.32 

Earnings per diluted common share

     

Income from continuing operations

  $0.87  $0.75  $1.88  $1.30 

Income (loss) from discontinued operations

   —   —   (0.01)   — 

Earnings per diluted common share

  $0.87  $0.75  $1.87  $1.30 

Dividends declared per common share

  $0.20  $0.15  $0.40  $0.30 

Average common shares outstanding

     

Basic

   1,791   1,866   1,796   1,875 

Diluted

   1,830   1,899   1,836   1,907 
March 2018 Form 10-Q40See Notes to Consolidated Financial Statements

Consolidated Comprehensive Income Statements

(Unaudited)

LOGO

   Three Months Ended
March 31,		 
$ in millions          2018                   2017         

Net income

  $2,704   $        1,971 

Other comprehensive income (loss), net of tax:

          

Foreign currency translation adjustments

  $117   $150 

Change in net unrealized gains (losses) on available-for-sale securities

   (410)    84 

Pension, postretirement and other

   5    — 

Change in net debt valuation adjustment

   451    9 

Total other comprehensive income (loss)

  $163   $243 

Comprehensive income

  $2,867   $2,214 

Net income applicable to noncontrolling interests

   36    41 

Other comprehensive income (loss) applicable to noncontrolling interests

   72    50 

Comprehensive income applicable to Morgan Stanley

  $2,759   $2,123 

See Notes to Consolidated Financial Statements41March 2018 Form 10-Q

Consolidated Balance SheetsLOGO

$ in millions, except share data  (Unaudited)
At
March 31,
2018		   At
December 31,
2017		 

Assets

    

Cash and cash equivalents:

    

Cash and due from banks

  $29,073   $        24,816 

Interest bearing deposits with banks

   22,980    21,348 

Restricted cash

   35,291    34,231 

Trading assets at fair value ($163,158and $169,735 were pledged to various parties)

   273,044    298,282 

Investment securities (includes$56,749and $55,203 at fair value)

   80,641    78,802 

Securities purchased under agreements to resell

   80,246    84,258 

Securities borrowed

   135,835    124,010 

Customer and other receivables

   66,835    56,187 

Loans:

    

Held for investment (net of allowance of$243 and $224)

   95,124    92,953 

Held for sale

   14,011    11,173 

Goodwill

   6,706    6,597 

Intangible assets (net of accumulated amortization of$2,817 and $2,730)

   2,427    2,448 

Other assets

   16,282    16,628 

Total assets

  $858,495   $851,733 

Liabilities

    

Deposits (includes$242 and $204 at fair value)

  $160,424   $159,436 

Trading liabilities at fair value

   139,023    131,295 

Securities sold under agreements to repurchase (includes$792 and $800 at fair value)

   51,575    56,424 

Securities loaned

   13,556    13,592 

Other secured financings (includes$3,423and $3,863 at fair value)

   10,275    11,271 

Customer and other payables

   194,924    191,510 

Other liabilities and accrued expenses

   14,265    17,157 

Borrowings (includes$47,533 and $46,912 at fair value)

   194,964    192,582 

Total liabilities

   779,006    773,267 

Commitments and contingent liabilities (see Note 11)

    

Equity

    

Morgan Stanley shareholders’ equity:

    

Preferred stock

   8,520    8,520 

Common stock, $0.01 par value:

    

Shares authorized:3,500,000,000; Shares issued:2,038,893,979; Shares outstanding:1,773,934,393 and 1,788,086,805

   20    20 

Additional paid-in capital

   23,260    23,545 

Retained earnings

   60,009    57,577 

Employee stock trusts

   2,907    2,907 

Accumulated other comprehensive income (loss)

   (3,406)    (3,060) 

Common stock held in treasury at cost, $0.01 par value (264,959,586 and 250,807,174 shares)

   (10,369)    (9,211) 

Common stock issued to employee stock trusts

   (2,907)    (2,907) 

Total Morgan Stanley shareholders’ equity

   78,034    77,391 

Noncontrolling interests

   1,455    1,075 

Total equity

   79,489    78,466 

Total liabilities and equity

  $858,495   $851,733 

March 2018 Form 10-Q42See Notes to Consolidated Financial Statements

Consolidated Statements of Changes in Total Equity

(Unaudited)

LOGO

$ in millions 

Preferred

Stock

  

Common

Stock

  

Additional

Paid-in

Capital

  

Retained

Earnings

  

Employee

Stock

Trusts

  

Accumulated

Other

Comprehensive

Income (Loss)

  

Common

Stock

Held in

Treasury

at Cost

  

Common

Stock

Issued to

Employee

Stock

Trusts

  

Non-

controlling

Interests

  

Total

Equity

 

Balance at December 31, 2017

 $8,520  $20  $23,545  $57,577  $2,907  $(3,060)  $(9,211)  $(2,907)  $1,075  $78,466 

Cumulative adjustment for accounting changes1

  —   —   —   306   —   (437)   —   —   —   (131) 

Net income applicable to Morgan Stanley

  —   —   —   2,668   —   —   —   —   —   2,668 

Net income applicable to noncontrolling interests

  —   —   —   —   —   —   —   —   36   36 

Dividends

  —   —   —   (542)   —   —   —   —   —   (542) 

Shares issued under employee plans

  —   —   (285)   —   —   —   710   —   —   425 

Repurchases of common stock and employee tax withholdings

  —   —   —   —   —   —   (1,868)   —   —   (1,868) 

Net change in Accumulated other comprehensive income (loss)

  —   —   —   —   —   91   —   —   72   163 

Other net increases

  —   —   —   —   —   —   —   —   272   272 

Balance at March 31, 2018

 $    8,520  $    20  $    23,260  $    60,009  $    2,907  $(3,406)  $(10,369)  $(2,907)  $1,455  $79,489 

Balance at December 31, 2016

 $7,520  $20  $23,271  $53,679  $2,851  $(2,643)  $(5,797)  $(2,851)  $1,127  $77,177 

Cumulative adjustment for accounting changes1

  —   —   45   (35)   —   —   —   —   —   10 

Net income applicable to Morgan Stanley

  —   —   —   1,930   —   —   —   —   —   1,930 

Net income applicable to noncontrolling interests

  —   —   —   —   —   —   —   —   41   41 

Dividends

  —   —   —   (465)   —   —   —   —   —   (465) 

Shares issued under employee plans

  —   —   (430)   —   186   —               803   (186)   —   373 

Repurchases of common stock and employee tax withholdings

  —   —   —   —   —   —   (1,161)   —   —   (1,161) 

Net change in Accumulated other comprehensive income (loss)

  —   —   —   —   —               193   —   —   50   243 

Issuance of preferred stock

  1,000   —   (6)   —   —   —   —               —   —   994 

Other net decreases

  —   —   —   —   —   —   —   —   (58)   (58) 

Balance at March 31, 2017

 $8,520  $20  $22,880  $55,109  $3,037  $(2,450)  $(6,155)  $(3,037)  $    1,160  $    79,084 

1.

The cumulative adjustments relate to the adoption of certain accounting updates during the current and prior year quarters. See Notes 2 and 14 for further information.

 

See Notes to Consolidated Financial Statements  43  June 2017March 2018 Form 10-Q

Consolidated Comprehensive Income Statements (Unaudited)LOGO

   

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
$ in millions      2017          2016          2017          2016     

Net income

  $1,791  $1,646  $3,762  $2,803 

Other comprehensive income (loss), net of tax:

     

Foreign currency translation adjustments

  $12  $131   162   317 

Change in net unrealized gains onavailable-for-sale securities

   108   143   192   538 

Pension, postretirement and other

   4   (5)   4   (4) 

Change in net debt valuation adjustment

   (183)   145   (174)   348 

Total other comprehensive income (loss)

  $(59)  $414  $184  $1,199 

Comprehensive income

  $1,732  $2,060  $3,946  $4,002 

Net income applicable to noncontrolling interests

   34   64   75   87 

Other comprehensive income (loss) applicable to noncontrolling interests

   (21)   81   29   136 

Comprehensive income applicable to Morgan Stanley

  $1,719  $1,915  $3,842  $3,779 

June 2017 Form 10-Q44See Notes to Consolidated Financial Statements

Consolidated Balance SheetsLOGO

   (Unaudited)    
$ in millions, except share data  

At

June 30,
2017

  

At

December 31,
2016

 

Assets

   

Cash and due from banks

  $25,008  $22,017 

Interest bearing deposits with banks

   19,651   21,364 

Trading assets at fair value ($163,689and $152,548 were pledged to various parties)

   290,802   262,154 

Investment securities (includes$50,488 and $63,170 at fair value)

   71,576   80,092 

Securities purchased under agreements to resell (includes$102 and $302 at fair value)

   97,408   101,955 

Securities borrowed

   126,722   125,236 

Customer and other receivables

   54,917   46,460 

Loans:

 

   

Held for investment (net of allowance of$306 and $274)

   87,007   81,704 

Held for sale

   10,632   12,544 

Goodwill

   6,591   6,577 

Intangible assets (net of accumulated amortization of$2,575 and $2,421)

   2,567   2,721 

Other assets

   48,135   52,125 

Total assets

  $841,016  $814,949 

Liabilities

   

Deposits (includes$130 and $63 at fair value)

  $144,913  $155,863 

Short-term borrowings (includes$582 and $406 at fair value)

   916   941 

Trading liabilities at fair value

   134,810   128,194 

Securities sold under agreements to repurchase (includes$738 and $729 at fair value)

   50,697   54,628 

Securities loaned

   16,862   15,844 

Other secured financings (includes$5,731 and $5,041 at fair value)

   16,642   11,118 

Customer and other payables

   197,055   190,513 

Other liabilities and accrued expenses

   15,042   15,896 

Long-term borrowings (includes$43,226 and $38,736 at fair value)

   184,112   164,775 

Total liabilities

   761,049   737,772 

Commitments and contingent liabilities (see Note 11)

   

Equity

   

Morgan Stanley shareholders’ equity:

   

Preferred stock

   8,520   7,520 

Common stock, $0.01 par value:

   

Shares authorized:3,500,000,000; Shares issued:2,038,893,979; Shares outstanding:1,839,578,174 and 1,852,481,601

   20   20 

Additionalpaid-in capital

   23,140   23,271 

Retained earnings

   56,325   53,679 

Employee stock trusts

   2,945   2,851 

Accumulated other comprehensive income (loss)

   (2,488)   (2,643) 

Common stock held in treasury at cost, $0.01 par value (199,315,805 and 186,412,378 shares)

   (6,691)   (5,797) 

Common stock issued to employee stock trusts

   (2,945)   (2,851) 

Total Morgan Stanley shareholders’ equity

   78,826   76,050 

Noncontrolling interests

   1,141   1,127 

Total equity

   79,967   77,177 

Total liabilities and equity

  $841,016  $814,949 

See Notes to Consolidated Financial Statements45June 2017 Form 10-Q

Consolidated Statements of Changes in Total Equity (Unaudited)LOGO

$ in millions

 

Preferred

Stock

  

Common

Stock

  

Additional

Paid-in

Capital

  

Retained

Earnings

  

Employee

Stock

Trusts

  

Accumulated

Other

Comprehensive

Income (Loss)

  

Common

Stock

Held in

Treasury

at Cost

  

Common

Stock

Issued to

Employee

Stock

Trusts

  

Non-

controlling

Interests

  

Total

Equity

 

Balance at December 31, 2016

 $7,520  $20  $23,271  $53,679  $2,851  $(2,643)  $(5,797)  $(2,851)  $1,127  $77,177 

Cumulative adjustment for accounting changes1

  —   —   45   (35)   —   —   —   —   —   10 

Net income applicable to Morgan Stanley

  —   —   —   3,687   —   —   —   —   —   3,687 

Net income applicable to noncontrolling interests

  —   —   —   —   —   —   —   —   75   75 

Dividends

  —   —   —   (1,006)   —   —   —   —   —   (1,006) 

Shares issued under employee plans

  —   —   (170)   —   94   —   815   (94)   —   645 

Repurchases of common stock and employee tax withholdings

  —   —   —   —   —   —   (1,709)   —   —   (1,709) 

Net change in Accumulated other comprehensive income (loss)

  —   —   —   —   —   155   —   —   29   184 

Issuance of preferred stock

  1,000   —   (6)   —   —   —   —   —   —   994 

Other net decreases

  —   —   —   —   —   —   —   —   (90)   (90) 

Balance at June 30, 2017

 $8,520  $20  $23,140  $56,325  $2,945  $(2,488)  $(6,691)  $(2,945)  $1,141  $79,967 

Balance at December 31, 2015

 $7,520  $20  $24,153  $49,204  $2,409  $(1,656)  $(4,059)  $(2,409)  $1,002  $76,184 

Cumulative adjustment for accounting change related to DVA2

  —   —   —   312   —   (312)   —   —   —   — 

Net adjustment for accounting change related to consolidation3

  —   —   —   —   —   —   —   —   106   106 

Net income applicable to Morgan Stanley

  —   —   —   2,716   —   —   —   —   —   2,716 

Net income applicable to noncontrolling interests

  —   —   —   —   —   —   —   —   87   87 

Dividends

  —   —   —   (822)   —   —   —   —   —   (822) 

Shares issued under employee plans and related tax effects

  —   —   (1,456)   —   464   —   2,062   (464)   —   606 

Repurchases of common stock and employee tax withholdings

  —   —   —   —   —   —   (1,629)   —   —   (1,629) 

Net change in Accumulated other comprehensive income (loss)

  —   —   —   —   —   1,063   —   —   136   1,199 

Other net decreases

  —   —   —   —   —   —   —   —   (72)   (72) 

Balance at June 30, 2016

 $7,520  $20  $22,697  $51,410  $2,873  $(905)  $(3,626)  $(2,873)  $1,259  $78,375 

1.

The cumulative adjustment relates to the adoption of the following accounting updates on January 1, 2017: Improvements to Employee Share-Based Payment Accounting,for which the Firm recorded a cumulativecatch-up adjustment to reflect its election to account for forfeitures as they occur (see Note 2 for further information); andIntra-Entity Transfers of Assets Other Than Inventory, for which the Firm recorded a cumulativecatch-up adjustment to reflect the tax impact from an intercompany sale of assets.

2.

Debt valuation adjustment (“DVA”) represents the change in the fair value resulting from fluctuations in the Firm’s credit spreads and other credit factors related to liabilities carried at fair value under the fair value option, primarily related to certain Long-term and Short-term borrowings. In accordance with the early adoption of a provision of the accounting updateRecognition and Measurement of Financial Assets and Financial Liabilities, a cumulativecatch-up adjustment was recorded as of January 1, 2016 to move the cumulative unrealized DVA amount, net of noncontrolling interests and tax, related to outstanding liabilities under the fair value option election from Retained earnings into Accumulated other comprehensive income (loss) (“AOCI”). See Note 2 to the consolidated financial statements in the Firm’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”) and Note 14 for further information.

3.

In accordance with the accounting updateAmendments to the Consolidation Analysis, a net adjustment was recorded as of January 1, 2016 to both consolidate and deconsolidate certain entities under the new guidance. See Note 2 to the consolidated financial statements in the 2016 Form10-K for further information.

June 2017 Form 10-Q46See Notes to Consolidated Financial Statements

Consolidated Cash Flow Statements

(Unaudited)

  LOGOLOGO

 

   

Six Months Ended

June 30,

 
$ in millions          2017                  2016         

Cash flows from operating activities

   

Net income

  $3,762  $2,803 

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

   

(Income) loss from equity method investments

   —   (1) 

Compensation payable in common stock and options

   518   492 

Depreciation and amortization

   889   879 

Net gain on sale ofavailable-for-sale securities

   (16)   (82) 

Impairment charges

   6   67 

Provision for credit losses on lending activities

   25   131 

Other operating adjustments

   (148)   218 

Changes in assets and liabilities:

   

Trading assets, net of Trading liabilities

   (18,050)   (333) 

Securities borrowed

   (1,486)   11,135 

Securities loaned

   1,018   (2,117) 

Customer and other receivables and other assets

   (2,336)   (10,537) 

Customer and other payables and other liabilities

   5,732   9,949 

Securities purchased under agreements to resell

   4,547   (9,932) 

Securities sold under agreements to repurchase

   (3,931)   13,636 

Net cash provided by (used for) operating activities

   (9,470)   16,308 

Cash flows from investing activities

   

Proceeds from (payments for):

   

Other assets—Premises, equipment and software, net

   (723)   (645) 

Changes in loans, net

   (5,326)   (4,724) 

Investment securities:

   

Purchases

   (8,418)   (30,700) 

Proceeds from sales

   13,533   20,274 

Proceeds from paydowns and maturities

   3,668   3,507 

Other investing activities

   (39)   (126) 

Net cash provided by (used for) investing activities

   2,695   (12,414) 

Cash flows from financing activities

   

Net proceeds from (payments for):

   

Short-term borrowings

   (25)   (1,293) 

Noncontrolling interests

   (35)   (43) 

Other secured financings

   4,272   (69) 

Deposits

   (10,950)   (3,341) 

Proceeds from:

   

Derivatives financing activities

   73   — 

Issuance of preferred stock, net of issuance costs

   994   — 

Issuance of long-term borrowings

   33,522   20,628 

Payments for:

   

Long-term borrowings

   (17,796)   (15,900) 

Derivatives financing activities

   (48)   (120) 

Repurchases of common stock and employee tax withholdings

   (1,709)   (1,629) 

Cash dividends

   (954)   (791) 

Other financing activities

   21   — 

Net cash provided by (used for) financing activities

   7,365   (2,558) 

Effect of exchange rate changes on cash and cash equivalents

   688   714 

Net increase in cash and cash equivalents

   1,278   2,050 

Cash and cash equivalents, at beginning of period

   43,381   54,083 

Cash and cash equivalents, at end of period

  $44,659  $56,133 

Cash and cash equivalents include:

   

Cash and due from banks

  $25,008  $27,597 

Interest bearing deposits with banks

   19,651   28,536 

Cash and cash equivalents, at end of period

  $44,659  $56,133 

Supplemental Disclosure of Cash Flow Information

Cash payments for interest were$1,922 millionand $1,082 million.

Cash payments for income taxes, net of refunds, were$732 millionand $340 million

   Three Months Ended
March 31,		 
$ in millions          2018                   2017         

Cash flows from operating activities

    

Net income

  $2,704   $1,971 

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

    

(Income) loss from equity method investments

   (50)    (9) 

Stock-based compensation expense

   321    269 

Depreciation and amortization

   390    434 

Net gain on sale of available-for-sale securities

   —    (2) 

Impairment charges

   8    5 

Provision for credit losses on lending activities

   26    25 

Other operating adjustments

   5    (74) 

Changes in assets and liabilities:

    

Trading assets, net of Trading liabilities

   33,832    (12,838) 

Securities borrowed

   (11,825)    13,433 

Securities loaned

   (36)    3,090 

Customer and other receivables and other assets

   (13,019)    (1,687) 

Customer and other payables and other liabilities

   1,129    (3,556) 

Securities purchased under agreements to resell

   4,012    (2,868) 

Securities sold under agreements to repurchase

   (4,849)    1,897 

Net cash provided by (used for) operating activities

   12,648    90 

Cash flows from investing activities

    

Proceeds from (payments for):

    

Other assets—Premises, equipment and software, net

   (410)    (350) 

Changes in loans, net

   (3,801)    (1,105) 

Investment securities:

    

Purchases

   (5,482)    (6,449) 

Proceeds from sales

   810    3,604 

Proceeds from paydowns and maturities

   2,125    2,071 

Other investing activities

   (164)    61 

Net cash provided by (used for) investing activities

   (6,922)    (2,168) 

Cash flows from financing activities

    

Net proceeds from (payments for):

    

Noncontrolling interests

   (5)    (2) 

Other secured financings

   (2,101)    199 

Deposits

   988    (3,754) 

Proceeds from:

    

Derivatives financing activities

   —    48 

Issuance of preferred stock, net of issuance costs

   —    994 

Issuance of Borrowings

   15,370    18,433 

Payments for:

    

Borrowings

   (11,377)    (11,538) 

Repurchases of common stock and employee tax withholdings

   (1,868)    (1,161) 

Cash dividends

   (599)    (511) 

Other financing activities

   (45)    14 

Net cash provided by (used for) financing activities

   363    2,722 

Effect of exchange rate changes on cash and cash equivalents

   860    877 

Net increase (decrease) in cash and cash equivalents

   6,949    1,521 

Cash and cash equivalents, at beginning of period

   80,395    77,360 

Cash and cash equivalents, at end of period

  $87,344   $78,881 

Cash and cash equivalents:

    

Cash and due from banks

  $29,073   $        22,081 

Interest bearing deposits with banks

   22,980    20,773 

Restricted cash

   35,291    36,027 

Cash and cash equivalents, at end of period

  $87,344   $78,881 

Supplemental Disclosure of Cash Flow Information

    

Cash payments for:

    

Interest

  $1,407   $737 

Income taxes, net of refunds

   250    262 

 

March 2018 Form 10-Q44See Notes to Consolidated Financial Statements47June 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

1. Introduction and Basis of Presentation

The Firm

Morgan Stanley a financial holding company, is a global financial services firm that maintains significant market positions in each of its business segments—Institutional Securities, Wealth Management and Investment Management. Morgan Stanley, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Unless the context otherwise requires, the terms “Morgan Stanley” or the “Firm” mean Morgan Stanley (the “Parent Company”) together with its consolidated subsidiaries. See the “Glossary of Common Acronyms” for definitions of certain acronyms used throughout this Form 10-Q.

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

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

Wealth Management provides 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, financial and wealth planning services, annuity and insurance products, credit and other lending 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, founda-

tions,foundations, endowments, government entities, sovereign wealth funds, insurance companies, third-party fund sponsors and corporations. Individual clients are serviced through intermediaries, including affiliated andnon-affiliated distributors.

Basis of Financial Information

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

The accompanying consolidated financial statements should be read in conjunction with the Firm’s consolidated financial statements and notes thereto included in the 20162017 Form10-K. Certain footnote disclosures included in the 20162017 Form10-K have been condensed or omitted from these consolidated financial statements as they are not required for interim reporting under U.S. GAAP. The consolidated financial statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of operations for interim periods are not necessarily indicative of results for the entire year.

Consolidation

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

 

 

June 201745March 2018 Form 10-Q48

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

For a discussion of the Firm’s involvement with VIEs and its significant regulated U.S. and international subsidiaries, see Notes 1 and 2 to the consolidated financial statements in the 2016 2017Form10-K.

2. Significant Accounting Policies

For a detailed discussion about the Firm’s significant accounting policies, see Note 2 to the consolidated financial statements in the 20162017 Form10-K.

During the sixthree months ended June 30, 2017March 31, 2018 (“current year period”quarter”), other than the following, there were no significant updates maderevisions to the Firm’s significant accounting policies.policies, other than the following and the accounting updates adopted.

Carried Interest

The Firm is entitled to receive performance-based fees (also referred to as incentive fees, and includes carried interest) when the return on assets under management exceeds certain benchmark returns or other performance targets. Beginning January 1, 2018, when the Firm earns carried interest from funds as specified performance thresholds are met, that carried interest and any related general or limited partner interest is accounted for under the equity method of accounting and measured based on the Firm’s claim on the NAV of the fund at the reporting date taking into account the distribution terms applicable to the interest held. Performance-based fees in the form of carried interest considered equity method investments are therefore outside the scope of the policies for revenue from contracts with customers discussed below. See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received.

Accounting StandardsUpdates Adopted

The Firm adopted the following accounting update onupdates in the current quarter. Prior year quarter results are presented under previous policies. See Note 14 for a summary of the Retained earnings impacts of these and other minor adoptions effective this quarter.

Revenue from Contracts with Customers

On January 1, 2017.2018, we adoptedRevenue from Contracts with Customers using the modified retrospective method, which resulted in a net decrease to Retained earnings of $32 million, net of tax. Prior period amounts were not restated. See Note 20 for new disclosures related to the adoption of this standard.

Our revised accounting policy in accordance with this adoption is effective January 1, 2018, and is discussed below.

Revenue Recognition

Revenues are recognized when the promised goods or services are delivered to our customers, in an amount that is based on the consideration the Firm expects to receive in exchange for those goods or services when such amounts are not probable of significant reversal.

 

• 

Improvements to Employee Share-Based Payment AccountingInvestment Banking. This accounting update simplifies the accounting for employee share-based payments, including the recognition of forfeitures, the classification of income tax consequences, and the classification within the consolidated cash flow statements.

Beginning in 2017, theRevenue from investment banking activities consists of revenues earned from underwriting primarily equity and fixed income tax consequencessecurities and advisory fees for mergers, acquisitions, restructuring and advisory assignments.

Underwriting revenues are generally recognized on trade date if there is no uncertainty or contingency related to share-based payments are requiredthe amount to be paid. Underwriting costs are deferred and recognized in Provision for income taxesthe relevant non-compensation expense line items when the related underwriting revenues are recorded.

Advisory fees are recognized as advice is provided to the client, based on the estimated progress of work and when the revenue is not probable of a significant reversal. Advisory costs are recognized as incurred in the consolidated incomerelevant non-compensation expense line items, including when reimbursed.

•

Commissions and Fees

Commission and fee revenues result from transaction-based arrangements in which the client is charged a fee for the execution of transactions. Such revenues primarily arise from transactions in equity securities; services related to sales and trading activities; and sales of mutual funds, alternative funds, futures, insurance products and options. Commission and fee revenues are recognized on trade date when the performance obligation is satisfied.

•

Asset Management Revenues

Asset management, distribution and administration fees are generally based on related asset levels being managed, such as the AUM of a customer’s account, or the net asset value of a fund. These fees are generally recognized when services are performed and the fees become known. Management fees are reduced by estimated fee waivers and expense caps, if any, provided to the customer.

March 2018 Form 10-Q46

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Performance-based fees not in the form of carried interest are recorded when the annual performance target is met and the revenue is not probable of a significant reversal. Performance-based fees in the form of carried interest are considered equity method investments and are therefore outside the scope of these policies for revenue from contracts with customers.

Sales commissions paid by the Firm in connection with the sale of certain classes of shares of its open-end mutual fund products are accounted for as deferred commission assets and amortized to expense over the expected life of the contract. The Firm periodically tests deferred commission assets for recoverability based on cash flows expected to be received in future periods. Other asset management and distribution costs are recognized as incurred in the relevant non-compensation expense line items.

•

Other Items

Revenue from commodities-related contracts is recognized as the promised goods or services are delivered to the customer.

Receivables from contracts with customers are recognized in Customer and other receivables in the balance sheets when the underlying performance obligations have been satisfied and the Firm has the right per the contract to bill the customer. Contract assets are recognized in Other assets when the Firm has satisfied its performance obligations, but customer payment is conditional. Contract liabilities are recognized in Other liabilities when the Firm has collected payment from a customer based on the terms of the contract, but the underlying performance obligations are not yet satisfied.

For contracts with a term less than one year, incremental costs to obtain the contract are expensed as incurred. Revenues are not discounted when payment is expected within one year.

The Firm presents, net within revenues, all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Firm from a customer.

statements uponDerivatives and Hedging–Targeted Improvements to Accounting for Hedging Activities

This accounting update aims to better align the conversionhedge accounting requirements with an entity’s risk management strategies and improve the financial reporting of employee share-based awards instead of additionalpaid-in capital. The impacthedging relationships. It also results in simplification of the income tax consequences upon conversionapplication of hedge accounting related to the awards may be either a benefit or a provision. Conversionassessment of employee share-based awards tohedge effectiveness.

The Firm shares will primarily occurearly adopted this accounting update in the first quarter of each year. The impact of recognizing excess tax benefits upon conversion of awards in the quarter in which the accounting update was adopted (three months ended March 31, 2017) was a $112 million benefit to Provision for income taxes. The classification of cash flows from excess tax benefits was moved from the financing section to the operating section of the consolidated cash flow statements, and was applied on a retrospective basis.

In addition, this accounting update permits an entity to elect whether to continue to estimate the total forfeitures, or to account for forfeitures on an actual basis as they occur. The Firm has elected to account for forfeitures on an actual basis as they occur. This change is required to be applied using a modified retrospective approach, and upon2018. Upon adoption, the Firm recorded a cumulativecatch-up adjustment, decreasing Retained earnings by approximately $30$99 million, net of tax. This adjustment represents the cumulative effect of applying the new rules from the inception of certain fair value hedges of the interest rate risk of our borrowings, in particular the provision allowing only the benchmark rate component of coupon cash flows to be hedged.

Effective January 1, 2018, in accordance with this adoption, the Firm has updated its accounting policies to permit the hedged item in a fair value hedge of interest rate risk to be defined as including only the benchmark rate component of contractual coupon cash flows, and to allow for hedging part of the contractual term of the hedged instrument. The accounting policy also requires the entire gain or loss from revaluing hedges of net investments in foreign operations at the spot rate to be reported within AOCI.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

This accounting update, which the Firm elected to early adopt as of January 1, 2018, allows companies to reclassify from AOCI to Retained earnings the stranded tax increasing Additionalpaid-in capital by approximately $45 millioneffects associated with enactment of the Tax Act on December 22, 2017. These stranded tax effects resulted from the requirement to reflect the total amount of the remeasurement of and increasingother adjustments to deferred tax assets by approximately $15 million.and liabilities in 2017 income from continuing operations, regardless of whether the deferred taxes were originally recorded in AOCI. Accordingly, as of January 1, 2018, the Firm recorded a net increase to Retained earnings as a result of the reclassification of $443 million of such stranded tax effects previously recorded in AOCI, which were primarily the result of the remeasurement of deferred tax assets and liabilities associated with the change in tax rates.

Aside from the above treatment related to the Tax Act, the Firm releases stranded tax effects from AOCI into earnings once the related category of instruments or transactions giving rise to these effects no longer exists. For further detail on the tax effects reclassified, refer to Note 14 to the financial statements.

 

 

  4947  June 2017March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

3. Fair Values

Fair Value Measurement

Assets and Liabilities Measured at Fair Value on a Recurring

Basis

 

  At June 30, 2017 
$ in millions Level 1  Level 2  Level 3  Netting4  Total 

Assets at Fair Value

     

Trading assets:

     

U.S. government and agency securities:

     

U.S. Treasury securities

 $27,473  $—  $—  $—  $27,473 

U.S. agency securities

  2,148   25,832   —   —   27,980 

Total U.S. government and agency securities

  29,621   25,832   —   —   55,453 

Other sovereign government obligations1

  19,553   5,382   100   —   25,035 

Corporate and other debt:

     

State and municipal securities

  —   2,572   9   —   2,581 

Residential mortgage-, commercial mortgage- and asset-backed securities

  —   2,564   264   —   2,828 

Corporate bonds

  —   15,338   449   —   15,787 

Collateralized debt and loan obligations

  —   305   58   —   363 

Loans and lending commitments2

  —   4,361   4,864   —   9,225 

Other debt

  —   2,269   186   —   2,455 

Total corporate and other debt

  —   27,409   5,830   —   33,239 

Corporate equities3

  127,252   394   500   —   128,146 

Securities received as collateral

  14,402   6   —   —   14,408 

Derivative and other contracts:

     

Interest rate

  623   254,677   1,850   —   257,150 

Credit

  —   9,049   423   —   9,472 

Foreign exchange

  100   54,895   62   —   55,057 

Equity

  803   41,506   3,073   —   45,382 

Commodity and other

  1,647   6,705   4,071   —   12,423 

Netting4

  (2,976)   (297,356)   (2,360)   (46,652)   (349,344) 

Total derivative and other contracts

  197   69,476   7,119   (46,652)   30,140 

Investments5

  305   243   946   —   1,494 

Physical commodities

  —   134   —   —   134 

Total trading assets5

  191,330   128,876   14,495   (46,652)   288,049 

Investment securities—AFS

  22,018   28,470   —   —   50,488 

Securities purchased under agreements to resell

  —   102   —   —   102 

Intangible assets

  —   3   —   —   3 

Total assets at fair value6

 $213,348  $157,451  $14,495  $(46,652)  $338,642 
  At March 31, 2018 
$ in millions Level 1  Level 2  Level 3  Netting1  Total 

Assets at fair value

     

Trading assets:

     

U.S. Treasury and agency securities

 $22,675  $23,430  $—  $—  $46,105 

Other sovereign government obligations

  18,185   9,371   7   —   27,563 

State and municipal securities

  —   3,235   2   —   3,237 

MABS

  —   1,799   342   —   2,141 

Loans and lending commitments2

  —   4,865   8,128   —   12,993 

Corporate and other debt

  —   21,392   814   —   22,206 

Corporate equities3

  120,280   494   233   —   121,007 

Derivative and other contracts:

 

 

Interest rate

  989   176,030   1,250   —   178,269 

Credit

  —   6,971   362   —   7,333 

Foreign exchange

  45   53,504   29   —   53,578 

Equity

  1,165   44,506   3,871   —   49,542 

Commodity and other

  383   6,908   4,576   —   11,867 

Netting1

  (1,665)   (216,759)   (1,581)   (47,436)   (267,441) 

Total derivative and other contracts

  917   71,160   8,507   (47,436)   33,148 

Investments4

  482   372   1,012   —   1,866 

Physical commodities

  —   205   —   —   205 

Total trading assets4

  162,539   136,323   19,045   (47,436)   270,471 

Investment securities— AFS

  29,979   26,770   —   —   56,749 

Intangible assets

  —   3   —   —   3 

Total assets at fair value

 $192,518  $163,096  $19,045  $(47,436)  $327,223 
  At June 30, 2017 
$ in millions Level 1  Level 2  Level 3  Netting4  Total 

Liabilities at Fair Value

     

Deposits

 $—  $51  $79  $—  $130 

Short-term borrowings

  —   582   —   —   582 

Trading liabilities:

     

U.S. government and agency securities:

     

U.S. Treasury securities

  16,142   —   —   —   16,142 

U.S. agency securities

  439   84   —   —   523 

Total U.S. government and agency securities

  16,581   84   —   —   16,665 

Other sovereign government obligations1

  25,411   1,118   —   —   26,529 

Corporate and other debt:

     

Corporate bonds

  —   6,653   13   —   6,666 

Other debt

  —   316   2   —   318 

Total corporate and other debt

  —   6,969   15   —   6,984 

Corporate equities3

  36,338   81   27   —   36,446 

Obligation to return securities received as collateral

  21,471   9   1   —   21,481 

Derivative and other contracts:

     

Interest rate

  551   233,943   880   —   235,374 

Credit

  —   9,677   728   —   10,405 

Foreign exchange

  35   58,070   60   —   58,165 

Equity

  699   44,996   1,980   —   47,675 

Commodity and other

  1,847   6,757   2,562   —   11,166 

Netting4

  (2,976)   (297,356)   (2,360)   (33,388)   (336,080) 

Total derivative and other contracts

  156   56,087   3,850   (33,388)   26,705 

Total trading liabilities

  99,957   64,348   3,893   (33,388)   134,810 

Securities sold under agreements to repurchase

  —   590   148   —   738 

Other secured financings

  —   5,487   244   —   5,731 

Long-term borrowings

  67   40,513   2,646   —   43,226 

Total liabilities at fair value6

 $100,024  $111,571  $7,010  $(33,388)  $185,217 

  At March 31, 2018 
$ in millions Level 1  Level 2  Level 3  Netting1  Total 

Liabilities at fair value

     

Deposits

 $—  $198  $44  $—  $242 

Trading liabilities:

     

U.S. Treasury and agency securities

  20,182   32   —   —   20,214 

Other sovereign government obligations

  24,281   3,890   3   —   28,174 

Corporate and other debt

  —   7,886   4   —   7,890 

Corporate equities3

  56,667   60   32   —   56,759 

Derivative and other contracts:

 

 

Interest rate

  1,043   159,538   580   —   161,161 

Credit

  —   7,456   392   —   7,848 

Foreign exchange

  31   53,408   62   —   53,501 

Equity

  1,054   46,616   2,856   —   50,526 

Commodity and other

  543   5,680   2,916   —   9,139 

Netting1

  (1,665)   (216,759)   (1,581)   (36,184)   (256,189) 

Total derivative and other contracts

  1,006   55,939   5,225   (36,184)   25,986 

Total trading liabilities

  102,136   67,807   5,264   (36,184)   139,023 

Securities sold under agreements to repurchase

  —   792   —   —   792 

Other secured financings

  —   3,203   220   —   3,423 

Borrowings

  —   43,907   3,626   —   47,533 

Total liabilities at fair value

 $102,136  $115,907  $9,154  $(36,184)  $191,013 
 

 

June 2017March 2018 Form 10-Q  5048  

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

  At December 31, 2016 
$ in millions Level 1  Level 2  Level 3  Netting4  Total 

Assets at Fair Value

     

Trading assets:

     

U.S. government and agency securities:

     

U.S. Treasury securities

 $25,457  $—  $—  $—  $25,457 

U.S. agency securities

  2,122   20,392   74   —   22,588 

Total U.S. government and agency securities

  27,579   20,392   74   —   48,045 

Other sovereign government obligations

  14,005   5,497   6   —   19,508 

Corporate and other debt:

     

State and municipal securities

  —   2,355   250   —   2,605 

Residential mortgage-, commercial mortgage- and asset-backed securities

  —   1,691   217   —   1,908 

Corporate bonds

  —   11,051   232   —   11,283 

Collateralized debt and loan obligations

  —   602   63   —   665 

Loans and lending commitments2

  —   3,580   5,122   —   8,702 

Other debt

  —   1,360   180   —   1,540 

Total corporate and other debt

  —   20,639   6,064   —   26,703 

Corporate equities3

  117,857   333   445   —   118,635 

Securities received as collateral

  13,717   19   1   —   13,737 

Derivative and other contracts:

     

Interest rate

  1,131   300,406   1,373   —   302,910 

Credit

  —   11,727   502   —   12,229 

Foreign exchange

  231   74,921   13   —   75,165 

Equity

  1,185   35,736   1,708   —   38,629 

Commodity and other

  2,808   6,734   3,977   —   13,519 

Netting4

  (4,378)   (353,543)   (1,944)   (51,381)   (411,246) 

Total derivative and other contracts

  977   75,981   5,629   (51,381)   31,206 

Investments5

  237   197   958   —   1,392 

Physical commodities

  —   112   —   —   112 

Total trading assets5

  174,372   123,170   13,177   (51,381)   259,338 

Investment securities—AFS

  29,120   34,050   —   —   63,170 

Securities purchased under agreements to resell

  —   302   —   —   302 

Intangible assets

  —   3   —   —   3 

Total assets at fair value6

 $203,492  $157,525  $13,177  $(51,381)  $322,813 
  At December 31, 2017 
$ in millions Level 1  Level 2  Level 3  Netting1  Total 

Assets at fair value

     

Trading assets:

     

U.S. Treasury and agency securities

 $22,077  $26,888  $—  $—  $48,965 

Other sovereign government obligations

  20,234   7,825   1   —   28,060 

State and municipal securities

  —   3,592   8   —   3,600 

MABS

  —   2,364   423   —   2,787 

Loans and lending commitments2

  —   4,791   5,945   —   10,736 

Corporate and other debt

  —   16,837   701   —   17,538 

Corporate equities3

  149,697   492   166   —   150,355 

Derivative and other contracts:

 

 

Interest rate

  472   178,704   1,763   —   180,939 

Credit

  —   7,602   420   —   8,022 

Foreign exchange

  58   53,724   15   —   53,797 

Equity

  1,101   40,359   3,530   —   44,990 

Commodity and other

  1,126   5,390   4,147   —   10,663 

Netting1

  (2,088)   (216,764)   (1,575)   (47,171)   (267,598) 

Total derivative and other contracts

  669   69,015   8,300   (47,171)   30,813 

Investments4

  297   523   1,020   —   1,840 

Physical commodities

  —   1,024   —   —   1,024 

Total trading assets4

  192,974   133,351   16,564   (47,171)   295,718 

Investment securities— AFS

  27,522   27,681   —   —   55,203 

Intangible assets

  —   3   —   —   3 

Total assets at fair value

 $220,496  $161,035  $16,564  $(47,171)  $350,924 
 At December 31, 2016  At December 31, 2017 
$ in millions Level 1 Level 2 Level 3 Netting4 Total  Level 1 Level 2 Level 3 Netting1 Total 

Liabilities at Fair Value

     

Liabilities at fair value

     

Deposits

 $—  $21  $42  $—  $63  $—  $157  $47  $—  $204 

Short-term borrowings

  —  404  2   —  406 

Trading liabilities:

          

U.S. government and agency securities:

     

U.S. Treasury securities

 10,745   —   —   —  10,745 

U.S. agency securities

 891  61   —   —  952 

Total U.S. government and agency securities

 11,636  61   —   —  11,697 

U.S. Treasury and agency securities

 17,802  24   —   —  17,826 

Other sovereign government obligations

 20,658  2,430   —   —  23,088  24,857  2,016   —   —  26,873 

Corporate and other debt:

     

Corporate bonds

  —  5,572  34   —  5,606 

Other debt

  —  549  2   —  551 

Total corporate and other debt

  —  6,121  36   —  6,157 

Corporate and other debt

  —  7,141  3   —  7,144 

Corporate equities3

 37,611  29  34   —  37,674  52,653  82  22   —  52,757 

Obligation to return securities received as collateral

 20,236  25  1   —  20,262 

Derivative and other contracts:

     

Derivative and other contracts:

 

 

Interest rate

 1,244  285,379  953   —  287,576  364  162,239  545   —  163,148 

Credit

  —  12,550  875   —  13,425   —  8,166  379   —  8,545 

Foreign exchange

 17  75,510  56   —  75,583  23  55,118  127   —  55,268 

Equity

 1,162  37,828  1,524   —  40,514  1,001  44,666  2,322   —  47,989 

Commodity and other

 2,663  6,845  2,377   —  11,885  1,032  5,156  2,701   —  8,889 

Netting4

 (4,378)  (353,543)  (1,944)  (39,803)  (399,668) 

Netting1

 (2,088)  (216,764)  (1,575)  (36,717)  (257,144) 

Total derivative and other contracts

 708  64,569  3,841  (39,803)  29,315  332  58,581  4,499  (36,717)  26,695 

Physical commodities

  —  1   —   —  1 

Total trading liabilities

 90,849  73,236  3,912  (39,803)  128,194  95,644  67,844  4,524  (36,717)  131,295 

Securities sold under agreements to repurchase

  —  580  149   —  729   —  650  150   —  800 

Other secured financings

  —  4,607  434   —  5,041   —  3,624  239   —  3,863 

Long-term borrowings

 47  36,677  2,012   —  38,736 

Total liabilities at fair value6

 $90,896  $115,525  $6,551  $(39,803)  $173,169 

Borrowings

  —  43,928  2,984   —  46,912 

Total liabilities at fair value

 $95,644  $116,203  $7,944  $(36,717)  $183,074 

AFS—Available for sale

1.MABS—Mortgage-

At June 30, 2017, the Firm transferred from Level 2 to Level 1 $1.3 billion and $1.8 billion of Trading assets-Other sovereign government obligations and Trading liabilities-Other sovereign government obligations, respectively, due to increased market activity in these instruments.asset-backed securities

2.

At June 30, 2017, loans held at fair value consisted of $6,775 million of corporate loans, $662 million of residential real estate loans and $1,788 million of wholesale real estate loans. At December 31, 2016, loans held at fair value consisted of $7,217 million of corporate loans, $966 million of residential real estate loans and $519 million of wholesale real estate loans.

3.

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

4.1.

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

5.2.

For a further breakdown by type, see the following Loans and Lending Commitments at Fair Value table.

3.

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

4.

Amounts exclude certain investments that are measured at fair value using the net asset value (“NAV”)based on NAV per share, which are not classified in the fair value hierarchy. For additional disclosure about such investments, see “Fair Value of Investments Measured at NAV”“Measured Based on Net Asset Value” herein.

6.

Amounts exclude the unsettled fair value on long futures contracts of $852 million at June 30, 2017 and $784 million at December 31, 2016 included in Customer and other receivables in the consolidated balance sheets and unsettled fair value of short futures contracts of $425 million at June 30, 2017 and $174 million at December 31, 2016 in Customer and other payables in the consolidated balance sheets. These contracts are primarily: classified as Level 1 in the fair value hierarchy, actively traded, and valued based on quoted prices from the exchange.

Loans and Lending Commitments at Fair Value

$ in millions  At
March 31, 2018		   At
December 31, 2017		 

Corporate

  $9,346   $8,358 

Residential real estate

   706    799 

Wholesale real estate

   2,941    1,579 

Total

  $12,993   $10,736 
 

 

  5149  June 2017March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

Unsettled Fair Value of Futures Contracts1

$ in millions At
March 31, 2018		  At
December 31, 2017		 

Customer and other receivables, net

 $714  $831 

1.

These contracts are primarily Level 1, actively traded, valued based on quoted prices from the exchange and are excluded from the previous recurring fair value tables.

For a description of the valuation techniques applied to the Firm’s major categories of assets and liabilities measured at fair value on a recurring basis, see Note 3 to the consolidated financial statements in the 20162017 Form10-K. During the current quarter, there were no significant updatesrevisions made to the Firm’s valuation techniques.

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

The following tables present additional information about Level 3 assets and liabilities measured at fair value on a

recurring basis for the three months ended June 30, 2017 (“current quarter”), the three months ended June 30, 2016 (“prior year quarter”), the current year period and the six months ended June 30, 2016 (“prior year period”).basis. Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilities within the Level 3 category presented in the following tables do not reflect the related realized and unrealized gains (losses) on hedging instruments that have been classified by the Firm within the Level 1 and/or Level 2 categories.

Additionally, both observable and unobservable inputs may be used to determine the fair value of positions that the Firm has classified within the Level 3 category. As a result, the unrealized gains (losses) during the period for assets and liabilities within the Level 3 category presented in the following tables herein may include changes in fair value during the period that were attributable to both observable and unobservable inputs. Total realized and unrealized gains (losses) are primarily included in Trading revenues in the consolidated income statements.

Roll-forward

Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Current Quarter

 


$ in millions		  Beginning
Balance at
March 31,
2017		  Realized
and
Unrealized
Gains
(Losses)		  Purchases1  Sales and
Issuances2		  Settlements1  Net
Transfers		  Ending
Balance at
June 30,
2017		  Unrealized
Gains
(Losses) at
June 30,
2017		 

Assets at Fair Value

         

Trading assets:

         

U.S. agency securities

  $42  $—  $—  $—  $—  $(42)  $—  $— 

Other sovereign government obligations

   65   —   87   (52)   —   —   100   — 

Corporate and other debt:

         

State and municipal securities

   55                 3                 3   (52)   —   —   9   — 

Residential mortgage-, commercial mortgage- and asset backed securities

   216   36   32   (44)   (5)   29   264   8 

Corporate bonds

   445   2   144   (161)   —   19   449   (2) 

Collateralized debt and loan obligations

   78   (2)   5   (23)   (1)   1   58   (2) 

Loans and lending commitments

   4,479   27   1,242   (417)   (581)   114   4,864   11 

Other debt

   194   33   57   (108)   —   10   186   30 

Total corporate and other debt

   5,467   99   1,483   (805)   (587)   173   5,830   45 

Corporate equities

   309   8   101   (59)   —   141   500   9 

Securities received as collateral

   1   —   —   (1)                   —           —                   —               — 

Net derivative and other contracts3:

         

Interest rate

   298   35   28   (27)   637   (1)   970   58 

Credit

   (351)   28   —                   —   16   2   (305)   24 

Foreign exchange

   (71)   53   1   (1)   22   (2)   2   64 

Equity

   217   185   677   (171)   80   105   1,093   189 

Commodity and other

   1,503   154   3   —   (108)   (43)   1,509   79 

Total net derivative and other contracts

   1,596   455   709   (199)   647   61   3,269   414 

Investments

   961   11   20   (25)   4   (25)   946   7 

Liabilities at Fair Value

         

Deposits

  $56  $—  $—  $23  $—  $—  $79  $— 

Trading liabilities:

         

Corporate and other debt:

         

Corporate bonds

   34   —   (135)   124   —   (10)   13   (1) 

Other debt

   2   —   —   —   —   —   2   — 

Total corporate and other debt

   36   —   (135)   124   —   (10)   15   (1) 

Corporate equities

   —   (12)   (34)   44   —   5   27   (11) 

Obligation to return securities received as collateral

   2   —   (2)   1   —   —   1   — 

Securities sold under agreements to repurchase

   148   —   —   —   —   —   148   — 

Other secured financings

   203   (4)   —   38   (1)   —   244   (4) 

Long-term borrowings

   2,092   (45)   —   694   (145)   (40)   2,646   (49) 

June 2017 Form 10-Q52

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

$ in millions  Beginning
Balance at
March 31,
2016		  Realized
and
Unrealized
Gains
(Losses)		  Purchases1  Sales and
Issuances2		  Settlements1  Net
Transfers		  Ending
Balance at
June 30,
2016		  Unrealized
Gains
(Losses) at
June 30,
2016		 

Assets at Fair Value

         

Trading assets:

         

U.S. agency securities

  $8  $—  $—  $(18)  $                —  $30  $20  $— 

Other sovereign government obligations

   8                 —                 —   (3)   —   (3)   2               — 

Corporate and other debt:

         

State and municipal securities

                 5   1   4                 —   —                 —   10   2 

Residential mortgage-, commercial mortgage- and asset backed securities

   355   (4)   7   (87)   —   84   355   (14) 

Corporate bonds

   224   17   116   (35)   —   (46)   276   17 

Collateralized debt and loan obligations

   348   18   3   (178)   —   (82)   109   18 

Loans and lending commitments

   6,185   (46)   360   (484)   (596)   (1)   5,418   (55) 

Other debt

   527   4   13   (19)   —   3   528   2 

Total corporate and other debt

   7,644   (10)   503   (803)   (596)   (42)   6,696   (30) 

Corporate equities

   430   (63)   273   (82)   —   14   572   (63) 

Net derivative and other contracts3:

                                 

Interest rate

   169   (159)   2   (7)   42   (282)   (235)   (157) 

Credit

   (723)   65   1   —   93   (550)   (1,114)   53 

Foreign exchange

   126   (58)   —   —   (94)   25   (1)   (47) 

Equity

   (1,832)   168   50   (140)   263   18   (1,473)   (106) 

Commodity and other

   1,200   211   5  ��(4)   (88)   (37)   1,287   130 

Total net derivative and other contracts

   (1,060)   227   58   (151)   216   (826)   (1,536)   (127) 

Investments

   922   5   58   (11)   —   —   974   7 

Intangible assets

   4   —   —   —   —   (4)                 —   — 

Liabilities at Fair Value

         

Deposits

  $23  $(1)  $—  $8  $—  $(2)  $30  $(1) 

Trading liabilities:

         

Corporate and other debt:

         

Corporate bonds

   6   (1)   (5)   29   —   (25)   6   (1) 

Other debt

   5   1   (1)   —   —   —   3   — 

Total corporate and other debt

   11   —   (6)   29   —   (25)   9   (1) 

Corporate equities

   31   (28)   (33)   5   —   (5)   26   — 

Obligation to return securities received as collateral

   1   —   (1)   —   —   —   —   — 

Securities sold under agreements to repurchase

   151   1   —   —   —   —   150   1 

Other secured financings

   454   (14)   —   23   (22)   (28)   441   (14) 

Long-term borrowings

   1,798   21   —   164   (131)   119   1,929   26 

53June 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

$ in millions Beginning
Balance at
December 31,
2016		  Realized
and
Unrealized
Gains
(Losses)		  Purchases1  Sales and
Issuances2		  Settlements1  Net
Transfers		  Ending
Balance at
June 30,
2017		  Unrealized
Gains
(Losses) at
June 30,
2017		 

Assets at Fair Value

        

Trading assets:

        

U.S. agency securities

 $74  $(1)  $—  $(240)  $                —  $167  $                —  $                — 

Other sovereign government obligations

  6                 —   98   (4)   —   —   100   — 

Corporate and other debt:

        

State and municipal securities

                250   3   3   (77)   —   (170)   9   — 

Residential mortgage-, commercial mortgage- and asset backed securities

  217   44   78   (83)   (16)   24   264   27 

Corporate bonds

  232   (2)   241   (98)   —   76   449   (1) 

Collateralized debt and loan obligations

  63   (3)   11   (12)   (2)   1   58   (3) 

Loans and lending commitments

  5,122   89   1,596   (1,002)   (1,146)   205   4,864   41 

Other debt

  180   36   38   (115)   —   47   186   34 

Total corporate and other debt

  6,064   167   1,967   (1,387)   (1,164)   183   5,830   98 

Corporate equities

  445   10   97   (158)   —   106   500   15 

Securities received as collateral

  1   —   —   (1)   —   —   —   — 

Net derivative and other contracts3:

        

Interest rate

  420   (66)   47   (27)   652   (56)   970   (55) 

Credit

  (373)   1   —   —   62   5   (305)   (13) 

Foreign exchange

  (43)   23   1   (1)   8   14   2   43 

Equity

  184   118   758   (158)   121   70   1,093   200 

Commodity and other

  1,600   104   9   (19)   (188)   3   1,509   (76) 

Total net derivative and other contracts

  1,788   180   815   (205)   655   36   3,269   99 

Investments

  958   19   82   (28)   (63)   (22)   946   11 

Liabilities at Fair Value

        

Deposits

 $42  $(1)  $—  $36  $—  $—  $79  $(1) 

Short-term borrowings

  2   —                 —                 —   (2)   —   —   — 

Trading liabilities:

        

Corporate and other debt:

        

Corporate bonds

  34   —   (164)   129   —   14   13   — 

Other debt

  2   —   —   —   —   —   2   — 

Total corporate and other debt

  36   —   (164)   129   —   14   15   — 

Corporate equities

  34   —   (63)   5   —   51   27   — 

Obligation to return securities received as collateral

  1   —   —   —   —   —   1   — 

Securities sold under agreements to repurchase

  149   1   —   —   —   —   148   1 

Other secured financings

  434   (23)   —   52   (221)   (44)   244   (16) 

Long-term borrowings

  2,012   (104)   —   981   (286)   (165)   2,646   (95) 

June 2017 Form 10-Q54

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

$ in millions Beginning
Balance at
December 31,
2015		 Realized
and
Unrealized
Gains
(Losses)		 Purchases1 Sales and
Issuances2		 Settlements1 Net
Transfers		 Ending
Balance at
June 30,
2016		 Unrealized
Gains
(Losses) at
June 30,
2016		  Beginning
Balance at
December 31,
2017		 Realized and
Unrealized
Gains
(Losses)		 Purchases1 Sales and
Issuances2		 Settlements1 Net Transfers Ending
Balance at
March 31,
2018		 Unrealized Gains
(Losses)		 

Assets at Fair Value

        

Assets at fair value

        

Trading assets:

                

U.S. agency securities

 $                —  $1  $                —  $(19)  $                —  $38  $20  $1 

Other sovereign government obligations

 4                 —   —  (5)   —  3  2  1  $1  $—  $7  $—  $—  $(1)  $7  $— 

Corporate and other debt:

        

State and municipal securities

 19  1  4  (15)   —  1  10  1  8   —   1   (7)   —   —   2   — 

Residential mortgage-, commercial mortgage- and asset backed securities

 438  (36)  26  (170)   —  97  355  (33) 

Corporate bonds

 267  62  113  (128)   —  (38)  276  61 

Collateralized debt and loan obligations

 430  5  22  (224)   —  (124)  109  17 

MABS

 423   77   64   (238)   (16)   32   342   2 

Loans and lending commitments

 5,936  (111)  970  (720)  (672)  15  5,418  (121)  5,945   28   3,740   (283)   (1,218)   (84)   8,128   (9) 

Other debt

 448  (2)  133  (63)   —  12  528  (2) 

Total corporate and other debt

 7,538  (81)  1,268  (1,320)  (672)  (37)  6,696  (77) 

Corporate and other debt

 701   1   350   (243)   —   5   814   (1) 

Corporate equities

 433  (45)  296  (119)   —  7  572  (64)  166   —   166   (132)   —   33   233   (9) 

Securities received as collateral

 1   —   —  (1)   —                 —                 —                 — 

Net derivative and other contracts3:

                

Interest rate

 260  305  3  (21)  (60)  (722)  (235)  205  1,218   52   32   (41)   (81)   (510)   670   75 

Credit

 (844)  (343)  1   —  153  (81)  (1,114)  (360)  41   (107)   —   —   38   (2)   (30)   (109) 

Foreign exchange

 141  (109)   —   —  (201)  168  (1)  (82)  (112)   57   —   (31)   33   20   (33)   (9) 

Equity

 (2,031)  (321)  71  (184)  1,121  (129)  (1,473)  (434)  1,208   356   142   (799)   159   (51)   1,015   315 

Commodity and other

 1,050  297  7  (4)  (176)  113  1,287  210  1,446   217   13   (6)   (57)   47   1,660   149 

Total net derivative and other contracts

 (1,424)  (171)  82  (209)  837  (651)  (1,536)  (461)  3,801   575   187   (877)   92   (496)   3,282   421 

Investments

 707  (56)  404  (40)  (41)   —  974  (53)  1,020   44   21   (78)   —   5   1,012   22 

Intangible assets

 5   —   —   —   —  (5)   —   — 

Liabilities at Fair Value

        

Liabilities at fair value

        

Deposits

 $19  $(2)  $—  $13  $—  $(4)  $30  $(2)  $47  $1  $—  $9  $(1)  $(10)  $44  $1 

Short-term borrowings

 1   —   —   —  (1)   —   —   — 

Trading liabilities:

                

Corporate and other debt:

        

Corporate bonds

  —  (5)  (7)  10   —  (2)  6  (5) 

Other debt

 4  2  (3)  4   —   —  3  2 

Total corporate and other debt

 4  (3)  (10)  14   —  (2)  9  (3) 

Other sovereign government obligations

  —   —   —   3   —   —   3   — 

Corporate and other debt

 3   —   (2)   1   —   2   4   — 

Corporate equities

 17  (3)  (22)  18   —  10  26  (3)  22   4   (5)   11   —   8   32   4 

Obligation to return securities received as collateral

 1   —  (1)   —   —   —   —   — 

Securities sold under agreements to repurchase

 151  1   —   —   —   —  150  1  150   —   —   —   —   (150)   —   — 

Other secured financings

 461  (32)   —  69  (43)  (78)  441  (32)  239   13   —   4   (10)   —   220   13 

Long-term borrowings

 1,987  (12)   —  276  (167)  (179)  1,929  (6) 

Borrowings

 2,984   102   —   640   (83)   187   3,626   99 

 

1.

Loan originations and consolidations of VIEs are included in purchasesPurchases and deconsolidations of VIEs are included in settlements.Settlements.

2.

Amounts related to entering into Net derivativesderivative and other contracts, Deposits, Short-term borrowings, Other secured financings and Long-term borrowingsBorrowings primarily represent issuances. Amounts for other line items primarily represent sales.

3.

Net derivative and other contracts represent Trading assets—Derivative and other contracts, net of Trading liabilities—Derivative and other contracts. Amounts are presented before counterparty netting.

 

March 2018 Form 10-Q  5550  June 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Prior Year Quarter

 

$ in millions Beginning
Balance at
December 31,
2016		  Realized and
Unrealized
Gains
(Losses)		  Purchases1  Sales and
Issuances2		  Settlements1  Net Transfers  Ending
Balance at
March 31,
2017		  Unrealized Gains
(Losses)		 

Assets at fair value

        

Trading assets:

        

U.S. Treasury and agency securities

 $74  $—  $42  $(241)  $—  $167  $42  $— 

Other sovereign government obligations

  6   —   61   (2)   —   —   65   — 

State and municipal securities

  250   —   2   (2)   —   (195)   55   — 

MABS

  217   7   39   (56)   (11)   20   216   (1) 

Loans and lending commitments

  5,122   53   757   (555)   (985)   87   4,479   39 

Corporate and other debt

  475   21   262   (142)   (1)   102   717   3 

Corporate equities

  446   (1)   41   (105)   —   (71)   310   3 

Net derivative and other contracts3:

        

Interest rate

  420   (114)   46   (24)   16   (46)   298   (127) 

Credit

  (373)   (25)   6   (5)   41   5   (351)   (33) 

Foreign exchange

  (43)   (36)   1   —   11   (4)   (71)   (20) 

Equity

  184   (144)   83   (121)   231   (16)   217   (81) 

Commodity and other

  1,600   127   6   (28)   (69)   (133)   1,503   34 

Total net derivative and other contracts

  1,788   (192)   142   (178)   230   (194)   1,596   (227) 

Investments

  958   8   62   (3)   (66)   2   961   8 

Liabilities at fair value

        

Deposits

 $42  $(1)  $—  $13  $—  $—  $56  $(1) 

Trading liabilities:

        

Corporate and other debt

  36   (1)   (119)   101   —   17   36   (1) 

Corporate equities

  35   12   (68)   26   —   21   2   — 

Securities sold under agreements to repurchase

  149   1   —   —   —   —   148   1 

Other secured financings

  434   (19)   —   13   (220)   (43)   203   (12) 

Borrowings

  2,014   (59)   —   270   (165)   (86)   2,092   (58) 

1.

Loan originations and consolidations of VIEs are included in Purchases and deconsolidations of VIEs are included in Settlements.

2.

Amounts related to entering into Net derivative and other contracts, Deposits, Other secured financings and Borrowings primarily represent issuances. Amounts for other line items primarily represent sales.

3.

Net derivative and other contracts represent Trading assets—Derivative and other contracts, net of Trading liabilities—Derivative and other contracts. Amounts are presented before counterparty netting.

Significant Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value Measurements

The following disclosures provide information on the valuation techniques, significant unobservable inputs, and their ranges and averages for each major category of assets and liabilities measured at fair value on a recurring and nonrecurring basis with a significant Level 3 balance. The level of aggregation and breadth of products cause the range of inputs to be wide and not evenly distributed across the inventory. Further, the range of unobservable inputs may differ across firms in the financial services industry because of diversity in the types of products included in each firm’s inventory. For qualitative information on the sensitivity of the fair value measurements to changes in the significant unobservable inputs, see Note 3 to the consolidated financial statements in the 20162017 Form 10-K. There are no predictable relationships between multiple significant unobservable inputs attributable to a given valuation technique. A single amount is disclosed when there is no significant difference between the minimum, maximum and average (weighted average or simple average / average/median).

Valuation Techniques and Sensitivity of Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value Measurements

   Predominant Valuation Techniques/Significant
Unobservable Inputs		  Range (Weighted Averages or Simple Averages/Median)1
$ in millions    At June 30, 2017  At December 31, 2016

Recurring Fair Value Measurement

    

Assets at Fair Value

    

U.S. agency securities ($- and $74)

    

Comparable pricing:

  Comparable bond price  N/A  96 to 105 points (102 points)

Other sovereign government obligations ($100 and $6)

    

Comparable pricing:

  Comparable bond price  92 to 99 points (96 points)  N/M

State and municipal securities ($9 and $250)

    

Comparable pricing:

  Comparable bond price  N/M  53 to 100 points (91 points)

Residential mortgage-, commercial mortgage- and asset-backed securities ($264 and $217)

  

Comparable pricing:

  Comparable bond price  0 to 95 points (24 points)  0 to 86 points (27 points)

Corporate bonds ($449 and $232)

    

Comparable pricing:

  Comparable bond price  2 to 133 points (87 points)  3 to 130 points (70 points)

Option model:

  At the money volatility  15% to 34% (24%)  23% to 33% (30%)

Collateralized debt and loan obligations ($58 and $63)

    

Comparable pricing:

  Comparable bond price  0 to 65 points (35 points)  0 to 103 points (50 points)

Correlation model:

  Credit correlation  42% to 49% (44%)  N/M

Loans and lending commitments($4,864 and $5,122)

    

Corporate loan model:

  Credit spread  N/M  402 to 672 bps (557 bps)

Expected recovery:

  Asset coverage  36% to 100% (85%)  43% to 100% (83%)

Option model:

  Volatility skew  -1%  N/M

Margin loan model:

  Discount rate  1% to 5% (2%)  2% to 8% (3%)
   Volatility skew  10% to 32% (18%)  21% to 63% (33%)

Comparable pricing:

  Comparable loan price  55 to 104 points (95 points)  45 to 100 points (84 points)

Discounted cash flow:

  Implied weighted average cost of capital  N/M  5%
   Capitalization rate  N/M  4% to 10% (4%)

Other debt ($186 and $180)

    

Option model:

  At the money volatility  17% to 52% (44%)  16% to 52% (52%)

Discounted cash flow:

  Discount rate  9% to 12% (11%)  7% to 12% (11%)

Comparable pricing:

  Comparable loan price  N/M  1 to 74 points (23 points)

Corporate equities ($500 and $445)

    

Comparable pricing:

  Comparable equity price  100%  100%

Net derivative and other contracts2:

    

Interest rate ($970 and $420)

    

Option model:

  Interest rate - Foreign exchange correlation  

N/M

  28% to 58% (44% / 43%)
   Interest rate volatility skew  

26% to 94% (42% / 41%)

  19% to 117% (55% / 56%)
   Interest rate quanto correlation  N/M  -17% to 31% (1% /-5%)
   Interest rate curve correlation  N/M  28% to 96% (68% / 72%)
   Inflation volatility  24% to 63% (44% / 41%)  23% to 55% (40% / 39%)
   Interest rate - inflation correlation  -48% to -27% (-36% / -34%)  N/M
   Interest rate curve  1%  N/M

 

June 201751March 2018 Form 10-Q56

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

Valuation Techniques and Sensitivity of Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value MeasurementsValuation Techniques and Sensitivity of Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value Measurements
  Predominant Valuation Techniques/Significant
Unobservable Inputs		  Range (Weighted Averages or Simple Averages/Median)1 

Predominant Valuation Techniques/

    Significant Unobservable Inputs

  

Range (Weighted Average or Simple Average/Median)1

$ in millions  At June 30, 2017  At December 31, 2016

Credit ($(305)and $(373))

    
$ in millions, except inputs 

Predominant Valuation Techniques/

    Significant Unobservable Inputs

  At March 31, 2018  At December 31, 2017

Recurring Fair Value Measurement

Recurring Fair Value Measurement

  

Assets at fair value

Assets at fair value

  

MABS ($342and $423)

     

Comparable pricing:

 Comparable bond price  0 to 95 points (41 points)  0 to 95 points (26 points)

Loans and lending commitments ($8,128and $5,945)

Loans and lending commitments ($8,128and $5,945)

    

Margin loan model:

 Discount rate  0% to 3% (1%)  0% to 3% (1%)
 Volatility skew  9% to 67% (28%)  7% to 41% (22%)

Comparable pricing:

 Comparable loan price  55 to 101 points (97 points)  55 to 102 points (95 points)

Corporate and other debt ($814 and $701)

Corporate and other debt ($814 and $701)

    

Comparable pricing:

 Comparable bond price  3 to 100 points (70 points)  3 to 134 points (59 points)

Discounted cash flow:

 Recovery rate  16%  6% to 36% (27%)
 Discount rate  7% to 20% (15%)  7% to 20% (14%)

Option model:

 At the money volatility  15% to 52% (33%)  17% to 52% (52%)

Corporate equities ($233and $166)

Corporate equities ($233and $166)

    

Comparable pricing:

 Comparable equity price  100%  100%

Net derivative and other contracts2:

Net derivative and other contracts2:

    

Interest rate ($670 and $1,218)

Interest rate ($670 and $1,218)

    

Option model:

 Interest rate volatility skew  29% to 106% (40% / 43%)  31% to 97% (41% / 47%)
 Inflation volatility  23% to 61% (44% / 41%)  23% to 63% (44% / 41%)
 Interest rate curve  1% to 2% (2% / 2%)  2%

Credit ($(30)and $41)

Credit ($(30)and $41)

    

Comparable pricing:

  Cash synthetic basis  4 to 6 points (5 points)  5 to 12 points (11 points) Cash synthetic basis  10 to 11 points (11 points)  12 to 13 points (12 points)
  Comparable bond price  N/M  0 to 70 points (23 points) Comparable bond price  0 to 75 points (25 points)  0 to 75 points (25 points)

Correlation model:

  Credit correlation  37% to 78% (48%)  32% to 70% (45%) Credit correlation  39% to 67% (50%)  38% to 100% (48%)

Foreign exchange3 ($2and $(43))

    

Foreign exchange3 ($(33)and $(112))

Foreign exchange3 ($(33)and $(112))

    

Option model:

  Interest rate - Foreign exchange correlation  27% to 54% (44% / 44%)  28% to 58% (44% / 43%) Interest rate - Foreign exchange correlation  55% to 57% (56% / 56%)  54% to 57% (56% / 56%)
  Interest rate volatility skew  29% to 102% (47% / 46%)  34% to 117% (55% / 56%) Interest rate volatility skew  29% to 106% (40% / 43%)  31% to 97% (41% / 47%)
  Interest rate quanto correlation  

N/M

  -17% to 31% (1% /-5%) Contingency probability  90% to 95% (93% / 93%)  95% to 100% (96% / 95%)

Equity3 ($1,093 and $184)

    

Equity3 ($1,015 and $1,208)

Equity3 ($1,015 and $1,208)

    

Option model:

  At the money volatility  6% to 57% (33%)  7% to 66% (33%) At the money volatility  14% to 55% (35%)  7% to 54% (32%)
  Volatility skew  -3% to 1%(-1%)  -4% to 0%(-1%) Volatility skew  -3% to 0% (-1%)  -5% to 0% (-1%)
  Equity - Equity correlation  5% to 99% (78%)  25% to 99% (73%) Equity - Equity correlation  5% to 99% (76%)  5% to 99% (76%)
  Equity - Foreign exchange correlation  -70% to 9%(-30%)  -63% to 30%(-43%) Equity - Foreign exchange correlation  -62% to 55% (-42%)  -55% to 40% (36%)
  Equity - Interest rate correlation  -7% to 52% (23% / 24%)  -8% to 52% (12% / 4%) Equity - Interest rate correlation  -7% to 48% (18% / 14%)  -7% to 49% (18% / 20%)

Commodity and other($1,509and $1,600)

    

Commodity and other ($1,660and $1,446)

Commodity and other ($1,660and $1,446)

    

Option model:

  Forward power price  $6 to $87 ($30) per MWh  $7 to $90 ($32) per MWh Forward power price  $2 to $212 ($30) per MWh  $4 to $102 ($31) per MWh
  Commodity volatility  6% to 62% (17%)  6% to 130% (18%) Commodity volatility  5% to 167% (14%)  7% to 205% (17%)
  Cross-commodity correlation  5% to 99% (92%)  5% to 99% (92%) Cross-commodity correlation  5% to 99% (92%)  5% to 99% (92%)

Investments ($946 and $958)

    

Investments ($1,012and $1,020)

Investments ($1,012and $1,020)

    

Discounted cash flow:

  Implied weighted average cost of capital  N/M  10% WACC  9% to 15% (9%)  8% to 15% (9%)
  Exit multiple  10 times  10 to 24 times (11 times) Exit multiple  8 to 10 times (10 times)  8 to 11 times (10 times)

Market approach:

  EBITDA multiple  8 to 24 times (13 times)  6 to 24 times (12 times) EBITDA multiple  6 to 24 times (11 times)  6 to 25 times (11 times)

Comparable pricing:

  Comparable equity price  75% to 100% (90%)  75% to 100% (93%) Comparable equity price  35% to 100% (93%)  45% to 100% (92%)

Liabilities at Fair Value

    

Deposits ($79 and $42)

    

Option model:

  At the money volatility  15% to 50% (24%)  N/M
  Volatility skew  -1% to 0%(-1%)  N/M

Securities sold under agreements to repurchase ($148 and $149)

    

Discounted cash flow:

  Funding spread  131 to 145 bps (136 bps)  118 to 127 bps (121 bps)

Other secured financings ($244 and $434)

    

Discounted cash flow:

  Funding spread  48 to 80 bps (64 bps)  63 to 92 bps (78 bps)

Option model:

  Volatility skew  -1%  -1%
  At the money volatility  10% to 40% (26%)  N/M

Discounted cash flow:

  Discount rate  N/M  4%

Long-term borrowings ($2,646and $2,012)

    

Option model:

  At the money volatility  6% to 42% (26%)  7% to 42% (30%)
  Volatility skew  -3% to 1%(-1%)  -2% to 0%(-1%)
  Equity - Equity correlation  36% to 98% (71%)  35% to 99% (84%)
  Equity - Foreign exchange correlation  -72% to 13%(-29%)  -63% to 13%(-40%)

Option model:

  Interest rate volatility skew  26% to 94% (42% / 41%)  25%
  Equity volatility discount  9% to 12% (10% / 11%)  7% to 11% (10% / 10%)

Comparable pricing:

  Comparable equity price  100%  N/M
Nonrecurring Fair Value Measurement      
Assets at Fair Value      
Loans ($1,277 and $2,443)    

Corporate loan model:

  Credit spread  90 to 563 bps (273 bps)  90 to 487 bps (208 bps)

Expected recovery:

  Asset coverage  73% to 95% (84%)  73% to 99% (97%)

bps—Basis points. One basis point equals 1/100th of 1%.

March 2018 Form 10-Q52

Points—Percentage of par

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

  

Predominant Valuation Techniques/

    Significant Unobservable Inputs

  

Range (Weighted Average or Simple Average/Median)1

$ in millions, except inputs   At March 31, 2018  At December 31, 2017

Liabilities at Fair Value

     

Securities sold under agreements to repurchase ($— and $150)

    

Discounted cash flow:

 Funding spread  N/A  107 to 126 bps (120 bps)

Other secured financings ($220 and $239)

    

Discounted cash flow:

 Funding spread  54 to 93 bps (74 bps)  39 to 76 bps (57 bps)

Option model:

 Volatility skew  -1%  -1%
  At the money volatility  10% to 40% (26%)  10% to 40% (26%)

Borrowings ($3,626and $2,984)

    

Option model:

 At the money volatility  5% to 33% (23%)  5% to 35% (22%)
  Volatility skew  -2% to 0% (0%)  -2% to 0% (0%)
  Equity - Equity correlation  45% to 95% (81%)  39% to 95% (86%)
  Equity - Foreign exchange correlation  -43% to 30% (-26%)  -55% to 10% (-18%)

Nonrecurring Fair Value Measurement

    

Assets at fair value

     

Loans ($1,057and $924)

     

Corporate loan model:

 Credit spread  94 to 432 bps (206 bps)  93 to 563 bps (239 bps)

Expected recovery:

 Asset coverage  95% to 99% (95%)  95% to 99% (95%)

MWh—Megawatt hours

EBITDA—Earnings before interest, taxes, depreciation and amortization

N/A—Not Applicable

N/M—Not Meaningful
Points—Percentage

of par

1.

Amounts represent weighted averages except where simple averages and the median of the inputs are provided when more relevant.

2.

Credit valuation adjustment (“CVA”)CVA and funding valuation adjustments (“FVA”)FVA are included in the balance but excluded from the Valuation Technique(s) and Significant Unobservable Inputs in the previous table.Inputs. CVA is a Level 3 input when the underlying counterparty credit curve is unobservable. FVA is a Level 3 input in its entirety given the lack of observability of funding spreads in the principal market.

3.

Includes derivative contracts with multiple risks (i.e., hybrid products).

 

57June 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

For a description of the Firm’s significant unobservable inputs for all major categories of assets and liabilities,related sensitivity, see Note 3 to the consolidated financial statements in the 20162017 Form10-K. During the current quarter, there were no significant updatesrevisions made to the Firm’s significant unobservable inputs.

FairMeasured Based on Net Asset Value of Investments Measured at NAV

For a description of the Firm’s investments in private equity funds, real estate funds and hedge funds, which are measured at fair value based on NAV, see Note 3 to the consolidated financial statements in the 20162017 Form10-K.

Investments in Certain Funds Measured at NAV per Share

 

  At June 30, 2017  At December 31, 2016 
$ in millions Fair Value  Commitment  Fair Value  Commitment 

Private equity funds

 $          1,588  $                388  $        1,566  $                335 

Real estate funds

  1,050   157   1,103   136 

Hedge funds

  115   18   147   4 

Total

 $2,753  $563  $2,816  $475 
  At March 31, 2018  At December 31, 2017 
$ in millions Carrying
Value		  Commitment  Carrying
Value		  Commitment 

Private equity

 $1,678  $304  $1,674  $308 

Real estate

  796   181   800   183 

Hedge1

  99   4   90   4 

Total

 $2,573  $489  $2,564  $495 

1.

Investments in hedge funds may be subject to initial period lock-up or gate provisions, which restrict an investor from withdrawing from the fund during a certain initial period or restrict the redemption amount on any redemption date, respectively.

Amounts in the previous table represent the Firm’s carrying value of general and limited partnership interests in fund investments, as well as any related performance fees in the form of carried interest. The carrying amounts are measured

based on the NAV of the fund taking into account the distribution terms applicable to the interest held. This same measurement applies whether investments are accounted for under the equity method or fair value.

See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received. See Note 19 for information regarding related performance fees at risk of reversal, including performance fees in the form of carried interest.

Nonredeemable Funds by Contractual Maturity

 

   Fair Value at June 30, 2017 
$ in millions  Private Equity   Real Estate 

Less than 5 years

  $                             297   $                             80 

5-10 years

   745    644 

Over 10 years

   546    326 

Total

  $1,588   $1,050 

Restrictions

Investments in hedge funds may be subject to initial periodlock-up or gate provisions. Alock-up provision is a provision that provides that during a certain initial period an investor may not make a withdrawal from the fund. A gate provision restricts the amount of redemption that an investor can demand on any redemption date.

Hedge Funds Redemption Frequency

Fair Value At
June 30, 2017

Quarterly

57%

Every six months

—%

Greater than six months

21%

Subject tolock-up provisions1

22%

Percentage of hedge fund investments that cannot be redeemed due to a gate provision2

23%

1.

Remaining restriction period for these investments was primarily over three years.

2.

Gate provision has been imposed by the hedge fund manager primarily for indefinite periods.

The redemption notice periods for hedge funds were primarily greater than six months.

   Carrying Value at March 31, 2018 
$ in millions      Private Equity           Real Estate     

Less than 5 years

  $430   $60 

5-10 years

   1,054    527 

Over 10 years

   194    209 

Total

  $1,678   $796 

Fair Value Option

The Firm elected the fair value option for certain eligible instruments that are risk managed on a fair value basis to mitigate income statement volatility caused by measurement basis differences between the elected instruments and their associated risk management transactions or to eliminate complexities of applying certain accounting models.

53March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Earnings Impact of Instruments under the Fair Value Option

 

$ in millions  Trading
Revenues		  Interest
Income
(Expense)		  Net
Revenues		 

Three Months Ended June 30, 2017

     

Securities purchased under agreements to resell

  $(1)  $        1  $— 

Deposits1

   —  —   — 

Short-term borrowings1

   6  (1)   5 

Securities sold under agreements to repurchase1

   (3)  (4)   (7) 

Long-term borrowings1

   (901)  (111)   (1,012) 

Three Months Ended June 30, 2016

     

Securities purchased under agreements to resell

  $(1)  $        2  $1 

Deposits1

   (1)  (1)   (2) 

Short-term borrowings1

   (9)  —   (9) 

Securities sold under agreements to repurchase1

   (3)  (3)   (6) 

Long-term borrowings1

   (1,289)  (130)   (1,419) 

Six Months Ended June 30, 2017

     

Securities purchased under agreements to resell

  $(1)  $        2  $1 

Deposits1

   (1)  —   (1) 

Short-term borrowings1

   (9)  (1)   (10) 

Securities sold under agreements to repurchase1

   (1)  (8)   (9) 

Long-term borrowings1

   (2,511)  (230)   (2,741) 

Six Months Ended June 30, 2016

     

Securities purchased under agreements to resell

  $(1)  $        4  $3 

Deposits1

   (3)  (1)   (4) 

Short-term borrowings1

   36  —   36 

Securities sold under agreements to repurchase1

   (12)  (5)   (17) 

Long-term borrowings1

   (2,254)  (269)   (2,523) 
$ in millions  Trading
Revenues		   Interest
Income
(Expense)		   Net
Revenues		 

Three Months Ended March 31, 2018

 

          

Borrowings

  $26   $(102)   $(76) 

Three Months Ended March 31, 2017

 

Borrowings

  $(1,625)   $(119)   $(1,744) 

Gains (losses) are mainly attributable to changes in foreign currency rates or interest rates or movements in the reference price or index.

1.

Gains (losses) in all periods are mainly attributable to changes in foreign currency rates or interest rates or movements in the reference price or index for short-term and long-term borrowings before the impact of related hedges.

The amounts in the previous table are included within Net revenues and do not reflect any gains or losses on related hedging instruments. In addition to the amounts in the

June 2017 Form 10-Q58

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

previous table, as discussed in Note 2 to the consolidated financial statements in the 2016 Form10-K, instruments within Trading assets or Trading liabilities are measured at fair value.

Gains (Losses) Due to Changes in Instrument-Specific Credit Risk

 

   Three Months Ended June 30, 
   2017  2016 
$ in millions  Trading
Revenues		  OCI  Trading
Revenues		  OCI 

Short-term and long-term borrowings1

  $(4)   $    (281)  $—  $    226 

Securities sold under agreements to repurchase1

   —   —   —   (1) 

Loans and other debt2

   48   —   (14)   — 

Lending commitments3

   —   —   2   — 
   Six Months Ended June 30, 
   2017  2016 
$ in millions  Trading
Revenues		  OCI  Trading
Revenues		  OCI 

Short-term and long-term borrowings1

  $(8)  $(267)  $41  $545 

Securities sold under agreements to repurchase1

   —   (3)   —   3 

Loans and other debt2

   45   —   (114)   — 

Lending commitments3

   —   —   3   — 
  Three Months Ended March 31, 
  2018  2017 
$ in millions Trading
Revenues		      OCI      Trading
Revenues		      OCI     

Borrowings

 $(15)  $593  $(4)  $14 

Securities sold under agreements to repurchase

  —   2   —   (3) 

Loans and other debt1

  81   —   (3)   — 

Lending commitments2

  2   —   —   — 

 

$ in millions  June 30,
2017		   December 31,
2016		   

At

March 31,

2018

   

At

December 31,
2017

 

Cumulativepre-tax DVA gain (loss)
recognized in AOCI

   $    (1,191)   $(921)   $(1,236)   $(1,831) 

OCI—Other comprehensive income (loss)

1.

Unrealized DVA gains (losses) are recorded in OCI and when such gains (losses) are realized they are recorded in Trading revenues. See Note 2 to the consolidated financial statements in the 2016 Form10-K and Note 14 for further information.

2.

Loans and other debt instrument-specific credit gains (losses) were determined by excluding thenon-credit components of gains and losses, such as those due to changes in interest rates.losses.

3.2.

Gains (losses) on lending commitments were generally determined based on the difference between estimated expected client yields and contractual yields at each respectiveperiod-end.

Short-Term and Long-Term Borrowings Measured at Fair Value on a Recurring Basis

 

$ in millions

  

At

June 30,

2017

   

At

December 31,
2016

   

At

March 31,
2018

   At
December 31,
2017		 
Business Unit Responsible for Risk Management    

Business Unit Responsible for Risk Management

 

Equity

  $            23,605   $21,066   $25,181   $25,903 

Interest rates

   18,502    16,051    19,744    19,230 

Foreign exchange

   760    1,114    622    666 

Credit

   709    647    855    815 

Commodities

   232    264    1,131    298 

Total

  $43,808   $39,142   $47,533   $46,912 

Net DifferenceExcess of Contractual Principal Amount Over Fair Value

 

$ in millions  

At

June 30,

2017

   At
December 31,
2016		   

At

March 31,
2018

   At
December 31,
2017		 

Loans and other debt1

  $            12,986   $13,495   $14,843   $13,481 

Loans 90 or more days past due and/or on nonaccrual status1

   11,337    11,502    11,834    11,253 

Short-term and long-term borrowings2

   621    720 

Borrowings2

   897    71 

 

1.

The majority of the difference between principal and fair value amounts for loans and other debt relates to distressed debt positions purchased at amounts well below par.

2.

Short-term and long-term borrowingsBorrowings do not include structured notes where the repayment of the initial principal amount fluctuates based on changes in a reference price or index.

Fair Value Loans on Nonaccrual Status

 

$ in millions  At
June 30,
2017		   At
December 31,
2016		   

At

March 31,
2018

   At
December 31,
2017		 

Nonaccrual loans

  $1,326   $1,536   $1,315   $1,240 

Nonaccrual loans 90 or more days past due

  $796   $787   $654   $779 

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.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Current Quarter Gains (Losses)Carrying and Fair Values

 

  At March 31, 2018 
  Three Months
Ended June 30,		   Fair Value 
$ in millions  20171 20161   Level 2   Level 31   Total 

Assets

         

Loans2

  $20  $(34) 

Other Assets—Other investments3

   —  (38) 

Other assets—Premises, equipment and software costs4

   (1)  (22) 

Loans

  $1,352   $1,057   $2,409 

Other assets—Premises, equipment and software

   —    —    — 

Total

  $19  $(94)   $1,352   $1,057   $2,409 

Liabilities

         

Other liabilities and accrued expenses2

   

Lending commitments

  $21  $13 

Other liabilities and accrued expenses—Lending commitments

  $173   $40   $213 

Total

  $21  $13   $173   $40   $213 
 

 

March 2018 Form 10-Q  5954  June 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

   At December 31, 2017 
   Fair Value 
$ in millions  Level 2   Level 31   Total 

Assets

      

Loans

  $1,394   $924   $2,318 

Other assets—Other investments

   —    144    144 

Total

  $1,394   $1,068   $2,462 

Liabilities

      

Other liabilities and accrued expenses—Lending commitments

  $158   $38   $196 

Total

  $158   $38   $196 

1.

For significant Level 3 balances, refer to “Significant Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value Measurements” section herein for details of the significant unobservable inputs used for nonrecurring fair value measurement.

Gains (Losses) from Fair Value Remeasurements1

 

Current Year Period Gains (Losses)

  Six Months Ended
June 30,		   Three Months Ended
March 31,		 
$ in millions  20171 20161   2018   2017 

Assets

       

Loans2

  $44  $(131)   $8   $32 

Other Assets—Other investments3

   —  (40) 

Other assets—Premises, equipment and software costs4

   (6)  (27) 

Other assets—Premises, equipment and software3

   (8)    (5) 

Total

  $38  $(198)   $—   $27 

Liabilities

       

Other liabilities and accrued expenses2

   

Lending commitments

  $48  $24 

Other liabilities and accrued expenses—Lending commitments2

  $6   $11 

Total

  $48  $24   $6   $11 

 

1.

Gains and losses for Loans and Other assets—Other investments are classified in Other revenues. For other items, gains and losses are recorded in Other revenues if the item is held for sale, otherwise in Other expenses.

2.

Non-recurringNonrecurring changes in the fair value of loans and lending commitments were calculated as follows: for the held for investment category, based on the value of the underlying collateral; and for the held for sale category, based on recently executed transactions, market price quotations, valuation models that incorporate market observable inputs where possible, such as comparable loan or debt prices and credit default swapCDS spread levels adjusted for any basis difference between cash and derivative instruments, or default recovery analysis where such transactions and quotations are unobservable.

3.

Losses related to Other assets—Other investments were determined using techniques that included discounted cash flow models, methodologies that incorporate multiples of certain comparable companies and recently executed transactions.

4.

Losses related to Other assets—Premises, equipment and software costs were determined using techniques that included a default recovery analysis and recently executed transactions.

Carrying and Fair Values

   At June 30, 2017 
         Fair Value by Level 
$ in millions  Total   Level 2   Level 31 

Assets

               

Loans

  $    2,632   $1,355   $1,277 

Total assets

  $2,632   $1,355   $1,277 

Liabilities

      

Other liabilities and accrued expenses—Lending commitments

  $212   $164   $48 

Total liabilities

  $212   $164   $48 
   At December 31, 2016 
         Fair Value by Level 
$ in millions  Total   Level 2   Level 31 

Assets

               

Loans

  $    4,913   $2,470   $2,443 

Other assets—Other investments

   123    —    123 

Other assets—Premises, equipment and software costs

   25    22    3 

Total assets

  $5,061   $2,492   $2,569 

Liabilities

      

Other liabilities and accrued expenses—Lending commitments

  $226   $166   $60 

Total liabilities

  $226   $166   $60 

1.

Refer to “Significant Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value Measurements” section herein for details of the significant unobservable inputs used for nonrecurring fair value measurement.

Financial Instruments Not Measured at Fair Value

 

  At June 30, 2017 
  Carrying  Fair Value 
$ in millions Value  Level 1  Level 2  Level 3  Total 

Financial Assets

 

    

Cash and due
from banks

 $25,008  $25,008  $—  $—  $25,008 

Interest bearing
deposits with
banks

  19,651   19,651   —   —   19,651 

Investment securities—HTM

  21,088   8,255   12,319   123   20,697 

Securities purchased under agreements
to resell

  97,306   —   92,537   4,718   97,255 

Securities borrowed

  126,722   —   126,722   1   126,723 

Customer and other receivables1

  49,292   —   45,052   4,110   49,162 

Loans2

  97,639   —   20,319   78,579   98,898 

Other assets3

  30,171   30,171   —   —   30,171 

Financial Liabilities

 

    

Deposits

 $144,783  $—  $144,783  $—  $144,783 

Short-term
borrowings

  334   —   334   —   334 

Securities sold
under agreements
to repurchase

  49,959   —   46,452   3,488   49,940 

Securities loaned

  16,862   —   16,477   401   16,878 

Other secured financings

  10,911   —   9,961   956   10,917 

Customer and
other payables1

  192,973   —   192,973   —   192,973 

Long-term
borrowings

  140,886   —   145,544   51   145,595 
  At March 31, 2018 
  Carrying  Fair Value 
$ in millions Value  Level 1  Level 2  Level 3  Total 

Financial Assets

     

Cash and cash equivalents:

 

    

Cash and due from banks

 $29,073  $  29,073  $—  $—  $29,073 

Interest bearing deposits with banks

  22,980   22,980   —   —   22,980 

Restricted cash

  35,291   35,291   —   —   35,291 

Investment securities—HTM

  23,892   11,327   11,270   322   22,919 

Securities purchased under agreements to resell

  80,246   —   80,175   16   80,191 

Securities borrowed

  135,835   —   135,781   —   135,781 

Customer and other receivables1

  61,017   —   57,405   3,433   60,838 

Loans2

  109,135   —   25,687   83,146   108,833 

Other assets

  438   —   438   —   438 

Financial Liabilities

     

Deposits

 $  160,182  $—  $  160,172  $—  $  160,172 

Securities sold under agreements to repurchase

  50,783   —   50,763   1   50,764 

Securities loaned

  13,556   —   13,623   —   13,623 

Other secured financings

  6,852   —   6,265   607   6,872 

Customer and other payables1

  191,332   —   191,332   —   191,332 

Borrowings

  147,431   —   151,664   27   151,691 

 

June 2017 Form 10-Q60

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

  At December 31, 2017 
  Carrying  Fair Value 
$ in millions Value  Level 1  Level 2  Level 3  Total 

Financial Assets

     

Cash and cash equivalents:

 

    

Cash and due from banks

 $24,816  $24,816  $—  $—  $24,816 

Interest bearing deposits with banks

  21,348   21,348   —   —   21,348 

Restricted cash

  34,231   34,231   —   —   34,231 

Investment securities—HTM

  23,599   11,119   11,673   289   23,081 

Securities purchased under agreements to resell

  84,258   —   78,239   5,978   84,217 

Securities borrowed

  124,010   —   124,018   1   124,019 

Customer and other receivables1

  51,269   —   47,159   3,984   51,143 

Loans2

  104,126   —   21,290     82,928   104,218 

Other assets

  433   —   433   —   433 

Financial Liabilities

     

Deposits

 $  159,232  $—  $  159,232  $—  $  159,232 

Securities sold under agreements to repurchase

  55,624   —   51,752   3,867   55,619 

Securities loaned

  13,592   —   13,191   401   13,592 

Other secured financings

  7,408   —   5,987   1,431   7,418 

Customer and other payables1

  188,464   —   188,464   —   188,464 

Borrowings

  145,670   —   151,692   30   151,722 

 

  At December 31, 2016 
  Carrying  Fair Value 
$ in millions Value  Level 1  Level 2  Level 3  Total 

Financial Assets

                    

Cash and due
from banks

 $22,017  $22,017  $—  $—  $22,017 

Interest bearing
deposits with
banks

  21,364   21,364   —   —   21,364 

Investment securities—HTM

  16,922   5,557   10,896   —   16,453 

Securities purchased under agreements
to resell

  101,653   —   97,825   3,830   101,655 

Securities borrowed

  125,236   —   125,093   147   125,240 

Customer and other receivables1

  41,679   —   36,962   4,575   41,537 

Loans2

  94,248   —   20,906   74,121   95,027 

Other assets3

  33,979   33,979   —   —   33,979 

Financial Liabilities

     

Deposits

 $155,800  $—  $155,800  $—  $155,800 

Short-term
borrowings

  535   —   535   —   535 

Securities sold
under agreements
to repurchase

  53,899   —   50,941   2,972   53,913 

Securities loaned

  15,844   —   15,853   —   15,853 

Other secured financings

  6,077   —   4,792   1,290   6,082 

Customer and
other payables1

  187,497   —   187,497   —   187,497 

Long-term
borrowings

  126,039   —   129,826   51   129,877 

HTM—Held

to maturity

1.

Accrued interest fees, and dividend receivables and payables where carrying value approximates fair value have been excluded.

2.

Amounts include loans measured at fair value on anon-recurring nonrecurring basis.

3.

Cash deposited with clearing organizations or segregated under federal and other regulations or requirements.

55March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Lending commitments—Commitments—Held for investmentInvestment and Held for saleSale

 

   Commitment   Fair Value 
$ in millions  amount1   Total   Level 2   Level 3 

June 30, 2017

  $95,090   $917   $706   $211 

December 31, 2016

   97,409    1,241    973    268 
   

Commitment

Amount1

   Fair Value 
$ in millions    Level 2   Level 3   Total 

March 31, 2018

  $117,582   $  643   $  185   $    828 

December 31, 2017

   100,151    620    174    794 

 

1.

For further discussion on lending commitments, see Note 11.

The previous tables exclude certain financial instruments such as equity method investments and allnon-financial assets and liabilities such as the value of the long-term relationships with the Firm’s deposit customers. For further discussion of the contents and valuation techniques of financial instruments not measured at fair value, see Note 3 to the consolidated financial statements in the 2016 Form10-K. During the current quarter, there were no significant updates made to the Firm’s valuation techniques for financial instruments not measured at fair value.

 

 

March 2018 Form 10-Q  6156  June 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

4. Derivative Instruments and Hedging Activities

Derivative Fair Values

Derivative Fair Values 

At March 31, 2018

 

  Assets 
$ in millions 

Bilateral

OTC

  

Cleared

OTC

  Exchange-
Traded		  Total 

Designated as accounting hedges

 

 

Interest rate contracts

 $804  $1  $—  $805 

Foreign exchange contracts

  43   7   —   50 

Total

  847   8   —   855 

Not designated as accounting hedges

 

 

Interest rate contracts

  175,200   1,742   522   177,464 

Credit contracts

  5,352   1,981   —   7,333 

Foreign exchange contracts

  52,711   764   53   53,528 

Equity contracts

  25,320   —   24,222   49,542 

Commodity and other contracts

  10,295   —   1,572   11,867 

Total

  268,878   4,487   26,369   299,734 

Total gross derivatives

 $    269,725  $    4,495  $    26,369  $    300,589 

Amounts offset

 

 

Counterparty netting

  (198,282)   (3,424)   (22,787)   (224,493) 

Cash collateral netting

  (42,284)   (664)   —   (42,948) 

Total in Trading assets

 $29,159  $407  $3,582  $33,148 

Amounts not offset1

 

 

Financial instruments collateral

  (12,646)   —   —   (12,646) 

Other cash collateral

  (20)   —   —   (20) 

Net amounts

 $16,493  $407  $3,582  $20,482 

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable

 

 $3,876 

  Liabilities 
$ in millions Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

 

Interest rate contracts

 $174  $1  $—  $175 

Foreign exchange contracts

  107   22   —   129 

Total

  281   23   —   304 

Not designated as accounting hedges

 

 

Interest rate contracts

  159,276   1,267   443   160,986 

Credit contracts

  5,723   2,125   —   7,848 

Foreign exchange contracts

  52,493   835   44   53,372 

Equity contracts

  26,778   —   23,748   50,526 

Commodity and other contracts

  7,583   —   1,556   9,139 

Total

  251,853   4,227   25,791   281,871 

Total gross derivatives

 $    252,134  $    4,250  $25,791  $    282,175 

Amounts offset

 

 

Counterparty netting

  (198,282)   (3,424)   (22,787)   (224,493) 

Cash collateral netting

  (31,280)   (416)   —   (31,696) 

Total in Trading liabilities

 $22,572  $410  $3,004  $25,986 

Amounts not offset1

 

 

Financial instruments collateral

  (4,966)   —   (374)   (5,340) 

Other cash collateral

  (38)   (26)   —   (64) 

Net amounts

 $17,568  $384  $2,630  $20,582 

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable

 

 $4,366 

 

At December 31, 2017

 
  Assets 
$ in millions Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

 

Interest rate contracts

 $1,057  $—  $—  $1,057 

Foreign exchange contracts

  57   6   —   63 

Total

  1,114   6   —   1,120 

Not designated as accounting hedges

 

 

Interest rate contracts

  177,948   1,700   234   179,882 

Credit contracts

  5,740   2,282   —   8,022 

Foreign exchange contracts

  52,878   798   58   53,734 

Equity contracts

  24,452   —   20,538   44,990 

Commodity and other contracts

  8,861   —   1,802   10,663 

Total

  269,879   4,780   22,632   297,291 

Total gross derivatives

 $    270,993  $    4,786  $    22,632  $    298,411 

Amounts offset

 

 

Counterparty netting

  (201,051)   (3,856)   (19,861)   (224,768) 

Cash collateral netting

  (42,141)   (689)   —   (42,830) 

Total in Trading assets

 $27,801  $241  $2,771  $30,813 

Amounts not offset1

 

 

Financial instruments collateral

  (12,363)   —   —   (12,363) 

Other cash collateral

  (4)   —   —   (4) 

Net amounts

 $15,434  $241  $2,771  $18,446 

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable

 

 $3,154 

 

At June 30, 2017   
  Assets 

$ in millions

 Bilateral
OTC		  Cleared
OTC1		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

Interest rate contracts

 $1,547  $937  $—  $2,484 

Foreign exchange contracts

  48   8   —   56 

Total

  1,595   945   —   2,540 

Not designated as accounting hedges2

 

Interest rate contracts

  182,333   72,140   193   254,666 

Credit contracts

  7,282   2,190   —   9,472 

Foreign exchange contracts

  54,357   544   100   55,001 

Equity contracts

  24,832   —   20,550   45,382 

Commodity and other contracts

  10,197   —   2,226   12,423 

Total

  279,001   74,874   23,069   376,944 

Total gross derivatives

 $280,596  $75,819  $23,069  $379,484 

Amounts offset

    

Counterparty netting

  (215,065)   (71,178)   (20,307)   (306,550) 

Cash collateral netting

  (38,973)   (3,821)   —   (42,794) 

Total in Trading assets

 $26,558  $820  $2,762  $30,140 

Amounts not offset3

    

Financial instruments collateral

  (11,213)   —   —   (11,213) 

Other cash collateral

  (10)   —   —   (10) 

Net amounts4

 $15,335  $820  $2,762  $18,917 
  Liabilities 

$ in millions

 Bilateral
OTC		  Cleared
OTC1		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

Interest rate contracts

 $60  $757  $—  $817 

Foreign exchange contracts

  138   40   —   178 

Total

  198   797   —   995 

Not designated as accounting hedges2

 

Interest rate contracts

  166,210   68,206   141   234,557 

Credit contracts

  8,132   2,273   —   10,405 

Foreign exchange contracts

  57,314   625   48   57,987 

Equity contracts

  27,653   —   20,022   47,675 

Commodity and other contracts

  8,881   —   2,285   11,166 

Total

  268,190   71,104   22,496   361,790 

Total gross derivatives

 $268,388  $71,901  $22,496  $362,785 

Amounts offset

    

Counterparty netting

  (215,065)   (71,178)   (20,307)   (306,550) 

Cash collateral netting

  (29,136)   (394)   —   (29,530) 

Total in Trading liabilities

 $24,187  $329  $2,189  $26,705 

Amounts not offset3

    

Financial instruments collateral

  (6,276)   —   (168)   (6,444) 

Other cash collateral

  (26)   (58)   —   (84) 

Net amounts4

 $17,885  $271  $2,021  $20,177 
At December 31, 2016   
  Assets 

$ in millions

 Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

Interest rate contracts

 $1,924  $1,049  $—  $2,973 

Foreign exchange contracts

  249   18   —   267 

Total

  2,173   1,067   —   3,240 

Not designated as accounting hedges5

 

Interest rate contracts

  200,336   99,217   384   299,937 

Credit contracts

  9,837   2,392   —   12,229 

Foreign exchange contracts

  73,645   1,022   231   74,898 

Equity contracts

  20,710   —   17,919   38,629 

Commodity and other contracts

  9,792   —   3,727   13,519 

Total

  314,320   102,631   22,261   439,212 

Total gross derivatives

 $316,493  $103,698  $22,261  $442,452 

Amounts offset

    

Counterparty netting

  (243,488)   (100,477)   (19,607)   (363,572) 

Cash collateral netting

  (45,875)   (1,799)   —   (47,674) 

Total in Trading assets

 $27,130  $1,422  $2,654  $31,206 

Amounts not offset3

    

Financial instruments collateral

  (10,293)   —   —   (10,293) 

Other cash collateral

  (124)   —   —   (124) 

Net amounts4

 $16,713  $1,422  $2,654  $20,789 
  Liabilities 

$ in millions

 Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

Interest rate contracts

 $77  $647  $—  $724 

Foreign exchange contracts

  15   25   —   40 

Total

  92   672   —   764 

Not designated as accounting hedges5

 

Interest rate contracts

  183,063   103,392   397   286,852 

Credit contracts

  11,024   2,401   —   13,425 

Foreign exchange contracts

  74,575   952   16   75,543 

Equity contracts

  22,531   —   17,983   40,514 

Commodity and other contracts

  8,303   —   3,582   11,885 

Total

  299,496   106,745   21,978   428,219 

Total gross derivatives

 $299,588  $107,417  $21,978  $428,983 

Amounts offset

    

Counterparty netting

  (243,488)   (100,477)   (19,607)   (363,572) 

Cash collateral netting

  (30,405)   (5,691)   —   (36,096) 

Total in Trading liabilities

 $25,695  $1,249  $2,371  $29,315 

Amounts not offset3

    

Financial instruments collateral

  (7,638)   —   (585)   (8,223) 

Other cash collateral

  (10)   (1)   —   (11) 

Net amounts4

 $18,047  $1,248  $1,786  $21,081 
  Liabilities 
$ in millions Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

 

Interest rate contracts

 $67  $1  $—  $68 

Foreign exchange contracts

  72   57   —   129 

Total

  139   58   —   197 

Not designated as accounting hedges

 

 

Interest rate contracts

  161,758   1,178   144   163,080 

Credit contracts

  6,273   2,272   —   8,545 

Foreign exchange contracts

  54,191   925   23   55,139 

Equity contracts

  27,993   —   19,996   47,989 

Commodity and other contracts

  7,117   —   1,772   8,889 

Total

  257,332   4,375   21,935   283,642 

Total gross derivatives

 $    257,471  $    4,433  $    21,935  $    283,839 

Amounts offset

 

 

Counterparty netting

  (201,051)   (3,856)   (19,861)   (224,768) 

Cash collateral netting

  (31,892)   (484)   —   (32,376) 

Total in Trading liabilities

 $24,528  $93  $2,074  $26,695 

Amounts not offset1

 

 

Financial instruments collateral

  (5,523)   —   (412)   (5,935) 

Other cash collateral

  (18)   (14)   —   (32) 

Net amounts

 $18,987  $79  $1,662  $20,728 

Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable

 

 $3,751 

 

June 2017 Form 10-Q62

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Derivative Notionals

At June 30, 2017

  Assets 

$ in billions

 Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

Interest rate contracts

 $25  $36  $—  $61 

Foreign exchange contracts

  4   —   —   4 

Total

  29   36   —   65 

Not designated as accounting hedges2

 

Interest rate contracts

  3,928   7,275   3,184   14,387 

Credit contracts

  255   105   —   360 

Foreign exchange contracts

  1,779   60   10   1,849 

Equity contracts

  388   —   291   679 

Commodity and other contracts

  69   —   84   153 

Total

  6,419   7,440   3,569   17,428 

Total gross derivatives

 $6,448  $7,476  $3,569  $17,493 
  Liabilities 

$ in billions

 Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

Interest rate contracts

 $2  $95  $—  $97 

Foreign exchange contracts

  5   1   —   6 

Total

  7   96   —   103 

Not designated as accounting hedges2

 

Interest rate contracts

  3,671   5,901   1,236   10,808 

Credit contracts

  287   87   —   374 

Foreign exchange contracts

  1,869   62   23   1,954 

Equity contracts

  378   —   347   725 

Commodity and other contracts

  76   —   69   145 

Total

  6,281   6,050   1,675   14,006 

Total gross derivatives

 $6,288  $6,146  $1,675  $    14,109 

At December 31, 2016

  Assets 

$ in billions

 Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

Interest rate contracts

 $30  $38  $—  $68 

Foreign exchange contracts

  6   —   —   6 

Total

  36   38   —   74 

Not designated as accounting hedges5

 

Interest rate contracts

  3,586   6,224   2,586   12,396 

Credit contracts

  333   112   —   445 

Foreign exchange contracts

  1,580   52   13   1,645 

Equity contracts

  338   —   242   580 

Commodity and other contracts

  67   —   79   146 

Total

  5,904   6,388   2,920   15,212 

Total gross derivatives

 $5,940  $6,426  $2,920  $15,286 
  Liabilities 

$ in billions

 Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

Interest rate contracts

 $2  $52  $—  $54 

Foreign exchange contracts

  1   1   —   2 

Total

  3   53   —   56 

Not designated as accounting hedges5

 

Interest rate contracts

  3,462   6,087   897   10,446 

Credit contracts

  359   96   —   455 

Foreign exchange contracts

  1,557   48   14   1,619 

Equity contracts

  321   —   273   594 

Commodity and other contracts

  78   —   59   137 

Total

  5,777   6,231   1,243   13,251 

Total gross derivatives

 $5,780  $6,284  $1,243  $    13,307 

OTC—Over–the-counter

1.

Effective in the first quarter of 2017, the Chicago Mercantile Exchange (“CME”) amended its rulebook for cleared OTC derivatives, resulting in the characterization of variation margin transfers as settlement payments as opposed to cash posted as collateral. In the quarter of adoption, the cleared OTC gross derivative assets and liabilities, and related counterparty and cash collateral netting amounts in total decreased by approximately $13 billion and $20 billion, respectively.

2.

Notional amounts include gross notionals related to open long and short futures contracts of $2,765 billion and $732 billion, respectively. The unsettled fair value on these futures contracts (excluded from this table) of $852 million and $425 million is included in Customer and other receivables and Customer and other payables, respectively, in the consolidated balance sheets.

3.

Amounts relate to master netting agreements and collateral agreements that have been determined by the Firm to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance.

 

 

  6357  June 2017March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

4.

Amounts include transactions that are either not subject to master netting agreements or collateral agreements or are subject to such agreements but the Firm has not determined the agreements to be legally enforceable as follows: $3.3 billion of derivative assets and $3.5 billion of derivative liabilities at June 30, 2017 and $3.7 billion of derivative assets and $3.5 billion of derivative liabilities at December 31, 2016.

See Note 3 for information related to the unsettled fair value of futures contracts not designated as accounting hedges, which are excluded from the tables above.

Derivative Notionals

At March 31, 2018

 

  Assets 
$ in billions Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

 

Interest rate contracts

 $20  $26  $—  $46 

Foreign exchange contracts

  5   —   —   5 

Total

  25   26   —   51 

Not designated as accounting hedges

 

 

Interest rate contracts

  4,449   7,472   3,477   15,398 

Credit contracts

  165   90   —   255 

Foreign exchange contracts

  2,223   89   8   2,320 

Equity contracts

  402   —   383   785 

Commodity and other contracts

  94   —   61   155 

Total

  7,333   7,651   3,929   18,913 

Total gross derivatives

 $    7,358  $    7,677  $3,929  $    18,964 

  Liabilities 
$ in billions Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

 

Interest rate contracts

 $2  $133  $—  $135 

Foreign exchange contracts

  4   2   —   6 

Total

  6   135   —   141 

Not designated as accounting hedges

 

 

Interest rate contracts

  4,614   7,074   1,181   12,869 

Credit contracts

  188   83   —   271 

Foreign exchange contracts

  2,184   98   14   2,296 

Equity contracts

  425   —   474   899 

Commodity and other contracts

  74   —   53   127 

Total

  7,485   7,255   1,722   16,462 

Total gross derivatives

 $    7,491  $    7,390  $  1,722  $    16,603 

At December 31, 2017

 

  Assets 
$ in billions Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

 

Interest rate contracts

 $20  $46  $—  $66 

Foreign exchange contracts

  4   —   —   4 

Total

  24   46   —   70 

Not designated as accounting hedges

 

 

Interest rate contracts

  3,999   6,458   2,714   13,171 

Credit contracts

  194   100   —   294 

Foreign exchange contracts

  1,960   67   9   2,036 

Equity contracts

  397   —   334   731 

Commodity and other contracts

  86   —   72   158 

Total

  6,636   6,625   3,129   16,390 

Total gross derivatives

 $    6,660  $    6,671  $    3,129  $    16,460 
  Liabilities 
$ in billions Bilateral
OTC		  Cleared
OTC		  Exchange-
Traded		  Total 

Designated as accounting hedges

 

 

Interest rate contracts

 $2  $102  $—  $104 

Foreign exchange contracts

  4   2   —   6 

Total

  6   104   —   110 

Not designated as accounting hedges

 

 

Interest rate contracts

  4,199   6,325   1,089   11,613 

Credit contracts

  226   80   —   306 

Foreign exchange contracts

  2,014   78   51   2,143 

Equity contracts

  394   —   405   799 

Commodity and other contracts

  68   —   61   129 

Total

  6,901   6,483   1,606   14,990 

Total gross derivatives

 $    6,907  $    6,587  $    1,606  $    15,100 

The Firm believes that the notional amounts of the derivative contracts generally overstate its exposure.

5.

Notional amounts include gross notionals related to open long and short futures contracts of $2,088 billion and $332 billion, respectively. The unsettled fair value on these futures contracts (excluded from this table) of $784 million and $174 million is included in Customer and other receivables and Customer and other payables, respectively, in the consolidated balance sheets.

For information related to offsetting of certain collateralized transactions, see Note 6. For a discussion of the Firm’s derivative instruments and hedging activities, see Note 4 to the consolidated financial statements in the 20162017 Form10-K.

Gains (Losses) on Accounting Hedges

   Three Months Ended 
   March 31, 
$ in millions  2018   2017 

Fair Value Hedges—Recognized in Interest Expense

 

     

Interest rate contracts

  $(1,841)   $(805) 

Borrowings

           1,852            717 

Net Investment Hedges—Foreign exchange contracts

 

  

Recognized in OCI

  $(148)   $(205) 

Forward points excluded from hedge effectiveness testing—Interest income

   7   $(9) 

Borrowings under Fair Value Hedges

 

  Recognized in Interest Expense 
  Three Months Ended
June 30,		  Six Months Ended
June 30,		 
$ in millions 2017  2016  2017  2016 

Derivatives

  $   138   $   969   $  (660)  $  3,119  

Borrowings

  (213)   (993)   495   (3,282) 

Total

 $(75)  $(24)   $  (165)  $(163) 
$ in millions  At March 31,
2018		 

Carrying amount of Borrowings currently or previously hedged

  $107,264 

Basis adjustments included in carrying amount—outstanding hedges

   2,035 

Gains (Losses) on Net Investment HedgesHedge accounting basis adjustments for Borrowings are primarily related to outstanding hedges.

 

  Three Months Ended
June 30,		  Six Months Ended
June 30,		 
$ in millions 2017  2016  2017  2016 

Foreign exchange contracts

 

  

Effective portion—OCI

  $    (47)  $(112)   $  (251)   $  (336) 

Forward points excluded from hedge effectiveness testing—Interest income

  $      (9)  $(19)   $    (19)   $    (39) 
March 2018 Form 10-Q58

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Trading Revenues by Product Type

 

  Three Months Ended 
 Three Months
Ended June 30,		 Six Months Ended
June 30,		   March 31, 
$ in millions 2017 2016 2017 2016   2018   2017 

Interest rate contracts

 $451  $320  $  1,045  $626    $871   $594 

Foreign exchange contracts

  197  362   432  599     261    235 

Equity security and index contracts1

    1,818    1,615     3,459    2,945     1,877    1,641 

Commodity and other contracts

  110  20   299  (124)    435    189 

Credit contracts

  355  429   931  765     326    576 

Total

 $  2,931  $  2,746  $6,166  $4,811    $      3,770   $      3,235 

 

1.

Dividend income is included within equity security and index contracts.

The previous table summarizes gains and losses included in Trading revenues in the consolidated income statements from trading activities.statements. These activities include revenues related to derivative andnon-derivative financial instruments. The Firm generally utilizes financial instruments across a variety of product types in connection with its market-making and related risk management strategies. Accordingly, theThe trading revenues presented in the previous table are not representative of the manner in which the Firm manages its business activities and are prepared in a manner similar to the presentation of trading revenues for regulatory reporting purposes.

OTC Derivative Products—Trading Assets

Counterparty Credit Rating and Remaining Maturity of OTC Derivative Assets

  Fair Value at June 30, 20171 
  Contractual Years to Maturity  Total
Derivative
Assets		 
$ in millions Less than 1  1-3  3-5  Over 5  

Credit Rating2

 

AAA

 $232  $308  $406  $3,168  $4,114 

AA

  1,357   1,913   2,336   10,841   16,447 

A

  6,487   5,123   4,342   18,625   34,577 

BBB

  3,417   2,685   2,001   12,737   20,840 

Non-investment grade

  2,753   2,104   3,070   2,247   10,174 

Total

 $14,246  $  12,133  $  12,155  $  47,618  $86,152 

  Fair Value at June 30, 20171 
$ in millions Total
Derivative
Assets		  

Cross-Maturity

and Cash

Collateral

Netting3

  

Net Amounts

Post-cash

Collateral

  

Net Amounts

Post-
collateral4

 

Credit Rating2

 

AAA

 $4,114  $(3,091)  $1,023  $952 

AA

  16,447   (10,935)   5,512   2,756 

A

  34,577   (25,571)   9,006   5,118 

BBB

  20,840   (14,301)   6,539   4,908 

Non-investment grade

  10,174   (4,886)   5,288   2,421 

Total

 $86,152  $(58,784)  $27,368  $16,155 

  Fair Value at December 31, 20161 
  Contractual Years to Maturity  Total
Derivative
Assets		 
$ in millions Less than 1  1-3  3-5  Over 5  

Credit Rating2

 

AAA

 $150  $428  $918  $2,931  $4,427 

AA

  3,177   2,383   2,942   10,194   18,696 

A

  9,244   6,676   5,495   21,322   42,737 

BBB

  4,423   3,085   2,434   13,023   22,965 

Non-investment grade

  2,283   1,702   1,722   1,794   7,501 

Total

 $19,277  $  14,274  $  13,511  $  49,264  $96,326 

June 2017 Form 10-Q64

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

  Fair Value at December 31, 20161 
$ in millions Total
Derivative
Assets		  

Cross-Maturity

and Cash

Collateral
Netting3

  Net Amounts
Post-cash
Collateral		  Net Amounts
Post-
collateral4		 

Credit Rating2

 

AAA

 $4,427  $(3,900)  $527  $485 

AA

  18,696   (11,813)   6,883   4,114 

A

  42,737   (31,425)   11,312   6,769 

BBB

  22,965   (16,629)   6,336   4,852 

Non-investment grade

  7,501   (4,131)   3,370   1,915 

Total

 $96,326  $(67,898)  $28,428  $18,135 

1.

Fair values shown represent the Firm’s net exposure to counterparties related to its OTC derivative products.

2.

Obligor credit ratings are determined internally by the Credit Risk Management Department.

3.

Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity categories. Receivable and payable balances with the same counterparty in the same maturity category are netted within such maturity category, where appropriate. Cash collateral received is netted on a counterparty basis, provided legal right of offset exists.

4.

Fair value is shown net of collateral received (primarily cash and U.S. government and agency securities).

Credit Risk-Related Contingencies

In connection with certain OTC trading agreements, the Firm may be required to provide additional collateral or immediately settle any outstanding liability balances with certain counterparties in the event of a credit rating downgrade of the Firm.

The following table presents the aggregate fair value of certain derivative contracts that contain credit risk-related contingent features that are in a net liability position for which the Firm has posted collateral in the normal course of business.

Net Derivative Liabilities and Collateral Posted

 

$ in millions

  At June 30,
2017		   At December 31,
2016		   At
March 31,
2018		   At
December 31,
2017		 

Net derivative liabilities with credit risk-related contingent features

  $19,335   $22,939   $        17,213   $20,675 

Collateral posted

   14,672    17,040    15,244    16,642 

The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by contract and can be based on ratings by either or both of Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’sS&P Global Ratings (“S&P”).TheRatings. The following table shows the future potential collateral amounts and termination payments that could be called or required by counterparties or exchange and clearing organizations in the event ofone-notch ortwo-notch

downgrade scenarios based on the relevant contractual downgrade triggers.

Incremental Collateral or Termination Payments upon Potential Future Ratings Downgrade

 

$ in millionsAt June 30, 20171

One-notch downgrade

$                        1,042

Two-notch downgrade

401
$ in millions  At
March 31,
2018		 

One-notch downgrade

  $              618 

Two-notch downgrade

   409 

Bilateral downgrade agreements included in the amounts above1

  $910 

 

1.

Amounts include $1,187 million related to bilateralAmount represents arrangements between the Firm and other parties where upon the downgrade of one party, the downgraded party must deliver collateral to the other party. These bilateral downgrade arrangements are used by the Firm to manage the risk of counterparty downgrades.

Credit Derivatives and Other Credit Contracts

The Firm enters into credit derivatives, principally through credit default swaps,CDS, under which it receives or provides protection against the risk of default on a set of debt obligations issued by a specified reference entity or entities. A majority of the Firm’s counterparties for these derivatives are banks, broker-dealers, and insurance and other financial institutions.

For further information on credit derivatives and other credit contracts, see Note 4 to the consolidated financial statements in the 20162017 Form10-K.

Protection Sold and Purchased with Credit Default SwapsCDS

 

 At March 31, 2018 
 At June 30, 2017  Notional Fair Value (Asset)/Liability 
 Protection Sold Protection Purchased  Protection Protection Protection Protection 

$ in millions

 Notional 

Fair Value
(Asset)/

Liability

 Notional 

Fair Value
(Asset)/

Liability

  Sold Purchased Sold Purchased 

Credit default swaps

 

   

Single name

 $ 195,821  $(1,274)   $ 207,973  $1,613  $133,209  $152,446  $(1,148)  $1,580 

Index and basket

  131,476   (48)   126,594   (113)   103,531   98,822   (163)   5 

Tranched index and basket

  23,519   (408)   48,605   1,163   12,330   25,506   (276)   517 

Total

 $350,816  $(1,730)   $383,172  $2,663  $    249,070  $    276,774  $(1,587)  $2,102 

Single name and non-tranched index and basket with identical underlying reference obligations

 $323,765   —  $330,349   —  $233,572  $250,376   

 

 At December 31, 2017 
 At December 31, 2016  Notional Fair Value (Asset)/Liability 
 Protection Sold Protection Purchased  Protection Protection Protection Protection 

$ in millions

 Notional 

Fair Value
(Asset)/

Liability

 Notional 

Fair Value
(Asset)/

Liability

  Sold Purchased Sold Purchased 

Credit default swaps

 

   

Single name

 $ 266,918    $(753)   $ 269,623   $826  $146,948  $164,773  $(1,277)  $1,658 

Index and basket

 130,383  374  122,061  (481)  131,073  120,348  (341)  209 

Tranched index and basket

 32,429  (670)  78,505  1,900  11,864  24,498  (342)  616 

Total

 $ 429,730    $(1,049)   $470,189   $2,245  $    289,885  $    309,619  $(1,960)  $2,483 

Single name and non-tranched index and basket with identical underlying reference obligations

 $395,536   —  $389,221   —  $274,473  $281,162   
 

 

  6559  June 2017March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

Fair value amounts as shown in the table below are on a gross basis prior to cash collateral or counterparty netting. In order to provide an indication of the current payment status or performance risk of the CDS, a breakdown of CDS based on the Firm’s internal credit ratings by investment grade and non-investment grade is provided. Internal credit ratings

serve as the Credit Risk Management Department’s assessment of credit risk and the basis for a comprehensive credit limits framework used to control credit risk. The Firm uses quantitative models and judgment to estimate the various risk parameters related to each obligor.

 

Credit Ratings of Reference Obligation and Maturities of Credit Protection Sold

 

  At June 30, 2017   At March 31, 2018 
  Maximum Potential Payout/Notional   

Fair Value

(Asset)/

Liability1

   Maximum Potential Payout/Notional   Fair Value
(Asset)/
Liability		 
  Years to Maturity     Years to Maturity   
$ in millions  Less than 1   1-3   3-5   Over 5   Total     Less than 1   1-3   3-5   Over 5   Total   

Single name credit default swaps2

            

Single name CDS

            

Investment grade

  $57,174   $    52,949   $    26,353   $9,523   $    145,999   $(1,397)   $33,332   $35,927   $17,621   $10,658   $97,538   $(1,124) 

Non-investment grade

   22,379    18,958    7,465    1,020    49,822    123    12,994    13,871    6,813    1,993    35,671    (24) 

Total single name credit default swaps

   79,553    71,907    33,818    10,543    195,821    (1,274) 

Index and basket credit default swaps2

            

Total single name CDS

  $46,326   $49,798   $24,434   $12,651   $133,209   $(1,148) 

Index and basket CDS

            

Investment grade

   26,972    14,044    48,806    7,914    97,736    (999)   $29,448   $14,049   $16,003   $10,902   $70,402   $(811) 

Non-investment grade

   27,129    7,037    13,807    9,286    57,259    543    5,941    6,139    17,681    15,698    45,459    372 

Total index and basket credit default swaps

   54,101    21,081    62,613    17,200    154,995    (456) 

Total credit default swaps sold

  $133,654   $92,988   $96,431   $    27,743   $350,816   $(1,730) 

Total index and basket CDS

  $35,389   $20,188   $33,684   $26,600   $115,861   $(439) 

Total CDS sold

  $81,715   $69,986   $58,118   $39,251   $249,070   $(1,587) 

Other credit contracts

   27    —    13    129    169    4    —    2    —    127    129    20 

Total credit derivatives and other credit contracts

  $133,681   $92,988   $96,444   $27,872   $350,985   $(1,726)   $81,715   $69,988   $58,118   $39,378   $249,199   $(1,567) 

 

   At December 31, 2016 
   Maximum Potential Payout/Notional   

Fair Value

(Asset)/

Liability1

 
   Years to Maturity   
$ in millions  Less than 1   1-3   3-5   Over 5   Total   

Single name credit default swaps2

            

Investment grade

  $79,449   $70,796   $34,529   $10,293   $195,067   $(1,060) 

Non-investment grade

   34,571    25,820    10,436    1,024    71,851    307 

Total single name credit default swaps

  $114,020   $96,616   $44,965   $11,317   $266,918   $(753) 

Index and basket credit default swaps2

            

Investment grade

  $26,530   $21,388   $35,060   $9,096   $92,074   $(846) 

Non-investment grade

   26,135    22,983    11,759    9,861    70,738    550 

Total index and basket credit default swaps

  $52,665   $44,371   $46,819   $18,957   $162,812   $(296) 

Total credit default swaps sold

  $166,685   $    140,987   $    91,784   $    30,274   $    429,730   $(1,049) 

Other credit contracts

   49    6    —    215    270    — 

Total credit derivatives and other credit contracts

  $166,734   $140,993   $91,784   $30,489   $430,000   $(1,049) 

1.

Fair value amounts are shown on a gross basis prior to cash collateral or counterparty netting.

2.

In order to provide an indication of the current payment status or performance risk of the CDS, a breakdown of CDS based on the Firm’s internal credit ratings by investment grade andnon-investment grade is provided. Internal credit ratings serve as the Credit Risk Management Department’s assessment of credit risk and the basis for a comprehensive credit limits framework used to control credit risk. The Firm uses quantitative models and judgment to estimate the various risk parameters related to each obligor.

   At December 31, 2017 
   Maximum Potential Payout/Notional   Fair Value
(Asset)/
Liability		 
   Years to Maturity   
$ in millions  Less than 1   1-3   3-5   Over 5   Total   

Single name CDS

            

Investment grade

  $39,721   $42,591   $18,157   $8,872   $109,341   $(1,167) 

Non-investment grade

   14,213    16,293    6,193    908    37,607    (110) 

Total single name CDS

  $53,934   $58,884   $24,350   $9,780   $146,948   $(1,277) 

Index and basket CDS

            

Investment grade

  $29,046   $15,418   $37,343   $6,807   $88,614   $(1,091) 

Non-investment grade

   5,246    7,371    32,417    9,289    54,323    408 

Total index and basket CDS

  $34,292   $22,789   $69,760   $16,096   $142,937   $(683) 

Total CDS sold

  $88,226   $81,673   $94,110   $25,876   $289,885   $(1,960) 

Other credit contracts

   2    —    —    134    136    16 

Total credit derivatives and other credit contracts

  $88,228   $81,673   $94,110   $26,010   $290,021   $(1,944) 

 

June 2017March 2018 Form 10-Q  6660  

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

5. Investment Securities

The following tables present information about the Firm’s AFS securities, which are carried at fair value, and HTM securities, which are carried at amortized cost. The net unrealized gains or losses on AFS securities are reported on anafter-tax basis as a component of AOCI.

AFS and HTM Securities

 

  

At June 30, 2017

  At March 31, 2018 
$ in millions  Amortized
Cost		   Gross
Unrealized
Gains		   Gross
Unrealized
Losses		   Fair
Value		  Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair Value 

AFS debt securities

        

AFS securities

    

U.S. government and agency securities:

            

U.S. Treasury securities

  $21,580   $—   $417   $21,163  $30,032  $—  $833  $    29,199 

U.S. agency securities1

   21,714    36    200    21,550   22,084   32   504   21,612 

Total U.S. government and agency securities

   43,294    36    617    42,713   52,116   32   1,337   50,811 

Corporate and other debt:

            

Commercial mortgage-backed securities:

        

Agency

   1,536    2    42    1,496 

Non-agency

   1,578    11    9    1,580 

Agency CMBS

  1,302   2   59   1,245 

Non-agency CMBS

  857   2   17   842 

Corporate bonds

   1,586    13    8    1,591   1,346   —   28   1,318 

Collateralized loan obligations

   560    1    —    561 

FFELP student loan asset-backed securities2

   2,549    7    15    2,541 

CLO

  351   1   —   352 

FFELP student loan ABS2

  2,173   15   7   2,181 
Total corporate and other debt   7,809    34    74    7,769   6,029   20   111   5,938 

Total AFS debt securities

   51,103    70    691    50,482 

AFS equity securities

   15    —    9    6 

Total AFS securities

   51,118    70    700    50,488   58,145   52   1,448   56,749 

HTM securities

            

U.S. government securities:

        

U.S. government and agency securities:

    

U.S. Treasury securities

   8,463    9    216    8,256   11,817   —   490   11,327 

U.S. agency securities1

   12,501    10    193    12,318   11,747   —   477   11,270 

Total U.S. government and agency securities

   20,964    19    409    20,574   23,564   —   967   22,597 

Corporate and other debt:

            

Commercial mortgage-backed securities:

        

Non-agency

   124    —    1    123 

Total corporate and other debt

   124    —    1    123 

Non-agency CMBS

  328   —   6   322 

Total HTM securities

   21,088    19    410    20,697   23,892   —   973   22,919 

Total Investment securities

  $72,206   $89   $1,110   $71,185 

Total investment securities

 $82,037  $52  $2,421  $79,668 
  At December 31, 2016  At December 31, 2017 
$ in millions  Amortized
Cost		   Gross
Unrealized
Gains		   Gross
Unrealized
Losses		   Fair Value  Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair Value 

AFS debt securities

            

U.S. government and agency securities:

            

U.S. Treasury securities

  $28,371   $1   $545   $    27,827  $26,842  $—  $589  $26,253 

U.S. agency securities1

   22,348    14    278    22,084  22,803  28  247  22,584 

Total U.S. government and agency securities

   50,719    15    823    49,911  49,645  28  836  48,837 

Corporate and other debt:

            

Commercial mortgage-backed securities:

        

Agency

   1,850    2    44    1,808 

Non-agency

   2,250    11    16    2,245 

Auto loan asset-backed securities

   1,509    1    1    1,509 

Agency CMBS

 1,370  2  49  1,323 

Non-agency CMBS

 1,102   —  8  1,094 

Corporate bonds

   3,836    7    22    3,821  1,379  5  12  1,372 

Collateralized loan obligations

   540    —    1    539 

FFELP student loan asset-backed securities2

   3,387    5    61    3,331 

CLO

 398  1   —  399 

FFELP student loan ABS2

 2,165  15  7  2,173 

Total corporate and other debt

   13,372    26    145    13,253  6,414  23  76  6,361 

Total AFS debt securities

   64,091    41    968    63,164  56,059  51  912  55,198 

AFS equity securities

   15    —    9    6  15   —  10  5 

Total AFS securities

   64,106    41    977    63,170  56,074  51  922  55,203 

HTM securities

            

U.S. government securities:

        

U.S. government and agency securities:

    

U.S. Treasury securities

   5,839    1    283    5,557  11,424   —  305  11,119 

U.S. agency securities1

   11,083    1    188    10,896  11,886  7  220  11,673 

Total U.S. government and agency securities

 23,310  7  525  22,792 

Corporate and other debt:

    

Non-agency CMBS

 289  1  1  289 

Total HTM securities

   16,922    2    471    16,453  23,599  8  526  23,081 

Total Investment securities

  $81,028   $43   $1,448   $79,623 

Total investment securities

 $79,673  $59  $1,448  $    78,284 

 

1.

U.S. agency securities consist mainly of agency-issued debt, agency mortgage pass-through pool securities and collateralized mortgage obligations.CMOs.

2.

FFELP—Federal Family Education Loan Program. Amounts are backed by a guarantee from the U.S. Department of Education of at least 95% of the principal balance and interest on such loans.

 

 

  6761  June 2017March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

Investment Securities in an Unrealized Loss Position

 

  At March 31, 2018 
  At June 30, 2017   Less than 12 Months   12 Months or Longer   Total 
  Less than 12 Months   12 Months or Longer   Total   

 

 

 
$ in millions  Fair Value   Gross
Unrealized
Losses		   Fair Value   Gross
Unrealized
Losses		   Fair Value   Gross
Unrealized
Losses		   Fair Value   Gross
Unrealized
Losses		   Fair Value   Gross
Unrealized
Losses		   Fair Value   Gross
Unrealized
Losses		 

AFS debt securities

            

AFS securities

            

U.S. government and agency securities:

                        

U.S. Treasury securities

  $21,163   $417   $—   $—   $21,163   $417   $25,041   $711   $3,958   $122   $28,999   $833 

U.S. agency securities

   11,890    199    99    1    11,989    200    12,634    402    2,417    102    15,051    504 

Total U.S. government and agency securities

   33,053    616    99    1    33,152    617    37,675    1,113    6,375    224    44,050    1,337 

Corporate and other debt:

                        

Commercial mortgage-backed securities:

            

Agency

   1,063    42    —    —    1,063    42 

Non-agency

   370    6    406    3    776    9 

Agency CMBS

   910    59    —    —    910    59 

Non-agency CMBS

   309    7    242    10    551    17 

Corporate bonds

   592    8    —    —    592    8    809    13    383    15    1,192    28 

FFELP student loan asset-backed securities

   1,580    15    —    —    1,580    15 

FFELP student loan ABS

   1,006    7    —    —    1,006    7 

Total corporate and other debt

   3,605    71    406    3    4,011    74    3,034    86    625    25    3,659    111 

Total AFS debt securities

   36,658    687    505    4    37,163    691 

AFS equity securities

   —    —    6    9    6    9 

Total AFS securities

   36,658    687    511    13    37,169    700    40,709    1,199    7,000    249    47,709    1,448 

HTM securities

                        

U.S. government and agency securities:

                        

U.S. Treasury securities

   7,043    216    —    —    7,043    216    6,585    177    4,742    313    11,327    490 

U.S. agency securities

   10,573    193    —    —    10,573    193    4,404    119    6,866    358    11,270    477 

Total U.S. government and agency securities

   17,616    409    —    —    17,616    409    10,989    296    11,608    671    22,597    967 

Corporate and other debt:

                        

Non-agency

   91    1    —    —    91    1 

Total corporate and other debt

   91    1    —    —    91    1 

Non-agency CMBS

   220    6    —    —    220    6 

Total HTM securities

   17,707    410    —    —    17,707    410    11,209    302    11,608    671    22,817    973 

Total Investment securities

  $54,365   $1,097   $511   $13   $54,876   $1,110 

Total investment securities

  $51,918   $1,501   $18,608   $920   $70,526   $2,421 

   At December 31, 2017 
   Less than 12 Months   12 Months or Longer   Total 
  

 

 

 
$ in millions  Fair Value   

Gross

Unrealized

Losses

   Fair Value   

Gross

Unrealized

Losses

   Fair Value   

Gross

Unrealized

Losses

 

AFS debt securities

            

U.S. government and agency securities:

            

U.S. Treasury securities

  $21,941   $495   $4,287   $94   $26,228   $589 

U.S. agency securities

   12,673    192    2,513    55    15,186    247 

Total U.S. government and agency securities

   34,614    687    6,800    149    41,414    836 

Corporate and other debt:

            

Agency CMBS

   930    49    —    —    930    49 

Non-agency CMBS

   257    1    559    7    816    8 

Corporate bonds

   316    3    389    9    705    12 

FFELP student loan ABS

   984    7    —    —    984    7 

Total corporate and other debt

   2,487    60    948    16    3,435    76 

Total AFS debt securities

   37,101    747    7,748    165    44,849    912 

AFS equity securities

   —    —    5    10    5    10 

Total AFS securities

   37,101    747    7,753    175    44,854    922 

HTM securities

            

U.S. government and agency securities:

            

U.S. Treasury securities

   6,608    86    4,512    219    11,120    305 

U.S. agency securities

   2,879    24    7,298    196    10,177    220 

Total U.S. government and agency securities

   9,487    110    11,810    415    21,297    525 

Corporate and other debt:

            

Non-agency CMBS

   124    1    —    —    124    1 

Total HTM securities

   9,611    111    11,810    415    21,421    526 

Total investment securities

  $46,712   $858   $19,563   $590   $66,275   $1,448 

 

June 2017March 2018 Form 10-Q  6862  

Notes to Consolidated Financial Statements

(Unaudited)

  LOGO

   At December 31, 2016 
   Less than 12 Months   12 Months or Longer   Total 
$ in millions  Fair Value   Gross
Unrealized
Losses		   Fair Value   Gross
Unrealized
Losses		   Fair Value   Gross
Unrealized
Losses		 

AFS debt securities

            

U.S. government and agency securities:

            

U.S. Treasury securities

  $25,323   $545   $—   $—   $25,323   $545 

U.S. agency securities

   16,760    278    125    —    16,885    278 

Total U.S. government and agency securities

   42,083    823    125    —    42,208    823 

Corporate and other debt:

            

Commercial mortgage-backed securities:

            

Agency

   1,245    44    —    —    1,245    44 

Non-agency

   763    11    594    5    1,357    16 

Auto loan asset-backed securities

   659    1    123    —    782    1 

Corporate bonds

   2,050    21    142    1    2,192    22 

Collateralized loan obligations

   178    —    239    1    417    1 

FFELP student loan asset-backed securities

   2,612    61    —    —    2,612    61 

Total corporate and other debt

   7,507    138    1,098    7    8,605    145 

Total AFS debt securities

   49,590    961    1,223    7    50,813    968 

AFS equity securities

   6    9    —    —    6    9 

Total AFS securities

   49,596    970    1,223    7    50,819    977 

HTM securities

            

U.S. government and agency securities:

            

U.S. Treasury securities

   5,057    283    —    —    5,057    283 

U.S. agency securities

   10,612    188    —    —    10,612    188 

Total HTM securities

   15,669    471    —    —    15,669    471 

Total Investment securities

  $65,265   $1,441   $1,223   $7   $66,488   $1,448 

69June 2017 Form 10-QLOGO

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

 

As discussed in Note 2 to the consolidated financial statements in the 2016 Form10-K, AFS and HTM securities with a current fair value less than their amortized cost are analyzed as part of the Firm’s ongoing assessment of temporarily versus other-than-temporarily impaired at the individual security level.

The Firm believes there are no securities in an unrealized loss position that are other-than-temporarily-impaired at June 30,other-than-temporarily impaired after performing the analysis described in Note 2 to the financial statements in the 2017 and December 31, 2016 for the reasons discussed herein.

Form 10-K. For AFS debt securities, the Firm does not intend to sell the securities and is not likely to be required to sell the securities prior to recovery of amortized cost basis. ForFurthermore, for AFS and HTM debt securities, the securities have not experienced credit losses as the net unrealized losses reported in the previous table are primarily due to higher interest rates since those securities were purchased.

Additionally, the Firm does not expect to experience a credit loss based on consideration of the relevant information (as discussed in Note 2 to the consolidated financial statements in the 2016 Form10-K), including for U.S. government and agency securities, the existence of an explicit and implicit guarantee provided by the U.S. government. The risk of credit loss on securities in an unrealized loss position is considered minimal because the Firm’s U.S. government and agency securities, as well as asset-backed securities (“ABS”), commercial mortgage-backed securities (“CMBS”) and collateralized loan obligations (“CLOs”), are highly rated and because corporate bonds are all investment grade.

For AFS equity securities, the Firm has the intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in market value.

See Note 12 for additional information on securities issued by VIEs, including U.S. agency mortgage-backed securities,non-agency CMBS, auto loan ABS, CLO and FFELP student loan ABS.

Investment Securities by Contractual Maturity

 

 At June 30, 2017   At March 31, 2018 

$ in millions

 Amortized
Cost		 Fair Value Annualized
Average
Yield		   

Amortized

Cost

   Fair Value   

Annualized

Average

Yield

 

AFS debt securities

   

AFS securities

      

U.S. government and agency securities:

U.S. government and agency securities:

 

      

U.S. Treasury securities:

         

Due within 1 year

 $          3,798  $          3,786   0.9%   $6,153   $6,132    0.9% 

After 1 year through 5 years

  13,090   12,923   1.2%    19,385    18,906    1.6% 

After 5 years through 10 years

  4,692   4,454   1.4%    4,494    4,161    1.4% 

Total

  21,580   21,163     30,032    29,199    

U.S. agency securities:

      

Due within 1 year

   43    42    1.1% 

After 1 year through 5 years

   1,899    1,883    1.0% 

After 5 years through 10 years

   1,555    1,506    1.8% 

After 10 years

   18,587    18,181    2.0% 

Total

       22,084        21,612    

Total U.S. government and agency securities

   52,116    50,811    1.6% 

Corporate and other debt:

      

Agency CMBS:

      

Due within 1 year

   19    19    1.3% 

After 1 year through 5 years

   431    430    1.3% 

After 5 years through 10 years

   47    47    1.2% 

After 10 years

   805    749    1.6% 

Total

   1,302    1,245    

 At June 30, 2017   At March 31, 2018 

$ in millions

 Amortized
Cost		 Fair Value Annualized
Average
Yield		   

Amortized
Cost

   Fair Value   Annualized
Average
Yield		 

U.S. agency securities:

   

Due within 1 year

 $539  $539   0.3% 

After 1 year through 5 years

  3,696   3,693   0.7% 

After 5 years through 10 years

  760   762   2.0% 

After 10 years

  16,719   16,556   1.8% 

Total

  21,714   21,550  

Total U.S. government and agency securities

  43,294   42,713   1.4% 

Corporate and other debt:

   

Commercial mortgage-backed securities:

 

Agency:

   

Due within 1 year

  49   49   1.1% 

After 1 year through 5 years

  241   240   1.5% 

After 5 years through 10 years

  383   385   1.2% 

After 10 years

  863   822   1.6% 

Total

  1,536   1,496  

Non-agency:

   

Non-agency CMBS:

      

After 5 years through 10 years

  36   35   2.5%   $36   $35    2.5% 

After 10 years

  1,542   1,545   2.1%    821    807    1.9% 

Total

  1,578   1,580     857    842    

Corporate bonds:

         

Due within 1 year

  36   36   1.2%    97    97    1.6% 

After 1 year through 5 years

  1,219   1,225   2.4%    1,175    1,150    2.4% 

After 5 years through 10 years

  331   330   2.4%    74    71    2.5% 

Total

  1,586   1,591     1,346    1,318    

Collateralized loan obligations:

   

CLO:

      

After 5 years through 10 years

  362   362   1.5%    153    153    1.5% 

After 10 years

  198   199   2.4%    198    199    2.4% 

Total

  560   561     351    352    

FFELP student loan asset-backed securities:

   

FFELP student loan ABS:

      

After 1 year through 5 years

  57   56   0.8%    48    47    0.8% 

After 5 years through 10 years

  536   532   0.8%    390    388    0.8% 

After 10 years

  1,956   1,953   1.1%    1,735    1,746    1.1% 

Total

  2,549   2,541     2,173    2,181    

Total corporate and other debt

  7,809   7,769   1.6%    6,029    5,938    1.6% 

Total AFS debt securities

  51,103   50,482   1.4% 

AFS equity securities

  15   6   — % 

Total AFS securities

  51,118   50,488   1.4%    58,145    56,749    1.6% 

HTM securities

         

U.S. government securities:

         

U.S. Treasury securities:

         

Due within 1 year

  300   300   0.7%    2,027    2,012    1.2% 

After 1 year through 5 years

  4,837   4,831   1.5%    3,952    3,871    1.8% 

After 5 years through 10 years

  2,599   2,472   1.6%    5,112    4,807    1.9% 

After 10 years

  727   653   2.3%    726    637    2.3% 

Total

  8,463   8,256     11,817    11,327    

U.S. agency securities:

            

After 5 years through 10 years

   34    33    1.9% 

After 10 years

  12,501   12,318   2.4%    11,713    11,237    2.6% 

Total

  12,501   12,318     11,747    11,270    

Total U.S. government and agency

      

securities

   23,564    22,597    2.2% 

Corporate and other debt:

         

Commercial mortgage-backed securities:

 

Non-agency:

   

Non-agency CMBS:

      

After 1 year through 5 years

  41   41   3.7%    92    92    3.6% 

After 5 years through 10 years

  83   82   3.8%    217    212    3.9% 

Total

  124   123  

After 10 years

   19    18    4.1% 

Total corporate and other debt

   328    322    3.8% 

Total HTM securities

  21,088   20,697   2.1%    23,892    22,919    2.2% 

Total Investment securities

 $72,206  $71,185   1.6% 

Total investment securities

  $82,037   $79,668    1.8% 
 

 

June 201763March 2018 Form 10-Q70

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

Gross Realized Gains and Losses on Sales of AFS Securities

   Three Months Ended
June 30,		  Six Months Ended
June 30,		 
$ in millions  2017  2016  2017  2016 

Gross realized gains

  $23  $71  $27  $85 

Gross realized (losses)

   (9)   (1)   (11)   (3) 

Total

  $14  $70  $16  $82 

Gross realized gains and losses are recognized in Other revenues in the consolidated income statements.

6. Collateralized Transactions

The Firm enters into securities purchased under agreements to resell, securities sold under agreements to repurchase, securities borrowed and securities loaned transactions to, among other things, acquire securities to cover short positions and settle other securities obligations, to accommodate customers’ needs and to finance its inventory positions. For further discussion of the Firm’s collateralized transactions, see Note 6 to the consolidated financial statements in the 20162017 Form10-K.

Offsetting of Certain Collateralized Transactions

 

  At June 30, 2017 

$ in millions

 Gross
Amounts		  

Amounts

Offset

  Net
Amounts
Presented		  Amounts
Not Offset1		  Net
Amounts		 

Assets

     

Securities purchased under agreements to resell

 $161,364  $(63,956)  $97,408  $(89,731)  $7,677 

Securities borrowed

  140,136   (13,414)   126,722   (121,668)   5,054 

Liabilities

     

Securities sold under agreements to repurchase

 $  114,653  $(63,956)  $50,697  $(44,980)  $5,717 

Securities loaned

  30,276   (13,414)   16,862   (16,632)   230 

Not subject to legally enforceable master netting agreements2

 

Securities purchased under agreements to resell

 

 $7,010 

Securities borrowed

                  1,224 

Securities sold under agreements to repurchase

 

  5,222 

Securities loaned

                  183 
 At December 31, 2016  At March 31, 2018 

$ in millions

 Gross
Amounts		 

Amounts

Offset

 Net
Amounts
Presented		 Amounts
Not Offset1		 Net
Amounts		  Gross
Amounts		 

Amounts

Offset

 Net
Amounts
Presented		 

Amounts

Not

Offset1

 Net
Amounts		 

Assets

          

Securities purchased under agreements to resell

 $  182,888  $    (80,933)  $101,955  $(93,365)  $8,590  $  185,498  $  (105,252)  $80,246  $(74,843)  $  5,403 

Securities borrowed

 129,934  (4,698)  125,236  (118,974)  6,262   149,347   (13,512)     135,835     (132,271)   3,564 

Liabilities

          

Securities sold under agreements to repurchase

 $135,561  $(80,933)  $54,628  $(47,933)  $6,695  $156,827  $(105,252)  $51,575  $(45,207)  $6,368 

Securities loaned

 20,542  (4,698)  15,844  (15,670)  174   27,068   (13,512)   13,556   (13,336)   220 

Not subject to legally enforceable master netting agreements2

 

Net amounts for which master netting agreements are not in place or may not be legally enforceable

Net amounts for which master netting agreements are not in place or may not be legally enforceable

 

Securities purchased under agreements to resell

Securities purchased under agreements to resell

 

 $7,765 

Securities purchased under agreements to resell

 

 $5,212 

Securities borrowed

 2,591   669 

Securities sold under agreements to repurchase

Securities sold under agreements to repurchase

 

 6,500 

Securities sold under agreements to repurchase

 

  5,118 

Securities loaned

 154   194 

  At December 31, 2017 
$ in millions Gross
Amounts		  Amounts
Offset		  Net
Amounts
Presented		  

Amounts

Not

Offset1

  Net
Amounts		 

Assets

     

Securities purchased under agreements to resell

 $  199,044  $  (114,786)  $84,258  $(78,009)  $  6,249 

Securities borrowed

  133,431   (9,421)     124,010     (119,358)   4,652 

Liabilities

     

Securities sold under agreements to repurchase

 $171,210  $(114,786)  $56,424  $(48,067)  $8,357 

Securities loaned

  23,014   (9,422)   13,592   (13,271)   321 

Net amounts for which master netting agreements are not in place or may not be legally enforceable

 

Securities purchased under agreements to resell

 

 $5,687 

Securities borrowed

                  572 

Securities sold under agreements to repurchase

 

  6,945 

Securities loaned

                  307 

 

1.

Amounts relate to master netting agreements that have been determined by the Firm to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance.

2.

Represents amounts within Net Amounts related to transactions that are either not subject to master netting agreements or are subject to such agreements but the Firm has not determined the agreements to be legally enforceable.

For information related to offsetting of derivatives, see Note 4.

Maturities and Collateral Pledged

Gross Secured Financing Balances by Remaining Contractual Maturity

 

 At June 30, 2017  At March 31, 2018 

$ in millions

 

Overnight

and
Open

 

Less
than

30 Days

 30-90
Days		 

Over

90 Days

 Total  

Overnight

and Open

 

Less than

30 Days

 30-90
Days		 

Over

90 Days

 Total 

Securities sold under agreements to repurchase1

 $  29,403  $  26,884  $  18,896  $  39,470  $  114,653 

Securities loaned1

  16,447   1,656   1,833   10,340   30,276 

Gross amount of secured financing included in the offsetting disclosure

 $45,850  $28,540  $20,729  $49,810  $144,929 

Securities sold under agreements to repurchase

 $39,192  $49,822  $27,926  $39,887  $156,827 

Securities loaned

  16,869   603   2,045   7,551   27,068 

Total included in the offsetting disclosure

 $56,061  $50,425  $29,971  $47,438  $183,895 

Trading liabilities— Obligation to return securities received as collateral

  21,481   —   —   —   21,481   18,136   —   610   —   18,746 

Total

 $67,331  $28,540  $20,729  $49,810  $166,410  $74,197  $  50,425  $  30,581  $  47,438  $  202,641 

  At December 31, 2017 
$ in millions 

Overnight

and Open

  

Less than

30 Days

  30-90
Days		  

Over

90 Days

  Total 

Securities sold under agreements to repurchase

 $41,332  $66,593  $28,682  $34,603  $171,210 

Securities loaned

  12,130   873   1,577   8,434   23,014 

Total included in the offsetting disclosure

 $53,462  $67,466  $30,259  $43,037  $194,224 

Trading liabilities— Obligation to return securities received as collateral

  22,555   —   —   —   22,555 

Total

 $76,017  $  67,466  $  30,259  $  43,037  $  216,779 

Gross Secured Financing Balances by Class of Collateral Pledged

$ in millions  

At

March 31,

2018

   

At

December 31,
2017

 

Securities sold under agreements to repurchase

 

U.S. government and agency securities

  $37,361   $43,346 

State and municipal securities

   1,643    2,451 

Other sovereign government obligations

   78,844    87,141 

ABS

   2,204    1,130 

Corporate and other debt

   10,063    7,737 

Corporate equities

   25,893    28,497 

Other

   819    908 

Total

  $      156,827   $171,210 

Securities loaned

          

U.S. government and agency securities

  $6   $81 

Other sovereign government obligations

   14,077    9,489 

Corporate and other debt

   28    14 

Corporate equities

   12,770    13,174 

Other

   187    256 

Total

  $27,068   $23,014 

Total included in the offsetting disclosure

  $183,895   $194,224 

Trading liabilities—Obligation to return securities received as collateral

 

Corporate equities

  $18,746   $22,555 

Total

  $202,641   $216,779 
 

 

March 2018 Form 10-Q  7164  June 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGO

  At December 31, 2016 

$ in millions

 

Overnight

and
Open

  

Less
than

30 Days

  30-90
Days		  

Over

90 Days

  Total 

Securities sold under agreements to repurchase1

 $41,549  $  36,703  $  24,648  $  32,661  $  135,561 

Securities loaned1

  9,487   851   2,863   7,341   20,542 

Gross amount of secured financing included in the offsetting disclosure

 $51,036  $37,554  $27,511  $40,002  $156,103 

Trading liabilities— Obligation to return securities received as collateral

  20,262   —   —   —   20,262 

Total

 $71,298  $37,554  $27,511  $40,002  $176,365 

1.

Amounts are presented on a gross basis, prior to netting in the consolidated balance sheets.

LOGO

Gross Secured Financing Balances by Class of Collateral Pledged

$ in millions  

At

June 30,

2017

   

At

December 31,
2016

 

Securities sold under agreements to repurchase1

 

U.S. government and agency securities

  $28,512   $56,372 

State and municipal securities

   157    1,363 

Other sovereign government obligations

   51,498    42,790 

Asset-backed securities

   1,549    1,918 

Corporate and other debt

   5,083    9,086 

Corporate equities

   26,599    23,152 

Other

   1,255    880 

Total securities sold under agreements to repurchase

  $114,653   $135,561 

Securities loaned1

    

Other sovereign government obligations

   13,599    4,762 

Corporate and other debt

   124    73 

Corporate equities

   16,375    15,693 

Other

   178    14 

Total securities loaned

  $30,276   $20,542 

Gross amount of secured financing included in the offsetting disclosure

  $144,929   $156,103 

Trading liabilities—Obligation to return securities received as collateral

 

Corporate equities

   21,472    20,247 

Other

   9    15 

Total Trading liabilities—Obligation to return securities received as collateral

  $21,481   $20,262 

Total

  $          166,410   $          176,365 

1.

Amounts are presented on a gross basis, prior to netting in the consolidated balance sheets.

Assets Pledged

$ in millions  

At

June 30,

2017

   

At

December 31,

2016

 

Carrying value of trading assets loaned or pledged1

  $42,053   $41,358 

Carrying value of loans pledged (gross of allowance for loan losses)1

   3,876    —   

Total

  $            45,929   $            41,358 

1.

Counterparties do not have the right to sell or repledge the collateral.

The Firm pledges its trading assets and loans to collateralize securities sold under agreements to repurchase, securities loaned, other secured financings and derivatives. Counterparties may or may not have the right to sell or repledge the collateral.

Pledged financial instruments that can be sold or repledged by the secured party are identified as Trading assets (pledged to various parties) in the consolidated balance sheets. Pledged financial instruments that cannot be sold or repledged by the secured party are shown in the previous table.

Carrying Value of Assets Loaned or Pledged without
Counterparty Right to Sell or Repledge		 
$ in millions  

At

March 31,

2018

   

At

December 31,

2017

 

Trading assets

  $      34,590   $31,324 

Loans (gross of allowance for loan losses)

   342    228 

Total

  $34,932   $31,552 

Collateral Received

The Firm receives collateral in the form of securities in connection with securities purchased under agreements to resell, securities borrowed, securities-for-securities transactions, derivative transactions, customer margin loans and securities-based lending. In many cases, the Firm is permitted to sell or repledge these securities held as collateral and use the securities to secure securities sold under agreements to repurchase, to enter into securities lending and derivative transactions or for delivery to counterparties to cover short positions.

The Firm also receives securities as collateral in connection with certainsecurities-for-securities transactions. In instances where the Firm is the lender and permitted to sell or repledge these securities, it reports the fair value of the collateral received and the related obligation to return the collateral included in Trading assets and Trading liabilities, respectively, in its consolidated balance sheets.

Fair Value of Collateral Received with Right to Sell or Repledge

$ in millions  

At

June 30,

2017

   

At

December 31,

2016

 

Collateral received with right to sell or repledge

  $556,203   $561,239 

Collateral that was sold or repledged

             429,029              430,911 

June 2017 Form 10-Q72

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Fair Value of Collateral Received with Right to Sell or Repledge 
$ in millions  

At

March 31,

2018

   

At

December 31,

2017

 

Collateral received with right to sell or repledge

  $      597,886   $599,244 

Collateral that was sold or repledged

   471,985    475,113 

Customer Margin Lending and Other

 

$ in millions  

At

June 30,

2017

   

At

December 31,

2016

   

At

March 31,

2018

   

At

December 31,

2017

 

Net customer receivables representing margin loans

  $27,744   $24,359   $      34,382   $32,112 

The Firm engages inprovides margin lending to clients that allowsarrangements which allow the client to borrow against the value of qualifying securities. Margin loans are included within Customer and other receivables in the consolidated balance sheets. Under these agreements and transactions, the Firm receives collateral, including U.S.

government and agency securities, other sovereign government obligations, corporate and other debt, and corporate equities. Customer receivables generated from margin lending activities are collateralized by customer-owned securities held by the Firm. The Firm monitors required margin levels and established credit terms daily and, pursuant to such guidelines, requires customers to deposit additional collateral, or reduce positions, when necessary.

For a further discussion of the Firm’s margin lending activities, see Note 6 to the consolidated financial statements in the 20162017 Form10-K.

The Firm has additional secured liabilities. For a further discussion of other secured financings, see Note 10.

Cash and Securities Deposited with Clearing Organizations or Segregated

Restricted Cash and Segregated SecuritiesRestricted Cash and Segregated Securities 
$ in millions  

At

June 30,

2017

   

At

December 31,

2016

  

At

March 31,

2018

 

At

December 31,

2017

 

Restricted cash

 $35,291  $34,231 

Segregated securities1

  $20,351   $23,756   18,917  20,549 

Other assets—Cash deposited with clearing organizations or segregated under federal and other regulations or requirements

   30,171    33,979 

Total

  $          50,522   $          57,735  $54,208  $54,780 

 

1.

Securities segregated under federal regulations for the Firm’s U.S. broker-dealers are sourced from Securities purchased under agreements to resell and Trading assets in the consolidated balance sheets.

7. Loans, Lending Commitments and Allowance for Credit Losses

Loans

The Firm’s loans held for investment are recorded at amortized cost, and its loans held for sale are recorded at the lower of cost or fair value in the consolidated balance sheets. For a further description of these loans, refer to Note 7 to the consolidated financial statements in the 20162017 Form10-K. See Note 3 for further information regarding Loans and lending commitments held at fair value. See Note 11 for details of current commitments to lend in the future.

 

Loans by Type 
  At March 31, 2018 
$ in millions Loans Held
for Investment		  Loans Held
for Sale		  Total Loans 

Corporate loans

 $31,903  $12,000  $43,903 

Consumer loans

  26,877   —   26,877 

Residential real estate loans

  26,566   33   26,599 

Wholesale real estate loans

  10,021   1,978   11,999 

Total loans, gross

  95,367   14,011   109,378 

Allowance for loan losses

  (243)   —   (243) 

Total loans, net

 $95,124  $  14,011  $  109,135 

Loans Held for Investment and Held for Sale by Loan Type

 

   At June 30, 2017 
$ in millions  Loans
Held for
Investment		  Loans
Held for
Sale		   Total
Loans		 

Corporate loans

  $26,831  $9,394   $36,225 

Consumer loans

   26,354   —    26,354 

Residential real estate loans

   25,646   60    25,706 

Wholesale real estate loans

   8,482   1,178    9,660 

Total loans, gross

   87,313   10,632    97,945 

Allowance for loan losses

   (306)   —    (306) 

Total loans, net

  $87,007  $10,632   $97,639 
65March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

 

   At December 31, 2016 
$ in millions  Loans
Held for
Investment		  Loans
Held for
Sale		   Total
Loans		 

Corporate loans

  $25,025  $10,710   $35,735 

Consumer loans

   24,866   —    24,866 

Residential real estate loans

   24,385   61    24,446 

Wholesale real estate loans

   7,702   1,773    9,475 

Total loans, gross

   81,978   12,544    94,522 

Allowance for loan losses

   (274)   —    (274) 

Total loans, net

  $81,704  $12,544   $94,248 

Loans toNon-U.S. Borrowers

  At December 31, 2017 
$ in millions Loans Held
for Investment		  Loans Held
for Sale		  Total
Loans		 

Corporate loans

 $29,754  $9,456  $39,210 

Consumer loans

  26,808   —   26,808 

Residential real estate loans

  26,635   35   26,670 

Wholesale real estate loans

  9,980   1,682   11,662 

Total loans, gross

  93,177   11,173   104,350 

Allowance for loan losses

  (224)   —   (224) 

Total loans, net

 $92,953  $  11,173  $  104,126 

 

$ in millions  

At
June 30,

2017

   At
December 31,
2016		 

Loans, net of allowance

  $8,725   $9,388 

Loans by Interest Rate Type

Loans by Interest Rate Type        
$ in millions  

At

March 31,
2018

   At
December 31,
2017		 

Fixed

  $14,252   $13,339 

Floating or adjustable

   94,883    90,787 

Total loans, net

  $109,135   $104,126 

 

$ in millions  

At
June 30,

2017

   At
December 31,
2016		 

Fixed

  $12,696   $11,895 

Floating or adjustable

  $84,943   $82,353 
Loans to Non-U.S. Borrowers
$ in millions

At

March 31,
2018

At
December 31,
2017

Loans, net

$16,110$9,977

Credit Quality

For a further discussion about the Firm’s evaluation of credit transactions and monitoring and credit quality indicators, see Note 7 to the consolidated financial statements in the 2016 Form10-K.

73June 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Loans Held for Investment before Allowance by Credit Quality

  At June 30, 2017 

$ in millions

 Corporate  Consumer  

Residential

Real
Estate

  

Wholesale

Real
Estate

  Total 

Pass

 $25,321  $26,351  $25,598  $7,975  $85,245 

Special mention

  416   3   —   192   611 

Substandard

  1,025   —   48   315   1,388 

Doubtful

  69   —   —   —   69 

Loss

  —   —   —   —   — 

Total

 $26,831  $26,354  $25,646  $8,482  $87,313 

  At December 31, 2016 
$ in millions Corporate  Consumer  

Residential

Real
Estate

  

Wholesale

Real
Estate

  Total 

Pass

 $23,409  $24,853  $24,345  $7,294  $79,901 

Special mention

  288   13   —   218   519 

Substandard

  1,259   —   40   190   1,489 

Doubtful

  69   —   —   —   69 

Loss

  —   —   —   —   — 

Total

 $25,025  $24,866  $24,385  $7,702  $81,978 

Allowance for Credit Losses and Impaired Loans

Foras well as factors considered by the Firm in determining the allowance for loan losses and impairments, see Notes 2 and 7 to the consolidated financial statements in the 20162017 Form10-K.

Impaired Loans Before Allowance by Product Type

 

   At June 30, 2017 
$ in millions  Corporate   

Residential

Real
Estate

   Total 

With allowance

  $141   $—   $141 

Without allowance1

   122    35    157 

Unpaid principal balance2

   273    36    309 
   At December 31, 2016 
$ in millions  Corporate   

Residential

Real
Estate

   Total 

With allowance

  $104   $—   $104 

Without allowance1

   206    35    241 

Unpaid principal balance2

   316    38    354 
Loans Held for Investment before Allowance by Credit
Quality		 
  At March 31, 2018 
$ in millions Corporate  Consumer  Residential
Real Estate		  Wholesale
Real Estate		  Total 

Pass

 $31,327  $26,872  $26,492  $9,126  $93,817 

Special mention

  162   5   —   460   627 

Substandard

  405   —   74   435   914 

Doubtful

  9   —   —   —   9 

Loss

  —   —   —   —   — 

Total

 $31,903  $  26,877  $  26,566  $  10,021  $  95,367 

  At December 31, 2017 
$ in millions Corporate  Consumer  

Residential

Real Estate

  

Wholesale

Real Estate

  Total 

Pass

 $29,166  $26,802  $26,562  $9,480  $92,010 

Special mention

  188   6   —   200   394 

Substandard

  393   —   73   300   766 

Doubtful

  7   —   —   —   7 

Loss

  —   —   —   —   — 

Total

 $29,754  $  26,808  $  26,635  $  9,980  $  93,177 

The following loans and lending commitments have been evaluated for a specific allowance. All remaining loans and lending commitments are assessed under the inherent allowance methodology.

Impaired Loans and Lending Commitments before
Allowance		 
   At March 31, 2018 
$ in millions  Corporate   Residential
Real Estate		   Total 

Loans

      

With allowance

  $15   $—   $15 

Without allowance1

   69    49    118 

UPB

   95    51    146 

Lending Commitments

      

Without allowance1

  $            226   $—   $            226 
   At December 31, 2017 
$ in millions  Corporate   Residential
Real Estate		   Total 

Loans

      

With allowance

  $16   $—   $16 

Without allowance1

   118    45    163 

UPB

   146    46    192 

Lending Commitments

      

Without allowance1

  $199   $—   $199 

 

1.

At June 30, 2017March 31, 2018 and December 31, 2016,2017, no allowance was recorded for these loans and lending commitments as the present value of the expected future cash flows (or, alternatively, the observable market price of the loaninstrument or the fair value of the collateral held) equaled or exceeded the carrying value.

2.

The impaired loans unpaid principal balance differs from the aggregate amount of impaired loan balances with and without allowance due to various factors, including charge-offs and net deferred loan fees or costs.

Select Loan Information by Region

 

   At June 30, 2017 
$ in millions  Americas   EMEA   Asia-
Pacific		   Total 

Impaired loans

  $279   $9   $10   $298 

Allowance for loan losses

   274    30    2    306 
   At December 31, 2016 
$ in millions  Americas   EMEA   Asia-
Pacific		   Total 

Impaired loans

  $320   $9   $16   $345 

Allowance for loan losses

   245    28    1    274 

EMEA—Europe, Middle East and Africa

Allowance for Credit Losses on Lending Activities

Loans—Current Year Period

Allowance for Loan Losses Rollforward

Impaired Loans and Allowance by Region    
  At March 31, 2018 
$ in millions Americas  EMEA  Asia  Total 

Impaired loans

 $          129  $—  $4  $133 

Allowance for loan losses

  199  $          42  $2  $243 
  At December 31, 2017 
$ in millions Americas  EMEA  Asia  Total 

Impaired loans

 $160  $9  $          10  $          179 

Allowance for loan losses

  194   27   3   224 

 

$ in millions 

Corporate

  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		  Total 

December 31, 2016

 $195  $4  $20  $55  $274 

Recoveries

  1   —   —   —   1 

Provision for (release of) loan losses1

  14   —   1   14   29 

Other

  1   —   —   1   2 

June 30, 2017

 $211  $4  $21  $70  $306 

Loan Loss Allowance by Impairment Methodology

   At June 30, 2017 
$ in
millions		  Corporate   Consumer   

Residential

Real
Estate

   Wholesale
Real
Estate		   Total 

Inherent

  $142   $4 �� $21   $70   $237 

Specific

   69    —    —    —    69 

Total

  $211   $4   $21   $70   $306 

Loans by Impairment Methodology2

  At June 30, 2017 
$ in millions Corporate  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		  Total 

Inherent

 $26,568  $26,354  $25,611  $8,482  $87,015 

Specific

  263   —   35   —   298 

Total

 $26,831  $26,354  $25,646  $8,482  $87,313 

1.

The Firm recorded provisions of $7 million for loan losses for the current quarter.

2.

Loan balances are gross of the allowance for loan losses.

June 2017 Form 10-Q74

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Loans—Prior Year Period

Allowance for Loan Losses Rollforward

$ in millions 

Corporate

  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		  Total 

December 31, 2015

 $166  $5  $17  $37  $225 

Provision for (release of) loan losses1

  116   (1)   1   12   128 

Other2

  (30)   —   —   —   (30) 

June 30, 2016

 $252  $4  $18  $49  $323 

Loan Loss Allowance by Impairment Methodology

  At June 30, 2016 
$ in millions Corporate  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		  Total 

Inherent

 $147  $4  $18  $49  $218 

Specific

  105   —   —   —   105 

Total

 $252  $4  $18  $49  $323 

Loans by Impairment Methodology3

  At June 30, 2016 
$ in millions Corporate  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		  Total 

Inherent

 $23,604  $23,337  $22,638  $7,415  $76,994 

Specific

  582   —   30   —   612 

June 30, 2016

 $24,186  $23,337  $22,668  $7,415  $77,606 

1.

The Firm recorded provisions of $16 million for loan losses for the prior year quarter.

2.

Amount includes the impact related to the transfer to loans held for sale and foreign currency translation adjustments.

3.

Loan balances are gross of the allowance for loan losses.

Commitments—Current Year Period

Allowance for Lending Commitments Rollforward

$ in millions Corporate  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		  Total 

December 31, 2016

 $185  $1  $—  $4  $190 

Provision for (release of) lending commitments1

  (3)   —   —   (1)   (4) 

June 30, 2017

 $182  $1  $—  $3  $186 

Lending Commitments Allowance by Impairment Methodology

  At June 30, 2017 
$ in millions Corporate  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		  Total 

Inherent

 $179  $1  $—  $3  $183 

Specific

  3   —   —   —   3 

Total

 $182  $1  $—  $3  $186 

Lending Commitments by Impairment Methodology2

  At June 30, 2017 
$ in millions Corporate  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		  Total 

Inherent

 $62,339  $6,005  $346  $409  $69,099 

Specific

  229   —   —   —   229 

Total

 $62,568  $6,005  $346  $409  $69,328 

1.

The Firm recorded a release of $7 million for commitments for the current quarter.

2.

Lending commitments are gross of the allowance for lending commitments.

Commitments—Prior Year Period

Allowance for Lending Commitments Rollforward

$ in millions Corporate  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		  Total 

December 31, 2015

 $180  $1  $—  $4  $185 

Provision for lending commitments1

  1   —   —   2   3 

Other

  —   (1)   —   —   (1) 

June 30, 2016

 $181  $—  $—  $6  $187 

Lending Commitments Allowance by Impairment Methodology

  At June 30, 2016 
$ in millions Corporate  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		  Total 

Inherent

 $173  $—  $—  $6  $179 

Specific

  8   —   —   —   8 

Total

 $181  $—  $—  $6  $187 

75June 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Lending Commitments by Impairment Methodology2

  At June 30, 2016 
$ in millions Corporate  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		  Total 

Inherent

 $63,120  $5,264  $327  $496  $69,207 

Specific

  64   —   —   —   64 

Total

 $63,184  $5,264  $327  $496  $69,271 

1.

The Firm recorded a release of $13 million for commitments for the prior year quarter.

2.

Lending commitments are gross of the allowance for lending commitments.

Troubled Debt Restructurings    

Troubled Debt Restructurings 
$ in millions  At
March 31,
2018		   At
December 31,
2017		 

Loans

  $              52   $51 

Lending commitments

   25    28 

Allowance for loan losses and lending commitments

   6    10 

Impaired loans and lending commitments classified as held for investment within corporate loans include troubled debt restructuringsTDRs as shown in the followingprevious table.

Troubled Debt Restructurings

$ in millions  

At June 30,

2017

   At December 31,
2016		 

Loans

  $58   $67 

Lending commitments

   21    14 

Allowance for loan losses

   8    — 

These restructurings typically include modifications of interest rates, collateral requirements, other loan covenants and payment extensions.

Employee Loans

March 2018 Form 10-Q66

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Allowance for Loan Losses Rollforward    
$ in millions Corporate  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		  Total 

December 31, 2017

 $126  $4  $24  $70  $224 

Provision (release)

  6   —   (1)   14   19 

Other

  (1)   —   —   1   — 

March 31, 2018

 $131  $4  $23  $85  $243 

Inherent

 $126  $4  $23  $85  $            238 

Specific

  5   —   —   —   5 

$ in millions Corporate  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		  Total 

December 31, 2016

 $195  $4  $20  $55  $274 

Recoveries

  1   —   —   —   1 

Provision (release)

  13   —   —   9   22 

March 31, 2017

 $209  $4  $20  $64  $297 

Inherent

 $142  $4  $20  $64  $            230 

Specific

  67   —   —   —   67 

Allowance for Lending Commitments Rollforward 
$ in millions Corporate  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		  Total 

December 31, 2017

 $194  $1  $—  $3  $198 

Provision (release)

  7   —   —   —   7 

Other

  —   —   —   —   — 

March 31, 2018

 $201  $1  $—  $3  $            205 

Inherent

 $200  $1  $—  $3  $204 

Specific

  1   —   —   —   1 

$ in millions Corporate  Consumer  

Residential

Real
Estate

  Wholesale
Real
Estate		  Total 

December 31, 2016

 $185  $1  $—  $4  $190 

Provision (release)

  3   —   —   —   3 

March 31, 2017

 $188  $1  $—  $4  $193 

Inherent

 $186  $1  $—  $4  $            191 

Specific

  2   —   —   —   2 

Employee Loans 
$ in millions  At March 31,
2018		   At
December 31,
2017		 

Balance

  $3,687   $4,185 

Allowance for loan losses

   (75)    (77) 

Balance, net

  $3,612   $4,108 

Repayment term range, in years

               1 to 20    1 to 20 

Employee loans are granted in conjunction with a program established in the Wealth Management business segment to retain and recruit certain employees.employees, are full recourse and generally require periodic repayments. These loans are recorded in Customer and other receivables in the consolidated balance sheets. These loans are full recourse, generally require periodic payments and have repayment terms ranging from 1 to 20 years. The Firm establishes an allowance for loan amounts it does not consider recoverable, and the related provision is recorded in Compensation and benefits expense.

Employee Loans

$ in millions  

At June 30,

2017

  At December 31,
2016		 

Balance

  $4,323  $4,804 

Allowance for loan losses

   (83)   (89) 

Balance, net

  $4,240  $4,715 

8. Equity Method Investments

Overview

The Firm’sEquity method investments accounted for under the equity method of accounting (see Note 1 to the consolidated financial statementsother than certain investments in the 2016 Form10-K)funds are summarized below and included in Other assets—Other investmentsassets in the consolidated balance sheets. Income (loss) from equity method investments issheets with related income or loss included in Other revenues in the consolidated income statements. See the Measured Based on Net Asset Value table in Note 3 for the carrying value of the Firm’s fund interests, which are comprised of general and limited partnership interests, as well as any related performance fees in the form of carried interest.

Equity Method Investment Balances

 

$ in millions  At June 30,
2017		   At December 31,
2016		   

At

March 31, 2018

   

At

December 31, 2017

 

Investments

  $2,760   $2,837   $                    2,662   $                    2,623 

 

 Three Months Ended
June 30,		 Six Months Ended
June 30,		   Three Months Ended March 31, 
$ in millions 2017 2016 2017 2016           2018                   2017         

Income (loss)

 $(9)  $(14)  $—  $1   $50   $              9 

Japanese Securities Joint Venture

Included in the equity method investments is the Firm’s 40% voting interest (“40% interest”) in Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (“MUMSS”). Mitsubishi UFJ Financial Group, Inc. (“MUFG”) holds a 60% voting interest. The Firm accounts for its equity method investment in MUMSS within the Institutional Securities business segment. The Firm records income from its 40% interest in MUMSS within Other revenues in the consolidated income statements.

 

  Three Months Ended
June 30,		  Six Months Ended
June 30,		 
$ in millions 2017  2016  2017  2016 

Income from investment in MUMSS

 $23  $23  $71  $57 

In addition to MUMSS, the Firm held other equity method investments that were not individually significant.

9. Deposits

Deposits

         
$ in millions  At June 30,
2017		   At December 31,
2016		 

Savings and demand deposits

  $141,087   $154,559 

Time deposits1

   3,826    1,304 

Total2

  $144,913   $155,863 

Deposits subject to FDIC insurance

  $120,991   $127,992 

Time deposits that equal or exceed the FDIC insurance limit

  $2   $46 
  Three Months Ended March 31, 
$ in millions         2018                  2017         

Income from investment in MUMSS

 $56  $                    48 
 

 

June 201767March 2018 Form 10-Q76

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

Interest Bearing9. Deposits

Deposits

$ in millions At March 31,
2018		  At December 31,
2017		 

Savings and demand deposits

 $138,358  $144,487 

Time deposits

  22,066   14,949 

Total

 $160,424  $159,436 

Deposits subject to FDIC insurance

 $            129,968  $            127,017 

Time deposits that equal or exceed the FDIC insurance limit

 $10  $38 

Time Deposit Maturities at June 30, 2017

 

$ in millions  Savings and
Demand Deposits		   Time
Deposits1		 

Demand

  $141,047   $— 

2017

   —    2,925 

2018

   —    672 

2019

   —    105 

2021

   —    8 

Thereafter

   —    116 

FDIC—Federal

Deposit Insurance Corporation

1.

Certain time deposit accounts are carried at fair value under the fair value option (see Note 3).

2.

Deposits were primarily held in the U.S.

The vast majority of deposits in Morgan Stanley Bank, N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”) are sourced from Wealth Management customer accounts.

$ in millions  

At

March 31, 2018

 

2018

  $13,164 

2019

   4,803 

2020

   2,257 

2021

   747 

2022

   418 

Thereafter

   677 

10. Long-Term Borrowings and Other Secured Financings

Long-Term Borrowings

 

$ in millions  At June 30,
2017		   At December 31,
2016		   

At

March 31,

2018

   

At

December 31,

2017

 

Original maturities of one year or less

  $1,256   $1,519 

Original maturities greater than one year

    

Senior

  $173,761   $154,472   $183,712   $180,835 

Subordinated

   10,351    10,303    9,996    10,228 

Total

  $184,112   $164,775   $193,708   $        191,063 

Weighted average stated maturity, in years

   6.5    5.9 

Total borrowings

  $        194,964   $192,582 

Weighted average stated maturity, in years1

   6.6    6.6 

During the current year period and prior year period, the Firm issued notes with a principal amount of approximately $33.5 billion and $20.6 billion, respectively, and approximately $17.8 billion and $15.9 billion, respectively, in aggregate long-term borrowings matured or were retired.

1.

Includes only borrowings with original maturities greater than one year.

Other Secured Financings

Other secured financings include the liabilities related to pledged commodities, certain ELNs, transfers of financial assets that are accounted for as financings rather than sales, consolidated VIEs where the Firm is deemed to be the primary beneficiary pledged commodities, certain equity-linked notes and other secured borrowings. These liabilities are generally payable from the cash flows of the related assets accounted for as Trading assets.Seeassets. See Note 12 for further information on Otherother secured financings related to VIEs and securitization activities.

Other Secured Financings by Original Maturity and Type

 

$ in millions  At June 30,
2017		   At December 31,
2016		   

At

March 31,

2018

   

At

December 31,

2017

 

Secured Financings

    

Original maturities:

        

Greater than one year

  $11,005   $9,404   $        8,159   $8,685 

One year or less

   4,996    1,429    1,406    2,034 

Failed sales1

   641    285    710    552 

Total

  $16,642   $11,118   $            10,275   $            11,271 

 

1.

For more information on failed sales, see Note 12.

11. Commitments, Guarantees and Contingencies

Commitments

The Firm’s commitments are summarized in the following table by years to maturity. Since commitments associated with these instruments may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.

 

   Years to Maturity at June 30, 2017     
$ in millions  Less
than 1		   1-3   3-5   Over 5   Total 

Lending:

          

Corporate1

  $13,478   $28,417   $45,187   $3,806   $90,888 

Consumer

   5,998    4    —    4    6,006 

Residential real estate

   35    25    84    238    382 

Wholesale real estate

   232    266    8    67    573 

Forward-starting secured financing receivables2

   70,023    —    —    —    70,023 

Underwriting

   1,024    —    —    —    1,024 

Investment activities

   569    197    22    259    1,047 

Letters of credit and other financial guarantees

   156    1    1    41    199 

Total

  $91,515   $28,910   $45,302   $4,415   $170,142 

1.

Due to the nature of the Firm’s obligations under the commitments, these amounts include certain commitments participated to third parties of $6.2 billion.

2.

Represents forward-starting securities purchased under agreements to resell and securities borrowed agreements, of which $59.8 billion settled within three business days.

  Years to Maturity at March 31, 2018 
$ in millions 

Less

than 1

  1-3  3-5  Over 5  Total 

Lending:

     

Corporate

 $14,447  $43,086  $46,618  $7,454  $111,605 

Consumer

  6,598   —   8   3   6,609 

Residential real estate

  5   64   33   259   361 

Wholesale real estate

  183   833   25   —   1,041 

Forward-starting secured financing receivables

  85,399   —   —   1,177   86,576 

Underwriting

  344   —   —   —   344 

Investment activities

  527   96   62   230   915 

Letters of credit and other financial guarantees

  195   —   1   41   237 

Total

 $  107,698  $  44,079  $  46,747  $  9,164  $  207,688 

Corporate lending commitments participated to third parties

 

 $6,877 

Forward-starting secured financing receivables settled within three business days

 

 $72,754 

For a further description of these commitments, refer to Note 12 to the consolidated financial statements in the 20162017 Form 10-K.

 

 

March 2018 Form 10-Q  7768  June 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

Guarantees

Obligations under Guarantee Arrangements at June 30, 2017March 31, 2018

 

 Maximum Potential Payout/Notional  Maximum Potential Payout/Notional 
 Years to Maturity     Years to Maturity 
$ in millions Less
than 1		 1-3 3-5 Over 5 Total  Less
than 1		 1-3 3-5 Over 5 Total 

Credit derivatives

 $133,654  $92,988  $96,431  $27,743  $350,816  $81,715  $69,986  $58,118  $39,251  $249,070 

Other credit contracts

  27   —   13   129   169   —   2   —   127   129 

Non-credit derivatives

  1,560,514   918,800   331,073   572,502   3,382,889   1,903,988   1,196,331   379,171   639,749   4,119,239 

Standby letters of credit and other financial guarantees issued1

  779   856   1,147   5,153   7,935   806   1,114   1,272   4,903   8,095 

Market value guarantees

  39   65   70   —   174   40   62   58   —   160 

Liquidity facilities

  3,229   —   —   —   3,229   3,367   —   —   —   3,367 

Whole loan sales guarantees

  —   —   2   23,278   23,280   —   1   1   23,223   23,225 

Securitization representations and warranties

  —   —   —   57,547   57,547   —   —   —   60,861   60,861 

General partner guarantees

  34   44   313   13   404   33   52   324   27   436 

 

$ in millions  Carrying
Amount
(Asset)/
Liability		 Collateral/
Recourse		   Carrying
Amount
(Asset)/
Liability		   Collateral/
Recourse		 

Credit derivatives2

  $(1,730)  $—   $(1,587)   $— 

Other credit contracts

   4   —    20    — 

Non-credit derivatives2

   45,076   —    45,314    — 

Standby letters of credit and other financial guarantees issued1

   (186)   6,560    (182)    6,588 

Market value guarantees

   1   4    —    — 

Liquidity facilities

   (5)   5,503    (5)    5,475 

Whole loan sales guarantees

   8   —    8    — 

Securitization representations and warranties

   90   —    91    — 

General partner guarantees

   44   —    59    — 

 

1.

These amounts include certain issued standby letters of credit participated to third parties, totaling $0.7 billion of notional and collateral/recourse, due to the nature of the Firm’s obligations under these arrangements.

2.

Carrying amounts of derivative contracts are shown on a gross basis prior to cash collateral or counterparty netting. For further information on derivative contracts, see Note 4.

The Firm also has obligations under certain guarantee arrangements, including contracts and indemnification agreements, that contingently require the Firm to make payments to the guaranteed party based on changes in an underlying measure (such as an interest or foreign exchange rate, security or commodity price, an index, or the occurrence ornon-occurrence of a specified event) related to an asset, liability or equity security of a guaranteed party. Also included as guarantees are contracts that contingently require the Firm to make payments to the guaranteed party based on another entity’s failure to perform under an agreement, as well as indirect guarantees of the indebtedness of others.

In certain situations, collateral may be held by the Firm for those contracts that meet the definition of a guarantee. Generally, the Firm sets collateral requirements by counterparty so that the collateral covers various transactions and products and is not allocated specifically to individual contracts. Also, the Firm may recover amounts related to the underlying asset delivered to the Firm under the derivative contract.

For more information on the nature of the obligation and related business activity for market value guarantees, liquidity facilities, whole loan sales guarantees and general partner guarantees related to certain investment management funds, as well as the other products in the previous table, see Note 12 to the consolidated financial statements in the 20162017 Form10-K.

Other Guarantees and Indemnities

In the normal course of business, the Firm provides guarantees and indemnifications in a variety of transactions. These provisions generally are standard contractual terms. Certain of these guarantees and indemnifications related to indemnities, exchange/clearinghouse member guarantees and merger and acquisition guarantees are described in Note 12 to the consolidated financial statements in the 20162017 Form10-K.

In addition, in the ordinary course of business, the Firm guarantees the debt and/or certain trading obligations (including obligations associated with derivatives, foreign exchange contracts and the settlement of physical commodities) of certain subsidiaries. These guarantees generally are entity or product specific and are required by investors or trading counterparties. The activities of the Firm’s subsidiaries covered by these guarantees (including any related debt or trading obligations) are included in the consolidated financial statements.

Finance Subsidiary

The Parent Company fully and unconditionally guarantees the securities issued by Morgan Stanley Finance LLC, a 100%-owned finance subsidiary.

Contingencies

Legal. 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 litiga-

June 2017 Form 10-Q78

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

tion,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

69March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

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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. These actions have included, but are not limited to, residential mortgage and credit-crisis relatedcredit crisis-related matters.

Over the last several years, the level of litigation and investigatory activity (both formal and informal) by governmental 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 any individual proceedings where the Firm believes a material loss to be reasonably possible and reasonably estimable, there can be no assurance that material losses will not be incurred from claims that have not yet been asserted or are not yet determined to be probable or possible and reasonably estimable losses.

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 consolidated financial statements and the Firm can reasonably estimate the amount of that loss, the Firm accrues the estimated loss by a charge to income.

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. In addition, even where a loss is possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss contingency, it is not always possible to reasonably estimate the size of the possible loss or range of loss.

For certain legal proceedings and investigations, the Firm cannot reasonably estimate such losses, particularly for proceedings and investigations where the factual record is being developed or contested or where plaintiffs or governmentalgovernment 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 range of loss can be reasonably estimated for a proceeding or investigation.

For certain other legal proceedings and investigations, the Firm can estimate reasonably possible losses, additional

losses, ranges of loss or ranges of additional loss in excess of amounts accrued, but does not believe, based on current knowledge and after consultation with counsel, that such losses will have a material adverse effect on the Firm’s consolidated financial statements as a whole, other than the matters referred to in the following paragraphs.

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 alal.., 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 credit default swapCDS 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 credit default swapCDS with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the credit default swap,CDS, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied the Firm’s motion to dismiss the complaint. Based on currently available information, the Firm believes it could incur a loss in this action of up to approximately $240 million pluspre- and post-judgment interest, fees and costs.

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 styledMorganStanley Mortgage Loan Trust 2006-14SL, et al. v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital 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 trusts, which had original principal balances of approximately $354 million and $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 August 16, 2016, the Firm moved for summary judgment and the plaintiffs moved for partial summary judgment. Based on currently available informa-

79June 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

tion, the Firm believes that it could incur a loss in this action of up to approximately $527 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, pluspre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

On May 3, 2013, plaintiffs inDeutscheZentral-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 $644$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 Firm’s motion to dismiss the complaint. On June 20, 2017 the Appellate Division First Department, affirmed the lower court’s June 10, 2014 order. On July 28,October 3, 2017, the Firm filed aAppellate Division denied the Firm’s motion for leave to appeal that decision to the New York Court of Appeals. At March 25, 2017,2018, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $237$211 million, and the certificates had incurred

March 2018 Form 10-Q70

Notes to Consolidated Financial Statements

(Unaudited)

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actual losses of approximately $87$89 million. Based on currently available information, the Firm believes it could incur a loss in this action up to the difference between the $237$211 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Firm, or upon sale, pluspre- and post-judgment interest, fees and costs. The Firm may be entitled to be indemnified for some of these losses.

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, asSuccessor-by-Merger to Morgan Stanley MortgageCapital Inc. andGreenPoint Mortgage Funding,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 August 22,

2013, the Firm filed a motion to dismiss the complaint, which was granted in part and denied in part on November 24, 2014. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $240 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, pluspre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

On December 30, 2013, Wilmington Trust Company, in its capacity as trustee for Morgan Stanley Mortgage LoanTrust 2007-12, filed a complaint against the Firm styledWilmington Trust Company v. MorganStanley 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 warranties. The complaint seeks, among other relief, unspecified damages, attorneys’ fees, interest and costs. On February 28, 2014, the defendants filed a motion to dismiss the complaint, which was granted in part and denied in part on June 14, 2016. The plaintiff filed a notice of appeal of that order on August 17, 2016, and the appeal was fully briefed on May 5, 2017. On July 11, 2017, the Appellate Division First Department affirmed in part and reversed in part the trial court’s order that granted 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. Based on currently available information, the Firm believes

that it could incur a loss in this action of up to approximately $152 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus attorney’s fees, costs and interest, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

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 Companyv. Morgan Stanley Mortgage Capital Holdings LLC, pending in the United States District Court for the Southern District of New York. 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 May 8, 2017, the Firm moved for summary judgment. Based on currently available

June 2017 Form 10-Q80

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

information, the Firm believes that it could incur a loss in this action of up to approximately $292 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, pluspre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

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 court’s order.denial of its motion to dismiss the complaint and perfected its appeal on November 22, 2017. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $126 million, the unpaid balance of these notes, pluspre- and post-judgment interest, fees and costs, as well as claim payments that FGIC has made and will make in the future.

On September 23, 2014, 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.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 court’s order.order and perfected its appeal on November 22, 2017. Based on currently available information, the Firm believes

71March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

that it could incur a loss in this action of up to approximately $277 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase

demands from a certificate holder and FGIC that the Firm did not repurchase, pluspre- and post-judgment interest, fees and costs, as well as claim payments that FGIC has made and will make in the future. In addition, plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

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. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $277 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands from a certificate holder and a monoline insurer that the Firm did not repurchase, pluspre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

In matters styledCase number 15/3637 andCase number 15/4353,, the Dutch Tax Authority (“Dutch Authority”) is challenging, in the Dutch Tax TribunalDistrict Court in Amsterdam, the priorset-off by the Firm of approximately €124 million (plus(approximately $152 million) plus accrued interest)interest of withholding tax credits against the Firm’s corporation tax liabilities for the tax years 2007 to 2013. The Dutch Authority alleges that the Firm was not entitled to receive the withholding tax credits on the basis, inter alia, that a Firm subsidiary did not hold legal title to certain securities subject to withholding tax on the relevant dates. The Dutch Authority has also alleged that the Firm failed to provide certain information to the Dutch Authority and keep adequate books

and records. The Firm does not agree with these allegations. A hearing regardingtook place in this matter has been scheduled on September 19, 2017. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately €124 million (plus(approximately $152 million) plus accrued interest).interest. On April 26, 2018, the District Court in Amsterdam issued a decision in matters styledCase number 15/3637 andCase number 15/4353 dismissing the Dutch Authority’s claims. The Dutch Authority has until June 7, 2018 to file any appeal.

81June 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

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12. Variable12.Variable Interest Entities and Securitization Activities

Overview

For a discussion of the Firm’s VIEs, the determination and structure of VIEs and securitization activities, see Note 13 to the consolidated financial statements in the 20162017 Form10-K.

Consolidated VIEs

Assets and Liabilities by Type of Activity

Assets and Liabilities by Type of Activity 
             
  At March 31, 2018  At December 31, 2017 
$ in millions VIE Assets  VIE Liabilities  VIE Assets  VIE Liabilities 

OSF

 $361  $1  $378  $3 

MABS1

  234   197   249   210 

Other2

  2,718   1,131   1,174   250 

Total

 $3,313  $1,329  $1,801  $463 

   At June 30, 2017   At December 31, 2016 

$ in millions

  

VIE

Assets

   VIE
Liabilities		   

VIE

Assets

   VIE
Liabilities		 

Credit-linked notes

  $200   $—   $501   $— 

Other structured financings

   426    5    602    10 

Asset-backed securitizations1

   34    22    397    283 

Other2

   1,164    258    910    25 

Total

  $1,824   $285   $2,410   $318 

OSF—Other structured financings

1.

Asset-backed securitizationsAmounts include transactions backed by residential mortgage loans, commercial mortgage loans and other types of assets, including consumer or commercial assets. The value of assets is determined based on the fair value of the liabilities and the interests owned by the Firm in such VIEs becauseas the fair values for the liabilities and interests owned are more observable.

2.

Other primarily includes investment funds, certain operating entities, investment fundsCLOs and structured transactions. At March 31, 2018, Other includes the consolidation of a fund managed by Mesa West Capital, LLC, which was acquired in the current quarter.

March 2018 Form 10-Q72

Notes to Consolidated Financial Statements

(Unaudited)

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Assets and Liabilities by Balance Sheet Caption

 

  At March 31,   At December 31, 
$ in millions  At June 30,
2017		   At December 31,
2016		   2018   2017 

Assets

        

Cash and cash equivalents:

    

Cash and due from banks

  $87   $74   $103   $69 

Restricted cash

   223    222 

Trading assets at fair value

   785    1,295    2,345    833 

Customer and other receivables

   12    13    21    19 

Goodwill

   18    18    18    18 

Intangible assets

   166    177    149    155 

Other assets

   756    833    454    485 

Total

  $1,824   $2,410   $3,313   $1,801 

Liabilities

        

Other secured financings at fair value

  $249   $289 

Other secured financings

  $1,305   $438 

Other liabilities and accrued expenses

   36    29    24    25 

Total

  $285   $318   $1,329   $463 

Consolidated VIE assets and liabilities are presented in the previous tables after intercompany eliminations. TheMost assets owned by many consolidated VIEs cannot be removed unilaterally by the Firm and are not generally available to the Firm. TheMost related liabilities issued by many consolidated VIEs are

non-recourse to the Firm. In certain other consolidated VIEs, the Firm either has the unilateral right to remove assets or provides additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.

In general, the Firm’s exposure to loss in consolidated VIEs is limited to losses that would be absorbed on the VIE’sVIE net assets recognized in its financial statements, net of amounts absorbed by third-party variable interest holders.

Noncontrolling Interests and Additional Maximum Exposure to LossesSelect Information Related to Consolidated VIEs

 

  At March 31,   At December 31, 
$ in millions  At June 30,
2017		   At December 31,
2016		   2018   2017 

Noncontrolling interests

  $206   $228   $                494   $189 

Maximum exposure to losses1

   —    78 

1.

Primarily related to certain derivatives, commitments, guarantees and other forms of involvement not recognized in the consolidated financial statements.

Non-consolidated VIEs

The following tables include allnon-consolidated VIEs in which the Firm has determined that its maximum exposure to loss is greater than specific thresholds or meets certain other criteria and exclude exposure to loss from liabilities due to immateriality. Most of the VIEs included in the following tables are sponsored by unrelated parties; the Firm’s involvement generally is the result of its secondary market-making activities, securities held in its Investment securities portfolio (see Note 5) and certain investments in funds.

Non-consolidated VIE Assets, Maximum and Carrying Value of Exposure to Loss

Non-consolidated VIEs 
  At March 31, 2018 
$ in millions MABS  CDO  MTOB  OSF  Other 

VIE assets (UPB)

 $    76,854  $    14,445  $    5,439  $    3,307  $    19,959 

Maximum exposure to loss

 

  

Debt and equity interests

 $9,075  $2,163  $81  $1,589  $4,654 

Derivative and other contracts

  —   —   3,367   —   2,317 

Commitments, guarantees and other

  882   902   —   161   327 

Total

 $9,957  $3,065  $3,448  $1,750  $7,298 

Carrying value of exposure to loss—Assets

 

  

Debt and equity interests

 $9,075  $2,163  $51  $1,185  $4,654 

Derivative and other contracts

  —   —   5   —   111 

Total

 $9,075  $2,163  $56  $1,185  $4,765 

 

 At June 30, 2017  At December 31, 2017 
$ in millions MABS CDO MTOB OSF Other  MABS CDO MTOB OSF Other 

VIE assets (unpaid principal balance)

 $78,818  $8,598  $5,337  $3,526  $34,823 

VIE assets (UPB)

 $    89,288  $    9,807  $    5,306  $    3,322  $    31,934 

Maximum exposure to loss

Maximum exposure to loss

 

  

Maximum exposure to loss

 

   

Debt and equity interests

 $8,482  $1,703  $52  $1,503  $5,528  $10,657  $1,384  $80  $1,628  $4,730 

Derivative and other contracts

  —   —   3,229   —   25   —   —  3,333   —  1,686 

Commitments, guarantees and other

  805   1,468   —   174   337  1,214  668   —  164  433 

Total

 $9,287  $3,171  $3,281  $1,677  $5,890  $11,871  $2,052  $3,413  $1,792  $6,849 

Carrying value of exposure to loss—Assets

Carrying value of exposure to loss—Assets

 

  

Carrying value of exposure to loss—Assets

 

  

Debt and equity interests

 $8,482  $1,703  $52  $1,098  $5,528  $10,657  $1,384  $43  $1,202  $4,730 

Derivative and other contracts

  —   —   5   —   52   —   —  5   —  184 

Total

 $8,482  $1,703  $57  $1,098  $5,580  $10,657  $1,384  $48  $1,202  $4,914 

MTOB—Municipal

tender option bonds

 

 

June 201773March 2018 Form 10-Q82

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

  At December 31, 2016 
$ in millions MABS  CDO  MTOB  OSF  Other 

VIE assets (unpaid principal balance)

 $101,916  $11,341  $4,857  $4,293  $39,077 

Maximum exposure to loss

 

  

Debt and equity interests

 $11,243  $1,245  $50  $1,570  $4,877 

Derivative and other contracts

  —   —   2,812   —   45 

Commitments, guarantees and other

  684   99   —   187   228 

Total

 $11,927  $1,344  $2,862  $1,757  $5,150 

Carrying value of exposure to loss—Assets

 

  

Debt and equity interests

 $11,243  $1,245  $49  $1,183  $4,877 

Derivative and other contracts

  —   —   5   —   18 

Total

 $11,243  $1,245  $54  $1,183  $4,895 

MABS—Mortgage- and asset-backed securitizations

CDO—Collateralized debt obligations, including collateralized loan obligations

MTOB—Municipal tender option bonds

OSF—Other structured financings

Non-consolidated VIE Mortgage- and Asset-Backed Securitization Assets

  At June 30, 2017  At December 31, 2016 
$ in millions Unpaid
Principal
Balance		  Debt and
Equity
Interests		  Unpaid
Principal
Balance		  Debt and
Equity
Interests		 

Residential mortgages

 $9,106  $524  $4,775  $458 

Commercial mortgages

  49,504   2,614   54,021   2,656 

U.S. agency collateralized mortgage obligations

  13,243   2,745   14,796   2,758 

Other consumer or commercial loans

  6,965   2,599   28,324   5,371 

Total

 $    78,818  $     8,482  $    101,916  $     11,243 

The Firm’s maximum exposure to loss presented abovein the previous table often differs from the carrying value of the variable interests held by the Firm. The maximum exposure to loss presented abovein the previous table is dependent on the nature of the Firm’s variable interest in the VIEsVIE and is limited to the notional amounts of certain liquidity facilities, other credit support, total return swaps, written put options, and the fair value of certain other derivatives and investments the Firm has made in the VIEs.VIE. Liabilities issued by VIEs generally arenon-recourse to the Firm. Where notional amounts are utilized in quantifying the maximum exposure related to derivatives, such amounts do not reflect fair value write-downs already recorded by the Firm.

The Firm’s maximum exposure to loss presented abovein the previous table does not include the offsetting benefit of any financial instruments that the Firm may utilize to hedge these risks associated with its variable interests. In addition, the Firm’s maximum exposure to loss presented abovein the previous table is not reduced by the amount of collateral held as part of a transaction with the VIE or any party to the VIE directly against a specific exposure to loss.

Non-consolidated VIEs Mortgage- and Asset-Backed Securitization Assets

  At March 31, 2018  At December 31, 2017 
$ in millions UPB  Debt and
Equity
Interests		  UPB   Debt and
Equity
Interests		 

Residential mortgages

 $13,564  $782  $15,636   $1,272 

Commercial mortgages

  35,886   1,934   46,464    2,331 

U.S. agency collateralized mortgage obligations

  14,405   3,150   16,223    3,439 

Other consumer or commercial loans

  12,999   3,209   10,965    3,615 

Total

 $    76,854  $    9,075  $    89,288   $    10,657 

Securitization transactions generally involve VIEs. Primarily as a result of its secondary market-making activities, the Firm owned additional VIE assets mainly issued by securitization SPEs for which the maximum exposure to loss is less than specific thresholds. These additional assets totaled $11.9 billion and $11.7 billion at June 30, 2017 and December 31, 2016, respectively.

Additional VIE Assets Owned

$ in millions  

At March 31,

 

2018

   

At December 31,

 

2017

 

VIE assets

  $12,314   $11,318 

These assets were either retained in connection with transfers of assets by the Firm, acquired in connection with secondary market-making activities, held as AFS securities in its Investment securities portfolio (see Note 5), or held as investments in funds. At June 30, 2017March 31, 2018 and December 31, 2016,2017, these assets consisted of securities backed by residential mortgage loans, commercial mortgage loans or other consumer loans, such as credit card receivables, automobile loans and student loans, CDOs or CLOs, and investment funds.

The Firm’s primary risk exposure is to the securities issued by the SPESPEs owned by the Firm, with the highest risk on the most subordinate class of beneficial interests. These assets generally are included in Trading assets—Corporate and other debt, Trading assets—Investments or AFS securities within its Investment securities portfolio and are measured at fair value (see Note 3). The Firm does not provide additional support in these transactions through contractual facilities, such as liquidity facilities, guarantees or similar derivatives. The Firm’s maximum exposure to loss generally equals the fair value of the assets owned.

83June 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Transactions with SPEs in which the Firm, acting as principal, transferred financial assets with continuing involvement and received sales treatment are shown in the following tables.

Transfers of Assets with Continuing Involvement

 

  At March 31, 2018 
 At June 30, 2017 
$ in millions 

Residential
Mortgage
Loans

 Commercial
Mortgage
Loans		 U.S. Agency
Collateralized
Mortgage
Obligations		 

Credit-
Linked
Notes and

Other1

  RML CML U.S. Agency
CMO		 CLN and
Other1		 

SPE assets (unpaid principal balance)2

 $17,692  $53,764  $12,337  $11,831 

SPE assets (UPB)2

 $    14,978  $    59,607  $    14,751  $    16,823 

Retained interests

Retained interests

 

    

Investment grade3

 $—  $140  $710  $5 

Investment grade

 $—  $324  $825  $5 

Non-investment grade (fair value)

  3   86   —   643   1   107   —   308 

Total

 $3  $226  $710  $648  $1  $431  $825  $313 

Interests purchased in the secondary market (fair value)

Interests purchased in the secondary market (fair value)

 

Interests purchased in the secondary market (fair value)

 

 

Investment grade

 $4  $92  $66  $—  $—  $112  $71  $— 

Non-investment grade

  17   71   —   —   16   57   —   15 

Total

 $21  $163  $66  $—  $16  $169  $71  $15 

Derivative assets (fair value)

 $1  $—  $—  $32  $—  $—  $—  $191 

Derivative liabilities (fair value)

  —   —   —   307   —   —   —   119 

 

  At December 31, 2016 
$ in millions 

Residential
Mortgage
Loans

  Commercial
Mortgage
Loans		  U.S. Agency
Collateralized
Mortgage
Obligations		  

Credit-
Linked
Notes and

Other1

 

SPE assets (unpaid principal balance)2

 $19,381  $43,104  $11,092  $11,613 

Retained interests (fair value)

 

Investment grade

 $—  $22  $375  $— 

Non-investment grade

  4   79   —   826 

Total

 $4  $101  $375  $826 

Interests purchased in the secondary market (fair value)

 

Investment grade

 $—  $30  $26  $— 

Non-investment grade

  23   75   —   — 

Total

 $23  $105  $26  $— 

Derivative assets (fair value)

 $—  $261  $—  $89 

Derivative liabilities (fair value)

  —   —   —   459 
March 2018 Form 10-Q74

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

 

  At December 31, 2017 
$ in millions RML  CML  U.S. Agency
CMO		  

CLN and

Other1

 

SPE assets(UPB)2

 $15,555  $62,744  $11,612  $17,060 

Retained interests

    

Investment grade

 $—  $293  $407  $4 

Non-investment grade (fair value)

  1   98   —   478 

Total

 $1  $391  $407  $482 

Interests purchased in the secondary market (fair value)

 

 

Investment grade

 $—  $94  $439  $— 

Non-investment grade

  16   66   —   4 

Total

 $16  $160  $439  $4 

Derivative assets (fair value)

 $1  $—  $—  $226 

Derivative liabilities (fair value)

  —   —   —   85 

RML—Residential mortgage loans

CML—Commercial mortgage loans

1.

Amounts include CLO transactions managed by unrelated third parties.

2.

Amounts include assets transferred by unrelated transferors.

3.

Amounts include $734 million of investment grade retained interests at fair value.

   At June 30, 2017 
$ in millions  Level 2   Level 3   Total 

Retained interests (fair value)

      

Investment grade

  $729   $5   $734 

Non-investment grade

   4    728    732 

Total

  $733   $        733   $    1,466 

Interests purchased in the secondary market (fair value)

 

Investment grade

  $155   $7   $162 

Non-investment grade

   75    13    88 

Total

  $        230   $20   $250 

Derivative assets (fair value)

  $33   $—   $33 

Derivative liabilities (fair value)

   131    176    307 
   At December 31, 2016 
$ in millions  Level 2   Level 3   Total 

Retained interests (fair value)

      

Investment grade

  $385   $12   $397 

Non-investment grade

   14    895    909 

Total

  $399   $907   $1,306 

Interests purchased in the secondary market (fair value)

 

Investment grade

  $56   $—   $56 

Non-investment grade

   84    14    98 

Total

  $140   $14   $154 

Derivative assets (fair value)

  $348   $2   $350 

Derivative liabilities (fair value)

   98    361    459 

   Fair Value at March 31, 2018 
$ in millions  Level 2   Level 3   Total 

Retained interests

      

Investment grade

  $831   $5   $836 

Non-investment grade

   13    403    416 

Total

  $844   $408   $1,252 

Interests purchased in the secondary market

 

Investment grade

  $182   $1   $183 

Non-investment grade

   52    36    88 

Total

  $        234   $37   $        271 

Derivative assets

  $50   $        141   $191 

Derivative liabilities

   114    5    119 
   Fair Value at December 31, 2017 
$ in millions  Level 2   Level 3   Total 

Retained interests

      

Investment grade

  $407   $4   $411 

Non-investment grade

   22    555    577 

Total

  $        429   $        559   $        988 

Interests purchased in the secondary market

 

Investment grade

  $531   $2   $533 

Non-investment grade

   57    29    86 

Total

  $588   $31   $619 

Derivative assets

  $78   $149   $227 

Derivative liabilities

   81    4    85 

Transferred assets are carried at fair value prior to securitization, and any changes in fair value are recognized in the consolidated income statements. The Firm may act as underwriter of the beneficial interests issued by these securitization vehicles. Investment banking underwriting net revenues are recognized in connection with these transactions. The Firm may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are generally carried at fair value in the consolidated balance sheets with changes in fair value recognized in the consolidated income statements.

Proceeds from New Securitization Transactions and Sales of Loans

 

  Three Months Ended
June 30,		   Six Months Ended
June 30,		   

Three Months Ended

 

March 31,

 
$ in millions  2017   2016   2017   2016   2018   2017 

New transactions1

  $    4,750   $    4,163   $    10,747   $    6,876   $            6,134   $            5,997 

Retained interests

   529    502    959    1,133    481    430 

Sales of corporate loans to CLO SPEs1,2

   239    —    418    31 

Sales of corporate loans to CLO SPEs1, 2

   94    179 

 

1.

Net gains on new transactions and sales of corporate loans to CLO entities at the time of the sale were not material for all periods presented.

2.

Sponsored bynon-affiliates.

The Firm has provided, or otherwise agreed to be responsible for, representations and warranties regarding certain assets transferred in securitization transactions sponsored by the Firm (see Note 11).

June 2017 Form 10-Q84

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

The Firm also enters into transactions in which it sells equity securities and contemporaneously enters into bilateral OTC equity derivatives with the purchasers of the securities, through which it retains the exposure to the securities as shown in the following table.

Carrying and Fair Value of Assets Sold andwith Retained Interest Exposure

 

$ in millions  

At June 30,

2017

   At December 31,
2016		   

At March 31,

 

2018

   

At December 31,

 

2017

 

Carrying value of assets derecognized at the time of sale and gross cash proceeds

  $14,817   $11,209   $                26,800   $                19,115 

Fair value

        

Assets sold

   14,710    11,301   $26,566   $19,138 

Derivative assets recognized in the consolidated balance sheets

   33    128 

Derivative liabilities recognized in the consolidated balance sheets

   140    36 

Derivative assets recognized in the balance sheets

   2    176 

Derivative liabilities recognized in the balance sheets

   236    153 

Failed Sales

For transfers that fail to meet the accounting criteria for a sale, the Firm continues to recognize the assets in Trading assets at fair value, and the Firm recognizes the associated liabilities in Other secured financings at fair value in the consolidated balance sheets (see Note 10).

The assets transferred to certain unconsolidated VIEs in transactions accounted for as failed sales cannot be removed unilaterally by the Firm and are not generally available to the Firm. The related liabilities are alsonon-recourse to the Firm. In certain other failed sale transactions, the Firm has the right to remove assets or provides additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.

Carrying Value of Assets and Liabilities Related to Failed Sales

 

  

At June 30,

2017

   At December 31,
2016		   At March 31, 2018   At December 31, 2017 
$ in millions  Assets   Liabilities   Assets   Liabilities   Assets   Liabilities   Assets   Liabilities 

Failed sales

  $        641   $        641   $        285   $        285   $        710   $        710   $        552   $        552 

75March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

13. Regulatory Requirements

Regulatory Capital Framework and Requirements

For a discussion of the Firm’s regulatory capital framework, see Note 14 to the consolidated financial statements in the 2016 2017Form10-K.

Regulatory Capital Requirements

The Firm is required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. A summary of the calculations of regulatory capital,

risk-weighted assets (“RWAs”) RWA and transition provisions follows.

Regulatory Capital

The Firm’s binding risk-based capital ratios for purposes of determining regulatory purposescompliance are the lower of the capital ratios computed under (i) the (i) standardized approaches for calculating credit risk RWAs and market risk RWAs (the “StandardizedRWA (“Standardized Approach”) and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWAs (the “AdvancedRWA (“Advanced Approach”).

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

In addition to the minimum risk-based capital ratio requirements, on a fullyphased-in basis by 2019 the Firm will be subject to:to the following buffers:

 

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

 

The Common Equity Tier 1 global systemically important bankG-SIB capital surcharge, currently at 3%; and

 

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

In 2017 thephase-in amount forand 2018, each of the buffers is 50% and 75%, respectively, of the fullyphased-in buffer requirement.2019 requirement noted above. Failure to maintain the buffers will result in restrictions on the Firm’s ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers.

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

For a further discussion of the Firm’s calculation of risk-based capital ratios, see Note 14 to the consolidated financial statements in the 20162017 Form10-K.

85June 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

The Firm’s Regulatory Capital and Capital Ratios

At June 30, 2017March 31, 2018 and December 31, 2016,2017, the Firm’s binding ratios are based on the AdvancedStandardized Approach transitional rules.

Regulatory Capital

 

 At June 30, 2017    At March 31, 2018 

$ in millions

 Amount   Ratio Minimum
Capital
Ratio1		   Amount   Ratio   Required
Ratio1		 

Common Equity Tier 1 capital

 $61,604    16.6%   7.3%   $60,568    15.5%     8.6%  

Tier 1 capital

  70,380    19.0%   8.8%    69,213    17.7%     10.1%  

Total capital

  81,025    21.9%   10.8%    79,363    20.3%     12.1%  

Tier 1 leverage2

  —    8.5%   4.0% 

Total RWAs

 $    370,679    N/A   N/A 

Adjusted average assets3

  828,365    N/A   N/A 

Total RWA

   390,390    N/A     N/A  

Tier 1 leverage

   69,213    8.2%     4.0%  

Adjusted average assets2

   846,868    N/A     N/A  

SLR3

   69,213    6.3%     5.0%  

Supplementary leverage exposure

     1,091,518    N/A     N/A  
   At December 31, 2017 
$ in millions  Amount   Ratio   Required
Ratio1		 

Common Equity Tier 1 capital

  $      61,134    16.5%     7.3%  

Tier 1 capital

   69,938    18.9%     8.8%  

Total capital

   80,275    21.7%     10.8%  

Total RWA

   369,578    N/A     N/A  

Tier 1 leverage

   69,938    8.3%     4.0%  

Adjusted average assets2

   842,270    N/A     N/A  

 

  At December 31, 2016 

$ in millions

 Amount   Ratio  Minimum
Capital
Ratio1		 

Common Equity Tier 1 capital

 $60,398    16.9%   5.9% 

Tier 1 capital

  68,097    19.0%   7.4% 

Total capital

  78,642    22.0%   9.4% 

Tier 1 leverage2

  —    8.4%   4.0% 

Total RWAs

 $    358,141    N/A   N/A 

Adjusted average assets3

  811,402    N/A   N/A 

N/A—Not Applicable

1.

Percentages represent minimum required regulatory capital ratios under the transitional rules. Regulatory compliance was determined based on capital ratios calculated under the transitional rules until December 31, 2017.

2.

Tier 1 leverage ratios are calculated under the Standardized Approach transitional rules.

3.

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

3.

The SLR became effective as a capital standard on January 1, 2018.

U.S. Bank Subsidiaries’ Regulatory Capital and Capital Ratios

The Firm’s U.S. Bank Subsidiaries are subject to similar regulatory capital requirements as the Firm. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the U.S. Bank Subsidiaries’ and the Firm’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, each of the U.S. Bank Subsidiaries must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certainoff-balance sheet items as calculated under regulatory accounting practices.

March 2018 Form 10-Q76

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Each U.S. depository institution subsidiary of the Firm must be well-capitalized in order for the Firm to continue to qualify as a financial holding company and to continue to engage in the broadest range of financial activities permitted

for financial holding companies. Under regulatory capital requirements adopted by the U.S. federal banking agencies, U.S. depository institutions must maintain certain minimum capital ratios in order to be considered well-capitalized. At June 30, 2017March 31, 2018 and December 31, 2016,2017, the Firm’s U.S. Bank Subsidiaries maintained capital at levels sufficiently in excess of the universally mandated well-capitalized requirements to address any additional capital needs and requirements identified by the U.S. federal banking regulators.

At June 30, 2017March 31, 2018 and December 31, 2016,2017, the U.S. Bank Subsidiaries’ binding ratios are based on the Standardized Approach transitional rules.

MSBNA’s Regulatory Capital

 

   At March 31, 2018 
$ in millions  Amount       Ratio       Required  
Ratio1  		 

Common Equity Tier 1 capital

  $    15,514    19.7%    6.5% 

Tier 1 capital

   15,514    19.7%    8.0% 

Total capital

   15,785    20.1%    10.0% 

Tier 1 leverage

   15,514    11.8%    5.0% 

SLR2

      9.0%    6.0% 
  At June 30, 2017    At December 31, 2017 

$ in millions

  Amount   Ratio Minimum
Capital
Ratio1		   Amount       Ratio       Required  
Ratio1  		 

Common Equity Tier 1 capital

  $    14,526    18.5%   6.5%   $15,196    20.5%    6.5% 

Tier 1 capital

   14,526    18.5%   8.0%    15,196    20.5%    8.0% 

Total capital

   14,807    18.9%   10.0%    15,454    20.8%    10.0% 

Tier 1 leverage

   14,526    12.0%   5.0%    15,196    11.8%    5.0% 
MSPBNA’s Regulatory CapitalMSPBNA’s Regulatory Capital   
  At December 31, 2016    At March 31, 2018 

$ in millions

  Amount   Ratio Minimum
Capital
Ratio1		   Amount       Ratio       Required  
Ratio1  		 

Common Equity Tier 1 capital

  $13,398    16.9%  6.5%   $6,382    24.2%    6.5% 

Tier 1 capital

   13,398    16.9%  8.0%    6,382    24.2%    8.0% 

Total capital

   14,858    18.7%  10.0%    6,425    24.4%    10.0% 

Tier 1 leverage

   13,398    10.5%  5.0%    6,382    9.7%    5.0% 

SLR2

      9.3%    6.0% 
   At December 31, 2017 
$ in millions  Amount       Ratio       Required  
Ratio1  		 

Common Equity Tier 1 capital

  $6,215    24.4%    6.5% 

Tier 1 capital

   6,215    24.4%    8.0% 

Total capital

   6,258    24.6%    10.0% 

Tier 1 leverage

   6,215    9.7%    5.0% 

 

1.

Capital ratiosRatios that are required in order to be considered well-capitalized for U.S. regulatory purposes. Regulatory compliance was determined based on capital ratios calculated under the transitional rules until December 31, 2017.

MSPBNA’s Regulatory Capital

   At June 30, 2017 

$ in millions

  Amount   Ratio  Minimum
Capital
Ratio1		 

Common Equity Tier 1 capital

  $5,898    24.8%   6.5% 

Tier 1 capital

   5,898    24.8%   8.0% 

Total capital

   5,938    25.0%   10.0% 

Tier 1 leverage

   5,898    10.3%   5.0% 
   At December 31, 2016 

$ in millions

  Amount   Ratio  Minimum
Capital
Ratio1		 

Common Equity Tier 1 capital

  $    5,589    26.1%   6.5% 

Tier 1 capital

   5,589    26.1%   8.0% 

Total capital

   5,626    26.3%   10.0% 

Tier 1 leverage

   5,589    10.6%   5.0% 

1.2.

Capital ratios that are required in order to be considered well-capitalized for U.S. regulatory purposes.The SLR became effective as a capital standard on January 1, 2018.

June 2017 Form 10-Q86

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

U.S. Broker-Dealer Regulatory Capital Requirements

MS&Co. Regulatory Capital

 

$ in millions  At June 30, 2017   At December 31, 2016   At March 31, 2018   At December 31, 2017 

Net capital

  $10,388   $10,311   $                             12,661   $                             10,142 

Excess net capital

   8,312    8,034    10,303    8,018 

Morgan Stanley & Co. LLC (“MS&Co.”) is a registered U.S. broker-dealer and registered futures commission merchant and, accordingly, is subject to the minimum net capital requirements of the U.S. Securities and Exchange Commission (“SEC”)SEC and the U.S. Commodity Futures Trading Commission (“CFTC”). As an Alternative Net Capital broker-dealer under SEC rules, MS&Co. is subject to minimum net capital requirements, which it exceeded as presented in the previous table. In addition to these requirements, MS&Co. is required to meet capital requirements imposed by Appendix E of Rule15c3-1, which are presented in the following table.CFTC. MS&Co. has consistently operated with capital in excess of its regulatory capital requirements.

$ in millions  At June 30, 2017   At December 31, 2016 

Required tentative net capital1

  $1,000   $1,000 

Required net capital

   500    500 

1.

MS&Co. is required to notify the SEC in the event that its tentative net capital is less than $5 billion.

As an Alternative Net Capital broker-dealer, and in accordance with the market and credit risk standards of Appendix E of SEC Rule 15c3-1, MS&Co. is subject to minimum net capital and tentative net capital requirements. In addition, MS&Co. must notify the SEC if its tentative net capital falls below certain levels. At June 30, 2017March 31, 2018 and December 31, 2016,2017, MS&Co. hadhas exceeded its net capital requirement and has tentative net capital in excess of the minimum and the notification requirements.

MSSB LLC Regulatory Capital

 

$ in millions  At June 30, 2017   At December 31, 2016   At March 31, 2018   At December 31, 2017 

Net capital

  $2,288   $3,946   $                             2,919   $                             2,567 

Excess net capital

   2,131    3,797    2,759    2,400 

Morgan Stanley Smith Barney LLC (“MSSB LLC”)LLC is a registered U.S. broker-dealer and introducing broker for the futures business and, accordingly, is subject to the minimum net capital requirements of the SEC. MSSB LLC has consistently operated with capital in excess of its regulatory capital requirements.

Other Regulated Subsidiaries

Morgan Stanley & Co. International plc (“MSIP”),MSIP, a London-based broker-dealer subsidiary, is subject to the capital requirements of the Prudential Regulation Authority,PRA, and Morgan Stanley MUFG Securities Co., Ltd. (“MSMS”),MSMS, a Tokyo-based broker-dealer subsidiary, is subject to the capital requirements of the Financial Services Agency. MSIP and MSMS have consistently operated with capital in excess of their respective regulatory capital requirements.

Certain other U.S. andnon-U.S. subsidiaries of the Firm are subject to various securities, commodities and banking regulations, and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. These subsidiaries have consistently operated with capital in excess of their local capital adequacy requirements.

77March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

14. Total Equity

Dividends and Share Repurchases

   Three Months Ended
March 31,		 
$ in millions  2018   2017 

Repurchases of common stock under the Firm’s share repurchase program

  $                1,250   $                750 

The Firm repurchased approximately $500 million of its outstanding common stock as part of the share repurchase program during the current quarter and $1,250 million during the current year period. The Firm repurchased approximately $625 million during the prior year quarter and $1,250 million in the prior year period.

On June 28, 2017, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) announced that they did not object to the Firm’s 2017 capital planCapital Plan (“Capital Plan”). The Capital Plan includes the share repurchase of up to $5.0 billion of outstanding common stock for the period beginning July 1, 2017 through June 30, 2018, an increase from $3.5 billion in the 2016 Capital Plan. Additionally, the Capital Plan includes an increase in the quarterly common stock dividenddividends of up to $0.25 per share from $0.20 per share, beginning with the common stock dividend declared on July 19, 2017.share.

Preferred Stock

   

Three Months Ended

 

March 31,

 
$ in millions  2018   2017 

Dividends declared

  $                93   $                90 

For a description of Series A through Series K preferred stock issuances, see Note 15 to the consolidated financial statements in the 20162017 Form10-K. Dividends declared on the Firm’s outstanding preferred stock were $170 million during the current quarter and $156 million during the prior year quarter, and $260 million during the current year period and $234 million during the prior year period. On June 15, 2017, the Firm announced that the Board of Directors (the “Board”) declared a quarterly dividend for preferred stock shareholders of record on June 30, 2017 that was paid on July 17, 2017. The Firm is authorized to issue 30 million shares of preferred stock. The preferred stock has a preference over the common stock upon liquidation. The Firm’s preferred stock qualifies as Tier 1 capital in accordance with regulatory capital requirements (see Note 13).

Series K Preferred Stock.The Series K Preferred Stock offering (net of related issuance costs) in January 2017 resulted in proceeds of approximately $994 million.

87June 2017 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Preferred Stock Outstanding

 

$ in millions, except
per share data

 Shares
Outstanding		  

Liquidation
Preference
per Share

  Carrying Value 
  Shares
Outstanding		       Carrying Value 

$ in millions, except
per share data

 At June 30,
2017		 

Liquidation
Preference
per Share

  At June 30,
2017		 At December 31,
2016		   At
March 31,
2018		   Liquidation
Preference
per Share		   At
March 31,
2018		   At
December 31,
2017		 
              

A

  44,000  $25,000  $1,100  $1,100    44,000   $        25,000   $1,100   $1,100 

C1

  519,882   1,000   408  408    519,882    1,000    408    408 

E

  34,500   25,000   862  862    34,500    25,000    862    862 

F

  34,000   25,000   850  850    34,000    25,000    850    850 

G

  20,000   25,000   500  500    20,000    25,000    500    500 

H

  52,000   25,000   1,300  1,300    52,000    25,000    1,300    1,300 

I

  40,000   25,000   1,000  1,000    40,000    25,000    1,000    1,000 

J

  60,000   25,000   1,500  1,500    60,000    25,000    1,500    1,500 

K

  40,000   25,000   1,000   —    40,000    25,000    1,000    1,000 

Total

Total

 

 $8,520  $7,520       $    8,520   $    8,520 

 

1.

Series C is composed of the issuance of 1,160,791 shares of Series C Preferred Stock to MUFG for an aggregate purchase price of $911 million, less the redemption of 640,909 shares of Series C Preferred Stock of $503 million, which were converted to common shares of approximately $705 million.

Comprehensive Income (Loss)

Accumulated Other Comprehensive Income (Loss)1

 

$ in millions Foreign
Currency
Translation
Adjustments		  AFS
Securities		  Pensions,
Postretirement
and Other		  DVA  Total 

March 31, 2017

 $(879)  $(504)  $(474)  $(593)  $(2,450) 

OCI during the period1

  23   108   4   (173)   (38) 

June 30, 2017

 $(856)  $(396)  $(470)  $(766)  $(2,488) 

March 31, 2016

 $(831)  $76  $(373)  $(110)  $(1,238) 

OCI during the period1

  52   143   (5)   143   333 

June 30, 2016

 $(779)  $219  $(378)  $33  $(905) 

December 31, 2016

 $(986)  $(588)  $(474)  $(595)  $(2,643) 

OCI during the period1

  130   192   4   (171)   155 

June 30, 2017

 $(856)  $(396)  $(470)  $(766)  $(2,488) 

December 31, 2015

 $(963)  $(319)  $(374)  $—  $(1,656) 

Cumulative adjustment for accounting change related to DVA2

  —   —   —   (312)   (312) 

OCI during the period1

  184   538   (4)   345   1,063 

June 30, 2016

 $(779)  $219  $(378)  $33  $(905) 
$ in millions Foreign
Currency
Translation
Adjustments		  AFS
Securities		  Pension,
Postretirement
and Other		  DVA  Total 

December 31, 2017

 $(767)  $(547)  $(591)  $(1,155)  $(3,060) 

Cumulative adjustment for accounting changes2

  (8)   (111)   (124)   (194)   (437) 

OCI during the period

  60   (410)               5   436           91 

March 31, 2018

 $(715)  $(1,068)  $(710)  $(913)  $(3,406) 

December 31, 2016

 $(986)  $(588)  $(474)  $(595)  $(2,643) 

OCI during the period

  107             84   —               2   193 

March 31, 2017

 $(879)  $(504)  $(474)  $(593)  $(2,450) 

 

1.

Amounts net of tax and noncontrolling interests.

2.

In accordance withThe cumulative adjustment for accounting changes is primarily the earlyeffect of the adoption of a provision of the accounting updateRecognition and MeasurementReclassification of Financial Assets and Financial LiabilitiesCertain Tax Effects from Accumulated Other Comprehensive Income, a cumulativecatch-up. This adjustment was recorded as of January 1, 20162018 to move the cumulative unrealized DVA amount, net of noncontrolling interests andreclassify certain income tax effects related to outstanding liabilities underenactment of the fair value option electionTax Act from AOCI to Retained earnings, into AOCI.primarily related to the remeasurement of deferred tax assets and liabilities resulting from the reduction in corporate income tax rate to 21%. See Note 2 to the consolidated financial statements in the 2016 Form10-K for further information.

Period Changes in OCI Components

  

Three Months Ended

June 30, 2017

 
$ in millions Pre-tax
gain (loss)		  Income tax
benefit
(provision)		  After-tax
gain (loss)		  

Non-

controlling
interests

  Net 

Foreign currency translation adjustments

 

OCI activity

 $1  $11  $12  $(11)  $23 

Reclassified to earnings

  —   —   —   —   — 

Net OCI

 $1  $11  $12  $(11)  $23 

Change in net unrealized gains (losses) on AFS securities

 

OCI activity

 $185  $(68)  $117  $—  $117 

Reclassified to earnings1

  (14)   5   (9)   —   (9) 

Net OCI

 $171  $(63)  $108  $—  $108 

Pension, postretirement and other

 

OCI activity

 $3  $—  $3  $—  $3 

Reclassified to earnings1

  1   —   1   —   1 

Net OCI

  4   —   4   —   4 

Change in net DVA

 

OCI activity

 $(285)  $99  $(186)  $(10)  $(176) 

Reclassified to earnings1

  4   (1)   3   —   3 

Net OCI

 $(281)  $98  $(183)  $(10)  $(173) 

  

Three Months Ended

June 30, 2016

 
$ in millions Pre-tax
gain (loss)		  Income tax
benefit
(provision)		  After-tax
gain (loss)		  

Non-

controlling
interests

  Net 

Foreign currency translation adjustments

 

OCI activity

 $72  $59  $131  $79  $52 

Reclassified to earnings

  —   —   —   —   — 

Net OCI

 $72  $59  $131  $79  $52 

Change in net unrealized gains (losses) on AFS securities

 

OCI activity

 $298  $(110)  $188  $—  $188 

Reclassified to earnings1

  (70)   25   (45)   —   (45) 

Net OCI

 $228  $(85)  $143  $—  $143 

Pension, postretirement and other

 

OCI activity

 $(5)  $—  $(5)  $—  $(5) 

Reclassified to earnings1

  (1)   1   —   —   — 

Net OCI

 $(6)  $1  $(5)  $—  $(5) 

Change in net DVA

 

OCI activity

 $225  $(80)  $145  $2  $143 

Reclassified to earnings1

  —   —   —   —   — 

Net OCI

 $225  $(80)  $145  $2  $143 
 

 

June 2017March 2018 Form 10-Q  8878  

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

  

Six Months Ended

June 30, 2017

 
$ in millions Pre-tax
gain (loss)		  Income tax
benefit
(provision)		  After-tax
gain (loss)		  

Non-

controlling
interests

  Net 

Foreign currency translation adjustments

 

OCI activity

 $44  $118  $162  $32  $130 

Reclassified to earnings

  —   —   —   —   — 

Net OCI

 $44  $118  $162  $32  $130 

Change in net unrealized gains (losses) on AFS securities

 

OCI activity

 $322  $(120)  $202  $—  $202 

Reclassified to earnings1

  (16)   6   (10)   —   (10) 

Net OCI

 $306  $(114)  $192  $—  $192 

Pension, postretirement and other

 

OCI activity

 $3  $—  $3  $—  $3 

Reclassified to earnings1

  1   —   1   —   1 

Net OCI

  4   —   4   —   4 

Change in net DVA

 

OCI activity

 $(278)  $98  $(180)  $(3)  $(177) 

Reclassified to earnings1

  8   (2)   6   —   6 

Net OCI

 $(270)  $96  $(174)  $(3)  $(171) 

Components of Period Changes in OCI

 

 

Six Months Ended

June 30, 20162

  

Three Months Ended

 

March 31, 20181

 
$ in millions Pre-tax
gain (loss)		 Income tax
benefit
(provision)		 After-tax
gain (loss)		 

Non-

controlling
interests

 Net  Pre-tax
Gain
(Loss)		 Income
Tax
Benefit
(Provision)		 After-
tax Gain
(Loss)		 Non-
controlling
Interests		 Net 

Foreign currency translation adjustments

Foreign currency translation adjustments

 

Foreign currency translation adjustments

 

  

OCI activity

 $143  $174  $317  $133  $184  $78  $39  $117  $57  $60 

Reclassified to earnings

  —   —   —   —   —   —   —   —   —   — 

Net OCI

 $143  $174  $317  $133  $184  $78  $39  $117  $57  $60 

Change in net unrealized gains (losses) on AFS securities

Change in net unrealized gains (losses) on AFS securities

 

Change in net unrealized gains (losses) on AFS securities

 

 

OCI activity

 $934  $(344)  $590  $—  $590  $(535)  $125  $(410)  $—  $(410) 

Reclassified to earnings1

 (82)  30  (52)   —  (52) 

Reclassified to earnings

  —   —   —   —   — 

Net OCI

 $852  $(314)  $538  $—  $538  $(535)  $        125  $(410)  $—  $(410) 

Pension, postretirement and other

Pension, postretirement and other

 

Pension, postretirement and other

 

  

OCI activity

 $(6)  $3  $(3)  $—  $(3)  $—  $—  $—  $—  $— 

Reclassified to earnings1

 (2)  1  (1)   —  (1) 

Reclassified to earnings

  6   (1)   5   —   5 

Net OCI

 $(8)  $4  $(4)  $—  $(4)  $6  $(1)  $5  $—  $5 

Change in net DVA

Change in net DVA

 

     

OCI activity

 $589  $(215)  $374  $3  $371  $580  $(140)  $440  $15  $425 

Reclassified to earnings1

 (41)  15  (26)   —  (26) 

Reclassified to earnings

  15   (4)   11   —   11 

Net OCI

 $548  $(200)  $348  $3  $345  $  595  $(144)  $      451  $        15  $      436 
 

Three Months Ended

 

March 31, 2017

 
$ in millions Pre-tax
Gain
(Loss)		 Income
Tax
Benefit
(Provision)		 After-
tax Gain
(Loss)		 Non-
controlling
Interests		 Net 

Foreign currency translation adjustments

Foreign currency translation adjustments

 

  

OCI activity

 $43  $107  $150  $43  $107 

Reclassified to earnings

  —   —   —   —   — 

Net OCI

 $43  $107  $150  $43  $107 

Change in net unrealized gains (losses) on AFS securities

Change in net unrealized gains (losses) on AFS securities

 

  

OCI activity

 $137  $(52)  $85  $—  $85 

Reclassified to earnings

 (2)  1  (1)   —  (1) 

Net OCI

 $135  $(51)  $84  $—  $84 

Change in net DVA

     

OCI activity

 $7  $(1)  $6  $7  $(1) 

Reclassified to earnings

 4  (1)  3   —  3 

Net OCI

 $        11  $(2)  $9  $7  $        2 

 

1.

Amounts reclassifiedExclusive of 2018 cumulative adjustments related to earnings related to: realized gains and losses from salesthe adoption of AFS securities are classified within Other revenuescertain accounting updates in the consolidated income statements; Pension, postretirementcurrent quarter. Refer to the table below and Note 2 for further information.

Cumulative Adjustments to Retained Earnings

$ in millions

Three Months Ended

March 31, 2018

Revenue from contracts with customers

    $(32) 

Derivatives and hedging–targeted improvements to accounting for hedging activities

(99) 

Reclassification of certain tax effects from AOCI

443

Other1

(6) 

Total

    $306
$ in millionsThree Months Ended
March 31, 2017

Improvements to employee share-based payment accounting2

(30) 

Intra-entity transfers of assets other are classified within Compensationthan inventory

(5) 

Total

    $(35) 

1.

Other includes the adoption of accounting updates related toRecognition and benefits expensesMeasurement of Financial Assets and Financial Liabilities (other than the provision around presenting unrealized DVA in the consolidated income statements;OCI which we early adopted in 2016) and realizationDerecognition of DVA are classified within Trading revenues in the consolidated income statements.Nonfinancial Assets. The impact of these adoptions on Retained earnings was not significant.

2.

Exclusive of 2016 cumulative adjustmentSee Note 2 to the 2017 Form 10-K for accounting change related to DVA.further information.

Noncontrolling Interests 
$ in millions  At
June 30, 2017		   At
December 31 2016		 

Noncontrolling interests

  $1,141   $1,127 

The increaseAmounts in noncontrolling interests was primarily duethe previous table represent cumulative adjustments related to the increase in net income attributable to noncontrolling interests, partially offset by deconsolidationadoption of certain investment management funds sponsored by the Firm.

15. Earnings per Common Share

Calculation of Basicaccounting updates during the current and Diluted Earnings per Common Share (“EPS”)prior year quarters. See Note 2 for further information.

  Three Months
Ended June 30,		  Six Months
Ended June 30,		 
in millions, except for per share data 2017  2016  2017  2016 

Basic EPS

    

Income from continuing operations

 $1,796  $1,650  $3,789  $2,810 

Income (loss) from discontinued operations

  (5)   (4)   (27)   (7) 

Net income

  1,791   1,646   3,762   2,803 

Net income applicable to noncontrolling interests

  34   64   75   87 

Net income applicable to Morgan Stanley

  1,757   1,582   3,687   2,716 

Less: Preferred stock dividends and other

  (170)   (157)   (260)   (235) 

Earnings applicable to Morgan Stanley common shareholders

 $1,587  $1,425  $3,427  $2,481 

Weighted average common shares outstanding

  1,791   1,866   1,796   1,875 

Earnings per basic common share

 

Income from continuing operations

 $0.89  $0.77  $1.92  $1.33 

Income (loss) from discontinued operations

  —   (0.01)   (0.01)   (0.01) 

Earnings per basic common share

 $0.89  $0.76  $1.91  $1.32 

Diluted EPS

    

Earnings applicable to Morgan Stanley common shareholders

 $1,587  $1,425  $3,427  $2,481 

Weighted average common shares outstanding

  1,791   1,866   1,796   1,875 

Effect of dilutive securities:

    

Stock options and RSUs1

  39   33   40   32 

Weighted average common shares outstanding and common stock equivalents

  1,830   1,899   1,836   1,907 

Earnings per diluted common share

 

Income from continuing operations

 $0.87  $0.75  $1.88  $1.30 

Income (loss) from discontinued operations

  —   —   (0.01)   — 

Earnings per diluted common share

 $0.87  $0.75  $1.87  $1.30 

Weighted average antidilutive RSUs and stock options (excluded from the computation of diluted EPS)1

  —   14   —   15 
 

 

  8979  June 2017March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

15. Earnings per Common Share

Calculation of Basic and Diluted EPS

 

   

Three Months Ended

 

March 31,

 
in millions, except for per share data  2018   2017 

Basic EPS

    

Income from continuing operations

  $2,706   $1,993 

Income (loss) from discontinued operations

   (2)    (22) 

Net income

   2,704    1,971 

Net income applicable to noncontrolling interests

   36    41 

Net income applicable to Morgan Stanley

   2,668    1,930 

Preferred stock dividends and other

   93    90 

Earnings applicable to Morgan Stanley common shareholders

  $2,575   $1,840 

Weighted average common shares outstanding

   1,740    1,801 

Earnings per basic common share

    

Income from continuing operations

  $1.48   $1.03 

Income (loss) from discontinued operations

   —    (0.01) 

Earnings per basic common share

  $1.48   $1.02 

Diluted EPS

    

Earnings applicable to Morgan Stanley common shareholders

  $2,575   $1,840 

Weighted average common shares outstanding

   1,740    1,801 

Effect of dilutive securities: Stock options and RSUs1

   31    41 

Weighted average common shares outstanding and common stock equivalents

           1,771            1,842 

Earnings per diluted common share

    

Income from continuing operations

  $1.46   $1.01 

Income (loss) from discontinued operations

   (0.01)    (0.01) 

Earnings per diluted common share

  $1.45   $1.00 

Weighted average antidilutive RSUs and stock options (excluded from the computation of diluted EPS)1

   1    — 

1.

Restricted stock units (“RSUs”)RSUs that are considered participating securities are treated as a separate class of securities in the computation of basic EPS, and, therefore, such RSUs are not included as incremental shares in the diluted EPS computations.computation.

16. Interest Income and Interest Expense

Interest income and Interest expense are classified in the income statements based on the nature of the instrument and related market conventions. When included as a component of the instrument’s fair value, interest is included within Trading revenues or Investments revenues. Otherwise, it is included within Interest income or Interest expense.

  Three Months
Ended June 30,		  Six Months Ended
June 30,		 
$ in millions 2017  2016  2017  2016 

Interest income1

    

Investment securities

 $304  $237  $630  $473 

Loans

  798   680   1,546   1,327 

Interest bearing deposits with banks

  67   52   122   105 

Securities purchased under agreements to resell and Securities borrowed2

  29   (120)   10   (198) 

Trading assets, net of Trading liabilities3

  491   526   955   1,109 

Customer receivables and Other4

  417   292   808   598 

Total interest income

 $2,106  $1,667  $4,071  $3,414 

Interest expense1

    

Deposits

 $14  $15  $25  $37 

Short-term and Long-term borrowings

  1,067   851   2,088   1,818 

Securities sold under agreements to repurchase and Securities loaned5

  339   259   587   513 

Customer payables and Other6

  (65)   (371)   (151)   (766) 

Total interest expense

 $1,355  $754  $2,549  $1,602 

Net interest

 $751  $913  $1,522  $1,812 

   

Three Months Ended

 

March 31,

 
$ in millions      2018   2017 

Interest income

    

Investment securities

  $424   $326 

Loans

   938    748 

Securities purchased under agreements to resell and Securities borrowed1

   215    (18) 

Trading assets, net of Trading liabilities

   540    463 

Customer receivables and Other2

   743    446 

Total interest income

  $2,860   $1,965 

Interest expense

    

Deposits

  $159   $11 

Borrowings

   1,138    1,022 

Securities sold under agreements to repurchase and Securities loaned3

   402    248 

Customer payables and Other4

   186    (87) 

Total interest expense

  $        1,885   $        1,194 

Net interest

  $975   $771 

 

1.

Interest income and Interest expense are recorded within the consolidated income statements depending on the nature of the instrument and related market conventions. When interest is included as a component of the instrument’s fair value, interest is included within Trading revenues or Investments revenues. Otherwise, it is included within Interest income or Interest expense.

2.

Includes fees paid on Securities borrowed.

3.

Interest expense on Trading liabilities is reported as a reduction to Interest income on Trading assets.

4.2.

Includes interest from customerCustomer receivables, Restricted cash and cash depositedInterest bearing deposits with clearing organizations or segregated under federal and other regulations or requirements.banks.

5.3.

Includes fees received on Securities loaned.

6.4.

Includes fees received from prime brokerage customers for stock loan transactions incurred to cover customers’ short positions.

17. Employee Benefit Plans

The Firm sponsors various retirement plans for the majority of its U.S. andnon-U.S.employees. The Firm provides certain other postretirement benefits, primarily health care and life insurance, to eligible U.S. employees.

Components of the Net Periodic Benefit Expense (Income) for Pension and Other Postretirement Plans

 

  Three Months
Ended
June 30,		 Six Months
Ended
June 30,		   

Three Months Ended

 

March 31,

 
$ in millions  2017 2016 2017 2016       2018   2017 

Service cost, benefits earned during the period

  $4  $4  $8  $8   $4   $4 

Interest cost on projected benefit obligation

   38  39   75  77    34    37 

Expected return on plan assets

   (29)  (30)   (58)  (60)    (28)    (29) 

Net amortization of prior service credit

   (4)  (5)   (8)  (9)    —    (4) 

Net amortization of actuarial loss

   4  3   8  6    6    4 

Net periodic benefit expense (income)

  $13  $11  $25  $22   $            16   $            12 

March 2018 Form 10-Q80

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

18. Income Taxes

The Firm is under continuous examination by the Internal Revenue Service (the “IRS”)IRS and other tax authorities in certain countries, such as Japan and the United Kingdom (“U.K.”), and in states in which it has significant business operations, such as New York. The Firm has established a liability for unrecognized tax benefits, and associated interest, if applicable (“tax liabilities”), that it believes is adequate in relation to the potential for additional assessments. Once established, the Firm adjusts such tax liabilities only when new information is available or when an event occurs necessitating a change.

During the fourth quarter of 2017, the Firm agreed to proposed adjustments associated with the expected closure of the IRS field audits for tax years 2006-2008. The Firm expects final closure of these tax years in the second quarter of 2018. The Firm is currently at various levels of field examination with respect to audits by the IRS, as well as New York State and New York City, for tax years 2009-2012 and 2007-2014, respectively.

The Firm believes that the resolution of thesethe above tax matters will not have a material effect on the annual consolidated financial statements, although a resolution could have a material impact onin the consolidated income statements and effective tax rate for any period in which such resolution occurs.

In April 2016,Furthermore, by the end of the first quarter of 2018, the Firm received a notification from the IRS that the Congressional Joint Committee on Taxation approved the final report of an Appeals Office review of matters from tax years 1999-2005, and the Revenue Agent’s Report reflecting agreed closure of the 2006-2008 tax years. In March 2017, the Firm filed claims with the IRS to contest certain items, associated with tax years 1999-2005, the resolution of which is not expected to have a material impact on the annual consolidated financial statements or effective tax rate.

During 2017, the Firm expects to reachreached a conclusion with the U.K. tax authorities on substantially allcertain issues through tax year 2010, the resolution of which isdid not expected to have a material impact on the annual consolidated financial statements or effective tax rate.

The Firm has established a liability for unrecognized tax benefits that it believes is adequate in relation to the potential for additional assessments. Once established, the Firm adjusts liabilities for unrecognized tax benefits only when new information is available or when an event occurs necessitating a change.

June 2017 Form 10-Q90

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

The Firm expects to receive new information related to a multi-year IRS field audit examination that may prompt a decrease in the Firm’s recorded unrecognized tax benefits over the next 12 months. The potential change in unrecognized tax benefits is not expected to have a material impact on the Firm’s annual consolidated financial statements or effective tax rate, although it could have a material impact on

the Firm’s consolidated income statements and effective tax rate for the period in which such development occurs.

See Note 11 regarding the Dutch Tax Authority’s challenge, in the Dutch Tax TribunalDistrict Court in Amsterdam (matters styledCase number 15/3637andCase number 15/4353), of the Firm’s entitlement to certain withholding tax credits which may impact the balance of unrecognized tax benefits.

It is reasonably possible that significant changes in the balance of unrecognized tax benefits occur within the next 12 months. At this time, however, it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits and the impact on the Firm’s effective tax rate over the next 12 months.

19. Segment and Geographic Information

Segment Information

For a discussion about the Firm’s business segments, see Note 21 to the consolidated financial statements in the 20162017 Form10-K.

Selected Financial Information by Business Segment

 

  Three Months Ended June 30, 2017 
$ in millions IS1  WM  IM2  I/E  Total 

Totalnon-interest revenues3

 $5,020  $3,142  $665  $(75)  $8,752 

Interest income

  1,243   1,114   1   (252)   2,106 

Interest expense

  1,501   105   1   (252)   1,355 

Net interest

  (258)   1,009   —   —   751 

Net revenues

 $4,762  $4,151  $665  $(75)  $9,503 

Income from continuing operations before income taxes

 $1,443  $1,057  $142  $—  $2,642 

Provision for income taxes

  413   392   41   —   846 

Income from continuing operations

  1,030   665   101   —   1,796 

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

  (5)   —   —   —   (5) 

Net income

  1,025   665   101   —   1,791 

Net income applicable to noncontrolling interests

  33   —   1   —   34 

Net income applicable to Morgan Stanley

 $992  $665  $100  $—  $1,757 
  Three Months Ended June 30, 2016 
$ in millions IS4  WM4  IM2  I/E  Total 

Totalnon-interest revenues3

 $4,496  $2,982  $581  $(63)  $7,996 

Interest income

  966   920   3   (222)   1,667 

Interest expense

  884   91   1   (222)   754 

Net interest

  82   829   2   —   913 

Net revenues

 $4,578  $3,811  $583  $(63)  $8,909 

Income from continuing operations before income taxes

 $1,506  $859  $118  $—  $2,483 

Provision for income taxes

  453   343   37   —   833 

Income from continuing operations

  1,053   516   81   —   1,650 

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

  (4)   —   —   —   (4) 

Net income

  1,049   516   81   —   1,646 

Net income applicable to noncontrolling interests

  61   —   3   —   64 

Net income applicable to Morgan Stanley

 $988  $516  $78  $—  $1,582 
  Six Months Ended June 30, 2017 
$ in millions IS1  WM  IM2  I/E  Total 

Totalnon-interest revenues3

 $10,399  $6,206  $1,273  $(152)  $17,726 

Interest income

  2,367   2,193   2   (491)   4,071 

Interest expense

  2,852   190   1   (494)   2,549 

Net interest

  (485)   2,003   1   3   1,522 

Net revenues

 $9,914  $8,209  $1,274  $(149)  $19,248 

Income from continuing operations before income taxes

 $3,173  $2,030  $245  $2  $5,450 

Provision for income taxes

  872   718   71   —   1,661 

Income from continuing operations

  2,301   1,312   174   2   3,789 

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

  (27)   —   —   —   (27) 

Net income

  2,274   1,312   174   2   3,762 

Net income applicable to noncontrolling interests

  68   —   7   —   75 

Net income applicable to Morgan Stanley

 $2,206  $1,312  $167  $2  $3,687 
  Six Months Ended June 30, 2016 
$ in millions IS4  WM4  IM2  I/E  Total 

Totalnon-interest revenues3

 $8,141  $5,819  $1,059  $(130)  $14,889 

Interest income

  2,019   1,834   4   (443)   3,414 

Interest expense

  1,868   174   3   (443)   1,602 

Net interest

  151   1,660   1   —   1,812 

Net revenues

 $8,292  $7,479  $1,060  $(130)  $16,701 

Income from continuing operations before income taxes

 $2,414  $1,645  $162  $—  $4,221 

Provision for income taxes

  728   636   47   —   1,411 

Income from continuing operations

  1,686   1,009   115   —   2,810 

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

  (7)   —   —   —   (7) 

Net income

  1,679   1,009   115   —   2,803 

Net income (loss) applicable to noncontrolling interests

  100   —   (13)   —   87 

Net income applicable to Morgan Stanley

 $1,579  $1,009  $128  $—  $2,716 

IS—Institutional Securities

WM—Wealth Management

IM—Investment Management

          Three Months Ended March 31, 2018         
$ in millions IS  WM  IM  I/E  Total 

Total non-interest revenues

 $6,195  $3,305  $718  $(116)  $10,102 

Interest income

  1,804   1,280   1   (225)   2,860 

Interest expense

  1,899   211   1   (226)   1,885 

Net interest

  (95)   1,069   —   1   975 

Net revenues

 $6,100  $  4,374  $718  $(115)  $11,077 

Income from continuing operations before income taxes

 $2,112  $1,160  $148  $—  $3,420 

Provision for income taxes

  449   246   19   —   714 

Income from continuing operations

  1,663   914   129   —   2,706 

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

  (2)   —   —   —   (2) 

Net income

  1,661   914   129   —   2,704 

Net income applicable to noncontrolling interests

  34   —   2   —   36 

Net income applicable to Morgan Stanley

 $  1,627  $914  $    127  $—  $2,668 
          Three Months Ended March 31, 2017         
$ in millions IS  WM  IM  I/E  Total 

Total non-interest revenues

 $5,379  $3,064  $608  $(77)  $8,974 

Interest income

  1,124   1,079   1   (239)   1,965 

Interest expense

  1,351   85   —   (242)   1,194 

Net interest

  (227)   994   1   3   771 

Net revenues

 $5,152  $4,058  $609  $(74)  $    9,745 

Income from continuing operations before income taxes

 $1,730  $973  $103  $2  $2,808 

Provision for income taxes

  459   326   30   —   815 

Income from continuing operations

  1,271   647   73   2   1,993 

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

  (22)   —   —   —   (22) 

Net income

  1,249   647   73   2   1,971 

Net income applicable to noncontrolling interests

  35   —   6   —   41 

Net income applicable to Morgan Stanley

 $1,214  $647  $67  $        2  $1,930 

I/E—E–Intersegment eliminationsEliminations

 

 

  9181  June 2017March 2018 Form 10-Q

Notes to Consolidated Financial Statements

(Unaudited)

  LOGOLOGO

 

1.

In the current quarter, the Firm recorded a provision of $86 million for potential additional value-added tax, interest and penalties in relation to certain intercompany service activities provided to our U.K. Group.

2.

The Firm waives a portion of its fees from certain registered money market funds that comply with the requirements of Rule2a-7 of the Investment Company Act of 1940. These fee waivers resulted in a reduction of fees of approximately $23 million and $12 million for the current quarter and prior year quarter, respectively, and $45 million and $35 million for the current year period and prior year period, respectively.

3.

In certain management fee arrangements, the Firm is entitled to receive performance-based fees (also referred to as incentive fees and includes carried interest) when the return on assets under management exceeds certain benchmark returns or other performance targets. In such arrangements, performance fee revenues are accrued (or reversed) quarterly based on measuring account/fund performance to date versus the performance benchmark stated in the investment management agreement. The Firm’s portion of net unrealized cumulative performance-based fees (for which the Firm is not obligated to pay compensation) at risk of reversing if fund performance falls below stated investment management agreement benchmarks was approximately $469 million and $397 million at June 30, 2017 and December 31, 2016, respectively. See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received.

4.

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

Total Assets by Business Segment

 

$ in millions  At June 30,
2017		   At December 31,
2016		   

At

March 31,

2018

   At
December 31,
2017		 

Institutional Securities

  $665,603   $629,149   $674,785   $664,974 

Wealth Management

   170,735    181,135    177,603    182,009 

Investment Management

   4,678    4,665    6,107    4,750 

Total1

  $841,016   $814,949   $            858,495   $            851,733 

 

1.

CorporateParent assets have been fully allocated to the business segments.

Additional Information – Investment Management

Net Unrealized Performance-based Fees

$ in millions  At
March 31,
2018		   At
December 31,
2017		 

Net cumulative unrealized performance-based fees at risk of reversing

  $                    441   $                    442 

The Firm’s portion of net cumulative unrealized performance-based fees (for which the Firm is not obligated to pay compensation) are at risk of reversing if the fund performance falls below the stated investment management agreement benchmarks. See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received.

Reduction of Fees due to Fee Waivers

   Three Months Ended March 31, 
$ in millions  2018   2017 

Fee waivers

  $                        18   $                        23 

The Firm waives a portion of its fees in the Investment Management business segment from certain registered money market funds that comply with the requirements of Rule 2a-7 of the Investment Company Act of 1940.

Geographic Information

For a discussion about the Firm’s geographic net revenues, see Note 21 to the consolidated financial statements in the 20162017 Form10-K.

Net Revenues by Region

 

  Three Months Ended
June 30,		   Six Months Ended
June 30,		   Three Months Ended March 31, 
$ in millions  2017   2016   2017   2016   2018   2017 

Americas

  $6,746   $6,538   $13,834   $12,290   $8,018   $7,088 

EMEA

   1,606    1,312    3,095    2,441    1,708    1,489 

Asia-Pacific

   1,151    1,059    2,319    1,970 

Net revenues

  $9,503   $8,909   $19,248   $16,701 

Asia

   1,351    1,168 

Total

  $                11,077   $                9,745 

20. Revenues from Contracts with Customers

These disclosures are made in accordance with the adoption of the accounting updateRevenue from Contracts with Customers, as such, they relate only to the subset of revenues generated from contracts with customers, which excludes certain revenues primarily reflected in Trading and Interest income.

For a detailed discussion about the Firm’s revenue recognition accounting policies, see Note 2. For further segment and geographic information of the Firm’s total revenues, see Note 19. For a discussion about the Firm’s business segments, see Note 21 to the financial statements in the 2017 Form 10-K.

Customer Contract Revenue by Business Segment

  Three Months Ended March 31, 2018 
$ in millions IS  WM  IM  I/E  Total 

Investment banking1

 $1,308  $140  $—  $(19)  $1,429 

Commissions and fees

  744   498   —   (69)   1,173 

Asset management

  110   2,495   626   (39)   3,192 

Other customer contract revenues2

  59   59   —   (2)   116 

Total revenues from contracts with customers3

 $  2,221  $  3,192  $    626  $  (129)  $  5,910 

1.

Investment banking includes revenues from underwriting equity and fixed income securities and advisory fees.

2.

Includes Trading and Other revenues from contracts with customers.

3.

Includes $902 million in total consolidated revenue recognized in the current quarter from services performed over multiple periods related primarily to investment banking advisory fees, and distribution fees.

Customer Contract Revenue by Region

$ in millions  Three Months Ended
March 31, 2018		 

Americas

  $4,738 

EMEA

   622 

Asia

   550 

Total

  $5,910 

Change in Revenue as a Result of Application of the New Revenue Recognition Standard1

$ in millions  Three Months Ended
March 31, 2018		 

Investment banking2

  $60 

Commissions and fees

   2 

Asset management

   9 

Other customer contract revenues

   12 

Total change

  $83 

1.

The accounting update requires, among other things, a gross presentation of certain costs that were previously netted against revenues. As a result, the Firm recorded an increase to net revenues and noncompensation expenses of $79 million, which was reported as follows: $72 million in the Institutional Securities business segment; $23 million in the Investment. Management business segment; and $(16) million in Intersegment Eliminations related to intersegment activity.

2.

The effect of changing to a gross presentation on advisory fees and total underwriting fees within the Institutional Securities business segment in the current quarter was $15 million and $45 million, respectively.

March 2018 Form 10-Q82

Notes to Consolidated Financial Statements

(Unaudited)

LOGO

Balance Sheet Amounts Related to Customer Contracts Revenue

$ in millions  At
March 31,
2018		   At
January 1,
2018		 

Customer and other receivables

  $            2,697   $            2,805 

Other Liabilities—Contract Liabilities Rollforward

$ in millions  Three Months Ended
March 31, 2018		 

January 1, 2018

  $155 

Recognized contract liabilities

   184 

Contract liabilities recognized into revenue

   (160) 

March 31, 2018

  $179 

Current quarter activity in contract liabilities relates primarily to Wealth Management advisory and managed account fees that are billed in advance and recognized into revenue as the underlying services are provided.

Certain Future Expected Revenues

   At March 31, 2018 
$ in millions  2018   2019   2020   Thereafter   Total 

Other customer contract revenues1

  $89   $118   $95   $310   $612 

1.

Primarily includes commodities-related contracts with customers.

The previous table presents expected revenues from current obligations to perform services in the future. It excludes the following: revenue subject to potentially significant reversal, revenues from contracts shorter than one year, and revenues from billings that are commensurate with the value of the services performed at each stage of the contract.

21. Subsequent Events

The Firm has evaluated subsequent events for adjustment to or disclosure in the consolidated financial statements through the date of this report and has not identified any recordable or disclosable events not otherwise reported in these consolidated financial statements or the notes thereto.

 

 

June 201783March 2018 Form 10-Q92

Financial Data Supplement (Unaudited)

Average Balances and Interest Rates and Net Interest Income

  LOGOLOGO

 

   Three Months Ended June 30, 
   2017  2016 
$ in millions  

Average

Daily
Balance

   Interest  

Annualized

Average
Rate

  

Average

Daily
Balance

   Interest  Annualized
Average
Rate		 

Interest earning assets1

         

Investment securities2

  $74,855   $304   1.6%  $78,233   $237   1.2% 

Loans2

   96,230    798   3.3   89,344    680   3.1 

Interest bearing deposits with banks2

   19,555    67   1.4   29,250    52   0.7 

Securities purchased under agreements to resell and Securities borrowed3:

         

U.S.

   129,845    140   0.4   157,223    (64)   (0.2) 

Non-U.S.

   90,200    (111)   (0.5)   82,863    (56)   (0.3) 

Trading assets, net of Trading liabilities4:

         

U.S.

   60,963    476   3.1   49,914    459   3.7 

Non-U.S.

   3,409    15   1.8   12,447    67   2.2 

Customer receivables and Other5:

         

U.S.

   48,330    292   2.4   46,144    233   2.0 

Non-U.S.

   25,863    125   1.9   21,655    59   1.1 

Total

  $549,250   $2,106   1.5%  $567,073   $1,667   1.2% 

Interest bearing liabilities1

         

Deposits2

  $146,982   $14   —%  $154,835   $15   —% 

Short-term and Long-term borrowings2, 6

   180,918    1,067   2.4   164,061    851   2.1 

Securities sold under agreements to repurchase and Securities loaned7:

         

U.S.

   35,066    245   2.8   31,412    141   1.8 

Non-U.S.

   36,974    94   1.0   31,729    118   1.5 

Customer payables and Other8:

         

U.S.

   130,814    (98)   (0.3)   126,988    (335)   (1.1) 

Non-U.S.

   64,135    33   0.2   65,603    (36)   (0.2) 

Total

  $594,889   $1,355   0.9  $574,628   $754   0.5 

Net interest income and net interest rate spread

       $751   0.6%       $913   0.7% 

  Three Months Ended March 31, 
  2018  2017 
    Average       Annualized      Average       Annualized 
    Daily       Average      Daily       Average 
$ in millions    Balance     Interest  Rate        Balance     Interest  Rate 

Interest earning assets1

           

Investment securities2

 $  80,532  $  424   2.1%    $  80,693  $  326   1.6% 

Loans2

    104,407     938   3.6       95,364     748   3.2 

Securities purchased under agreements to resell and Securities borrowed3:

           

U.S.

    124,172     309   1.0       124,809     77   0.2 

Non-U.S.

    87,581     (94)   (0.4)       97,415     (95)   (0.4) 

Trading assets, net of Trading liabilities4:

           

U.S.

    53,488     487   3.7       54,498     445   3.3 

Non-U.S.

    5,059     53   4.2       3,201     18   2.3 

Customer receivables and Other5:

           

U.S.

    71,382     542   3.1       68,918     336   2.0 

Non-U.S.

    34,131     201   2.4       24,851     110   1.8 

Total

 $  560,752  $  2,860   2.1%    $  549,749  $  1,965   1.4% 

Interest bearing liabilities1

           

Deposits2

 $  159,948  $  159   0.4%    $  153,674  $  11   —% 

Borrowings2, 6

    194,558     1,138   2.4       171,000     1,022   2.4 

Securities sold under agreements to repurchase and Securities loaned7:

           

U.S.

    25,009     286   4.6       33,900     172   2.1 

Non-U.S.

    40,675     116   1.2       39,774     76   0.8 

Customer payables and Other8:

           

U.S.

    121,438     49   0.2       121,923     (86)   (0.3) 

Non-U.S.

    69,646     137   0.8       58,556     (1)   — 

Total

 $  611,274  $  1,885   1.3%    $  578,827  $  1,194   0.8% 

Net interest income and net interest rate spread

       $  975   0.8%          $  771   0.6% 
93June 2017 Form 10-Q

Financial Data Supplement (Unaudited)

Average Balances and Interest Rates and Net Interest Income

LOGO

   Six Months Ended June 30, 
   2017  2016 
$ in millions  

Average

Daily
Balance

   Interest  

Annualized

Average
Rate

  

Average

Daily
Balance

   Interest  Annualized
Average
Rate		 

Interest earning assets1

         

Investment securities2

  $77,758   $630   1.6%  $76,999   $473   1.2% 

Loans2

   95,799    1,546   3.3   87,979    1,327   3.0 

Interest bearing deposits with banks2

   19,928    122   1.2   30,514    105   0.7 

Securities purchased under agreements to resell and Securities borrowed3:

         

U.S.

   128,775    216   0.3   154,488    (126)   (0.2) 

Non-U.S.

   92,354    (206)   (0.4)   84,499    (72)   (0.2) 

Trading assets, net of Trading liabilities4:

         

U.S.

   58,390    922   3.2   48,827    957   4.0 

Non-U.S.

   2,630    33   2.5   13,386    152   2.3 

Customer receivables and Other5:

         

U.S.

   48,173    586   2.5   47,400    468   2.0 

Non-U.S.

   25,664    222   1.7   22,092    130   1.2 

Total

  $549,471   $4,071   1.5%  $566,184   $3,414   1.2% 

Interest bearing liabilities1

         

Deposits2

  $150,309   $25   —%  $156,893   $37   —% 

Short-term and Long-term borrowings2, 6

   175,937    2,088   2.4   162,059    1,818   2.3 

Securities sold under agreements to repurchase and Securities loaned7:

         

U.S.

   35,199    417   2.4   31,635    271   1.7 

Non-U.S.

   37,654    170   0.9   28,144    242   1.7 

Customer payables and Other8:

         

U.S.

   130,836    (183)   (0.3)   125,943    (704)   (1.1) 

Non-U.S.

   60,160    32   0.1   65,055    (62)   (0.2) 

Total

  $590,095   $2,549   0.9  $569,729   $1,602   0.6 

Net interest income and net interest rate spread

       $1,522   0.6%       $1,812   0.6% 

1.

Certain revisionsPrior period amounts have been made to prior periodsrevised to conform to the current presentation.

2.

Amounts include primarily U.S. balances.

3.

Includes fees paid on Securities borrowed.

4.

Trading assets, net of Trading liabilities excludenon-interest earning assets andnon-interest bearing liabilities, such as equity securities.

5.

Includes interest from customerCustomer receivables, Restricted cash and cash depositedInterest bearing deposits with clearing organizations or segregated under federal and other regulations or requirements.banks.

6.

The Firm also issues structured notes that have coupon or repayment terms linked to the performance of debt or equity securities, indices, currencies or commodities, which are recorded within Trading revenues (see Note 3 to the consolidated financial statements).

7.

Includes fees received on Securities loaned. The annualized average rate was calculated using (a) interest expense incurred on all securities sold under agreements to repurchase and securities loaned transactions, whether or not such transactions were reported in the balance sheets and (b) net average on-balance sheet balances, which exclude certain securities-for-securities transactions.

8.

Includes fees received from prime brokerage customers for stock loan transactions incurred to cover customers’ short positions.

 

June 2017March 2018 Form 10-Q  9484  

Financial Data Supplement (Unaudited)

Rate/Volume Analysis

  LOGOLOGO

 

Effect of Volume and Rate Changes on Net Interest Income

 

 

Three Months Ended March 31, 2018

versus

 
 Three Months Ended March 31, 2017 
  Three Months Ended June 30,
2017versusThree Months
Ended June 30, 2016		 Six Months Ended June 30,
2017versusSix Months
Ended June 30, 2016		 
  

Increase (decrease)

due to change in:

     

Increase (decrease)

due to change in:

     

Increase (Decrease)

Due to Change in:

    
$ in millions  Volume Rate Net Change Volume Rate Net Change    Volume       Rate       Net Change 

Interest earning assets

               

Investment securities

  $(10)  $77  $67  $5  $152  $157  $   (1)   $   99  $            98 

Loans

   52   66   118   118   101   219      71       119   190 

Interest bearing deposits with banks

   (17)   32   15   (37)   54   17 

Securities purchased under agreements to resell and Securities borrowed:

               

U.S.

   11   193   204   20   322   342      —       232   232 

Non-U.S.

   (5)   (50)   (55)   (7)   (127)   (134)      10       (9)   1 

Trading assets, net of Trading liabilities:

               

U.S.

   101   (84)   17   186   (221)   (35)      (8)       50   42 

Non-U.S.

   (49)   (3)   (52)   (122)   3   (119)      10       25   35 

Customer receivables and Other:

               

U.S.

   11   48   59   8   110   118      12       194   206 

Non-U.S.

   11   55   66   21   71   92      41       50   91 

Change in interest income

  $105  $334  $439  $192  $465  $657  $   135   $   760  $895 

Interest bearing liabilities

               

Deposits

  $(1)  $—  $(1)  $(2)  $(10)  $(12)  $   —   $   148  $148 

Short-term and Long-term borrowings

   88   128   216   156   114   270 

Borrowings

     141       (25)   116 

Securities sold under agreements to repurchase and Securities loaned:

               

U.S.

   16 �� 88   104   31   115   146      (45)       159   114 

Non-U.S.

   19   (43)   (24)   82   (154)   (72)      2       38   40 

Customer payables and Other:

               

U.S.

   (10)   247   237   (26)   547   521      —       135   135 

Non-U.S.

   1   68   69   5   89   94      —       138   138 

Change in interest expense

  $113  $488  $601  $246  $701  $947  $   98   $   593  $            691 

Change in net interest income

  $(8)  $(154)  $(162)  $(54)  $(236)  $(290)  $   37   $   167  $            204 

 

  9585  June 2017March 2018 Form 10-Q

Glossary of Common AcronymsLOGO

2017 Form 10-K—Annual Report on Form 10-K for year ended December 31, 2017 filed with the SEC

ABS—Asset-backed securities

AFS—Available-for-sale

AML—Anti-money laundering

AOCI—Accumulated other comprehensive income (loss)

AUM—Assets under management or supervision

BHC—Bank holding company

bps—Basis points; one basis point equals 1/100th of 1%

CCAR—Comprehensive Capital Analysis and Review

CCyB—Countercyclical capital buffer

CDO—Collateralized debt obligations, including collateralized loan obligations

CDS—Credit default swaps

CECL—Current expected credit loss

CFTC—U.S. Commodity Futures Trading Commission

CLN—Credit-linked notes

CLO—Collateralized loan obligations

CMBS—Commercial mortgage-backed securities

CMO—Collateralized mortgage obligations

CVA—Credit valuation adjustment

DVA—Debt valuation adjustment

EBITDA—Earnings before interest, taxes, depreciation and amortization

ELN—Equity-linked notes

EMEA—Europe, Middle East and Africa

EPS—Earnings per common share

ERISA—Employee Retirement Income Security Act of 1974

E.U.—European Union

FDIC—Federal Deposit Insurance Corporation

FFELP—Family Education Loan Program

FVA—Funding valuation adjustment

GLR—Global liquidity reserve

G-SIB—Global systemically important banks

HQLA—High-quality liquid assets

HTM—Held-to-maturity

I/E—Intersegment eliminations

IM—Investment Management

IRS—Internal Revenue Service

IS—Institutional Securities

LCR—Liquidity coverage ratio, as adopted by the U.S. banking agencies

LIBOR—London Interbank Offered Rate

M&A—Merger, acquisition and restructuring transaction

MSBNA—Morgan Stanley Bank, N.A.

MS&Co.—Morgan Stanley & Co. LLC

MSIP—Morgan Stanley & Co. International plc

MSMS—Morgan Stanley MUFG Securities Co., Ltd.

MSPBNA—Morgan Stanley Private Bank, National Association

MSSB LLC—Morgan Stanley Smith Barney LLC

MUFG—Mitsubishi UFJ Financial Group, Inc.

MUMSS—Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.

MWh—Megawatt hour

N/A—Not Applicable

NAV—Net asset value

N/M—Not Meaningful

Non-GAAP—Non-generally accepted accounting principles

NSFR—Net stable funding ratio, as proposed by the U.S. banking agencies

OCC—Office of the Comptroller of the Currency

OCI—Other comprehensive income (loss)

OTC—Over-the-counter

PRA—Prudential Regulation Authority

RMBS—Residential mortgage-backed securities

ROE—Return on average common equity

ROTCE—Return on average tangible common equity

RSU—Restricted stock units

RWA—Risk-weighted assets

SEC—U.S. Securities and Exchange Commission

SLR—Supplementary leverage ratio

S&P—Standard & Poor’s

SPE—Special purpose entity

SPOE—Single point of entry

March 2018 Form 10-Q86

Glossary of Common AcronymsLOGO

TDR—Troubled debt restructuring

TLAC—Total loss-absorbing capacity

U.K.—United Kingdom

UPB—Unpaid principal balance

U.S.—United States of America

U.S. DOL—U.S. Department of Labor

U.S. GAAP—Accounting principles generally accepted in the United States of America

VaR—Value-at-Risk

VAT—Value-added tax

VIE—Variable interest entities

WACC—Implied weighted average cost of capital

WM—Wealth Management

87March 2018 Form 10-Q

  LOGOLOGO

 

Other Information

Legal Proceedings

The following new matters and developments have occurred since previously reporting certain matters in the Firm’s Annual Report on2017 Form10-K for the year ended December 31, 2016 (the “Form10-K”) and the Firm’s Quarterly Report on Form10-Q for the quarterly period ended March 31, 2017 (the “First Quarter Form10-Q”). 10-K. See also the disclosures set forth under “Legal Proceedings” in Part I, Item 3 of the 2017 Form10-K and Part II, Item 1 of the First Quarter Form10-Q. 10-K.

Residential Mortgage and Credit Crisis Related Matters

On April 13, 2017,March 8, 2018, the Appellate Division, First Department,court denied plaintiff’sthe Firm’s renewed motion for leave to appeal todismiss the New York Court of Appealsnotification claims inFederal Housing Finance Agency,Deutsche Bank National Trust Company, as ConservatorTrustee 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.

On April 13, 2017,March 8, 2018, the Appellate Division, First Department, deniedcourt granted plaintiff’s motion for leave to appealamend its complaint to the New York Court of Appealsinclude failure to notify claims inFederal Housing Finance Agency,Deutsche Bank National Trust Company, solely in its capacity as ConservatorTrustee for the Federal Home Loan Mortgage Corporation, on behalf of the Trustee of the Morgan Stanley ABS Capital I Inc. Trust, Series2007-NC3 (MSAC2007-NC3) v. Morgan Stanley ABS Capital I Inc.

On April 21, 2017 the parties toMorgan Stanley Mortgage Loan Trust 2006-13ARX v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interestSuccessor-by-Merger to Morgan Stanley Mortgage Capital Inc. reachedOn March 19, 2018, the Firm filed an agreement in principleanswer to settle the litigation.plaintiff’s amended complaint.

On May 8, 2017, the Firm moved for summary judgment inDeutsche Bank National Trust Company v. Morgan Stanley Mortgage Capital Holdings LLC.

On May 12, 2017, plaintiff filed a notice of appeal of the decision and order by the Supreme Court of the State of New York, which granted the Firm’s motion to dismiss the amended complaint inRoyal Park Investments SA/NV v. Morgan Stanley et al.

On May 30, 2017,March 9, 2018, the parties inMorgan Stanley Mortgage Loan Trust2006-4SL, et al. v. Morgan Stanley Mortgage Capital Inc. andMorgan Stanley Mortgage Loan Trust 2006-10SL, 2006-14SL, et al. v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to MorganStanley Mortgage Capital Inc.Inc reached an agreement in principle. entered into agreements to settle the litigation.litigation, which are subject to court approval.

On June 20, 2017,April 4, 2018, the Appellate Division, First Department, affirmed the order granting in part and denying in part the Firm’s motion to dismissparties inDeutsche Zentral-Genossenschaftsbank AG et al.Bank National Trust Company, solely in its capacity as trustee for Morgan Stanley Structured Trust I 2007-1 v. Morgan Stanley et al. On July 28, 2017, the Firm filed a motion for leave to appeal that decision to the New York Court of Appeals.

Following the reversal on appeal of the Court’s order granting defendants’ motion to dismiss on November 17, 2016, on June 15, 2017, plaintiffs in Phoenix Light SF Limited, et al. v. Morgan Stanley, et al. filed a second amended complaint. On July 7, 2017, the court so-ordered a stipulation of partial discontinuance dismissing claims relating to certificates having an original face value of approximately $76 million.

On July 11, 2017, the Appellate Division, First Department, affirmed in part and reversed in part, an order granting in part and denying in part the Firm’s motion to dismiss inWilmington Trust Company v. MorganStanley Mortgage Capital Holdings LLC et al. filed a stipulation voluntarily dismissing the action, with prejudice, pursuant to a settlement.

European Matters

On July 17, 2017, the court in Parma, Italy presiding over the criminal trial against certain present and former employees ofMarch 30, 2018, the Firm relatedfiled its defense to the bankruptcy of Parmalat in 2003 issued a decision acquitting the present and former employees of all of the charges pending against them.

On May 31, 2017, Land Salzburg received parliamentary approval for the resolution of all claims in the actions styledLand Salzburg v. Morgan Stanley & Co. International plc andMorgan Stanley Capital Services LLC and Morgan Stanley & Co. International plc v. Land Salzburg.

On July 3, 2017, the Firm was informed thatclaim brought by 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 terminated in December 2011 and January 2012. The claim alleges, inter alia, that the Firm was acting as an agent of the Republic of Italy, that the derivative transactions were improper and that the termination of the transactions was also improper and asserts claims for damages through an administrative process against the Firm for €2.76 billion. The Firm does not agree with these allegations.matter styledCase number 2012/00406/MNV. A hearing regarding this matter has been scheduled forwas held on April 19, 2018. The timing of a decision is uncertain.

InOn March 20, 2018, the hearing on the parties’ final submissions inBanco Popolare Societá Cooperativa v. Morgan Stanley & Co. International plc & otherswas adjourned to May 17, 2018.

On April 26, 2018, the District Court in Amsterdam issued a decision in matters styledCase number 15/3637 andCase number 15/4353, dismissing the Dutch Tax Authority’s claims. The Dutch Tax Authority (“Dutch Authority”) ishas until June 7, 2018 to file any appeal.

 

 

June 2017March 2018 Form 10-Q  9688  

  LOGOLOGO

challenging in the Dutch Tax Tribunal in Amsterdam the priorset-off by the Firm of approximately €124 million (plus accrued interest) of withholding tax credits against the Firm’s corporation tax liabilities for the tax years 2007 to 2013. The Dutch Authority alleges that the Firm was not entitled to receive the withholding tax credits on the basis, inter alia, that a Firm subsidiary did not hold legal title to certain securities subject to withholding tax on the relevant dates. The Dutch Authority has also alleged that the Firm failed to provide certain information to the Dutch Authority and keep adequate books and records. The Firm does not agree with these allegations. A hearing regarding this matter has been scheduled on September 19, 2017.

Other

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 Southern District of New York styledIn Re: Interest Rate Swaps Antitrust Litigation. Plaintiffs allege, inter alia, that the Firm, together with a number of other financial institution defendants violated United States 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.

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 July 7, 2017, the EPA made a settlement demand of approximately $1 million. Further discussions between the parties are ongoing.

97June 2017 Form 10-Q

LOGO

 

Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth the information with respect to purchases made by or on behalf of the Firm of its common stock during the quarterly periodcurrent quarter ended June 30, 2017.March 31, 2018.

Issuer Purchases of Equity Securities

 

$ in millions, except per share data  

Total Number of

Shares
Purchased

   

Average Price

Paid Per Share

   

Total Number of

Shares Purchased

as Part of Publicly
Announced Plans
or Programs1

   

Approximate
Dollar Value of

Shares that May

Yet be Purchased
Under the Plans
or Programs

   

Total Number of

Shares

Purchased

 Average Price
Paid Per Share		   

Total Number of

Shares Purchased

as Part of Publicly

Announced Plans

or Programs1

 Approximate
Dollar Value of
Shares that May
Yet be Purchased
Under the Plans or
Programs		 

Month #1 (April 1, 2017—April 30, 2017)

        

Month #1 (January 1, 2018—January 31, 2018)

      

Share Repurchase Program2

   1,050,000   $43.04    1,050,000   $455    3,466,000  $57.14    3,466,000  $2,302 

Employee transactions3

   1,049,776   $40.86    —    —    10,078,944  $55.81    —   — 

Month #2 (May 1, 2017—May 31, 2017)

        

Month #2 (February 1, 2018—February 28, 2018)

      

Share Repurchase Program2

   5,728,000   $42.89    5,728,000   $209    10,170,000  $54.81    10,170,000  $1,745 

Employee transactions3

   82,728   $43.36    —    —    838,924  $56.86    —   — 

Month #3 (June 1, 2017—June 30, 2017)

        

Month #3 (March 1, 2018—March 31, 2018)

      

Share Repurchase Program2

   4,765,281   $43.89    4,765,281   $5,000    8,691,835  $56.89    8,691,835  $1,250 

Employee transactions3

   29,687   $42.57    —    —    142,392  $56.05    —   — 

Quarter ended at June 30, 2017

        

Quarter ended at March 31, 2018

      

Share Repurchase Program2

   11,543,281   $43.32    11,543,281   $5,000    22,327,835  $55.98    22,327,835  $1,250 

Employee transactions3

   1,162,191   $41.09    —    —    11,060,260  $55.89    —   — 

 

1.

Share purchases under publicly announced programs are made pursuant to open-market purchases, Rule10b5-1 plans or privately negotiated transactions (including with employee benefit plans) as market conditions warrant and at prices the Firm deems appropriate and may be suspended at any time. As previously announced, on April 18, 2018, the Firm entered into a sales plan with Mitsubishi UFJ Financial Group, Inc. (“MUFG”) and Morgan Stanley & Co. LLC (“MS&Co.”) whereby MUFG will sell shares of the Firm’s common stock to the Firm, through its agent MS&Co., as part of the Company’s share repurchase program (as defined below). The sales plan is only intended to maintain MUFG’s ownership percentage below 24.9% in order to comply with MUFG’s passivity commitments to the Federal Reserve and will have no impact on the strategic alliance between MUFG and the Firm, including the joint venture in Japan.

2.

The Firm’s Board of Directors has authorized the repurchase of the Firm’s outstanding stock under a share repurchase program (the “Share Repurchase Program”). The Share Repurchase Program is a program for capital management purposes that considers, among other things, business segment capital needs, as well as equity-based compensation and benefit plan requirements. The Share Repurchase Program has no set expiration or termination date. Share repurchases by the Firm are subject to regulatory approval. On June 28, 2017, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) announced that they did not object to our 2017 capital plan, which included a share repurchase of up to $5.0 billion of the Firm’s outstanding common stock during the period beginning July 1, 2017 through June 30, 2018. During the three monthsquarter ended June 30, 2017,March 31, 2018, the Firm repurchased approximately $500 million$1.25 billion of the Firm’s outstanding common stock as part of its Share Repurchase Program. For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity“Liquidity and Capital Resources—Capital Management”.Management.”

3.

Includes shares acquired by the Firm in satisfaction of the tax withholding obligations on stock-based awards and the exercise of stock options granted under the Firm’s stock-based compensation plans.

89March 2018 Form 10-Q

LOGO

Controls and Procedures

Under the supervision and with the participation of the Firm’s management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the Firm’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

No change in the Firm’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) occurred during the period covered by this report that materially affected, or is reasonably likely to materially affect, the Firm’s internal control over financial reporting.

Exhibits

An exhibit index has been filed as part of this Report on pageE-1.

 

June 2017March 2018 Form 10-Q  9890  

LOGO

Exhibit Index

Morgan Stanley

Quarter Ended March 31, 2018

    Exhibit No.

Description

10.1

Amended and Restated Trust Agreement dated as of January 1, 2018 by and between Morgan Stanley and State Street Bank and Trust Company.

12

Statement Re: Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (unaudited).

15

Letter of awareness from Deloitte & Touche LLP, dated May 4, 2018, concerning unaudited interim financial information.

31.1

Rule 13a-14(a) Certification of Chief Executive Officer.

31.2

Rule 13a-14(a) Certification of Chief Financial Officer.

32.1

Section 1350 Certification of Chief Executive Officer.

32.2

Section 1350 Certification of Chief Financial Officer.

101

Interactive data files pursuant to Rule 405 of Regulation S-T (unaudited): (i) the Consolidated Income Statements—Three Months Ended March 31, 2018 and 2017, (ii) the Consolidated Comprehensive Income Statements—Three Months Ended March 31, 2018 and 2017, (iii) the Consolidated Balance Sheets—at March 31, 2018 and December 31, 2017, (iv) the Consolidated Statements of Changes in Total Equity—Three Months Ended March 31, 2018 and 2017, (v) the Consolidated Cash Flow Statements—Three Months Ended March 31, 2018 and 2017, and (vi) Notes to Consolidated Financial Statements.

  LOGOE-1

LOGO

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

MORGAN STANLEY

(Registrant)

By:

/S/                    /s/ JONATHAN PRUZAN

Jonathan Pruzan

Executive Vice President and

Chief Financial Officer

By:

/S/                        /s/  PAUL C. WIRTH

Paul C. Wirth

Deputy Chief Financial Officer

Date: August 3, 2017May 4, 2018

 

  99S-1  June 2017 Form 10-Q

Exhibit Index

Morgan Stanley

Quarter Ended June 30, 2017

Exhibit No.

Description

12Statement Re: Computation of Ratio of Earnings to Fixed Charges and Computation of Earnings to Fixed Charges and Preferred Stock Dividends.
15Letter of awareness from Deloitte & Touche LLP, dated August 3, 2017, concerning unaudited interim financial information.
31.1Rule13a-14(a) Certification of Chief Executive Officer.
31.2Rule13a-14(a) Certification of Chief Financial Officer.
32.1Section 1350 Certification of Chief Executive Officer.
32.2Section 1350 Certification of Chief Financial Officer.
101Interactive data files pursuant to Rule 405 of RegulationS-T: (i) the Consolidated Income Statements—Three Months and Six Months Ended June 30, 2017 and 2016, (ii) the Consolidated Comprehensive Income Statements—Three Months and Six Months Ended June 30, 2017 and 2016, (iii) the Consolidated Balance Sheets—June 30, 2017 and December 31, 2016, (iv) the Consolidated Statements of Changes in Total Equity—Six Months Ended June 30, 2017 and 2016, (v) the Consolidated Cash Flow Statements—Six Months Ended June 30, 2017 and 2016, and (vi) Notes to Consolidated Financial Statements (unaudited).

E-1