Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2019
Commission File Number 1-11758
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
1585 Broadway
New York, NY 10036
(Address of principal executive
offices, including zip code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
36-3145972
(I.R.S. Employer Identification No.)
(212) 761-4000
(Registrant’s telephone number,
including area code)
Trading
Symbol(s)
MS
Name of exchange on
which registered
New York Stock Exchange
Depositary Shares, each representing 1/1,000th interest in a share of Floating Rate
Non-Cumulative Preferred Stock, Series A, $0.01 par value
MS/PA
New York Stock Exchange
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate
Non-Cumulative Preferred Stock, Series E, $0.01 par value
MS/PE
New York Stock Exchange
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate
Non-Cumulative Preferred Stock, Series F, $0.01 par value
MS/PF
New York Stock Exchange
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate
Non-Cumulative Preferred Stock, Series I, $0.01 par value
MS/PI
New York Stock Exchange
Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate
Non-Cumulative Preferred Stock, Series K, $0.01 par value
MS/PK
New York Stock Exchange
Depositary Shares, each representing 1/1,000th interest in a share of 4.875%
Non-Cumulative Preferred Stock, Series L, $0.01 par value
Global Medium-Term Notes, Series A, Fixed Rate Step-Up Senior Notes Due 2026
of Morgan Stanley Finance LLC (and Registrant’s guarantee with respect thereto)
Market Vectors ETNs due March 31, 2020 (two issuances)
Market Vectors ETNs due April 30, 2020 (two issuances)
Morgan Stanley Cushing® MLP High Income Index ETNs due March 21, 2031
MS/PL
New York Stock Exchange
MS/26C
URR/DDR
CNY/INR
MLPY
New York Stock Exchange
NYSE Arca, Inc.
NYSE Arca, Inc.
NYSE Arca, Inc.
Indicate by check mark if Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨
Indicate by check mark if Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No ý
Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý No ¨
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether Registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No ý
As of June 30, 2019, the aggregate market value of the common stock of Registrant held by non-affiliates of Registrant was approximately $69,733,657,018. This
calculation does not reflect a determination that persons are affiliates for any other purposes.
As of January 31, 2020, there were 1,599,276,515 shares of Registrant’s common stock, $0.01 par value, outstanding.
Documents Incorporated by Reference: Portions of Registrant’s definitive proxy statement for its 2020 annual meeting of shareholders are incorporated by reference
in Part III of this Form 10-K.
Table of Contents
ANNUAL REPORT ON FORM 10-K
For the year ended December 31, 2019
Table of Contents
Business
Overview
Business Segments
Competition
Supervision and Regulation
Information about our Executive Officers
Risk Factors
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Executive Summary
Business Segments
Supplemental Financial Information
Other Matters
Accounting Development Updates
Critical Accounting Policies
Liquidity and Capital Resources
Balance Sheet
Regulatory Requirements
Quantitative and Qualitative Disclosures about Risk
Risk Management
Market Risk
Credit Risk
Country and Other Risks
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Consolidated Income Statements
Consolidated Comprehensive Income Statements
Consolidated Balance Sheets
Consolidated Statements of Changes in Total Equity
Consolidated Cash Flow Statements
Notes to Consolidated Financial Statements
1. Introduction and Basis of Presentation
2. Significant Accounting Policies
3. Fair Values
4. Fair Value Option
5. Derivative Instruments and Hedging Activities
6. Investment Securities
7. Collateralized Transactions
8. Loans, Lending Commitments and Allowance for Credit Losses
9. Goodwill and Intangible Assets
i
Part
Item Page
I
1
1A
6
7
II
7A
8
1
1
1
1
2
9
11
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Table of Contents
Table of Contents
Part
Item Page
10. Other Assets—Equity Method Investments and Leases
11. Deposits
12. Borrowings and Other Secured Financings
13. Commitments, Guarantees and Contingencies
14. Variable Interest Entities and Securitization Activities
15. Regulatory Requirements
16. Total Equity
17. Interest Income and Interest Expense
18. Deferred Compensation Plans and Carried Interest Compensation
19. Employee Benefit Plans
20. Income Taxes
21. Segment, Geographic and Revenue Information
22. Parent Company
23. Quarterly Results (Unaudited)
24. Subsequent Event
Financial Data Supplement (Unaudited)
Glossary of Common Terms and Acronyms
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
118
119
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121
126
131
133
136
136
138
142
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S-1
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9B
1B
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16
I
II
III
IV
ii
Table of Contents
Forward-Looking Statements
We have included in or incorporated by reference into this report, and from time to time may make in our public filings, press releases
or other public statements, certain statements, including (without limitation) those under “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”, “Quantitative and Qualitative Disclosures about Risk” and “Legal Proceedings” that
may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. In addition, our management may make forward-looking statements to analysts, investors, representatives of the media
and others. These forward-looking statements are not historical facts and represent only our beliefs regarding future events, many of
which, by their nature, are inherently uncertain and beyond our control.
The nature of our business makes predicting the future trends of our revenues, expenses, and net income difficult. The risks and
uncertainties involved in our businesses could affect the matters referred to in such statements, and it is possible that our actual results
may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Important factors that could
cause actual results to differ from those in the forward-looking statements include (without limitation):
• the effect of market conditions, particularly in the global equity, fixed income, currency, credit and commodities markets, including
corporate and mortgage (commercial and residential) lending and commercial real estate and energy markets;
• the level of individual investor participation in the global markets as well as the level of client assets;
• the flow of investment capital into or from assets under management or supervision;
• the level and volatility of equity, fixed income and commodity prices, interest rates, inflation and currency values and other market
indices;
• the availability and cost of both credit and capital as well as the credit ratings assigned to our unsecured short-term and long-term
debt;
• technological changes instituted by us, our competitors or counterparties and technological risks, business continuity and related
operational risks, including breaches or other disruptions of our or a third party’s (or third parties thereof) operations or systems;
• risk associated with cybersecurity threats, including data protection and cybersecurity risk management;
• our ability to manage effectively our capital and liquidity, including non-objections to our capital plans by our banking regulators;
• the impact of current, pending and future legislation or changes thereto, regulation (including capital, leverage, funding, liquidity and
recovery and resolution requirements) and our ability to address such requirements;
• uncertainty concerning fiscal or monetary policies established by central banks and financial regulators, government shutdowns, debt
ceilings or funding;
• changes to global trade policies, tariffs, interest rates, reforms of LIBOR and other interest rate benchmarks;
• legal and regulatory actions, including litigation and enforcement, in the U.S. and worldwide;
• changes in tax laws and regulations globally;
• the effectiveness of our risk management processes;
• our ability to effectively respond to an economic downturn, or other market disruptions;
• the effect of social, economic and political conditions and geopolitical events, including the U.K.’s withdrawal from the E.U. ("Brexit"),
and sovereign risk;
• the actions and initiatives of current and potential competitors as well as governments, central banks, regulators and self-regulatory
organizations;
• our ability to provide innovative products and services and execute our strategic initiatives, and costs related thereto, including with
respect to the operational or technological integration related to such innovative and strategic initiatives;
• the performance and results of our acquisitions, divestitures, joint ventures, strategic alliances, or other strategic arrangements and
related integrations;
• investor, consumer and business sentiment and confidence in the financial markets;
• our reputation and the general perception of the financial services industry;
• climate-related incidents, pandemics and acts of war or terrorism; and
• other risks and uncertainties detailed under “Business—Competition”, “Business—Supervision and Regulation”, “Risk Factors” and
elsewhere throughout this report.
Accordingly, you are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which
they are made. We undertake no obligation to update publicly or revise any forward-looking statements to reflect the impact of
circumstances or events that arise after the dates they are made, whether as a result of new information, future events or otherwise except
as required by applicable law. You should, however, consult further disclosures we may make in future filings of our annual reports on
Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and any amendments thereto or in future press releases
or other public statements.
iii
Table of Contents
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. The SEC maintains a website,
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 website.
Our website is www.morganstanley.com. You can access our Investor Relations webpage at www.morganstanley.com/about-us-ir.
We make available free of charge, on or through our Investor Relations webpage, our proxy statements, annual reports on Form 10-
K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to
the Securities Exchange Act of 1934, as amended (“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 website, statements of beneficial ownership of our equity securities filed by our directors, officers, 10% or greater shareholders
and others under Section 16 of the Exchange Act.
You can access information about our corporate governance at www.morganstanley.com/about-us-governance and our sustainability
initiatives at www.morganstanley.com/about-us/sustainability-at-morgan-stanley. Our webpages include:
• Amended and Restated Certificate of Incorporation;
• Amended and Restated Bylaws;
• Charters for our Audit Committee, Compensation, Management Development and Succession Committee, Nominating and
Governance Committee, Operations and Technology Committee, and Risk Committee;
• Corporate Governance Policies;
• Policy Regarding Corporate Political Activities;
• Policy Regarding Shareholder Rights Plan;
• Equity Ownership Commitment;
• Code of Ethics and Business Conduct;
• Code of Conduct;
• Integrity Hotline Information;
• Environmental and Social Policies; and
• Sustainability Report.
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 website. 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 website is not incorporated by reference into this
report.
iv
Table of Contents
Business
Overview
We are a global financial services firm that, through our
subsidiaries and affiliates, advises, and originates, trades,
manages and distributes capital for, governments, institutions
and individuals. We were originally incorporated under the laws
of the State of Delaware in 1981, and our predecessor companies
date back to 1924. We are an FHC regulated by the Board of
Governors of the Federal Reserve System (“Federal Reserve”)
under the Bank Holding Company Act of 1956, as amended
(“BHC Act”). We conduct our business from our headquarters
in and around New York City, our regional offices and branches
throughout the U.S. and our principal offices in London, Tokyo,
Hong Kong and other world financial centers. As of
December 31, 2019, we had 60,431 employees worldwide.
Unless the context otherwise requires, the terms “Morgan
Stanley,” the “Firm,” “us,” “we,” and “our” mean Morgan
Stanley (the “Parent Company”) together with its consolidated
subsidiaries. See the “Glossary of Common Terms and
Acronyms” for the definition of certain terms and acronyms used
throughout the 2019 Form 10-K.
Financial information concerning us, our business segments and
geographic regions for each of the years ended December 31,
2019, December 31, 2018 and December 31, 2017 is included
in “Financial Statements and Supplementary Data.”
Business Segments
We are a global financial services firm that maintains significant
market positions
in each of our business segments—
Institutional Securities, Wealth Management and Investment
Management. Through our subsidiaries and affiliates, we
provide a wide variety of products and services to a large and
including
diversified group of clients and customers,
corporations, governments,
and
individuals. Additional information related to our business
segments, respective clients, and products and services provided
is included under “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
institutions
financial
Competition
All aspects of our businesses are highly competitive, and we
expect them to remain so. We compete in the U.S. and globally
for clients, market share and human talent. Operating within the
financial services industry on a global basis presents, among
other things, technological, risk management, regulatory and
other infrastructure challenges that require effective resource
allocation in order for us to remain competitive. Our competitive
position depends on a number of factors, including our
reputation, the quality and consistency of our long-term
investment performance, innovation, execution and relative
pricing. Our ability to sustain or improve our competitive
position also depends substantially on our ability to continue to
attract and retain highly qualified employees while managing
compensation and other costs. We compete with commercial
banks, brokerage firms, insurance companies, exchanges,
electronic trading and clearing platforms, financial data
repositories, sponsors of mutual funds, hedge funds and private
equity funds, energy companies, financial technology firms and
other companies offering financial or ancillary services in the
U.S., globally and digitally, including through the internet. In
addition, restrictive laws and regulations applicable to certain
financial services institutions, which may prohibit us from
engaging in certain transactions and impose more stringent
capital and liquidity requirements, can put us at a competitive
disadvantage to competitors in certain businesses not subject to
these same
requirements. See also “Supervision and
Regulation” herein and “Risk Factors.”
Institutional Securities and Wealth Management
We compete directly in the U.S. and globally with other
securities and financial services firms and broker-dealers and
with others on a regional or product basis. Additionally, there is
increased competition driven by established firms as well as the
emergence of new firms and business models (including
innovative uses of technology) competing for the same clients
and assets or offering similar products and services to customers.
Our ability to access capital at competitive rates (which is
generally impacted by our credit ratings), to commit and to
deploy capital efficiently, particularly in our capital-intensive
underwriting and sales, trading, financing and market-making
activities, also affects our competitive position. We expect
corporate clients to continue to request that we provide loans or
lending commitments in connection with certain investment
banking activities.
It is possible that competition may become even more intense
as we continue to compete with financial or other institutions
that may be larger, or better capitalized, or may have a stronger
local presence and longer operating history in certain
geographies or products. Many of these firms have the ability
to offer a wide range of products and services, and on different
platforms, that may enhance their competitive position and
could result in pricing pressure on our businesses.
We continue to experience intense price competition in some of
our businesses. In particular, the ability to execute securities
trades electronically on exchanges and through other automated
trading markets has increased the pressure on trading
commissions and fees. The trend toward direct access to
automated, electronic markets will likely increase as additional
trading moves to more automated platforms. It is also possible
that we will experience competitive pressures in these and other
areas in the future as some of our competitors seek to obtain
market share by reducing prices, including in the form of
commissions or fees.
1
December 2019 Form 10-K
Table of Contents
Investment Management
Our ability to compete successfully in the asset management
industry is affected by several factors, including our reputation,
investment objectives, quality of investment professionals,
performance of investment strategies or product offerings
relative to peers and appropriate benchmark indices, advertising
and sales promotion efforts, fee levels, the effectiveness of and
access to distribution channels and investment pipelines, and
the types and quality of products offered. Our investment
products, including alternative investment products, may
compete with investments offered by other investment managers
with passive investment products or who may be subject to less
stringent legal and regulatory regimes than us.
Supervision and Regulation
As a major financial services firm, we are subject to extensive
regulation by U.S. federal and state regulatory agencies and
securities exchanges and by regulators and exchanges in each
of the major markets where we conduct our business. These
include legislative and regulatory responses to the financial
crisis, both in the U.S. and worldwide, including: the Dodd-
Frank Wall Street Reform and Consumer Protection Act
(“Dodd-Frank Act”); risk-based capital, leverage and liquidity
standards adopted or being developed by the Basel Committee
on Banking Supervision (“Basel Committee”), including Basel
III, and the national implementation of those standards; capital
planning and stress testing requirements; and recovery and
resolution regimes in the U.S. and other jurisdictions. Some
areas of post-financial crisis regulation are still subject to final
rulemaking, transition periods, or revisions.
We continue to monitor the changing political, tax and
regulatory environment; it is likely that there will be further
changes in the way major financial institutions are regulated in
both the U.S. and other markets in which we operate, although
it remains difficult to predict the exact impact these changes will
have on our business, financial condition, results of operations
and cash flows for a particular future period. We expect to remain
subject to extensive supervision and regulation.
Financial Holding Company
Consolidated Supervision. We have operated as a BHC and
FHC under the BHC Act since September 2008. As a BHC, we
are subject
to comprehensive consolidated supervision,
regulation and examination by the Federal Reserve. The Federal
Reserve has authority to examine, prescribe regulations and take
action with respect to all of our subsidiaries. In particular, we
are subject to (among other things): significantly revised and
expanded regulation and supervision; intensive scrutiny of our
businesses and plans for expansion of those businesses;
limitations on activities; a systemic risk regime that imposes
heightened capital and liquidity requirements; restrictions on
activities and investments imposed by a section of the BHC Act
added by the Dodd-Frank Act referred to as the “Volcker Rule”;
December 2019 Form 10-K
2
and comprehensive derivatives regulation. In addition, the
Consumer Financial Protection Bureau has primary rulemaking,
enforcement and examination authority over us and our
subsidiaries with respect to federal consumer protection laws,
to the extent applicable.
Scope of Permitted Activities. The BHC Act limits the
activities of BHCs and FHCs and grants the Federal Reserve
authority to limit our ability to conduct activities. We must obtain
the Federal Reserve’s approval before engaging in certain
banking and other financial activities both in the U.S. and
internationally.
The BHC Act grandfathers “activities related to the trading, sale
or investment in commodities and underlying physical
properties,” provided that we were engaged in “any of such
activities as of September 30, 1997 in the U.S.” and provided
that certain other conditions that are within our reasonable
control are satisfied. We currently engage in our commodities
activities pursuant to the BHC Act grandfather exemption as
well as other authorities under the BHC Act.
Activities Restrictions under the Volcker Rule. The Volcker
Rule prohibits banking entities, including us and our affiliates,
from engaging in certain proprietary trading activities, as
defined in the Volcker Rule, subject to exemptions for
underwriting, market-making-related activities, risk-mitigating
hedging and certain other activities. The Volcker Rule also
prohibits certain investments and relationships by banking
entities with covered funds, as defined in the Volcker Rule, with
a number of exemptions and exclusions. The Volcker Rule also
requires that deductions be made from a BHC’s Tier 1 capital
for permissible investments in certain covered funds. In
addition, the Volcker Rule requires banking entities to have
comprehensive compliance programs reasonably designed to
ensure and monitor compliance with the Volcker Rule. We have
brought all of our activities and investments into conformance,
subject to a June 2017 approval by the Federal Reserve for a
five-year extension of the transition period to conform
investments in certain legacy covered funds that are also illiquid
funds. The approval covers essentially all of our non-
conforming investments in, and relationships with, legacy
covered funds subject to the Volcker Rule.
The federal financial regulatory agencies responsible for the
Volcker Rule’s implementing regulations have finalized
revisions to certain elements of those regulations. The changes
simplify the application of the Volcker Rule, and focus on
proprietary trading and certain requirements imposed in
connection with permitted market making, underwriting and
risk-mitigating hedging activities. As part of the changes, the
deduction for certain covered fund positions held in connection
with permitted market-making and underwriting activities is no
longer required. These revisions became effective on January
1, 2020. We were permitted to voluntarily comply with the
revised regulations, in whole or in part, beginning on that date,
with full compliance required by January 1, 2021. These
Table of Contents
revisions simplify elements of our compliance obligations and
we do not expect these revisions to have a material impact on
the way we conduct business under the current rule.
Capital Standards. The Federal Reserve establishes capital
requirements, including well-capitalized standards, for large
BHCs and evaluates our compliance with such requirements.
The OCC establishes similar capital requirements and standards
for Morgan Stanley Bank, N.A. (“MSBNA”) and Morgan
Stanley Private Bank, National Association (“MSPBNA”)
(collectively, our “U.S. Bank Subsidiaries”).
Regulatory Capital Framework. The regulatory capital
requirements for us and our U.S. Bank Subsidiaries are largely
based on the Basel III capital standards established by the Basel
Committee, as supplemented by certain provisions of the Dodd-
Frank Act. We are subject to various risk-based capital
requirements with various transition provisions, measured
against our Common Equity Tier 1 capital, Tier 1 capital and
Total capital bases, leverage-based capital requirements,
including the SLR, and additional capital buffers above
generally applicable minimum standards for BHCs.
The Basel Committee has published a comprehensive set of
revisions to its Basel III Framework. The revised requirements
are expected to take effect starting January 2022, subject to U.S.
banking agencies
implementation proposals. The
impact on us of any revisions to the Basel Committee’s capital
standards is uncertain and depends on future rulemakings by the
U.S. banking agencies.
issuing
capital
including
Regulated Subsidiaries. In addition, many of our regulated
subsidiaries are, or are expected to be in the future, subject to
regulatory
regulated
requirements,
subsidiaries registered as swap dealers with the CFTC or
security-based swap dealers with the SEC (collectively, “Swaps
Entities”) or registered as broker-dealers or futures commission
merchants. Specific regulatory capital requirements vary by
regulated subsidiary, and in many cases these standards are still
in proposed form, not yet effective or are subject to ongoing
rulemakings that could substantially modify requirements.
For more information about the specific capital requirements
applicable to us and our U.S. Bank Subsidiaries, see
“Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Liquidity and Capital Resources—
Regulatory Requirements.”
and
Tests
Stress
Planning,
Capital
Capital
Distributions. Pursuant to the Dodd-Frank Act, the Federal
Reserve has adopted capital planning and stress
test
requirements for large BHCs, including Morgan Stanley. For
more information about the capital planning and stress test
requirements,
those
requirements that would integrate them with certain ongoing
regulatory capital requirements, see “Management’s Discussion
and Analysis of Financial Condition and Results of Operations
including proposed
changes
to
and
Capital
—Liquidity
Resources—Regulatory
Requirements” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Liquidity and
Capital Resources—Regulatory Developments—Proposed
Stress Buffer Requirements.”
In addition to capital planning requirements, the Federal
Reserve, the OCC and the FDIC have the authority to prohibit
or to limit the payment of dividends by the banking organizations
they supervise, including us and our U.S. Bank Subsidiaries, if,
in the banking regulator’s opinion, payment of a dividend would
constitute an unsafe or unsound practice in light of the financial
condition of the banking organization. All of these policies and
other requirements could affect our ability to pay dividends and/
or repurchase stock, or require us to provide capital assistance
to our U.S. Bank Subsidiaries under circumstances which we
would not otherwise decide to do so.
Liquidity Standards. In addition to capital regulations, the
U.S. banking agencies and the Basel Committee have adopted,
or are in the process of adopting, liquidity and funding standards.
We and our U.S. Bank Subsidiaries are subject to the U.S.
banking agencies’ LCR requirements, which generally follow
Basel Committee standards. Similarly, if the proposed NSFR
requirements are adopted by the U.S. banking agencies, we and
our U.S. Bank Subsidiaries will become subject to NSFR
requirements, which generally follow Basel Committee
standards.
In addition to the LCR and NSFR, we and many of our regulated
subsidiaries, including those registered as Swaps Entities with
the CFTC or SEC, are, or are expected to be in the future, subject
to other liquidity standards, including liquidity stress-testing and
associated liquidity reserve requirements.
For more information, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—
Liquidity and Capital Resources—Regulatory Liquidity
Framework.”
Systemic Risk Regime. The Dodd-Frank Act, as amended by
the Economic Growth, Regulatory Relief and Consumer
Protection Act (“EGRRCPA”), establishes a systemic risk
regime to which certain large BHCs, including Morgan Stanley,
are subject. Under rules issued by the Federal Reserve to
implement certain requirements of the Dodd-Frank Act’s
enhanced prudential standards, such large BHCs must conduct
internal liquidity stress tests, maintain unencumbered highly
liquid assets to meet projected net cash outflows for 30 days
over the range of liquidity stress scenarios used in internal stress
tests, and comply with various liquidity risk management
requirements. These large BHCs also must comply with a range
of risk management and corporate governance requirements.
The Federal Reserve adopted a framework to impose single-
counterparty credit
large banking
organizations, for which compliance was required by January
limits (“SCCL”) for
3
December 2019 Form 10-K
Table of Contents
1, 2020. U.S. G-SIBs, including us, are subject to a limit of 15%
of Tier 1 capital for aggregate net credit exposures to any “major
counterparty” (defined to include other U.S. G-SIBs, foreign G-
SIBs, and nonbank systemically important financial institutions
supervised by the Federal Reserve). In addition, we are subject
to a limit of 25% of Tier 1 capital for aggregate net credit
exposures to any other unaffiliated counterparty.
The Federal Reserve has proposed rules that would create a new
early remediation framework to address financial distress or
material management weaknesses. The Federal Reserve also has
the ability to establish additional prudential standards, including
those regarding contingent capital, enhanced public disclosures
and limits on short-term debt, including off-balance sheet
exposures. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Liquidity and
Capital Resources—Regulatory Requirements—Total Loss-
Absorbing Capacity, Long-Term Debt and Clean Holding
Company Requirements.”
Under the systemic risk regime, if the Federal Reserve or the
Financial Stability Oversight Council determines that a BHC
with $250 billion or more in consolidated assets poses a “grave
threat” to U.S. financial stability, the institution may be, among
other things, restricted in its ability to merge or offer financial
products and/or required to terminate activities and dispose of
assets.
See also “Capital Standards” and “Liquidity Standards” herein
and “Resolution and Recovery Planning” below.
Resolution and Recovery Planning. Pursuant to the Dodd-Frank
Act, we are required to periodically submit to the Federal
Reserve and the FDIC a resolution plan that describes our
strategy for a rapid and orderly resolution under the U.S.
Bankruptcy Code in the event of our material financial distress
or failure. Our preferred resolution strategy, which is set out in
our 2019 resolution plan, is an SPOE strategy, which generally
contemplates the provision of adequate capital and liquidity by
the Parent Company to certain of its subsidiaries so that such
subsidiaries have the resources necessary to implement the
resolution strategy after the Parent Company has filed for
bankruptcy.
Under a final rule issued by the Federal Reserve and the FDIC,
we are now required to file resolution plans once every two
years, with interim updates required in certain limited
circumstances. The rule also allows us to alternate between
submitting a full, detailed resolution plan and a streamlined,
targeted resolution plan. Our next resolution plan submission is
expected to be a targeted resolution plan in 2021. The rule also
clarifies the information required to be included in our resolution
plan.
Further, we submit an annual recovery plan to the Federal
Reserve that outlines the steps that management could take over
December 2019 Form 10-K
4
time to generate or conserve financial resources in times of
prolonged financial stress.
Certain of our domestic and foreign subsidiaries are also subject
to resolution and recovery planning requirements in the
jurisdictions in which they operate. For example the FDIC
requires certain
institutions (“IDI”),
including our U.S. Bank Subsidiaries, to submit an annual
resolution plan that describes the IDI’s strategy for a rapid and
orderly resolution in the event of material financial distress or
failure of the IDI.
insured depository
In addition, certain financial companies, including BHCs such
as the Firm and certain of its subsidiaries, can be subjected to a
resolution proceeding under the orderly liquidation authority in
Title II of the Dodd-Frank Act with the FDIC being appointed
as receiver, provided that certain procedures are met, including
certain extraordinary financial distress and systemic risk
determinations by the U.S. Treasury Secretary in consultation
with the U.S. President. The orderly liquidation authority
rulemaking is proceeding in stages, with some regulations now
finalized and others not yet proposed. If we were subject to the
orderly liquidation authority, the FDIC would have considerable
powers, including: the power to remove directors and officers
responsible for our failure and to appoint new directors and
officers; the power to assign our assets and liabilities to a third
party or bridge financial company without the need for creditor
consent or prior court review; the ability to differentiate among
our creditors, including by treating certain creditors within the
same class better than others, subject to a minimum recovery
right on the part of disfavored creditors to receive at least what
they would have received in bankruptcy liquidation; and broad
powers to administer the claims process to determine
distributions from the assets of the receivership. The FDIC has
been developing an SPOE strategy that could be used to
implement the orderly liquidation authority.
Regulators have also taken and proposed various actions to
facilitate an SPOE strategy under the U.S. Bankruptcy Code,
the orderly liquidation authority or other resolution regimes.
For example, the Federal Reserve and the OCC have established
rules that impose contractual requirements on certain qualified
financial contracts (“covered QFCs”) to which U.S. G-SIBs,
including us, and their subsidiaries including our U.S. Bank
Subsidiaries, are parties (together, the “covered entities”). Under
these rules, covered QFCs must expressly provide that transfer
restrictions and default rights against covered entities are limited
to the same extent as they would be under the Federal Deposit
Insurance Act and Title II of the Dodd-Frank Act and their
implementing regulations, and they may not, among other
things, permit the exercise of any cross-default right against
covered entities based on an affiliate’s entry into insolvency,
resolution or similar proceedings, subject to certain creditor
protections. The final compliance date was January 1, 2020.
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For more information about our resolution plan-related
submissions and associated regulatory actions, see “Risk
Factors—Legal, Regulatory
and Compliance Risk”,
“Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Liquidity and Capital Resources—
Regulatory Requirements—Total Loss-Absorbing Capacity,
Long-Term Debt and Clean Holding Company Requirements”
and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital
and
Resources—Regulatory Requirements—Resolution
Recovery Planning.”
Cyber and Information Security Risk Management and
Protection of Client Information
information security
regarding cyber and
The financial services industry faces increased global regulatory
focus
risk
management practices. Many aspects of our businesses are
subject to cybersecurity legal and regulatory requirements
enacted by U.S. federal and state governments and other non-
U.S. jurisdictions in the Americas, Europe, the Middle East,
Africa and Asia. These laws are aimed at codifying basic
cybersecurity protections and mandating data breach
notification requirements.
Our businesses are also subject to privacy and data protection
information security legal requirements concerning the use and
protection of certain personal information. For example, the
General Data Protection Regulation (“GDPR”) became
effective in the E.U. on May 25, 2018 and the California
Consumer Privacy Act (“CCPA”) became effective on January
1, 2020. The GDPR and CCPA impose mandatory privacy and
data protection obligations, including providing for individual
rights, enhanced governance and accountability requirements
and significant fines and litigation risk for noncompliance. In
addition, other jurisdictions have adopted or are proposing
GDPR or similar standards, such as Australia, Singapore, Japan,
Argentina, India, Brazil, Switzerland and the Cayman Islands.
Many aspects of our businesses are subject to legal requirements
concerning the use and protection of certain customer
information. These include those adopted pursuant to the
Gramm-Leach-Bliley Act and the Fair and Accurate Credit
Transactions Act of 2003 in the U.S., the GDPR and CCPA and
various laws in Asia, including the Japanese Personal
Information Protection Law, the Hong Kong Personal Data
(Protection) Ordinance and the Australian Privacy Act. We have
adopted measures designed to comply with these and related
applicable requirements in all relevant jurisdictions.
U.S. Bank Subsidiaries
U.S. Bank Subsidiaries. MSBNA, primarily a wholesale
commercial bank, offers commercial lending and certain retail
securities-based lending services in addition to deposit products.
MSPBNA offers certain mortgage and other secured lending
products, including retail securities-based lending products,
primarily for customers of our affiliate retail broker-dealer,
Morgan Stanley Smith Barney LLC (“MSSB”). MSPBNA also
offers certain deposit products and prime brokerage custody
services.
Both MSBNA and MSPBNA are FDIC-insured national banks
subject to supervision, regulation and examination by the OCC.
They are both subject to the OCC’s risk governance guidelines,
which establish heightened standards for a large national bank’s
risk governance framework and the oversight of that framework
by the bank’s board of directors.
Prompt Corrective Action. The Federal Deposit Insurance
Corporation Improvement Act of 1991 provides a framework
for regulation of depository institutions and their affiliates,
including parent holding companies, by their federal banking
regulators. Among other things, it requires the relevant federal
banking regulator to take prompt corrective action with respect
to a depository institution if that institution does not meet certain
capital adequacy standards. These regulations generally apply
only to insured banks and thrifts such as MSBNA or MSPBNA
and not to their parent holding companies. The Federal Reserve
is, however, separately authorized to take appropriate action at
the holding company level, subject to certain limitations. Under
the systemic risk regime, as described above, we also would
become subject to an early remediation protocol in the event of
financial distress. In addition, BHCs, such as Morgan Stanley,
are required to serve as a source of strength to their U.S. bank
subsidiaries and commit resources to support these subsidiaries
in the event such subsidiaries are in financial distress.
Transactions with Affiliates. Our U.S. Bank Subsidiaries are
subject to Sections 23A and 23B of the Federal Reserve Act,
which impose restrictions on covered transactions, as defined
in the Federal Reserve Act, with any affiliates. Covered
transactions include any extension of credit to, purchase of assets
from, and certain other transactions by insured banks with an
affiliate. These restrictions limit the total amount of credit
exposure that our U.S. Bank Subsidiaries may have to any one
affiliate and to all affiliates. Sections 23A and 23B also set
collateral requirements and require all such transactions to be
made on market terms. Derivative, securities borrowing and
securities
transactions between our U.S. Bank
Subsidiaries and their affiliates are subject to these restrictions.
The Federal Reserve has indicated that it will propose a
rulemaking to implement changes to these restrictions made by
the Dodd-Frank Act.
lending
In addition, the Volcker Rule generally prohibits covered
transactions between (i) us or any of our affiliates and
(ii) covered funds for which we or any of our affiliates serve as
the investment manager, investment adviser, commodity trading
advisor or sponsor, or other covered funds organized and offered
by us or any of our affiliates pursuant to specific exemptions in
5
December 2019 Form 10-K
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the Volcker Rule. See also “Financial Holding Company—
Activities Restriction under the Volcker Rule” above.
FDIC Regulation. An FDIC-insured depository institution is
generally liable for any loss incurred or expected to be incurred
by the FDIC in connection with the failure of an insured
depository institution under common control by the same BHC.
As commonly controlled FDIC-insured depository institutions,
each of MSBNA and MSPBNA could be responsible for any
loss to the FDIC from the failure of the other. In addition, both
institutions are exposed to changes in the cost of FDIC
insurance.
Institutional Securities and Wealth Management
Broker-Dealer and Investment Adviser Regulation. Our
primary U.S. broker-dealer subsidiaries, Morgan Stanley & Co.
LLC (“MS&Co.”) and MSSB, are registered broker-dealers
with the SEC and in all 50 states, the District of Columbia, Puerto
Rico and the U.S. Virgin Islands, and are members of various
self-regulatory organizations, including FINRA, and various
securities exchanges and clearing organizations. Broker-dealers
are subject to laws and regulations covering all aspects of the
securities business, including sales and trading practices,
securities offerings, publication of research reports, use of
customers’ funds and securities, capital structure, risk
management controls in connection with market access,
recordkeeping and retention, and the conduct of their directors,
officers, representatives and other associated persons. Broker-
dealers are also regulated by securities administrators in those
states where they do business. Violations of the laws and
regulations governing a broker-dealer’s actions could result in
censures, fines, the issuance of cease-and-desist orders,
revocation of licenses or registrations, the suspension or
expulsion from the securities industry of such broker-dealer or
its officers or employees, or other similar consequences by both
federal and state securities administrators. Our broker-dealer
subsidiaries are also members of the Securities Investor
Protection Corporation, which provides certain protections for
customers of broker-dealers against losses in the event of the
insolvency of a broker-dealer.
MSSB is also a registered investment adviser with the SEC.
MSSB’s relationship with its investment advisory clients is
subject to the fiduciary and other obligations imposed on
investment advisers under the Investment Advisers Act of 1940,
and the rules and regulations promulgated thereunder as well as
various state securities laws. These laws and regulations
generally grant the SEC and other supervisory bodies broad
administrative powers to address non-compliance, including the
power to restrict or limit MSSB from carrying on its investment
advisory and other asset management activities. Other sanctions
that may be imposed include the suspension of individual
employees, limitations on engaging in certain activities for
specified periods of time or for specified types of clients, the
revocation of registrations, other censures and significant fines.
December 2019 Form 10-K
6
The Firm is subject to various regulations that affect broker-
dealer sales practices and customer relationships. For example,
the SEC has released a package of final rules and interpretations
relating to the provision of advice by broker-dealers and
investment advisers. The package includes new rules on the
standards of conduct and required disclosures for broker-dealers
when making securities-related recommendations to retail
investors, and a new formal interpretation of the fiduciary duty
owed by investment advisers. One of the final rules, entitled
“Regulation Best Interest,” requires 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.
Another new rule requires that both broker-dealers and
investment advisers provide to retail investors a brief summary
document containing information about the relationship
between the parties (“Form CRS”). The compliance date for
Regulation Best Interest and Form CRS is June 30, 2020. Certain
states have enacted laws or rules, or are considering laws or
rules, subjecting broker-dealers to a fiduciary duty when dealing
with retail customers under a variety of circumstances.
Margin lending by broker-dealers is regulated by the Federal
Reserve’s restrictions on lending in connection with customer
and proprietary purchases and short sales of securities, as well
as securities borrowing and lending activities. Broker-dealers
are also subject to maintenance and other margin requirements
imposed under FINRA and other self-regulatory organization
rules. In many cases, our broker-dealer subsidiaries’ margin
policies are more stringent than these rules.
As registered U.S. broker-dealers, certain of our subsidiaries are
subject to the SEC’s net capital rule and the net capital
requirements of various exchanges, other regulatory authorities
and self-regulatory organizations. These rules are generally
designed to measure the broker-dealer subsidiary’s general
financial integrity and/or liquidity and require that at least a
minimum amount of net and/or liquid assets be maintained by
the subsidiary. See also “Financial Holding Company—
Consolidated Supervision” and “Financial Holding Company
—Liquidity Standards” above. Rules of FINRA and other self-
regulatory organizations also
limitations and
requirements on the transfer of member organizations’ assets.
impose
have
regulations
Research. Research-related
been
implemented in many jurisdictions, including in the U.S., where
FINRA has adopted rules that cover research relating to both
equity and debt securities. Regulators continue to focus on
research conflicts of interest and may impose additional
regulations. See also “Business—Supervision and Regulation
—Non-U.S. Regulation” herein.
Regulation of Futures Activities and Certain Commodities
Activities. MS&Co., as a futures commission merchant, and
MSSB, as an introducing broker, are subject to net capital
requirements of, and certain of their activities are regulated by,
the CFTC, the NFA, the Joint Audit Committee (including the
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Chicago Mercantile Exchange & Chicago Board of Trade
(“CME Group”) in its capacity as MS&Co.'s designated self-
regulatory organization), and various commodity futures
exchanges. MS&Co. and MSSB and certain of their affiliates
are registered with the CFTC and are members of the NFA in
various capacities. Rules and regulations of the CFTC, NFA,
the Joint Audit Committee (including the CME Group) and
commodity futures exchanges address obligations related to,
among other things, customer protections, the segregation of
customer funds and the holding of secured amounts, the use by
futures commission merchants of customer funds, the margining
of customer accounts and documentation entered into by futures
commission merchants with their customers, recordkeeping and
reporting obligations of futures commission merchants and
introducing brokers, risk disclosure, risk management and
discretionary trading.
Our commodities activities are subject to extensive and evolving
energy, commodities, environmental, health and safety, and
other governmental laws and regulations in the U.S. and abroad.
Intensified scrutiny of certain energy markets by U.S. federal,
state and local authorities in the U.S. and abroad and by the
legal
public has resulted
enforcement and remedial proceedings involving companies
conducting the activities in which we are engaged.
increased regulatory and
in
Derivatives Regulation. The commodity futures, commodity
options and swaps industry in the U.S. is subject to regulation
under the U.S. Commodity Exchange Act (“CEA”). The CFTC
is the U.S. federal agency charged with the administration of
the CEA. In addition, the SEC is the U.S. federal agency charged
with the regulation of security-based swaps. The rules and
regulations of various self-regulatory organizations also govern
derivatives.
Under the U.S. regulatory regime for swaps and security-based
swaps (collectively, “Swaps”) implemented pursuant to the
Dodd-Frank Act, we are subject to comprehensive regulation of
our derivatives businesses, including regulations that impose
margin requirements, public and regulatory reporting, central
clearing and mandatory trading on regulated exchanges or
execution facilities for certain types of Swaps.
CFTC rules require registration of swap dealers, mandatory
clearing and execution of interest rate and certain credit default
swaps and real-time public reporting and adherence to business
conduct standards for all in-scope Swaps. We also anticipate that
the CFTC will adopt capital requirements for swap dealers and
major swap participants that are not subject to the capital rules
of a prudential regulator. We have registered a number of U.S.
and non U.S. CFTC swap dealers.
SEC rules govern the registration and regulation of security-
based swap dealers. Though compliance with a number of these
rules is not expected to be required until 2021, they will trigger
numerous obligations for entities that register as security-based
swap dealers, including capital, margin and segregation
requirements. We anticipate registering one or more entities as
a security-based swap dealer.
The specific parameters of some of these requirements for
Swaps have been and continue to be developed through CFTC,
SEC and bank regulator rulemakings. For example, the rules for
variation margin are presently effective, and those for initial
margin will continue to phase-in based on activity levels of the
swap dealer and the relevant counterparty with the final phase
currently expected to occur in September 2021, subject to
finalization of various proposed rule makings by the CFTC and
bank regulators. Margin rules with the same or similar
compliance dates have been adopted or are in the process of
being finalized by regulators outside the U.S., and certain of our
subsidiaries may be subject to such rules.
Although a significant number of areas within the global
derivatives regulatory framework have been finalized,
additional changes are expected. As the derivatives regulatory
framework continues to evolve, we expect to continue to face
increased costs and regulatory oversight. Complying with
registration and other regulatory requirements has required, and
is expected to require in the future, systems and other changes
to our derivatives businesses. Compliance with Swaps-related
regulatory capital requirements may also require us to devote
more capital to our businesses that engage in swaps. Our
Institutional Securities and Wealth Management business
segments activities are also regulated in jurisdictions outside the
U.S. See “Non-U.S. Regulation” herein.
Investment Management
Many of the subsidiaries engaged in our asset management
activities are registered as investment advisers with the SEC.
Many aspects of our asset management activities are also subject
to federal and state laws and regulations primarily intended to
benefit the investor or client. These laws and regulations
generally grant supervisory agencies and bodies broad
administrative powers, including the power to limit or restrict
us from carrying on our asset management activities in the event
that we fail to comply with such laws and regulations. Sanctions
that may be imposed for such failure include the suspension of
individual employees, limitations on our engaging in various
asset management activities for specified periods of time or
specified types of clients, the revocation of registrations, other
censures and significant fines. Morgan Stanley Distribution,
Inc., a U.S. broker-dealer subsidiary, acts as distributor to the
Morgan Stanley mutual funds and as placement agent to certain
investment funds managed by our Investment
private
Management business segment.
Our asset management activities are subject to certain additional
laws and regulations, including, but not limited to, additional
reporting and recordkeeping requirements (including with
respect to clients that are private funds) and restrictions on
sponsoring or investing in, or maintaining certain other
relationships with, covered funds, as defined in the Volcker Rule,
7
December 2019 Form 10-K
Table of Contents
subject to certain limited exemptions. See also “Financial
Holding Company—Activities Restrictions under the Volcker
Rule.”
In addition, certain of our affiliates are registered as commodity
trading advisors and/or commodity pool operators, or are
operating under certain exemptions from such registration
pursuant to CFTC rules and other guidance, and have certain
responsibilities with respect to each pool they advise. Violations
of the rules of the CFTC, the NFA or the commodity exchanges
could result in remedial actions, including fines, registration
restrictions or terminations, trading prohibitions or revocations
of commodity exchange memberships. See also “Institutional
Securities and Wealth Management—Broker-Dealer and
Investment Adviser Regulation,” “Institutional Securities and
Wealth Management—Regulation of Futures Activities and
Certain Commodities Activities,” and “Institutional Securities
and Wealth Management—Derivatives Regulation” above and
“Non-U.S. Regulation,” below for a discussion of other
regulations that impact our Investment Management business
activities, including MiFID II.
Non-U.S. Regulation
All of our businesses are regulated extensively by non-U.S.
regulators,
including governments, securities exchanges,
commodity exchanges, self-regulatory organizations, central
banks and regulatory bodies, especially in those jurisdictions in
which we maintain an office. Certain regulators have prudential,
business conduct and other authority over us or our subsidiaries,
as well as powers to limit or restrict us from engaging in certain
businesses or to conduct administrative proceedings that can
result in censures, fines, the issuance of cease-and-desist orders,
or the suspension or expulsion of a regulated entity or its
affiliates.
Some of our subsidiaries are regulated as broker-dealers,
investment advisers or other types of regulated entities under
the laws of the jurisdictions in which they operate. Subsidiaries
engaged in banking and trust activities and advisory activities
outside the U.S. are regulated by various government agencies
in the particular jurisdiction where they are chartered,
incorporated and/or conduct their business activity. For instance,
the PRA, the U.K. Financial Conduct Authority (“FCA”) and
several securities and futures exchanges in the U.K., including
the London Stock Exchange and ICE Futures Europe, regulate
für
our activities
Finanzdienstleistungsaufsicht
Financial
Supervisory Authority) and the Deutsche Börse AG regulate
certain of our activities in the Federal Republic of Germany; the
European Central Bank supervises certain subsidiaries in our
post-Brexit structure; the Financial Services Agency, the
Securities and Exchange Surveillance Commission, the Bank of
Japan, the Japan Securities Dealers Association and several
Japanese securities and futures exchanges and ministries
regulate our activities in Japan; the Securities and Futures
Commission of Hong Kong, the Hong Kong Monetary
the Bundesanstalt
the U.K.;
Federal
(the
in
December 2019 Form 10-K
8
Authority and the Hong Kong Exchanges and Clearing Limited
regulate our business in Hong Kong; and the Monetary
Authority of Singapore and the Singapore Exchange Limited
regulate our business in Singapore; other similar bodies regulate
our activities in Ireland, China, Korea, Australia, India and other
countries.
Our largest non-U.S. entity, MSIP, is subject to extensive
regulation and supervision by the PRA, which has broad legal
authority to establish prudential and other standards applicable
to MSIP that seek to ensure its safety and soundness and to
minimize adverse effects on the stability of the U.K. financial
system. MSIP is also regulated and supervised by the FCA with
respect to business conduct matters.
Non-U.S. policymakers and regulators, including the European
Commission and European Supervisory Authorities (among
others, the European Banking Authority and the European
Securities and Markets Authority), continue to propose and
adopt numerous reforms, including those that may further
impact the structure of banks or subject us to new prudential
requirements, and to formulate regulatory standards and
measures that will be of relevance and importance to our
European operations.
In June 2019, the European Commission published a package
of reforms including various risk reduction measures. These
include amendments to the Capital Requirements Directive and
Regulation providing updates to risk-based capital, liquidity
(including introducing a net stable funding ratio), leverage and
other prudential standards on a consolidated basis that are
consistent with final Basel standards. In addition, the reforms
will require certain large, non-E.U. financial groups with two
or more financial subsidiaries established in the E.U. to establish
an E.U. IHC. The E.U. IHC will be subject to direct supervision
and authorization by the European Central Bank or the relevant
national E.U. regulator. Further amendments to the E.U. bank
recovery and resolution regime under the E.U. Bank Recovery
and Resolution Directive (“BRRD”) were also published.
The amendments to the BRRD build on previous proposals by
regulators in the U.K., E.U. and other major jurisdictions to
finalize recovery and resolution planning frameworks and
related regulatory requirements that will apply to certain of our
subsidiaries that operate in those jurisdictions. For instance, the
BRRD established a recovery and resolution framework for E.U.
credit institutions and investment firms, including MSIP (under
the U.K. version of the BRRD which is expected to be adopted
after the Brexit transition period). In addition, certain
jurisdictions, including the U.K. and other E.U. jurisdictions,
have implemented, or are in the process of implementing,
changes to resolution regimes to provide resolution authorities
with the ability to recapitalize a failing entity organized in such
jurisdictions by reducing certain unsecured liabilities or
converting certain unsecured liabilities into equity.
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Regulators in the U.K., E.U. and other major jurisdictions have
also finalized other regulatory standards applicable to certain of
our subsidiaries that operate in those jurisdictions. For instance,
the European Market Infrastructure Regulation introduced
requirements regarding the central clearing and reporting of
derivatives, as well as margin requirements for uncleared
derivatives. MiFID II introduced comprehensive and new
trading and market infrastructure reforms in the E.U., including
new trading venues, enhancements to pre- and post-trading
transparency, additional investor protection requirements, and
requirements relating to the unbundling of research and
execution services among others, and we have had to make
extensive changes to our operations, including systems and
controls in order to comply with MiFID II.
Financial Crimes Program
Our Financial Crimes program is coordinated on an enterprise-
wide basis and supports our financial crime prevention efforts
across all regions and business units with responsibility for
governance, oversight and execution of our AML, economic
sanctions (“Sanctions”) and anti-corruption programs.
subsidiaries, broker-dealers,
In the U.S., the Bank Secrecy Act, as amended by the USA
PATRIOT Act of 2001, imposes significant obligations on
financial institutions to detect and deter money laundering and
terrorist financing activity, including requiring banks, BHCs and
commission
their
merchants, introducing brokers and mutual funds to implement
AML programs, verify the identity of customers that maintain
accounts, and monitor and report suspicious activity to
appropriate law enforcement or regulatory authorities. Outside
the U.S., applicable laws, rules and regulations similarly require
designated types of financial institutions to implement AML
programs.
futures
We have implemented policies, procedures and internal controls
that are designed to comply with all applicable AML laws and
regulations. Regarding Sanctions, we have implemented
policies, procedures and internal controls that are designed to
comply with the regulations and economic sanctions programs
administered by the U.S. Treasury’s Office of Foreign Assets
Control (“OFAC”), which target foreign countries, entities and
individuals based on external threats to U.S. foreign policy,
national security or economic interests, and to comply, as
applicable, with similar sanctions programs imposed by foreign
governments or global or regional multilateral organizations
such as the United Nations Security Council and the E.U.
Council.
We are also subject to applicable anti-corruption laws, such as
the U.S. Foreign Corrupt Practices Act and the U.K. Bribery
Act, in the jurisdictions in which we operate. Anti-corruption
laws generally prohibit offering, promising, giving or
authorizing others to give anything of value, either directly or
indirectly, to a government official or private party in order to
influence official action or otherwise gain an unfair business
advantage, such as to obtain or retain business. We have
implemented policies, procedures and internal controls that are
designed to comply with such laws, rules and regulations.
Information about our Executive Officers
The executive officers of Morgan Stanley and their age and titles
as of February 27, 2020 are set forth below. Business experience
is provided in accordance with SEC rules.
Jeffrey S. Brodsky (55). Executive Vice President and Chief
Human Resources Officer of Morgan Stanley (since January
2016). Vice President and Global Head of Human Resources
(January 2011 to December 2015). Co-Head of Human
Resources (January 2010 to December 2011). Head of Morgan
Stanley Smith Barney Human Resources (June 2009 to January
2010).
James P. Gorman (61). Chairman of the Board of Directors
and Chief Executive Officer of Morgan Stanley (since January
2012). President and Chief Executive Officer (January 2010 to
December 2011) and member of the Board of Directors (since
January 2010). Co-President (December 2007 to December
2009) and Co-Head of Strategic Planning (October 2007 to
December 2009). President and Chief Operating Officer of
Wealth Management (February 2006 to April 2008).
Eric F. Grossman (53). Executive Vice President and Chief
Legal Officer of Morgan Stanley (since January 2012). Global
Head of Legal (September 2010 to January 2012). Global Head
of Litigation (January 2006 to September 2010) and General
Counsel of the Americas (May 2009 to September 2010).
General Counsel of Wealth Management (November 2008 to
September 2010). Partner at the law firm of Davis Polk &
Wardwell LLP (June 2001 to December 2005).
Keishi Hotsuki (57). Executive Vice President (since May
2014) and Chief Risk Officer of Morgan Stanley (since May
2011). Interim Chief Risk Officer (January 2011 to May 2011)
and Head of Market Risk Department (March 2008 to April
2014). Global Head of Market Risk Management at Merrill
Lynch (June 2005 to September 2007).
Edward N. Pick (51). Head of Institutional Securities (since
July 2018). Global Head of Sales and Trading (October 2015 to
July 2018). Head of Global Equities (March 2011 to October
2015). Co-Head of Global Equities (April 2009 to March 2011).
Co-Head of Global Capital Markets (July 2008 to April 2009).
Co-Head of Global Equity Capital Markets (December 2005 to
July 2008).
Jonathan M. Pruzan (51). Executive Vice President and Chief
Financial Officer of Morgan Stanley (since May 2015) and Head
of Corporate Strategy (since December 2016). Co-Head of
Global Financial Institutions Group (January 2010 to April
2015). Co-Head of North American Financial Institutions Group
9
December 2019 Form 10-K
Table of Contents
M&A (September 2007 to December 2009). Head of the U.S.
Bank Group (April 2005 to August 2007).
Robert P. Rooney (52). Head of Technology, Operations and
Firm Resilience (since April 2019). Head of Technology
(January 2017 to April 2019). Chief Executive Officer of
Morgan Stanley International and Head of Europe, the Middle
East and Africa (January 2016 to May 2018). Global Co-Head
of Fixed Income Sales and Trading (May 2013 to January 2016).
Head of Fixed Income for Europe, the Middle East and Africa
and Global Head of Fixed Income Sales (September 2009 to
May 2013).
Andrew M. Saperstein (53). Head of Wealth Management
(since April 2019). Co-Head of Wealth Management (January
2016 to April 2019). Co-Chief Operating Officer of Institutional
Securities (March 2015 to January 2016). Head of Wealth
Management Investment Products and Services (June 2012 to
March 2015).
Daniel A. Simkowitz (54). Head of Investment Management
of Morgan Stanley (since October 2015). Co-Head of Global
Capital Markets (March 2013 to September 2015). Chairman of
Global Capital Markets (November 2009 to March 2013).
Managing Director in Global Capital Markets (December 2000
to November 2009).
December 2019 Form 10-K
10
Table of Contents
Risk Factors
For a discussion of the risks and uncertainties that may affect
our future results and strategic objectives, see “Forward-
Looking Statements” immediately preceding “Business” and
“Return on Equity and Tangible Common Equity Targets” under
“Management’s Discussion and Analysis of Financial Condition
and Results of Operations.”
Market Risk
Market risk refers to the risk that a change in the level of one or
more market prices, rates, indices, volatilities, correlations or
other market factors, such as market liquidity, will result in
losses for a position or portfolio owned by us. For more
information on how we monitor and manage market risk, see
“Quantitative and Qualitative Disclosures about Risk—Market
Risk.”
Our results of operations may be materially affected by market
fluctuations and by global and economic conditions and other
factors, including changes in asset values.
Our results of operations have been in the past and may, in the
future, be materially affected by market fluctuations due to
global financial markets, economic conditions, changes to
global trade policies and tariffs and other factors, including the
level and volatility of equity, fixed income and commodity
prices, the level and term structure of interest rates, inflation and
currency values, and the level of other market indices.
The results of our Institutional Securities business segment,
particularly results relating to our involvement in primary and
secondary markets for all types of financial products, are subject
to substantial market fluctuations due to a variety of factors that
we cannot control or predict with great certainty. These
fluctuations impact results by causing variations in business
flows and activity and in the fair value of securities and other
financial products. Fluctuations also occur due to the level of
global market activity, which, among other things, affects the
size, number and timing of investment banking client
assignments and transactions and the realization of returns from
our principal investments.
During periods of unfavorable market or economic conditions,
the level of individual investor participation in the global
markets, as well as the level of client assets, may also decrease,
which would negatively impact the results of our Wealth
Management business segment.
Substantial market fluctuations could also cause variations in
the value of our investments in our funds, the flow of investment
capital into or from AUM, and the way customers allocate capital
among money market, equity, fixed income or other investment
alternatives, which could negatively impact our Investment
Management business segment.
The value of our financial instruments may be materially
affected by market fluctuations. Market volatility, illiquid
market conditions and disruptions in the credit markets may
make it extremely difficult to value and monetize certain of our
financial instruments, particularly during periods of market
displacement. Subsequent valuations in future periods, in light
of factors then prevailing, may result in significant changes in
the values of these instruments and may adversely impact
historical or prospective fees and performance-based fees (also
known as incentive fees, which include carried interest) in
respect of certain businesses. In addition, at the time of any sales
and settlements of these financial instruments, the price we
ultimately realize will depend on the demand and liquidity in
the market at that time and may be materially lower than their
current fair value. Any of these factors could cause a decline in
the value of our financial instruments, which may have an
adverse effect on our results of operations in future periods.
In addition, financial markets are susceptible to severe events
evidenced by rapid depreciation in asset values accompanied by
a reduction in asset liquidity. Under these extreme conditions,
hedging and other risk management strategies may not be as
effective at mitigating trading losses as they would be under
more normal market conditions. Moreover, under these
conditions, market participants are particularly exposed to
trading strategies employed by many market participants
simultaneously and on a large scale. Our risk management and
monitoring processes seek to quantify and mitigate risk to more
extreme market moves. However, severe market events have
historically been difficult to predict and we could realize
significant losses if extreme market events were to occur.
Holding large and concentrated positions may expose us to
losses.
Concentration of risk may reduce revenues or result in losses in
our market-making, investing, underwriting, including block
trading, and lending businesses in the event of unfavorable
market movements, or when market conditions are more
favorable for our competitors. We commit substantial amounts
of capital to these businesses, which often results in our taking
large positions in the securities of, or making large loans to, a
particular issuer or issuers in a particular industry, country or
region. For further information regarding our country risk
exposure, see also “Quantitative and Qualitative Disclosures
about Risk—Country Risk.”
Credit Risk
Credit risk refers to the risk of loss arising when a borrower,
counterparty or issuer does not meet its financial obligations to
us. For more information on how we monitor and manage credit
risk, see “Quantitative and Qualitative Disclosures about Risk
—Credit Risk.”
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December 2019 Form 10-K
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We are exposed to the risk that third parties that are indebted
to us will not perform their obligations.
A default by a large financial institution could adversely affect
financial markets.
We incur significant credit risk exposure through our
Institutional Securities business segment. This risk may arise
from a variety of business activities, including, but not limited
to: extending credit to clients through various lending
commitments; entering into swap or other derivative contracts
under which counterparties have obligations to make payments
to us; providing short- or long-term funding that is secured by
physical or financial collateral whose value may at times be
insufficient to fully cover the loan repayment amount; posting
margin and/or collateral and other commitments to clearing
houses, clearing agencies, exchanges, banks, securities firms
and other financial counterparties; and investing and trading in
securities and loan pools, whereby the value of these assets may
fluctuate based on realized or expected defaults on the
underlying obligations or loans.
We also incur credit risk in our Wealth Management business
segment lending to mainly individual investors, including, but
not limited to, margin- and securities-based loans collateralized
by securities, residential mortgage loans and HELOCs.
Our valuations related to, and reserves for losses on, credit
exposures rely on complex models, estimates, and subjective
judgments about the future. While we believe current valuations
and reserves adequately address our perceived levels of risk,
future economic conditions that differ from or are more severe
than forecast, inaccurate models or assumptions, or external
factors such as natural disasters, could lead to inaccurate
measurement of or deterioration of credit quality of our
borrowers and counterparties or the value of collateral and result
in unexpected losses. In addition, we may incur higher than
anticipated credit losses in periods of market illiquidity or as a
result of disputes with counterparties over the valuation of
collateral during periods of economic stress.
Certain of our credit exposures are concentrated by product,
industry or country. Although our models and estimates account
for correlations among related types of exposures, a change in
the market environment for a concentrated product or an external
factor impacting a concentrated industry or country may result
in credit losses in excess of amounts forecast. Concentrations
of credit risk are managed through the Firm’s comprehensive
and global Credit Limits Framework.
In addition, as a clearing member of several central
counterparties, we are responsible for the defaults or misconduct
of our customers and could incur financial losses in the event
of default by other clearing members. Although we regularly
review our credit exposures, default risk may arise from events
or circumstances that are difficult to detect or foresee.
December 2019 Form 10-K
12
the
institutions.
relationships among
The commercial soundness of many financial institutions may
be closely interrelated as a result of credit, trading, clearing or
other
Increased
centralization of trading activities through particular clearing
houses, central agents or exchanges as required by provisions
of the Dodd-Frank Act may increase our concentration of risk
with respect to these entities. As a result, concerns about, or a
default or threatened default by, one institution could lead to
significant market-wide liquidity and credit problems, losses or
defaults by other institutions. This is sometimes referred to as
systemic risk and may adversely affect financial intermediaries,
such as clearing houses, clearing agencies, exchanges, banks
and securities firms, with which we interact on a daily basis and,
therefore, could adversely affect us. See also “Systemic Risk
Regime” under “Business—Supervision and Regulation—
Financial Holding Company.”
Operational Risk
Operational risk refers to the risk of loss, or of damage to our
reputation, resulting from inadequate or failed processes or
systems, from human factors or from external events (e.g., 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). Legal,
regulatory and compliance risk is included in the scope of
operational risk and is discussed below under “Legal,
Regulatory and Compliance Risk.” For more information on
how we monitor and manage operational risk, see “Quantitative
and Qualitative Disclosures about Risk—Operational Risk.”
We are subject to operational risks, including a failure, breach
or other disruption of our operations or security systems or
those of our third parties (or third parties thereof), as well as
human error or malfeasance, which could adversely affect our
businesses or reputation.
Our businesses are highly dependent on our ability to process
and report, on a daily basis, a large number of transactions across
numerous and diverse markets in many currencies. We may
introduce new products or services or change processes or
reporting, including in connection with new regulatory
requirements, resulting in new operational risk that we may not
fully appreciate or identify.
The trend toward direct access to automated, electronic markets
and the move to more automated trading platforms has resulted
in the use of increasingly complex technology that relies on the
continued effectiveness of the programming code and integrity
of the data to process the trades. We rely on the ability of our
employees, consultants, our internal systems and systems at
technology centers maintained by unaffiliated third parties to
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operate our different businesses and process a high volume of
transactions. Additionally, we are subject to complex and
evolving laws and regulations governing cybersecurity, privacy
and data protection, which may differ and potentially conflict,
in various jurisdictions.
As a major participant in the global capital markets, we face the
risk of incorrect valuation or risk management of our trading
positions due to flaws in data, models, electronic trading systems
or processes or due to fraud or cyber attack.
We also face the risk of operational failure or disruption of any
of the clearing agents, exchanges, clearing houses or other
financial intermediaries we use to facilitate our lending,
securities and derivatives transactions. In the event of a
breakdown or improper operation of our or a direct or indirect
third party’s systems (or third parties thereof) or processes or
improper or unauthorized action by third parties, including
consultants and subcontractors or our employees, we could
suffer financial loss, an impairment to our liquidity position, a
disruption of our businesses, regulatory sanctions or damage to
our reputation.
the
In addition,
interconnectivity of multiple financial
institutions with central agents, exchanges and clearing houses,
and the increased importance of these entities, increases the risk
that an operational failure at one institution or entity may cause
an industry-wide operational failure that could materially impact
our ability to conduct business. Furthermore, the concentration
of company and personal information held by a handful of third
parties increases the risk that a breach at a key third party may
cause an industry-wide data breach that could significantly
increase the cost and risk of conducting business.
There can be no assurance that our business contingency and
security response plans fully mitigate all potential risks to us.
Our ability to conduct business may be adversely affected by a
disruption in the infrastructure that supports our businesses and
the communities where we are located, which are concentrated
in the New York metropolitan area, London, Hong Kong and
Tokyo, as well as Baltimore, Glasgow, Frankfurt, Budapest and
Mumbai. This may include a disruption involving physical site
access; cybersecurity incidents; terrorist activities; political
unrest; disease pandemics; catastrophic events; climate-related
incidents and natural disasters (such as earthquakes, tornadoes,
hurricanes and wildfires); electrical outage; environmental
hazard; computer servers; communications or other services we
use; our employees or third parties with whom we conduct
business.
Although we employ backup systems for our data, those backup
systems may be unavailable following a disruption, the affected
data may not have been backed up or may not be recoverable
from the backup, or the backup data may be costly to recover,
which could adversely affect our business.
Notwithstanding evolving technology and technology-based
risk and control systems, our businesses ultimately rely on
people, including our employees and those of third parties with
which we conduct business. As a result of human error or
engagement in violations of applicable policies, laws, rules or
procedures, certain errors or violations are not always
discovered immediately by our technological processes or by
our controls and other procedures, which are intended to prevent
and detect such errors or violations. These can include
calculation errors, mistakes in addressing emails or other
communications, errors in software or model development or
implementation, or errors in judgment, as well as intentional
efforts to disregard or circumvent applicable policies, laws, rules
or procedures. Human errors and malfeasance, even if promptly
discovered and remediated, can result in material losses and
liabilities for us.
We conduct business in various jurisdictions outside the U.S.,
including jurisdictions that may not have comparable levels of
protection for their corporate assets such as intellectual property,
trademarks, trade secrets, know-how and customer information
and records. The protection afforded in those jurisdictions may
be less established and/or predictable than in the U.S. or other
jurisdictions in which we operate. As a result, there may also be
heightened risks associated with the potential theft of their data,
technology and intellectual property in those jurisdictions by
domestic or foreign actors, including private parties and those
affiliated with or controlled by state actors. Any theft of data,
technology or intellectual property may negatively impact our
operations and reputation, including disrupting the business
activities of our subsidiaries, affiliates, joint ventures or clients
conducting business in those jurisdictions.
A cyber attack, information or security breach or a technology
failure could adversely affect our ability to conduct our
business, manage our exposure to risk or result in disclosure
or misuse of confidential or proprietary information and
otherwise adversely impact our results of operations, liquidity
and financial condition, as well as cause reputational harm.
We maintain a significant amount of personal information on
our customers, clients, employees and certain counterparties that
we are required to protect under various state, federal and
international data protection and privacy laws. These laws may
be in conflict with one another, or courts and regulators may
interpret them in ways that we had not anticipated or that
adversely affect our business.
technologies,
the use of
Cybersecurity risks for financial institutions have significantly
increased in recent years in part because of the proliferation of
new
internet, mobile
telecommunications and cloud technologies to conduct financial
transactions, and the increased sophistication and activities of
organized crime, hackers, terrorists and other external extremist
parties, including foreign state actors, in some circumstances as
a means to promote political ends. In addition to the growing
sophistication of certain parties, the commoditization of cyber
the
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December 2019 Form 10-K
Table of Contents
tools which are able to be weaponized by less sophisticated
actors has led to an increase in the exploitation of technological
vulnerabilities. Global events and geopolitical instability may
lead to increased nation state targeting of financial institutions
in the U.S. and abroad. Foreign state actors have become more
sophisticated over time, increasing the risk of such an attack.
Any of these parties may also attempt to fraudulently induce
employees, customers, clients, vendors or other third parties or
users of our systems to disclose sensitive information in order
to gain access to our data or that of our employees or clients.
Cybersecurity risks may also derive from human error, fraud or
malice on the part of our employees or third parties, including
third party providers, or may result from accidental
technological failure. In addition, third parties with whom we
do business, their service providers, as well as other third parties
with whom our customers do business, may also be sources of
cybersecurity risks, particularly where activities of customers
are beyond our security and control systems. There is no
guarantee that the measures we take will provide absolute
security or recoverability given the techniques used in cyber
attacks are complex and frequently change, and may not be able
to be anticipated.
Like other financial services firms, the Firm, its third party
providers, and its clients continue to be the subject of
unauthorized access attacks, mishandling or misuse of
information, computer viruses or malware, cyber attacks
designed to obtain confidential information, destroy data,
disrupt or degrade service, sabotage systems or cause other
damage, denial of service attacks, data breaches and other
events. There can be no assurance that such unauthorized access,
mishandling or misuse of information, or cyber incidents will
not occur in the future, and they could occur more frequently
and on a more significant scale.
A cyber attack, information or security breach or a technology
failure of ours or of a third party could jeopardize our or our
clients’, employees’, partners’, vendors’ or counterparties’
information
personal, confidential, proprietary or other
processed and stored in, and transmitted through, our and our
third parties’ computer systems. Furthermore, such events could
cause interruptions or malfunctions in our, our clients’,
employees’, partners’, vendors’, counterparties’ or third parties’
operations, as well as the unauthorized release, gathering,
monitoring, misuse, loss or destruction of confidential,
proprietary and other information of ours, our employees, our
customers or of other third parties. Any of these events could
result in reputational damage with our clients and the market,
client dissatisfaction, additional costs to us to maintain and
update our operational and security systems and infrastructure,
regulatory
litigation or enforcement, or
regulatory fines or penalties, any of which could adversely affect
our business, financial condition or results of operations.
investigations,
Given our global footprint and the high volume of transactions
we process, the large number of clients, partners, vendors and
December 2019 Form 10-K
14
counterparties with which we do business, and the increasing
sophistication of cyber attacks, a cyber attack, information or
security breach could occur and persist for an extended period
of time without detection. We expect that any investigation of
a cyber attack would be inherently unpredictable and that it
would take time before the completion of any investigation and
before there is availability of full and reliable information.
During such time we would not necessarily know the extent of
the harm or how best to remediate it, and certain errors or actions
could be repeated or compounded before they are discovered
and remediated, all or any of which would further increase the
costs and consequences of a cyber attack.
While many of our agreements with partners and third party
vendors include indemnification provisions, we may not be able
to recover sufficiently, or at all, under such provisions to
adequately offset any losses we may incur. In addition, although
we maintain insurance coverage that may, subject to policy terms
and conditions, cover certain aspects of cyber and information
security risks, such insurance coverage may be insufficient to
cover all losses.
We continue to make investments with a view toward
maintaining and enhancing its cybersecurity posture. The cost
of managing cyber and information security risks and attacks
along with complying with new, increasingly expansive, and
evolving regulatory requirements could adversely affect our
results of operations and business.
Liquidity Risk
Liquidity risk refers to the risk that we will be unable to finance
our operations due to a loss of access to the capital markets or
difficulty in liquidating our assets. Liquidity risk also
encompasses our ability (or perceived ability) to meet our
financial obligations without experiencing significant business
disruption or reputational damage that may threaten our viability
as a going concern as well as the associated funding risks
triggered by the market or idiosyncratic stress events that may
negatively affect our liquidity and may impact our ability to raise
new funding. For more information on how we monitor and
manage liquidity risk, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—
Liquidity and Capital Resources” and “Quantitative and
Qualitative Disclosures about Risk—Liquidity Risk.”
Liquidity is essential to our businesses and we rely on external
sources to finance a significant portion of our operations.
Liquidity is essential to our businesses. Our liquidity could be
negatively affected by our inability to raise funding in the long-
term or short-term debt capital markets, our inability to access
the secured lending markets, or unanticipated outflows of cash
or collateral by customers or clients. Factors that we cannot
control, such as disruption of the financial markets or negative
views about the financial services industry generally, including
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concerns regarding fiscal matters in the U.S. and other
geographic areas, could impair our ability to raise funding.
Incremental Collateral or Terminating Payments upon Potential
Future Rating Downgrade.”
In addition, our ability to raise funding could be impaired if
investors or lenders develop a negative perception of our long-
term or short-term financial prospects due to factors such as an
incurrence of large trading losses, a downgrade by the rating
agencies, a decline in the level of our business activity, if
regulatory authorities take significant action against us or our
industry, or we discover significant employee misconduct or
illegal activity.
likely need
to finance or
If we are unable to raise funding using the methods described
above, we would
liquidate
unencumbered assets, such as our investment portfolios or
trading assets, to meet maturing liabilities or other obligations.
We may be unable to sell some of our assets or we may have to
sell assets at a discount to market value, either of which could
adversely affect our results of operations, cash flows and
financial condition.
Our borrowing costs and access to the debt capital markets
depend on our credit ratings.
The cost and availability of unsecured financing generally are
impacted by our long-term and short-term credit ratings. The
rating agencies continue to monitor certain company-specific
and industry-wide factors that are important to the determination
of our credit ratings. These include governance, the level and
quality of earnings, capital adequacy, liquidity and funding, risk
appetite and management, asset quality, strategic direction,
business mix, regulatory or legislative changes, macro-
economic environment, and perceived levels of support, and it
is possible that they could downgrade our ratings and those of
similar institutions.
Our credit ratings also can have a significant impact on certain
trading revenues, particularly in those businesses where longer
term counterparty performance is a key consideration, such as
OTC and other derivative transactions, including credit
derivatives and interest rate swaps. In connection with certain
OTC trading agreements and certain other agreements
associated with our Institutional Securities business segment,
we may be required to provide additional collateral to, or
immediately settle any outstanding liability balance with,
certain counterparties in the event of a credit ratings downgrade.
Termination of our trading and other agreements could cause us
to sustain losses and impair our liquidity by requiring us to find
other sources of financing or to make significant cash payments
or securities movements. The additional collateral or
termination payments which may occur in the event of a future
credit rating downgrade vary by contract and can be based on
ratings by either or both of Moody’s Investors Service, Inc. and
S&P Global Ratings. See also “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—
and Capital Resources—Credit Ratings—
Liquidity
We are a holding company and depend on payments from our
subsidiaries.
The Parent Company has no operations and depends on
dividends, distributions and other payments from its subsidiaries
to fund dividend payments and to fund all payments on its
obligations, including debt obligations. Regulatory restrictions,
tax restrictions or elections and other legal restrictions may limit
our ability to transfer funds freely, either to or from our
subsidiaries. In particular, many of our subsidiaries, including
our bank and broker-dealer subsidiaries, are subject to laws,
regulations and self-regulatory organization rules that limit, as
well as authorize regulatory bodies to block or reduce, the flow
of funds to the Parent Company, or that prohibit such transfers
or dividends altogether in certain circumstances, including steps
to “ring fence” entities by regulators outside of the U.S. to protect
clients and creditors of such entities in the event of financial
difficulties involving such entities.
These laws, regulations and rules may hinder our ability to
access funds that we may need to make payments on our
obligations. Furthermore, as a BHC, we may become subject to
a prohibition or to limitations on our ability to pay dividends.
The Federal Reserve, the OCC, and the FDIC have the authority,
and under certain circumstances the duty, to prohibit or to limit
the payment of dividends by the banking organizations they
supervise, including us and our U.S. Bank Subsidiaries.
Our liquidity and financial condition have in the past been,
and in the future could be, adversely affected by U.S. and
international markets and economic conditions.
Our ability to raise funding in the long-term or short-term debt
capital markets or the equity markets, or to access secured
lending markets, has in the past been, and could in the future
be, adversely affected by conditions in the U.S. and international
markets and economies.
In particular, our cost and availability of funding in the past have
been, and may in the future be, adversely affected by illiquid
credit markets and wider credit spreads. Significant turbulence
in the U.S., the E.U. and other international markets and
economies could adversely affect our liquidity and financial
condition and the willingness of certain counterparties and
customers to do business with us.
Legal, Regulatory and Compliance Risk
Legal, regulatory and compliance risk includes the risk of legal
or regulatory sanctions, material financial loss, including fines,
penalties, judgments, damages and/or settlements, or loss to
reputation we may suffer as a result of our failure to comply
with
self-regulatory
organization standards and codes of conduct applicable to our
regulations,
related
rules,
laws,
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December 2019 Form 10-K
Table of Contents
business activities. This risk also includes contractual and
commercial risk, such as the risk that a counterparty’s
performance obligations will be unenforceable. It also includes
compliance with AML, anti-corruption and terrorist financing
rules and regulations. For more information on how we monitor
and manage legal, regulatory and compliance risk, see
“Quantitative and Qualitative Disclosures about Risk—Legal
and Compliance Risk.”
The financial services industry is subject to extensive
regulation, and changes in regulation will impact our
business.
Like other major financial services firms, we are subject to
extensive regulation by U.S. federal and state regulatory
agencies and securities exchanges and by regulators and
exchanges in each of the major markets where we conduct our
business. These laws and regulations significantly affect the way
we do business and can restrict the scope of our existing
businesses and limit our ability to expand our product offerings
and pursue certain investments.
The Firm and its employees are, or will become, subject to
(among other things) wide-ranging regulation and supervision,
intensive scrutiny of our businesses and any plans for expansion
of those businesses, limitations on new activities, a systemic
risk regime that imposes heightened capital and liquidity and
funding requirements and other enhanced prudential standards,
resolution regimes and resolution planning requirements,
requirements for maintaining minimum amounts of TLAC and
external
long-term debt, restrictions on activities and
investments imposed by the Volcker Rule, comprehensive
derivatives regulation, market structure regulation,
tax
regulations, antitrust laws, trade and transaction reporting
obligations, and broadened fiduciary obligations.
In some areas, regulatory standards are subject to final
rulemaking or transition periods or may otherwise be revised in
whole or in part. Ongoing implementation of, or changes in,
laws and regulations could materially impact the profitability of
our businesses and the value of assets we hold, expose us to
additional costs, require changes to business practices or force
us to discontinue businesses, adversely affect our ability to pay
dividends and repurchase our stock or require us to raise capital,
including in ways that may adversely impact our shareholders
or creditors.
In addition, regulatory requirements that are being imposed by
foreign policymakers and regulators may be inconsistent or
conflict with regulations that we are subject to in the U.S. and
may adversely affect us. Legal and regulatory requirements
continue to be subject to ongoing change, which may result in
significant new costs to comply with new or revised
requirements as well as to monitor for compliance on an ongoing
basis.
December 2019 Form 10-K
16
The application of regulatory requirements and strategies in
the U.S. or other jurisdictions to facilitate the orderly
resolution of large financial institutions may pose a greater
risk of loss for our security holders, and subject us to other
restrictions.
Pursuant to the Dodd-Frank Act, we are required to periodically
submit to the Federal Reserve and the FDIC a resolution plan
that describes our strategy for a rapid and orderly resolution
under the U.S. Bankruptcy Code in the event of material
financial distress or failure. If the Federal Reserve and the FDIC
were to jointly determine that our resolution plan submission
was not credible or would not facilitate an orderly resolution,
and if we were unable to address any deficiencies identified by
the regulators, we or any of our subsidiaries may be subject to
more stringent capital, leverage, or liquidity requirements or
restrictions on our growth, activities, or operations, or after a
two-year period, we may be required to divest assets or
operations.
In addition, provided that certain procedures are met, we can be
subject to a resolution proceeding under the orderly liquidation
authority under Title II of the Dodd-Frank Act with the FDIC
being appointed as receiver. The FDIC’s power under the orderly
liquidation authority to disregard the priority of creditor claims
and treat similarly situated creditors differently in certain
circumstances, subject to certain limitations, could adversely
impact holders of our unsecured debt. See “Business—
Supervision and Regulation” and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations
—Liquidity
Regulatory
Requirements.”
Resources—
Capital
and
Further, because both our resolution plan contemplates an SPOE
strategy under the U.S. Bankruptcy Code and the FDIC has
proposed an SPOE strategy through which it may apply its
orderly liquidation authority powers, we believe that the
application of an SPOE strategy is the reasonably likely outcome
if either our resolution plan were implemented or a resolution
proceeding were commenced under the orderly liquidation
authority. An SPOE strategy generally contemplates the
provision of adequate capital and liquidity by the Parent
Company to certain of its subsidiaries so that such subsidiaries
have the resources necessary to implement the resolution
strategy, and the Parent Company has entered into a secured
amended and restated support agreement with its material
entities, as defined in our resolution plan, pursuant to which it
would provide such capital and liquidity to such entities.
In further development of our SPOE strategy, we have created
a wholly owned, direct subsidiary of the Parent Company,
Morgan Stanley Holdings LLC (“Funding IHC”), to serve as a
resolution funding vehicle. The Parent Company has
transferred, and has agreed to transfer on an ongoing basis,
certain assets to the Funding IHC. In the event of a resolution
scenario, the Parent Company would be obligated to contribute
all of its material assets that can be contributed under the terms
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of the amended and restated support agreement (other than
shares in subsidiaries of the Parent Company and certain other
assets) (“Contributable Assets”), to the Funding IHC. The
Funding IHC would be obligated to provide capital and liquidity,
as applicable, to our material entities.
The obligations of the Parent Company and the Funding IHC
under the 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 and certain other assets), and the assets of the Funding
IHC. As a result, claims of our material entities, including the
Funding IHC, against the assets of the Parent Company with
respect to such secured assets are effectively senior to unsecured
obligations of the Parent Company.
Although an SPOE strategy, whether applied pursuant to our
resolution plan or in a resolution proceeding under the orderly
liquidation authority, is intended to result in better outcomes for
creditors overall, there is no guarantee that the application of an
SPOE strategy, including the provision of support to the Parent
Company’s material entities pursuant to the secured amended
and restated support agreement, will not result in greater losses
for holders of our securities compared to a different resolution
strategy for us.
Regulators have taken and proposed various actions to facilitate
an SPOE strategy under the U.S. Bankruptcy Code, the orderly
liquidation authority and other resolution regimes. For example,
the Federal Reserve requires top-tier BHCs of U.S. G-SIBs,
including the Firm, to maintain minimum amounts of equity and
eligible long-term debt TLAC in order to ensure that such
institutions have enough loss-absorbing resources at the point
of failure to be recapitalized through the conversion of debt to
equity or otherwise by imposing losses on eligible TLAC where
the SPOE strategy is used. The combined implication of the
SPOE resolution strategy and the TLAC requirement is that our
losses will be imposed on the holders of eligible long-term debt
and other forms of eligible TLAC issued by the Parent Company
before any losses are imposed on the holders of the debt
securities of our operating subsidiaries or before putting U.S.
taxpayers at risk.
In addition, certain jurisdictions, including the U.K. and other
E.U. jurisdictions, have implemented, or are in the process of
implementing, changes to resolution regimes to provide
resolution authorities with the ability to recapitalize a failing
entity organized in such jurisdiction by writing down certain
unsecured liabilities or converting certain unsecured liabilities
into equity. Such “bail-in” powers are intended to enable the
recapitalization of a failing institution by allocating losses to its
shareholders and unsecured creditors. Non-U.S. regulators are
also considering requirements that certain subsidiaries of large
financial institutions maintain minimum amounts of TLAC that
would pass losses up from the subsidiaries to the Parent
Company and, ultimately, to security holders of the Parent
Company in the event of failure.
We may be prevented from paying dividends or taking other
capital actions because of regulatory constraints or revised
regulatory capital standards.
We are subject to comprehensive consolidated supervision,
regulation and examination by the Federal Reserve, which
requires us to submit, on an annual basis, a capital plan
describing proposed dividend payments to shareholders,
proposed repurchases of our outstanding securities and other
proposed capital actions that we intend to take. The Federal
Reserve may object to, or otherwise require us to modify, such
plan, or may object or require modifications to a resubmitted
capital plan, any of which would adversely affect shareholders.
In addition, beyond review of the plan, the Federal Reserve may
impose other restrictions or conditions on us that prevent us from
paying or increasing dividends, repurchasing securities or taking
other capital actions that would benefit shareholders.
Finally, the Federal Reserve may change regulatory capital
standards to impose higher requirements that restrict our ability
to take capital actions or may modify or impose other regulatory
standards that increase our operating expenses and reduce our
ability to take capital actions.
The financial services industry faces substantial litigation and
is subject to extensive regulatory and law enforcement
investigations, and we may face damage to our reputation and
legal liability.
As a global financial services firm, we face the risk of
investigations and proceedings by governmental and self-
regulatory organizations in all countries in which we conduct
our business. Investigations and proceedings initiated by these
authorities may result in adverse judgments, settlements, fines,
penalties, injunctions or other relief. In addition to the monetary
consequences, these measures could, for example, impact our
ability to engage in, or impose limitations on, certain of our
businesses.
industry and certain U.S. and
These investigations and proceedings, as well as the amount of
penalties and fines sought, continue to impact the financial
services
international
governmental entities have brought criminal actions against, or
have sought criminal convictions, pleas or deferred prosecution
agreements from, financial institutions. Significant regulatory
or law enforcement action against us could materially adversely
affect our business, financial condition or results of operations
or cause us significant reputational harm, which could seriously
harm our business.
The Dodd-Frank Act also provides compensation
to
whistleblowers who present the SEC or CFTC with information
related to securities or commodities law violations that leads to
a successful enforcement action. As a result of
this
compensation, it is possible we could face an increased number
of investigations by the SEC or CFTC.
17
December 2019 Form 10-K
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We have been named, from time to time, as a defendant in various
legal actions, including arbitrations, class actions and other
litigation, as well as investigations or proceedings brought by
regulatory agencies, arising in connection with our activities as
a global diversified financial services institution. Certain of the
actual or threatened legal or regulatory actions include claims
for substantial compensatory and/or punitive damages, claims
for indeterminate amounts of damages, or may result in
penalties, fines, or other results adverse to us.
In some cases, the issuers that would otherwise be the primary
defendants in such cases are bankrupt or are in financial distress.
In other cases, including antitrust litigation, we may be subject
to claims for joint and several liability with other defendants for
treble damages or other relief related to alleged conspiracies
involving other institutions. Like any large corporation, we are
also subject to risk from potential employee misconduct,
including non-compliance with policies and improper use or
disclosure of confidential information, or improper sales
practices or conduct.
We may be responsible for representations and warranties
associated with residential and commercial real estate loans
and may incur losses in excess of our reserves.
We originate loans secured by commercial and residential
properties. Further, we securitize and trade in a wide range of
commercial and residential real estate and real estate-related
whole loans, mortgages and other real estate and commercial
assets and products, including residential and CMBS. In
connection with these activities, we have provided, or otherwise
agreed to be responsible for, certain representations and
warranties. Under certain circumstances, we may be required to
repurchase such assets or make other payments related to such
assets if such representations and warranties were breached. We
have also made representations and warranties in connection
with our role as an originator of certain commercial mortgage
loans that we securitized in CMBS. For additional information,
see also Note 13 to the financial statements.
We currently have several legal proceedings related to claims
for alleged breaches of representations and warranties. If there
are decisions adverse to us in those legal proceedings, we may
incur losses substantially in excess of our reserves. In addition,
our reserves are based, in part, on certain factual and legal
assumptions. If those assumptions are incorrect and need to be
revised, we may need to adjust our reserves substantially.
Our commodities activities and investments subject us to
extensive regulation, and environmental risks and regulation
that may expose us to significant costs and liabilities.
In connection with the commodities activities in our Institutional
Securities business segment, we execute transactions involving
the storage, transportation and market-making of several
commodities, including metals, natural gas, electric power,
environmental attributes and other commodity products. In
December 2019 Form 10-K
18
addition, we are an electricity power marketer in the U.S. These
activities subject us to extensive energy, commodities,
environmental, health and safety and other governmental laws
and regulations.
Although we have attempted to mitigate our environmental risks
by, among other measures, limiting the scope of activities
involving storage and transportation, adopting appropriate
policies and procedures, and implementing emergency response
programs, these actions may not prove adequate to address every
contingency. In addition, insurance covering some of these risks
may not be available, and the proceeds, if any, from insurance
recovery may not be adequate to cover liabilities with respect
to particular incidents. As a result, our financial condition,
results of operations and cash flows may be adversely affected
by these events.
During the past several years, intensified scrutiny of certain
energy markets by federal, state and local authorities in the U.S.
and abroad and by the public has resulted in increased regulatory
and legal enforcement, litigation and remedial proceedings
involving companies conducting the activities in which we are
engaged. In addition, enhanced regulation of OTC derivatives
markets in the U.S. and the E.U., as well as similar legislation
proposed or adopted elsewhere, will impose significant costs
and requirements on our commodities derivatives activities.
We may incur substantial costs or loss of revenue in complying
with current or future laws and regulations and our overall
businesses and reputation may be adversely affected by the
current legal environment. In addition, failure to comply with
these laws and regulations may result in substantial civil and
criminal fines and penalties.
A failure to address conflicts of interest appropriately could
adversely affect our businesses and reputation.
financial
As a global financial services firm that provides products and
services to a large and diversified group of clients, including
and
corporations, governments,
individuals, we face potential conflicts of interest in the normal
course of business. For example, potential conflicts can occur
when there is a divergence of interests between us and a client,
among clients, between an employee on the one hand and us or
a client on the other, or situations in which we may be a creditor
of a client.
institutions
We have policies, procedures and controls that are designed to
identify and address potential conflicts of interest, and we utilize
various measures, such as the use of disclosure, to manage these
potential conflicts. However, identifying and mitigating
potential conflicts of interest can be complex and challenging
and can become the focus of media and regulatory scrutiny.
Indeed, actions that merely appear to create a conflict can put
our reputation at risk even if the likelihood of an actual conflict
has been mitigated. It is possible that potential conflicts could
give rise to litigation or enforcement actions, which may lead
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to our clients being less willing to enter into transactions in
which a conflict may occur and could adversely affect our
businesses and reputation.
Our regulators have the ability to scrutinize our activities for
potential conflicts of interest, including through detailed
examinations of specific transactions. For example, our status
as a BHC supervised by the Federal Reserve subjects us to direct
Federal Reserve scrutiny with respect to transactions between
our U.S. Bank Subsidiaries and their affiliates. Further, the
Volcker Rule subjects us to regulatory scrutiny regarding certain
transactions between us and our clients.
Risk Management
Our risk management strategies, models and processes may
not be fully effective in mitigating our risk exposures in all
market environments or against all types of risk, which could
result in unexpected losses.
We have devoted significant resources to develop our risk
management capabilities and expect to continue to do so in the
future. Nonetheless, our risk management strategies, models and
processes, including our use of various risk models for assessing
market exposures and hedging strategies, stress testing and other
analysis, may not be fully effective in mitigating our risk
exposure in all market environments or against all types of risk,
including risks that are unidentified or unanticipated.
As our businesses change and grow, and the markets in which
we operate evolve, our risk management strategies, models and
processes may not always adapt with those changes. Some of
our methods of managing risk are based upon our use of observed
historical market behavior and management’s judgment. As a
result, these methods may not predict future risk exposures,
which could be significantly greater than the historical measures
indicate.
In addition, many models we use are based on assumptions or
inputs regarding correlations among prices of various asset
classes or other market indicators and therefore cannot
anticipate sudden, unanticipated or unidentified market or
economic movements, which could cause us to incur losses.
Management of market, credit, liquidity, operational, model,
legal, regulatory and compliance risks requires, among other
things, policies and procedures to record properly and verify a
large number of transactions and events, and these policies and
procedures may not be fully effective. Our trading risk
management strategies and techniques also seek to balance our
ability to profit from trading positions with our exposure to
potential losses.
While we employ a broad and diversified set of risk monitoring
and risk mitigation techniques, those techniques and the
judgments that accompany their application cannot anticipate
every economic and financial outcome or the timing of such
outcomes. For example, to the extent that our trading or investing
activities involve less liquid trading markets or are otherwise
subject to restrictions on sales or hedging, we may not be able
to reduce our positions and therefore reduce our risk associated
with such positions. We may, therefore, incur losses in the course
of our trading or investing activities. For more information on
how we monitor and manage market and certain other risks and
related strategies, models and processes, see “Quantitative and
Qualitative Disclosures about Risk—Market Risk.”
Planned replacement of London Interbank Offered Rate and
replacement or reform of other interest rate benchmarks could
adversely affect our business, financial condition and results
of operations.
Central banks around the world, including the Federal Reserve,
have commissioned working groups of market participants and
official sector representatives to replace LIBOR and replace or
reform other interest rate benchmarks (collectively, the
“IBORs”). A transition away from the widespread use of such
rates to alternative rates and other potential interest rate
benchmark reforms has begun and will continue over the course
of the next few years. For example, the FCA, which regulates
LIBOR, has announced that it has commitments from panel
banks to continue to contribute to LIBOR through the end of
2021, but that it will not use its powers to compel contributions
beyond such date. As a result, there is considerable uncertainty
regarding the publication of LIBOR beyond 2021, and
regulators globally have continued to emphasize the need for
the industry to plan accordingly.
The Federal Reserve Bank of New York now publishes three
reference rates based on overnight U.S. Treasury repurchase
agreement transactions, including the Secured Overnight
Financing Rate, which had been recommended as the alternative
to U.S. dollar LIBOR by the Alternative Reference Rates
Committee convened by the Federal Reserve and the Federal
Reserve Bank of New York. Further, the Bank of England is
publishing a reformed Sterling Overnight Index Average,
comprised of a broader set of overnight Sterling money market
transactions, which has been selected by the Working Group on
Sterling Risk-Free Reference Rates as the alternative rate to
Sterling LIBOR. Central bank-sponsored committees in other
jurisdictions, including Europe, Japan and Switzerland, have
selected alternative reference rates denominated in other
currencies.
The market transition away from IBORs to alternative reference
rates is complex and could have a range of adverse impacts on
our business, financial condition and results of operations. In
particular, such transition or reform could:
• Adversely impact the pricing, liquidity, value of, return on
and trading for a broad array of financial products, including
any IBOR-linked securities, loans and derivatives that are
included in our financial assets and liabilities;
19
December 2019 Form 10-K
Table of Contents
• Require extensive changes to documentation that governs or
references IBOR or IBOR-based products, including, for
example, pursuant to time-consuming renegotiations of
existing documentation to modify the terms of outstanding
securities and related hedging transactions;
• Result in a population of products with documentation that
governs or references IBOR or IBOR-based products but that
cannot be amended due to an inability to obtain sufficient
consent from counterparties or product owners;
• Result in inquiries or other actions from regulators in respect
of our (or the market’s) preparation and readiness for the
replacement of an IBOR with one or more alternative
reference rates;
• Result in disputes, litigation or other actions with clients,
counterparties and investors, in various scenarios, such as
regarding the interpretation and enforceability of provisions
in IBOR-based products such as fallback language or other
related provisions, including in the case of fallbacks to the
alternative reference rates, any economic, legal, operational
or other impact resulting from the fundamental differences
between the IBORs and the various alternative reference rates;
• Require the transition and/or development of appropriate
systems and analytics to effectively transition our risk
management processes from IBORs to those based on one or
more alternative reference rates in a timely manner, including
by quantifying value and risk for various alternative reference
rates, which may prove challenging given the limited history
of the proposed alternative reference rates; and
• Cause us to incur additional costs in relation to any of the
above factors.
Other factors include the pace of the transition to the alternative
reference rates, timing mismatches between cash and derivative
markets, the specific terms and parameters for and market
acceptance of any alternative reference rate, market conventions
for the use of any alternative reference rate in connection with
a particular product (including the timing and market adoption
of any conventions proposed or recommended by any industry
or other group), prices of and the liquidity of trading markets
for products based on alternative reference rates, and our ability
to transition and develop appropriate systems and analytics for
one or more alternative reference rates.
Competitive Environment
We face strong competition from financial services firms and
others, which could lead to pricing pressures that could
materially adversely affect our revenue and profitability.
The financial services industry and all aspects of our businesses
are intensely competitive, and we expect them to remain so. We
compete with commercial banks, brokerage firms, insurance
trading and clearing
companies, exchanges, electronic
December 2019 Form 10-K
20
platforms, financial data repositories, sponsors of mutual funds,
hedge funds, energy companies, financial technology firms and
other companies offering financial or ancillary services in the
U.S., globally and digitally or through the internet. We compete
on the basis of several factors, including transaction execution,
capital or access to capital, products and services, innovation,
technology, reputation, risk appetite and price.
Over time, certain sectors of the financial services industry have
become more concentrated, as institutions involved in a broad
range of financial services have left businesses, been acquired
by or merged into other firms, or have declared bankruptcy. Such
changes could result in our remaining competitors gaining
greater capital and other resources, such as the ability to offer a
broader range of products and services and geographic diversity,
or new competitors may emerge.
We have experienced and may continue to experience pricing
pressures as a result of these factors and as some of our
competitors seek to obtain market share by reducing prices or
providing more favorable terms of business. In addition, certain
of our competitors may be subject to different, and, in some
cases, less stringent, legal and regulatory regimes, than we are,
thereby putting us at a competitive disadvantage. Some new
competitors in the financial technology sector have sought to
target existing segments of our businesses that could be
susceptible to disruption by innovative or less regulated business
models. For more information regarding the competitive
environment
in which we operate, see “Business—
Competition” and “Business—Supervision and Regulation.”
Automated trading markets and the introduction and
application of new technologies may adversely affect our
business and may increase competition.
the
trading platforms and
We have experienced intense price competition in some of our
businesses in recent years. In particular, the ability to execute
securities, derivatives and other financial instrument trades
electronically on exchanges, swap execution facilities, other
introduction and
automated
application of new technologies has increased the pressure on
bid-offer spreads, commissions, markups or comparable fees.
The trend toward direct access to automated, electronic markets
will likely continue and will likely increase as additional markets
move
trading platforms. We have
experienced and it is likely that we will continue to experience
competitive pressures in these and other areas in the future as
some of our competitors may seek to obtain market share by
reducing bid-offer spreads, commissions, markups or fees.
to more automated
Our ability to retain and attract qualified employees is critical
to the success of our business and the failure to do so may
materially adversely affect our performance.
Our people are our most important resource and competition for
qualified employees is intense. If we are unable to continue to
attract and retain highly qualified employees, or do so at levels
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or in forms necessary to maintain our competitive position, or
if compensation costs required to attract and retain employees
become more expensive, our performance, including our
competitive position and results of operations, could be
materially adversely affected.
stringent
The financial industry has experienced and may continue to
experience more
employee
compensation, including limitations relating to incentive-based
compensation, clawback requirements and special taxation,
which could have an adverse effect on our ability to hire or retain
the most qualified employees.
regulation
of
International Risk
We are subject to numerous political, economic, legal, tax,
operational, franchise and other risks as a result of our
international operations which could adversely impact our
businesses in many ways.
We are subject to numerous political, economic, legal, tax,
operational, franchise and other risks that are inherent in
operating in many countries, including risks of possible
nationalization, expropriation, price controls, capital controls,
exchange controls, increased taxes and levies, and other
restrictive governmental actions, as well as the outbreak of
hostilities or political and governmental instability. In many
countries, the laws and regulations applicable to the securities
and financial services industries are uncertain and evolving, and
it may be difficult for us to determine the exact requirements of
local laws in every market.
Our inability to remain in compliance with local laws in a
particular market could have a significant and negative effect
not only on our business in that market but also on our reputation
generally. We are also subject to the risk that transactions we
structure might not be legally enforceable in all cases.
financial disruptions,
Various emerging market countries have experienced severe
political, economic or
including
significant devaluations of their currencies, defaults or potential
defaults on sovereign debt, capital and currency exchange
controls, high rates of inflation and low or negative growth rates
in their economies. Crime and corruption, as well as issues of
security and personal safety, also exist in certain of these
countries. These conditions could adversely impact our
businesses and increase volatility in financial markets generally.
The emergence of a disease pandemic, such as the coronavirus,
or other widespread health emergencies, natural disasters,
terrorist activities or military actions, or social or political
tensions, could create economic and financial disruptions in
emerging markets or in other areas of the global economy that
could adversely affect our businesses, or could lead to
operational difficulties (including travel limitations) that could
impair our ability to manage or conduct our businesses around
the world.
As a U.S. company, we are required to comply with the economic
sanctions and embargo programs administered by OFAC and
similar multi-national bodies and governmental agencies
worldwide, as well as applicable anti-corruption laws in the
jurisdictions in which we operate, such as the U.S. Foreign
Corrupt Practices Act and the U.K. Bribery Act. A violation of
a sanction, embargo program, or anti-corruption law could
subject us, and
to a regulatory
individual employees,
enforcement action as well as significant civil and criminal
penalties.
The U.K.’s withdrawal from the E.U. could adversely affect
us.
It is difficult to predict the future of the U.K.’s relationship with
the E.U., the uncertainty of which may increase the volatility in
the global financial markets in the short- and medium-term and
may negatively disrupt regional and global financial markets.
Additionally, depending on the outcome, such uncertainty may
adversely affect the manner in which we operate certain of our
businesses in Europe.
On January 31, 2020, the U.K. withdrew from the E.U. under
the terms of a withdrawal agreement between the U.K. and the
E.U. The withdrawal agreement provides for a transition period
to the end of December 2020, during which time the U.K. will
continue to apply E.U. law as if it were a member state, and U.K.
firms' passporting rights to provide financial services in E.U.
jurisdictions will continue. Under the terms of the withdrawal
agreement the U.K. and the E.U. may agree to an extension of
the transition period for up to two years, although the U.K.
Government has signaled that it will not seek any extension.
With respect to financial services, the withdrawal agreement
provides that the U.K. and the E.U. will endeavor to conclude
by June 2020 whether they will grant each other equivalence
under European financial regulations. Equivalence would
provide a degree of access to E.U. markets for U.K. financial
firms, although the extent and duration of such access remains
subject to negotiation.
If equivalence (or any alternative arrangement) is not agreed,
our U.K. licensed entities may be unable to provide regulated
services in a number of E.U. jurisdictions from the end of
December 2020, absent further regulatory relief.
Potential effects of the U.K. exit from the E.U. and potential
mitigation actions may vary considerably depending on the
nature of the future trading arrangements between the U.K. and
the E.U.
While we have taken steps to make changes to our European
operations in an effort to ensure that we can continue to provide
cross-border banking and investment and other services in E.U.
member states without the need for separate regulatory
authorizations in each member state, as a result of the political
uncertainty described above, it is currently unclear what the final
21
December 2019 Form 10-K
For more information regarding the regulatory environment in
which we operate, see also “Business—Supervision and
Regulation.”
Table of Contents
post-Brexit structure of our European operations will be. Given
the potential negative disruption to regional and global financial
markets, and depending on the extent to which we may be
required to make material changes to our European operations
beyond those implemented or planned, our results of operations
and business prospects could be negatively affected. See also
“Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Liquidity and Capital Resources—
Regulatory Requirements—Regulatory Developments.”
Acquisition, Divestiture and Joint Venture Risk
We may be unable to fully capture the expected value from
acquisitions, divestitures, joint ventures, minority stakes or
strategic alliances.
In connection with past or future acquisitions, divestitures, joint
ventures, minority stakes or strategic alliances (including with
MUFG), we face numerous risks and uncertainties combining,
transferring, separating or integrating the relevant businesses
and systems, including the need to combine or separate
accounting and data processing systems and management
controls and to integrate relationships with clients, trading
counterparties and business partners. Certain of these strategic
initiatives, and integration thereof, may cause us to incur
incremental expenses and may also require incremental
financial, management and other resources.
In the case of joint ventures and minority stakes, we are subject
to additional risks and uncertainties because we may be
dependent upon, and subject to liability, losses or reputational
damage relating to systems, controls and personnel that are not
under our control.
In addition, conflicts or disagreements between us and any of
our joint venture partners may negatively impact the benefits to
be achieved by the relevant joint venture.
There is no assurance that any of our acquisitions, divestitures
or investments will be successfully integrated or disaggregated
or yield all of the positive benefits and synergies anticipated. If
we are not able to integrate or disaggregate successfully our past
and future acquisitions or dispositions, there is a risk that our
results of operations, financial condition and cash flows may be
materially and adversely affected.
Certain of our business initiatives, including expansions of
existing businesses, may bring us into contact, directly or
indirectly, with individuals and entities that are not within our
traditional client and counterparty base and may expose us to
new asset classes, services, competitors, and new markets.
These business activities expose us to new and enhanced risks,
greater regulatory scrutiny of these activities, increased credit-
related, sovereign and operational risks, and reputational
concerns regarding the manner in which these assets are being
operated or held, or services are being delivered.
December 2019 Form 10-K
22
Table of Contents
Selected Financial Data
Income Statement Data
Financial Measures
2019
2018
2017
2016
2015
2019
2018
2017
2016
2015
$ in millions
Revenues
Total non-interest
revenues1
Interest income
Interest expense
Net interest
Net revenues
Non-interest expenses
Compensation and
benefits
Non-compensation
expenses1
Total non-interest
expenses
Income from continuing
operations before
income taxes
Provision for (benefit
from) income taxes
Income from continuing
operations
Income (loss) from
discontinued
operations, net of
income taxes
Net income
Net income applicable to
noncontrolling interests
Net income applicable to
Morgan Stanley
Preferred stock dividends
and other
Earnings applicable to
Morgan Stanley
common
shareholders
$ 36,725
$ 36,301
$ 34,645
$ 30,933
$ 32,062
17,098
13,892
12,404
10,086
4,694
3,806
8,997
5,697
3,300
7,016
3,318
3,698
5,835
2,742
3,093
41,419
40,107
37,945
34,631
35,155
18,837
17,632
17,166
15,878
16,016
11,281
11,238
10,376
9,905
10,644
30,118
28,870
27,542
25,783
26,660
11,301
11,237
10,403
8,848
8,495
2,064
2,350
4,168
2,726
2,200
9,237
8,887
6,235
6,122
6,295
—
(4)
(19)
1
(16)
$ 9,237
$ 8,883
$ 6,216
$ 6,123
$ 6,279
195
135
105
144
152
$ 9,042
$ 8,748
$ 6,111
$ 5,979
$ 6,127
530
526
523
471
456
$ 8,512
$ 8,222
$ 5,588
$ 5,508
$ 5,671
Amounts applicable to Morgan Stanley
Income from continuing
operations
Income (loss) from
discontinued operations
Net income applicable
to Morgan Stanley
Effective income tax
rate from continuing
operations
$ 9,042
$ 8,752
$ 6,130
$ 5,978
$ 6,143
—
(4)
(19)
1
(16)
$ 9,042
$ 8,748
$ 6,111
$ 5,979
$ 6,127
18.3%
20.9%
40.1%
30.8%
25.9%
ROE2
ROTCE2, 3
11.7%
13.4%
11.8%
13.5%
8.0%
9.2%
8.0%
9.3%
8.5%
9.9%
Common Share-Related Data
Per common share
Earnings (basic)4
Earnings (diluted)4
Book value5
Tangible book
value3, 5
Dividends declared
2019
2018
2017
2016
2015
$
5.26 $
4.81 $
3.14 $
2.98 $
5.19
45.82
40.01
1.30
4.73
42.20
36.99
1.10
3.07
38.52
33.46
0.90
2.92
36.99
31.98
0.70
2.97
2.90
35.24
30.26
0.55
Common shares outstanding
in millions
At December 31
Annual average:
Basic
Diluted
Balance Sheet Data
1,594
1,700
1,788
1,852
1,920
1,617
1,640
1,708
1,738
1,780
1,821
1,849
1,887
1,909
1,953
$ in millions
GLR6
Loans7
Total assets
Deposits
Borrowings
Morgan Stanley
shareholders’ equity
Common
2019
2018
2017
2016
2015
$217,457 $249,735 $192,660 $202,297 $203,264
130,637
115,579
104,126
94,248
85,759
895,429
853,531
851,733
814,949
787,465
190,356
187,820
159,436
155,863
156,034
192,627
189,662
192,582
165,716
155,941
81,549
80,246
77,391
76,050
75,182
shareholders’ equity
73,029
71,726
68,871
68,530
67,662
Tangible common
shareholders’
equity3
63,780
62,879
59,829
59,234
58,098
1. Effective January 1, 2018, the Firm adopted new accounting guidance related to
Revenue from Contracts with Customers, which, among other things, requires a gross
presentation of certain costs that were previously netted against net revenues. Prior
period results have not been restated pursuant to this guidance.
2. ROE and ROTCE represent earnings applicable to Morgan Stanley common
shareholders as a percentage of average common equity and average tangible
common equity, respectively.
3. Represents a non-GAAP measure. See “Executive Summary—Selected Non-GAAP
Financial Information.”
4. For further information on basic and diluted earnings (loss) per common share, see
Note 16 to the financial statements.
5. Book value per common share and tangible book value per common share equal
common shareholders’ equity and tangible common shareholders’ equity, respectively,
divided by common shares outstanding.
6. For a discussion of the GLR, see “Liquidity and Capital Resources—Liquidity Risk
Management Framework—Global Liquidity Reserve” herein.
7. Amounts include loans held for investment (net of allowance) and loans held for sale
but exclude loans at fair value, which are included in Trading assets in the balance
sheets (see Note 8 to the financial statements).
23
December 2019 Form 10-K
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Wealth Management provides a comprehensive array of
financial services and solutions to individual investors and
small to medium-sized businesses and institutions covering:
brokerage and investment advisory services; financial and
wealth planning services; stock plan administration services;
annuity and insurance products; securities-based lending,
residential real estate loans and other lending products;
banking; and retirement plan services.
include equity, fixed
Investment Management provides a broad range of investment
strategies and products that span geographies, asset classes,
and public and private markets to a diverse group of clients
across institutional and intermediary channels. Strategies and
products, which are offered through a variety of investment
liquidity and
vehicles,
alternative/other products. Institutional clients
include
defined benefit/defined contribution plans, foundations,
endowments, government entities, sovereign wealth funds,
fund sponsors and
third-party
insurance companies,
corporations. Individual clients are generally served through
intermediaries,
including affiliated and non-affiliated
distributors.
income,
The results of operations in the past have been, and in the future
may continue to be, materially affected by: competition; risk
factors; legislative, legal and regulatory developments; and
other factors. These factors also may have an adverse impact on
our ability to achieve our strategic objectives. Additionally, the
discussion of our results of operations herein may contain
forward-looking statements. These statements, which reflect
management’s beliefs and expectations, are subject to risks and
uncertainties that may cause actual results to differ materially.
For a discussion of the risks and uncertainties that may affect
our future results, see “Forward-Looking Statements,”
“Business—Competition,”
and
Regulation,” “Risk Factors” and “Liquidity and Capital
Resources—Regulatory Requirements” herein.
“Business—Supervision
Morgan Stanley 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
and
corporations, governments,
individuals. Unless the context otherwise requires, the terms
“Morgan Stanley,” “Firm,” “us,” “we” or “our” mean Morgan
Stanley (the “Parent Company”) together with its consolidated
subsidiaries. See the “Glossary of Common Terms and
Acronyms” for the definition of certain terms and acronyms used
throughout this Form 10-K. For an analysis of 2018 results
compared with 2017 results, see Part II, Item 7, “Management's
Discussion and Analysis of Financial Condition and Results of
Operations” in the 2018 Form 10-K.
institutions
financial
A description of the clients and principal products and services
of each of our business segments is as follows:
Institutional Securities provides investment banking, sales
and trading, lending and other services to corporations,
governments, financial institutions and high to ultra-high net
worth clients. Investment banking services consist of capital
raising and financial advisory services, including services
relating to the underwriting of debt, equity and other
securities, as well as advice on mergers and acquisitions,
restructurings, real estate and project finance. Sales and
trading services include sales, financing, prime brokerage and
market-making activities in equity and fixed income products,
including foreign exchange and commodities. Lending
activities include originating corporate loans and commercial
real estate loans, providing secured lending facilities, and
extending financing to sales and trading customers. Other
activities
include Asia wealth management services,
investments and research.
December 2019 Form 10-K
24
Table of Contents
Management's Discussion and Analysis
Executive Summary
Overview of Financial Results
Consolidated Results
Net Revenues1
($ in millions)
Net Income Applicable to Morgan Stanley
($ in millions)
Earnings per Common Share2
Net Income Applicable to Morgan Stanley and Diluted EPS on
a U.S. GAAP and Adjusted Basis
$ in millions, except per share data
2019
2018
2017
Net income applicable to Morgan Stanley
U.S. GAAP
Adjusted—Non-GAAP3
Earnings per diluted common share
U.S. GAAP2
Adjusted—Non-GAAP3
$
9,042 $
8,748 $
6,111
8,694
8,545
7,079
$
5.19 $
4.73 $
4.98
4.61
3.07
3.60
1. Effective January 1, 2018, the Firm adopted new accounting guidance related to
Revenue from Contracts with Customers, which among other things, requires a gross
presentation of certain costs that were previously netted against net revenues. 2017
results have not been restated pursuant to this guidance.
2. For further information on basic and diluted EPS, see Note 16 to the financial
statements.
3. Represents a non-GAAP measure, see “Selected Non-GAAP Financial Information”
herein. Adjusted amounts exclude net discrete tax provisions (benefits) that are
intermittent and include those that are recurring. Provisions (benefits) related to
conversion of employee share-based awards are expected to occur every year and,
as such, are considered recurring discrete tax items. For further information on the
net discrete tax provisions (benefits), see “Supplemental Financial Information—
Income Tax Matters” herein.
2019 Compared with 2018
• We reported net revenues of $41,419 million in 2019
compared with $40,107 million in 2018. For 2019, net income
applicable to Morgan Stanley was $9,042 million, or $5.19
per diluted common share, compared with $8,748 million, or
$4.73 per diluted common share, in 2018.
• Results for 2019 and 2018 include intermittent net discrete
tax benefits of $348 million and $203 million or $0.21 and
$0.12 per diluted common share, respectively, primarily
associated with remeasurement of reserves and related
interest as a result of new information pertaining to the
resolution of multi-jurisdiction tax examinations.
• Excluding the intermittent net discrete tax items, net income
applicable to Morgan Stanley was $8,694 million, or $4.98
per diluted common share in 2019, compared with $8,545
million, or $4.61 per diluted common share, in 2018 (see
“Selected Non-GAAP Financial Information” herein).
25
December 2019 Form 10-K
Table of Contents
Management's Discussion and Analysis
Non-interest Expenses1, 2
($ in millions)
Business Segment Results
Net Revenues by Segment1, 2
($ in millions)
Net Income Applicable to Morgan Stanley by Segment1
($ in millions)
1. The percentages on the bars in the chart represent the contribution of compensation
and benefits expenses and non-compensation expenses to the total.
2. Effective January 1, 2018, the Firm adopted new accounting guidance related to
Revenue from Contracts with Customers, which among other things, requires a gross
presentation of certain costs that were previously netted against net revenues. 2017
results have not been restated pursuant to this guidance.
2019 Compared with 2018
• Compensation and benefits expenses of $18,837 million in
2019 increased 7% from $17,632 million in 2018. The 2019
results reflect increases in the fair value of investments to
which certain deferred compensation plans are referenced,
carried interest, salaries, and severance-related costs. These
increases were partially offset by decreases in discretionary
incentive compensation and the roll-off of certain acquisition-
related employee retention loans.
• Non-compensation expenses of $11,281 million in 2019 were
relatively unchanged from $11,238 million in 2018, with
increased
lower
professional services expenses.
technology offset by
investment
in
1. The percentages on the bars in the charts represent the contribution of each business
segment to the total of the applicable financial category and may not total to 100%
due to intersegment eliminations. See Note 21 to the financial statements for details
of intersegment eliminations.
2. Effective January 1, 2018, the Firm adopted new accounting guidance related to
Revenue from Contracts with Customers, which among other things, requires a gross
presentation of certain costs that were previously netted against net revenues. This
new guidance had the effect of increasing revenues reported in the Institutional
Securities and Investment Management business segments. 2017 results have not
been restated pursuant to this guidance.
December 2019 Form 10-K
26
Table of Contents
Management's Discussion and Analysis
2019 Compared with 2018
Financial Measures
• Institutional Securities net revenues of $20,386 million in
2019 were relatively unchanged from 2018, reflecting a mixed
market backdrop, with lower revenues from Equity sales and
trading and Investment banking offset by higher Fixed income
and Other sales and trading revenues.
• Wealth Management net revenues of $17,737 million in 2019
increased 3% from 2018, primarily reflecting higher
Transactional revenues due to gains related to investments
associated with certain deferred compensation plans.
• Investment Management net revenues of $3,763 million in
2019 increased 37% from 2018, primarily reflecting higher
Investments revenues, principally driven by an underlying
investment's initial public offering within an Asia private
equity fund.
Net Revenues by Region1, 2
($ in millions)
1. The percentages on the bars in the charts represent the contribution of each region
to the total.
2. For a discussion of how the geographic breakdown for net revenues is determined,
see Note 21 to the financial statements.
Consolidated financial measures
ROE
Adjusted ROE1, 2
ROTCE1
Adjusted ROTCE1, 2
Expense efficiency ratio3
Pre-tax margin4
Worldwide employees
Pre-tax margin by segment4
Institutional Securities
Wealth Management
Investment Management
Capital ratios5
Common Equity Tier 1 capital
Tier 1 capital
Total capital
Tier 1 leverage
SLR
2019
2018
2017
11.7%
11.2%
13.4%
12.9%
72.7%
27.3%
11.8%
11.5%
13.5%
13.2%
72.0%
28.0%
8.0%
9.4%
9.2%
10.8%
72.6%
27.4%
60,431
60,348
57,633
27%
27%
26%
30%
26%
17%
30%
26%
18%
At
December 31,
2019
At
December 31,
2018
16.4%
18.6%
21.0%
8.3%
6.4%
16.9%
19.2%
21.8%
8.4%
6.5%
1. Represents a non-GAAP measure. See “Selected Non-GAAP Financial Information”
herein.
2. Adjusted amounts exclude net discrete tax provisions (benefits) that are intermittent
and include those that are recurring. Provisions (benefits) related to conversion of
employee share-based awards are expected to occur every year and, as such, are
considered recurring discrete tax items. For further information on the net discrete tax
provisions (benefits), see “Supplemental Financial Information—Income Tax Matters”
herein.
3. The expense efficiency ratio represents total non-interest expenses as a percentage
of net revenues.
4. Pre-tax margin represents income from continuing operations before income taxes
as a percentage of net revenues.
5. At December 31, 2019 and 2018, our risk-based capital ratios are based on the
Standardized Approach rules. For a discussion of our capital ratios, see "Liquidity and
Capital Resources—Regulatory Requirements" herein.
Selected Non-GAAP Financial Information
We prepare our financial statements using U.S. GAAP. From
time to time, we may disclose certain “non-GAAP financial
measures” in this document or in the course of our earnings
releases, earnings and other conference calls, financial
presentations, definitive proxy statement and otherwise. A “non-
GAAP financial measure” excludes, or includes, amounts from
the most directly comparable measure calculated and presented
in accordance with U.S. GAAP. We consider the non-GAAP
financial measures we disclose to be useful to us, investors,
analysts and other stakeholders by providing
further
transparency about, or an alternate means of assessing, our
financial condition, operating results, prospective regulatory
capital requirements or capital adequacy.
These measures are not in accordance with, or a substitute for,
U.S. GAAP and may be different from or inconsistent with non-
GAAP financial measures used by other companies. Whenever
we refer to a non-GAAP financial measure, we will also
generally define it or present the most directly comparable
27
December 2019 Form 10-K
Table of Contents
Management's Discussion and Analysis
financial measure calculated and presented in accordance with
U.S. GAAP, along with a reconciliation of the differences
between the U.S. GAAP financial measure and the non-GAAP
financial measure.
The principal non-GAAP financial measures presented in this
document are set forth in the following tables.
Reconciliations from U.S. GAAP to Non-GAAP Consolidated
Financial Measures
$ in millions, except per share data
2019
2018
2017
Net income applicable to Morgan
Stanley
Impact of adjustments
Adjusted net income applicable to
Morgan Stanley—non-GAAP1
$ 9,042
$ 8,748
$ 6,111
(348)
(203)
968
$ 8,694
$ 8,545
$ 7,079
Earnings per diluted common share
$
5.19
$
4.73
$ 3.07
Impact of adjustments
(0.21)
(0.12)
0.53
Adjusted earnings per diluted common
share —non-GAAP1
Effective income tax rate
Impact of adjustments
Adjusted effective income tax
rate—non-GAAP1
$
4.98
$
4.61
$ 3.60
18.3%
20.9%
40.1 %
3.0%
1.8%
(9.3)%
21.3%
22.7%
30.8 %
$ in millions
Tangible equity
Average Monthly Balance
2017
2018
2019
Morgan Stanley shareholders’ equity
$ 81,240 $ 78,497 $ 78,230
Less: Goodwill and net intangible assets
(9,140)
(8,985)
(9,158)
Tangible Morgan Stanley shareholders’
equity
$ 72,100 $ 69,512 $ 69,072
Non-GAAP Financial Measures by Business Segment
$ in billions
Average common equity4, 5
Institutional Securities
Wealth Management
Investment Management
Average tangible common equity4, 5
Institutional Securities
Wealth Management
Investment Management
ROE6
Institutional Securities
Wealth Management
Investment Management
ROTCE6
Institutional Securities
Wealth Management
Investment Management
2019
2018
2017
$
40.4
$
40.8
$
40.2
18.2
2.5
16.8
2.6
17.2
2.4
$
39.9
$
40.1
$
39.6
10.2
1.5
9.2
1.7
9.3
1.6
10.4%
11.0%
7.8%
19.8%
20.0%
12.9%
28.9%
14.2%
10.1%
10.5%
35.6%
46.6%
11.2%
36.6%
22.2%
7.9%
23.8%
14.8%
1. Adjusted amounts exclude net discrete tax provisions (benefits) that are intermittent
and include those that are recurring. Provisions (benefits) related to conversion of
employee share-based awards are expected to occur every year and, as such, are
considered recurring discrete tax items. For further information on the net discrete tax
provisions (benefits), see “Supplemental Financial Information—Income Tax Matters”
herein.
2. ROE and ROTCE represent earnings applicable to Morgan Stanley common
shareholders as a percentage of average common equity and average tangible
common equity, respectively. When excluding intermittent net discrete tax provisions
(benefits), both the numerator and average denominator are adjusted.
3. The calculations used in determining our “ROE and ROTCE Targets” referred to in
the following section are the Adjusted ROE and Adjusted ROTCE amounts shown in
this table.
4. Average common equity and average tangible common equity for each business
segment is determined using our Required Capital framework (see "Liquidity and
Capital Resources—Regulatory Requirements—Attribution of Average Common
Equity According to the Required Capital Framework” herein).
5. The sums of the segments' Average common equity and Average tangible common
Common shareholders' equity
$ 72,720 $ 69,977 $ 69,787
equity do not equal the Consolidated measures due to Parent equity.
Less: Goodwill and net intangible assets
(9,140)
(8,985)
(9,158)
Tangible common shareholders' equity
$ 63,580 $ 60,992 $ 60,629
6. The calculation of ROE and ROTCE by segment uses net income applicable to Morgan
Stanley by segment less preferred dividends allocated to each segment as a
percentage of average common equity and average tangible common equity,
respectively, allocated to each segment.
$ in billions
Average common equity
Unadjusted—GAAP
Adjusted1—Non-GAAP
ROE2
Unadjusted—GAAP
Adjusted1, 3—Non-GAAP
2019
2018
2017
$
72.7
$
70.0
$
69.8
72.6
69.9
69.9
11.7%
11.2%
11.8%
11.5%
8.0%
9.4%
Average tangible common equity—Non-GAAP
Unadjusted
Adjusted1
ROTCE2—Non-GAAP
Unadjusted
Adjusted1, 3
$
63.6
$
61.0
$
60.6
63.5
60.9
60.7
13.4%
12.9%
13.5%
13.2%
9.2%
10.8%
December 2019 Form 10-K
28
Table of Contents
Management's Discussion and Analysis
Return on Equity and Tangible Common Equity Targets
We previously established an ROE Target of 10% to 13%, and
an ROTCE Target of 11.5% to 14.5%. Excluding the impact of
intermittent net discrete tax items, we generated an 11.2% ROE
and a 12.9% ROTCE for 2019.
In January 2020, we established a new ROTCE Target of 13%
to 15% to be achieved over the next two years.
Our ROTCE Target is a forward-looking statement that may be
materially affected by many factors, including, among other
things: macroeconomic and market conditions; legislative and
regulatory developments; industry trading and investment
rate
banking volumes; equity market
environment; outsized legal expenses or penalties; the ability to
maintain a reduced level of expenses; and capital levels. See
“Forward-Looking Statements” and “Risk Factors” for
additional information.
interest
levels;
For non-GAAP measures (ROTCE and ROE excluding
intermittent net discrete tax items), see “Selected Non-GAAP
Financial Information” herein. For information on the impact
of intermittent net discrete tax items, see “Supplemental
Financial Information—Income Tax Matters” herein.
Business Segments
Substantially all of our operating revenues and operating
expenses are directly attributable to our business segments.
Certain revenues and expenses have been allocated to each
business segment, generally in proportion to its respective net
revenues, non-interest expenses or other relevant measures. See
Note 21 to the financial statements for information on
intersegment transactions.
Net Revenues
Investment Banking
Investment banking revenues are derived from client
engagements in which we act as an adviser, underwriter or
distributor of capital.
Within the Institutional Securities business segment, these
revenues are primarily composed of fees earned from
underwriting equity and fixed income securities, syndicating
loans and advisory services in relation to mergers, acquisitions
and restructurings.
Within the Wealth Management business segment, these
revenues are derived from the distribution of newly issued
securities.
Trading
Trading revenues include the realized gains and losses from
transactions in financial instruments, unrealized gains and losses
from ongoing changes in the fair value of our positions and gains
and losses from financial instruments used to economically
hedge compensation expense related to certain employee
deferred compensation plans.
Within the Institutional Securities business segment, Trading
revenues arise from transactions in cash instruments and
derivatives in which we act as a market maker for our clients.
In this role, we stand ready to buy, sell or otherwise transact
with customers under a variety of market conditions and to
provide firm or indicative prices in response to customer
requests. Our liquidity obligations can be explicit in some cases,
and in others, customers expect us to be willing to transact with
them. In order to most effectively fulfill our market-making
function, we engage in activities across all of our trading
businesses that include, but are not limited to:
• taking positions in anticipation of, and in response to,
customer demand to buy or sell and—depending on the
liquidity of the relevant market and the size of the position—
to hold those positions for a period of time;
• building, maintaining and rebalancing inventory through
trades with other market participants;
• managing and assuming basis risk (risk associated with
imperfect hedging) between customized customer risks and
the standardized products available in the market to hedge
those risks;
• trading in the market to remain current on pricing and trends;
and
• engaging in other activities to provide efficiency and liquidity
for markets.
In many markets, the realized and unrealized gains and losses
from purchase and sale transactions will include any spreads
between bids and offers. Certain fees received on loans carried
at fair value and dividends from equity securities are also
recorded in Trading revenues since they relate to positions
carried at fair value.
Within the Wealth Management business segment, Trading
revenues primarily include revenues from customers’ purchases
and sales of fixed income instruments in which we act as
principal, and gains and losses related to investments associated
with certain employee deferred compensation plans.
Investments
Investments revenues are composed of realized and unrealized
gains and losses derived from investments, including those
associated with employee deferred compensation and co-
investment plans. Estimates of the fair value of the investments
that produce these revenues may involve significant judgment
and may fluctuate significantly over time in light of business,
29
December 2019 Form 10-K
Table of Contents
Management's Discussion and Analysis
market, economic and financial conditions, generally or in
relation to specific transactions.
performance criteria. These performance fees are generally
recognized annually.
Within the Institutional Securities segment, gains and losses are
primarily
investments. Certain
investments are subject to sale restrictions. Typically, there are
no fee revenues from these investments.
from business-related
Within
the Investment Management business segment,
Investments revenues, in addition to gains and losses from
investments, include performance-based fees in the form of
carried interest, a portion of which is subject to reversal. The
business is entitled to receive carried interest when the return in
targets.
certain
Investment
Additionally,
Management funds consolidated by us where revenues are
primarily attributable to holders of noncontrolling interests.
specified performance
there are certain
funds exceeds
sponsored
Commissions and Fees
Commissions and fees result from arrangements in which the
client is charged a fee for executing transactions related to
securities, services related to sales and trading activities, and
sales of other products.
the
Institutional Securities business
Within
segment,
commissions and fees include fees earned from trading
activities, such as executing and clearing client transactions on
major stock and derivative exchanges, as well as from OTC
derivatives.
Within the Wealth Management business segment, commissions
and fees primarily arise from client transactions in equity
securities, insurance products, mutual funds, futures and
options.
Asset Management
Asset management revenues include fees associated with the
management and supervision of assets, and the distribution of
funds and similar products.
Within the Wealth Management business segment, Asset
management revenues are associated with advisory services and
management of assets, account service and administration, as
well as distribution of products. These revenues are generally
based on the net asset value of the account in which a client is
invested.
Within the Investment Management business segment, Asset
management revenues are primarily composed of fees received
from mutual fund daily average net assets or based on monthly
or quarterly invested equity for other vehicles. Performance-
based fees, not in the form of carried interest, are earned on
certain products and separately managed accounts as a
percentage of appreciation generally earned by those products
and, in certain cases, are based upon the achievement of
December 2019 Form 10-K
30
Net Interest
Interest income and Interest expense are functions of the level
and mix of total assets and liabilities, including Trading assets
and Trading liabilities, Investment securities (which include
AFS and HTM securities), Securities borrowed or purchased
under agreements to resell, Securities loaned or sold under
agreements to repurchase, Loans, Deposits and Borrowings.
Within the Institutional Securities business segment, Net interest
is a function of market-making strategies, customer activity in
the prime brokerage business, and the prevailing level, term
structure and volatility of interest rates. Net interest is impacted
by market-making activities as securities held by the Firm earn
interest, while securities that are loaned, borrowed, sold with
agreements to repurchase and purchased with agreements to
resell incur interest expense.
Within the Wealth Management business segment, Interest
income is driven by Investment securities, Loans and margin
loans. Interest expense is driven by Deposits and other funding.
Other
Other revenues for Institutional Securities include revenues and
losses from equity method investments, lending commitments,
fees earned in association with lending activities and the
provision for loan losses.
Other revenues for Wealth Management are derived from
realized gains and losses on AFS securities, the provision for
loan losses, account handling fees, referral fees and other
miscellaneous revenues.
Institutional Securities—Sales and Trading Revenues
Sales and trading net revenues are composed of Trading
revenues, Commissions and fees, Asset management revenues
and Net interest. These revenues, which can be impacted by a
variety of interrelated market factors, including volumes, bid-
offer spreads and inventory prices, as well as the impact of
hedging activity, are viewed in the aggregate when assessing
the performance and profitability of our sales and trading
activities. We make transaction-related decisions based on,
among other things, an assessment of the potential gain or loss
associated with a transaction, including any associated
commissions and fees, dividends, or net interest income, any
costs associated with financing or hedging our positions and
other related expenses.
Following is a description of the sales and trading activities
within our equity and fixed income businesses, as well as how
their results impact the income statement line items.
Table of Contents
Management's Discussion and Analysis
Equity—Financing. We provide financing, prime brokerage and
fund administration 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. Fees for providing
fund administration services are reflected in Asset management
revenues.
Equity—Execution services. A significant portion of the results
for this business is generated by commissions and fees from
executing and clearing client transactions on major stock and
derivative exchanges, as well as from OTC transactions. We
make markets for our clients in equity-related securities and
derivative products, including those that provide liquidity and
are utilized for hedging. Market making also generates gains
and losses on positions held in inventory, which are reflected in
Trading revenues.
Fixed income—Within fixed income, we make markets in
various flow and structured products in order to facilitate client
activity as part of the following products and services:
• Global macro products. We make markets for our clients in
interest rate, foreign exchange and emerging market products,
including exchange-traded and OTC securities and derivative
instruments. The results of this market-making activity are
primarily driven by gains and losses from buying and selling
positions to stand ready for and satisfy client demand and are
recorded in Trading revenues.
• Credit products. We make markets in credit-sensitive
products, such as corporate bonds and mortgage securities and
other securitized products, and related derivative instruments.
The values of positions in this business are sensitive to
changes in credit spreads and interest rates, which result in
gains and losses reflected in Trading revenues. We undertake
lending activities, which include commercial mortgage
lending, asset-backed lending and financing extended to
customers. 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 metals. Other activities primarily include results
from the centralized management of our fixed income
derivative counterparty exposures and managing derivative
counterparty risk on behalf of clients. These activities are
primarily recorded in Trading revenues.
Other sales and trading revenues include impacts from certain
treasury functions, such as liquidity costs and gains and losses
on economic hedges related to certain borrowings, certain
activities associated with corporate lending, as well as gains and
losses from financial instruments used to economically hedge
compensation expense related to certain employee deferred
compensation plans.
Compensation Expense
Compensation and benefits expenses include base salaries and
fixed allowances, formulaic programs, discretionary incentive
compensation, amortization of deferred cash and equity awards,
changes in the fair value of investments to which certain deferred
compensation plans are referenced, carried interest allocated to
employees, severance costs, and other items such as health and
welfare benefits.
The factors that drive compensation for our employees vary
from period to period, from segment to segment and within a
segment. For certain revenue-producing employees in the
Wealth Management and Investment Management business
segments, compensation is largely paid on the basis of formulaic
payouts that link employee compensation to revenues.
Compensation for other employees,
including revenue-
producing employees in the Institutional Securities business
segment, include base salary and benefits, and may also include
incentive compensation that is determined following the
assessment of the Firm’s, business unit’s and individual’s
performance.
Compensation expense for deferred cash-based compensation
plans is recognized over the relevant vesting period and is
adjusted based on the notional earnings of the referenced
investments until distribution. Although
in
compensation expense resulting from changes in the fair value
of the referenced investments will generally be offset by changes
in the fair value of investments made by the Firm, there is
typically a timing difference between the immediate recognition
of gains and losses on the Firm's investments and the
compensation expense recognized over the vesting period.
changes
Income Taxes
The income tax provision for our business segments is generally
determined based on the revenues, expenses and activities
directly attributable to each business segment. Certain items
have been allocated to each business segment, generally in
proportion to its respective net revenues or other relevant
measures.
31
December 2019 Form 10-K
Table of Contents
Management's Discussion and Analysis
Institutional Securities
Income Statement Information
Investment Banking
Investment Banking Revenues
14,896
14,322
13,169
4 %
9 %
1. Includes transactions of $100 million or more. Based on full credit to each of the
$ in millions
Advisory
Underwriting:
Equity
Fixed Income
Total Underwriting
% Change
2019
2018
2017
2019
2018
$ 2,116 $ 2,436 $ 2,077
(13)% 17 %
1,708
1,910
3,618
1,726
1,926
3,652
1,484
1,976
3,460
(1)% 16 %
(1)%
(1)%
(3)%
6 %
Total Investment banking
$ 5,734 $ 6,088 $ 5,537
(6)% 10 %
Investment Banking Volumes
$ in billions
Completed mergers and acquisitions1
Equity and equity-related offerings2, 3
Fixed income offerings2, 4
2019
2018
2017
$
818 $ 1,114 $
61
270
64
241
753
65
307
Source: Refinitiv (formerly Thomson Reuters Financial & Risk), data as of January 2,
2020. 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, change in value or change in timing of certain
transactions.
advisors in a transaction.
2. Based on full credit for single book managers and equal credit for joint book managers.
3. Includes Rule 144A issuances and registered public offerings of common stock,
convertible securities and rights offerings.
4. Includes Rule 144A and publicly registered issuances, non-convertible preferred stock,
mortgage-backed and asset-backed securities, and taxable municipal debt. Excludes
leveraged loans and self-led issuances.
2019 Compared with 2018
Investment banking revenues of $5,734 million in 2019
decreased 6% from 2018, reflecting lower results in our advisory
business.
• Advisory revenues decreased primarily as a result of lower
volumes of completed M&A activity.
• Equity underwriting revenues were relatively unchanged as
lower revenues in initial public offerings were offset by higher
revenues in secondary block share trades.
• Fixed income underwriting revenues were essentially
unchanged as lower non-investment grade loan issuance fees
were offset by higher fees from bond and investment grade
loan issuances.
$ in millions
Revenues
2019
2018
2017
2019
2018
% Change
Investment banking
$ 5,734 $ 6,088 $ 5,537
Trading
Investments
10,318
11,191
10,295
325
182
368
79 % (51)%
Commissions and fees
2,484
2,671
2,433
(6)%
(8)%
10 %
9 %
(7)%
(2)%
10 %
17 %
18 % (15)%
413
632
421
535
359
630
Asset management
Other
Total non-interest
revenues
Interest income
Interest expense
Net interest
Net revenues
Compensation and
benefits
Non-compensation
expenses
Total non-interest
expenses
Income from continuing
operations before
income taxes
Provision for income
taxes
Income from continuing
operations
Income (loss) from
discontinued operations,
net of income taxes
19,906
21,088
19,622
12,193
11,713
9,271
9,777
5,377
6,186
(6)%
32 %
20 %
480
(506)
(809)
195 %
20,386
20,582
18,813
(1)%
7 %
72 %
58 %
37 %
9 %
7,433
6,958
6,625
7 %
5 %
7,463
7,364
6,544
1 %
13 %
5,490
6,260
5,644
(12)%
11 %
769
1,230
1,993
(37)% (38)%
4,721
5,030
3,651
(6)%
38 %
Net income
4,721
5,024
3,632
(6)%
—
(6)
(19)
100 %
68 %
38 %
Net income applicable
to noncontrolling interests
Net income applicable
to Morgan Stanley
122
118
96
3 %
23 %
$ 4,599 $ 4,906 $ 3,536
(6)%
39 %
December 2019 Form 10-K
32
Table of Contents
Management's Discussion and Analysis
Sales and Trading Net Revenues
2019 Compared with 2018
By Income Statement Line Item
Equity
Commissions and fees
2,484
2,671
2,433
$ in millions
Trading
Asset management
Net interest
Total
By Business
$ in millions
Equity
Fixed income
Other
Total
2019
2018
2017
2019
2018
% Change
$ 10,318 $ 11,191 $ 10,295
413
480
421
(506)
359
(809)
195 %
$ 13,695 $ 13,777 $ 12,278
(1)%
(8)%
(7)%
(2)%
9%
10%
17%
37%
12%
% Change
2019
2018
2017
2019
2018
$ 8,056 $ 8,976 $ 7,982
(10)%
5,546
5,005
4,928
11 %
93
(204)
(632) 146 %
$ 13,695 $ 13,777 $ 12,278
(1)%
12%
2%
68%
12%
Sales and Trading Revenues—Equity and Fixed Income
$ in millions
Financing
Execution services
Total Equity
Total Fixed income
$ in millions
Financing
Execution services
Total Equity
Total Fixed income
$ in millions
Financing
Execution services
Total Equity
Total Fixed income
2019
Trading
Fees1
Net
Interest2
Total
4,225 $
372 $
(514) $
4,083
1,986
2,202
(215)
3,973
6,211 $
2,574 $
(729) $
8,056
5,171 $
324 $
51 $
5,546
2018
Trading
Fees1
Net
Interest2
Total
4,841 $
394 $
(661) $
4,574
2,362
2,376
(336)
4,402
7,203 $
2,770 $
(997) $
8,976
4,793 $
322 $
(110) $
5,005
2017
Trading
Fees1
Net
Interest2
Total
4,140 $
363 $
(762) $
3,741
2,294
2,191
(244)
4,241
6,434 $
2,554 $
(1,006) $
7,982
4,453 $
238 $
237 $
4,928
$
$
$
$
$
$
$
$
$
1. Includes Commissions and fees and Asset management revenues.
2. Includes funding costs, which are allocated to the businesses based on funding usage.
Equity sales and trading net revenues of $8,056 million in 2019
decreased 10% from 2018, reflecting lower results in both our
financing and execution services businesses.
• Financing decreased from 2018, primarily due to lower
realized spreads and commissions, reflected in lower Trading
revenues.
• Execution services decreased from 2018, reflecting lower
Trading revenues as a result of less favorable inventory
management in derivatives products due to lower levels of
volatility. In addition, Commissions and fees decreased driven
by changes in market volumes and commission mix in cash
equities products.
Fixed Income
Fixed income net revenues of $5,546 million in 2019 were 11%
higher than 2018, primarily driven by higher results in credit
products, partially offset by lower results in global macro
products.
• Global macro products Trading revenues decreased primarily
due to inventory management losses in certain foreign
exchange and rates products as a result of movements in
foreign exchange volatility and a decline in interest rates.
• Credit products Trading revenues increased, primarily due to
improved inventory management in corporate credit and
securitized products and higher client activity in securitized
products.
• Commodities products and Other Trading revenues increased
as gains from counterparty risk management were offset by
lower client activity in commodities.
Fixed income Net interest increased compared with 2018,
primarily reflecting changes in funding mix, partially offset by
lower net spreads in securitized products.
Other
• Other sales and trading revenues of $93 million in 2019
increased from 2018, reflecting an increase in the fair value
of investments to which certain deferred compensation plans
are referenced and changes in funding mix, partially offset by
higher losses on hedges associated with corporate loans.
33
December 2019 Form 10-K
Table of Contents
Management's Discussion and Analysis
Investments, Other Revenues, Non-interest Expenses and
Income Tax Items
2019 Compared with 2018
Investments
• In 2019, net investment gains of $325 million were higher
compared with 2018, primarily as a result of realized gains
associated with an investment's initial public offering in 2019.
Other Revenues
• Other revenues of $632 million in 2019 increased from 2018,
primarily as a result of mark-to-market gains in 2019
compared with losses in 2018 on loans held for sale. This
increase was partially offset by a higher provision for loan
losses, which in 2018 included the recovery of a previously
charged off loan, and lower results in our Japanese joint
venture Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
(“MUMSS”).
Non-interest Expenses
Non-interest expenses of $14,896 million in 2019 increased
from 2018, reflecting a 7% increase in Compensation and
benefits expenses and a 1% increase in Non-compensation
expenses.
• Compensation and benefits expenses increased in 2019,
primarily due to an increase in the fair value of investments
to which certain deferred compensation plans are referenced,
higher salaries and severance-related costs, partially offset by
decreases in discretionary incentive compensation.
• Non-compensation expenses increased in 2019, reflecting
higher investments in technology, partially offset by lower
professional services expenses.
Income Tax Items
Intermittent net discrete tax benefits of $317 million and $182
million were recognized in Provision for income taxes in 2019
and 2018,
information, see
“Supplemental Financial Information—Income Tax Matters”
herein.
respectively. For
further
December 2019 Form 10-K
34
Table of Contents
Management's Discussion and Analysis
Wealth Management
Income Statement Information
Transactional Revenues
$ in millions
Revenues
2019
2018
2017
2019
2018
$ in millions
2019
2018
2017
2019
2018
% Change
% Change
Investment banking
$ 509
$ 475
$ 533
7 % (11)%
Investment banking
$
509 $
475 $
Trading
Investments
734
2
279
1
533
848
7 % (11)%
Trading
734
279
848
163 % (67)%
163 % (67)%
Commissions and fees
1,726
1,804
1,737
(4)%
4 %
3
100 % (67)%
Total
$2,969
$2,558
$3,118
16 % (18)%
Commissions and fees
1,726
1,804
1,737
(4)%
Asset management
10,199
10,158
9,342 — %
4 %
9 %
Other
345
248
268
39 % (7)%
Total non-interest revenues
13,515
12,965
12,731
4 %
2 %
Transactional revenues as a
% of Net revenues
17%
15%
19%
2019 Compared with 2018
Interest income
Interest expense
Net interest
Net revenues
Compensation and benefits
Non-compensation expenses
5,467
1,245
4,222
5,498
1,221
4,277
17,737
17,242
16,836
9,774
3,131
9,507
3,214
9,360
3,177
Total non-interest expenses
12,905
12,721
12,537
4,591
(1)% 20 %
486
2 % 151 %
Net Revenues
4,105
(1)%
3 %
3 %
(3)%
1 %
4 %
2 %
2 %
1 %
1 %
Transactional Revenues
Transactional revenues of $2,969 million in 2019 increased
16%, primarily as a result of higher Trading revenues, partially
offset by lower Commissions and fees.
4,832
1,104
4,521
1,049
4,299
1,974
7 %
5 %
5 % (47)%
• Investment banking revenues increased in 2019, primarily due
to higher revenues from closed-end fund issuances.
Income from continuing
operations before income
taxes
Provision for income taxes
Net income applicable to
Morgan Stanley
$ 3,728 $ 3,472 $ 2,325
7 % 49 %
Financial Information and Statistical Data
$ in billions, except employee data
Client assets
Fee-based client assets1
Fee-based client assets as a percentage of
total client assets
Client liabilities2
Investment securities portfolio
Loans and lending commitments
At
December 31,
2019
At
December 31,
2018
$
$
$
$
$
2,700
1,267
47%
90
67.2
93.2
$
$
$
$
$
2,303
1,046
45%
83
68.6
82.9
Wealth Management representatives
15,468
15,694
Per representative:
Revenues ($ in thousands)3
Client assets ($ in millions)4
Fee-based asset flows ($ in billions)5
2019
2018
2017
$ 1,136 $ 1,100 $ 1,068
$
$
175 $
147 $
151
64.9 $
65.9 $
75.4
1. Fee-based client assets represent the amount of assets in client accounts where the
fee for services is calculated based on those assets.
2. Client liabilities include securities-based and tailored lending, residential real estate
loans and margin lending.
• Trading revenues increased in 2019, primarily due to gains
related to investments associated with certain employee
deferred compensation plans, partially offset by lower fixed
income revenues driven by product mix.
• Commissions and fees decreased in 2019, primarily due to
changes in the mix of client activity in equities, partially offset
by increased client activity in alternative products.
Asset Management
Asset management revenues of $10,199 million in 2019 were
relatively unchanged compared with 2018, reflecting the effect
of higher fee-based client assets levels due to market
appreciation in 2019 and positive net flows, partially offset by
the effect of lower fee-based client assets levels at the beginning
of the year due to significant market declines in the fourth quarter
of 2018, and lower average fee rates predominantly driven by
shifts in the mix of fee-based client assets.
See “Fee-Based Client Assets Rollforwards” herein.
3. Revenues per representative equal Wealth Management’s net revenues divided by
the average number of representatives.
4. Client assets per representative equal total period-end client assets divided by period-
Other
end number of representatives.
5. For a description of the Inflows and Outflows included in Fee-based asset flows, see
Fee-based client assets herein. Excludes institutional cash management-related
activity.
Other revenues of $345 million in 2019 increased 39%,
primarily due to higher realized gains from the AFS securities
portfolio.
35
December 2019 Form 10-K
Table of Contents
Management's Discussion and Analysis
Net Interest
Net interest of $4,222 million in 2019 was relatively unchanged
compared with 2018, as higher costs due to changes in our
funding mix and higher prepayment amortization expense
related to mortgage-backed securities were offset by the impact
of higher balances of and higher interest rates on Loans, and
higher investment portfolio yields.
In addition, we centralized certain internal treasury activities as
of January 1, 2019, which partially offset Interest income and
Interest expense compared with the prior periods. The effect on
Net interest income was not significant in 2019.
Non-interest Expenses
Non-interest expenses of $12,905 million in 2019 were
relatively unchanged compared with 2018, as higher
Compensation and benefits expenses were offset by lower Non-
compensation expenses.
• Compensation and benefits expenses increased in 2019,
primarily due to increases in the fair value of investments to
which certain deferred compensation plans are referenced and
salaries, partially offset by the roll-off of certain acquisition-
related employee retention loans.
• Non-compensation expenses decreased in 2019, primarily as
a result of lower professional services expenses and lower
deposit insurance expense.
Fee-Based Client Assets Rollforwards
$ in billions
Separately managed1
Unified managed2
Advisor
Portfolio manager
Subtotal
Cash management
Total fee-based
client assets
At
December 31,
2018
Inflows Outflows
Market
Impact
At
December 31,
2019
$
$
$
279 $
53 $
(19) $
9 $
257
137
353
48
27
75
(39)
(32)
(48)
47
23
55
322
313
155
435
1,026 $
203 $
(138) $
134 $
1,225
20
36
(14)
—
42
1,046 $
239 $
(152) $
134 $
1,267
$ in billions
Separately managed1
Unified managed2
Advisor
Portfolio manager
Subtotal
Cash management
Total fee-based client
assets
At
December 31,
2017
Inflows Outflows
Market
Impact
At
December 31,
2018
$
$
$
252 $
40 $
(18) $
5 $
271
149
353
48
29
71
(34)
(28)
(42)
(28)
(13)
(29)
279
257
137
353
1,025 $
188 $
(122) $
(65) $
1,026
20
16
(16)
—
20
1,045 $
204 $
(138) $
(65) $
1,046
$ in billions
Separately managed1
Unified managed2
Advisor
Portfolio manager
Subtotal
Cash management
Total fee-based client
assets
At
December 31,
2016
Inflows Outflows
Market
Impact
At
December 31,
2017
$
$
$
222 $
39 $
(21) $
12 $
225
125
285
49
34
74
(34)
(25)
(41)
31
15
35
252
271
149
353
857 $
196 $
(121) $
93 $
1,025
20
13
(13)
—
20
877 $
209 $
(134) $
93 $
1,045
Average Fee Rates
Fee rate in bps
Separately managed
Unified managed2
Advisor
Portfolio manager
Subtotal
Cash management
Total fee-based client assets
2019
2018
2017
15
100
86
95
74
6
73
16
99
84
95
76
6
74
17
101
86
97
77
6
76
1. Includes non-custody account values reflecting prior quarter-end balances due to a
lag in the reporting of asset values by third-party custodians.
2. Prior periods have been recast to conform to current period presentation.
• Inflows—include new accounts, account transfers, deposits,
dividends and interest.
• Outflows—include closed or terminated accounts, account
transfers, withdrawals and client fees.
• Market impact—includes realized and unrealized gains and
losses on portfolio investments.
• Separately managed—accounts by which third-party and
affiliated asset managers are engaged to manage clients’ assets
with investment decisions made by the asset manager. Only
one third-party asset manager strategy can be held per
account.
• Unified managed—accounts that provide the client with the
ability to combine separately managed accounts, mutual funds
and exchange-traded funds all in one aggregate account.
Investment decisions and discretionary authority may be
exercised by the client, financial advisor or portfolio manager.
Also includes accounts that give the client the ability to
systematically allocate assets across a wide range of mutual
funds, for which the investment decisions are made by the
client.
• Advisor—accounts where the investment decisions must be
approved by the client and the financial advisor must obtain
approval each time a change is made to the account or its
investments.
December 2019 Form 10-K
36
Table of Contents
Management's Discussion and Analysis
• Portfolio manager—accounts where a financial advisor has
discretion (contractually approved by the client) to make
ongoing investment decisions without the client’s approval
for each individual change.
• Cash management—accounts where the financial advisor
provides discretionary cash management services
to
institutional clients, whereby securities or proceeds are
invested and reinvested in accordance with the client’s
investment criteria. Generally, the portfolio will be invested
in short-term fixed income and cash equivalent investments.
37
December 2019 Form 10-K
Table of Contents
Management's Discussion and Analysis
Investment Management
Income Statement Information
$ in millions
Revenues
Trading
Investments
Commissions and fees
Asset management
Other
2019
2018
2017
2019
2018
% Change
$
(8) $
25 $ (22)
(132)% N/M
1,213
1
254
—
449
—
N/M (43)%
N/M
— %
2,629
2,468 2,196
7 % 12 %
(46)
(30)
(37)
(53)% 19 %
Total non-interest revenues
3,789
2,717 2,586
39 %
5 %
Interest income
Interest expense
Net interest
Net revenues
20
46
(26)
57
28
29
4
4
(65)% N/M
64 % N/M
— (190)% N/M
3,763
2,746 2,586
37 %
6 %
Compensation and benefits
1,630
1,167 1,181
40 % (1)%
Non-compensation expenses
1,148
1,115
949
3 % 17 %
2019 Compared with 2018
Net Revenues
Investments
Investments revenues of $1,213 million in 2019 compared with
$254 million in 2018 reflect higher unrealized carried interest
and investment gains primarily from an Asia private equity fund,
principally driven by the initial public offering of an underlying
investment, which is subject to certain sales restrictions.
Asset Management
Asset management revenues of $2,629 million in 2019 increased
7% compared with 2018, primarily as a result of higher average
AUM and higher performance-based fees driven by real estate
funds and the monetization of a client asset in 2019.
Total non-interest expenses
2,778
2,282 2,130
22 %
7 %
See “Assets Under Management or Supervision” herein.
Income from continuing
operations before income
taxes
Provision for income taxes
Income from continuing
operations
Income from discontinued
operations, net of income taxes
Net income
Net income applicable to
noncontrolling interests
Net income applicable to
Morgan Stanley
985
193
464
73
456
201
112 %
2 %
164 % (64)%
Other
792
391
255
103 % 53 %
—
792
2
— (100)%
N/M
393
255
102 % 54 %
73
17
9
N/M
89 %
$ 719 $ 376 $ 246
91 % 53 %
Other losses were $46 million in 2019 and $30 million in 2018,
primarily reflecting impairments of two distinct equity method
investments in third-party asset managers, one in each year.
Non-interest Expenses
Non-interest expenses of $2,778 million in 2019 increased 22%
from 2018, primarily as a result of higher Compensation and
benefits expenses.
• Compensation and benefits expenses increased in 2019,
primarily due to higher compensation associated with carried
interest.
• Non-compensation expenses increased in 2019, primarily as
a result of higher fee sharing driven by higher average AUM.
December 2019 Form 10-K
38
Table of Contents
Management's Discussion and Analysis
Assets Under Management or Supervision
Rollforwards
$ in billions
Equity
Fixed income
Alternative/
Other
Long-term AUM
subtotal
Liquidity
Total AUM
Shares of
minority stake
assets
$ in billions
Equity
Fixed income
Alternative/
Other
Long-term AUM
subtotal
Liquidity1
Total AUM
Shares of
minority stake
assets
$ in billions
Equity
Fixed income
Alternative/
Other
Long-term AUM
subtotal
Liquidity
Total AUM
Shares of
minority stake
assets
At
December 31,
2018
Inflows Outflows
Market
Impact Other
At
December 31,
2019
$
103 $
39 $
(31) $
28 $
(1) $
68
128
299
164
25
22
86
(20)
(17)
(68)
1,315
(1,283)
5
10
43
2
1
(4)
(4)
(2)
$
463 $ 1,401 $ (1,351) $
45 $
(6) $
7
138
79
139
356
196
552
6
At
December 31,
2017
Inflows Outflows
Market
Impact Other
At
December 31,
2018
$
105 $
38 $
(32) $
(8) $ — $
73
128
306
176
25
22
85
(27)
(19)
(78)
1,351
(1,362)
(2)
(1)
(11)
2
(1)
(2)
(3)
(3)
$
482 $ 1,436 $ (1,440) $
(9) $
(6) $
7
103
68
128
299
164
463
7
At
December 31,
2016
Inflows Outflows
Market
Impact Other
At
December 31,
2017
$
79 $
23 $
(21) $
23 $
1 $
60
115
254
163
27
24
74
(21)
(18)
(60)
1,239
(1,227)
4
8
35
1
3
(1)
3
—
$
417 $ 1,313 $ (1,287) $
36 $
3 $
8
105
73
128
306
176
482
7
1. Included in Liquidity products outflows in 2018 is $18 billion related to the redesign of
our brokerage sweep deposits program.
Average AUM
$ in billions
Equity
Fixed income
Alternative/Other
Long-term AUM subtotal
Liquidity
Total AUM
Shares of minority stake assets
Average Fee Rates
Fee rate in bps
Equity
Fixed income
Alternative/Other
Long-term AUM
Liquidity
Total AUM
2019
2018
2017
$
124 $
111 $
71
134
329
171
71
131
313
158
$
500 $
471 $
6
7
93
66
122
281
157
438
7
2019
2018
2017
76
32
64
61
17
46
76
33
66
62
17
47
73
33
70
62
17
46
• Inflows—represent investments or commitments from new
and existing clients in new or existing investment products,
including reinvestments of client dividends and increases in
invested capital. Inflows exclude the impact of exchanges,
whereby a client changes positions within the same asset class.
• Outflows—represent redemptions from clients’ funds,
transition of funds from the committed capital period to the
invested capital period and decreases in invested capital.
Outflows exclude the impact of exchanges, whereby a client
changes positions within the same asset class.
• Market impact—includes realized and unrealized gains and
losses on portfolio investments. This excludes any funds
where market impact does not impact management fees.
• Other—contains both distributions and foreign currency
impact for all periods and the impact of the Mesa West Capital,
LLC acquisition in 2018. Distributions represent decreases in
invested capital due to returns of capital after the investment
period of a fund. It also includes fund dividends that the client
has not reinvested. Foreign currency impact reflects foreign
currency changes for non-U.S. dollar dominated funds.
• Alternative/Other—includes products in fund of funds, real
assets, private equity and credit strategies, as well as multi-
asset portfolios.
• Shares of minority stake assets—represent the Investment
Management business segment’s proportional share of assets
managed by third-party asset managers in which we hold
investments accounted for under the equity method.
• Average fee rate—based on Asset management revenues, net
of waivers, excluding performance-based fees and other non-
management fees. For certain non-U.S. funds, it includes the
portion of advisory fees that the advisor collects on behalf of
third-party distributors. The payment of those fees to the
distributor is included in Non-compensation expenses in the
income statements.
39
December 2019 Form 10-K
Table of Contents
Management's Discussion and Analysis
Supplemental Financial Information
U.S. Bank Subsidiaries’ Supplemental Financial Information1
21.3% 22.7% 30.8%
Total investment securities
Income Tax Matters
Effective Tax Rate from Continuing Operations
$ in millions
U.S. GAAP
Adjusted effective income
tax rate—non-GAAP1
2019
2018
2017
18.3% 20.9% 40.1%
Net discrete tax provisions/(benefits)
Recurring2
Intermittent3
(127)
(348)
(165)
(203)
(155)
968
1. The adjusted effective income tax rate is a non-GAAP measure that excludes net
discrete tax provisions (benefits) that are intermittent and includes those that are
recurring. For further information on non-GAAP measures, see “Selected Non-GAAP
Financial Information” herein.
2. Provisions (benefits) related to conversion of employee share-based awards are
expected to occur every year and, as such, are considered recurring discrete tax items.
3. Includes all tax provisions (benefits) that have been determined to be discrete, other
than Recurring items as defined above.
The effective tax rates for 2019 and 2018 include intermittent
net discrete
tax benefits primarily associated with
remeasurement of reserves and related interest as a result of new
information pertaining to the resolution of multi-jurisdiction tax
examinations.
The effective tax rate reflects our current assumptions, estimates
and interpretations related to the U.S. Tax Cuts and Jobs Act
enacted on December 22, 2017 (“Tax Act”) and other factors.
For a further discussion of the Tax Act, see Note 20 to the
financial statements.
U.S. Bank Subsidiaries
(collectively,
(“MSPBNA”)
Our U.S. bank subsidiaries, Morgan Stanley Bank N.A.
(“MSBNA”) and Morgan Stanley Private Bank, National
Association
“U.S. Bank
Subsidiaries”) accept deposits, provide loans to a variety of
customers, from large corporate and institutional clients to high
net worth individuals, and invest in securities. Lending activity
recorded in the U.S. Bank subsidiaries from the Institutional
Securities business segment primarily includes loans and
lending commitments to corporate clients. Lending activity
recorded in the U.S. Bank subsidiaries from the Wealth
Management business segment primarily includes securities-
based lending, which allows clients to borrow money against
the value of qualifying securities, and residential real estate
loans.
We expect our lending activities to continue to grow through
further market penetration of our client base. For a further
discussion of our credit risks, see “Quantitative and Qualitative
Disclosures about Risk—Credit Risk.” For a further discussion
about loans and lending commitments, see Notes 8 and 13 to
the financial statements.
December 2019 Form 10-K
40
$ in billions
Assets
Investment securities portfolio:
Investment securities—AFS
Investment securities—HTM
Deposits2
Wealth Management Loans
Securities-based lending and
other3
Residential real estate
Total
Institutional Securities Loans4
Corporate5:
Corporate relationship and
event-driven lending
Secured lending facilities
Securities-based lending and
other
Commercial and residential real
estate
Total
At
December 31,
2019
At
December 31,
2018
$
$
$
$
$
$
$
219.6 $
216.9
42.4
26.1
68.5 $
189.3 $
49.9 $
30.2
80.1 $
5.6 $
26.8
5.4
12.0
49.8 $
45.5
23.7
69.2
187.1
44.7
27.5
72.2
7.4
17.5
6.0
10.5
41.4
1. Amounts exclude transactions between the bank subsidiaries, as well as
deposits from the Parent Company and affiliates.
2. For further information on deposits, see “Liquidity and Capital Resources—
Funding Management—Unsecured Financing” herein.
3. Other loans primarily include tailored lending.
4. Prior periods have been conformed to the current presentation.
5. For a further discussion of corporate loans in the Institutional Securities business
segment, see “Credit Risk—Institutional Securities Corporate Loans” herein.
Other Matters
Deferred Cash-Based Compensation
The Firm sponsors a number of employee deferred cash-based
compensation programs. For eligible employees, a portion of
their year-end discretionary incentive compensation is awarded
in the form of deferred cash-based compensation. Such deferred
compensation awards generally contain vesting, clawback,
forfeiture and cancellation provisions. Additionally, there are
certain other deferred cash-based programs
that allow
employees to defer the receipt of current compensation to a
future date.
Employees are permitted to allocate the notional value of their
deferred awards among a menu of investments, whereby the
notional value of their awards will track the performance of the
referenced investments. The menu of investments, which is
selected by the Firm, includes fixed income, equity, commodity
and money market funds.
Table of Contents
Management's Discussion and Analysis
Compensation expense for deferred cash-based compensation
awards is calculated based on the notional value of the award
granted, adjusted for changes in the fair value of the referenced
investments that employees select. Compensation expense is
recognized over the relevant vesting period for each separate
vesting portion of deferred awards.
its obligations under
Correspondingly, the Firm invests directly, as a principal, in
financial instruments and other investments to economically
hedge
these deferred cash-based
compensation plans. Changes in the value of such investments
made by the Firm are recorded in Trading and Investments
revenues. Although changes in compensation expense resulting
from changes in the fair value of the referenced investments will
generally be offset by changes in the fair value of investments
made by the Firm, there is typically a timing difference between
the immediate recognition of gains and losses on the Firm’s
investments and the deferred recognition of the related
compensation expense over the vesting period. While this timing
difference is generally not material to Income from continuing
operations before income taxes in any individual period, it may
impact Firm reported ratios (e.g., the Expense efficiency ratio)
in certain periods.
Amounts Recognized in Compensation Expense
$ in millions
2019
2018
2017
Deferred cash-based awards
$
1,233 $
1,174 $
1,039
Return on referenced investments
645
(48)
499
Total recognized in compensation
expense
$
1,878 $
1,126 $
1,538
Amounts Recognized in Compensation Expense by Segment
$ in millions
Institutional Securities
Wealth Management
Investment Management
2019
2018
2017
$
916 $
611 $
760
202
346
169
771
564
203
Total recognized in compensation
expense
$
1,878 $
1,126 $
1,538
A rollforward of the Firm's estimated projected future
compensation obligation for existing deferred cash-based
compensation awards, exclusive of any assumptions about
future market conditions with respect to referenced investments
is set forth below.
Projected Future Compensation Obligation
$ in millions
Award liabilities at December 31, 20191, 2
Fully vested amounts to be distributed by the end of
February 20203
Unrecognized portion of prior awards at December 31,
20192
2019 performance year awards granted in 20202
Total4
$
$
5,376
(1,042)
1,092
1,050
6,476
1. Balance is reflected in Other liabilities and accrued expenses in the balance sheet as
of December 31, 2019.
2. Amounts do not
forfeitures, cancellations,
accelerations or assumptions about future market conditions with respect to
referenced investments.
include assumptions
regarding
3. Distributions after February of each year are generally immaterial.
4. Of the total projected future compensation obligation, approximately 40% relates to
Institutional Securities, approximately 50% relates to Wealth Management and
approximately 10% relates to Investment Management.
An estimate of compensation expense associated with the
Projected Future Compensation Obligation presented in the
previous table is as follows:
Projected Future Compensation Expense
$ in millions
Estimated to be recognized in:
2020
2021
Thereafter
Total1
$
$
1,169
469
504
2,142
1. Amounts do not
forfeitures, cancellations,
accelerations or assumptions about future market conditions with respect to
referenced investments.
include assumptions
regarding
Our projected future compensation obligation and expense for
deferred cash-based compensation awards are forward-looking
statements subject to uncertainty. Actual results may be
materially affected by various factors, including, among other
things: the performance of each participant’s referenced
investments; changes in market conditions; participants’
allocation of their deferred awards; and participant forfeitures,
cancellations, or accelerations. See “Forward-Looking
Statements” and “Risk Factors” for additional information.
For further information on the Firm's deferred stock-based plans
and carried interest compensation, which are excluded from the
previous tables, see Notes 2 and 18 to the financial statements.
Accounting Development Updates
The Financial Accounting Standards Board has issued certain
accounting updates that apply to us. Accounting updates not
listed below were assessed and either determined to be not
applicable or are not expected to have a significant impact on
our financial statements.
The following accounting update was adopted on January 1,
2020:
41
December 2019 Form 10-K
Table of Contents
Management's Discussion and Analysis
• Financial Instruments—Credit Losses. This accounting
update impacts the impairment model for certain financial
assets measured at amortized cost by requiring a CECL
methodology to estimate expected credit losses over the entire
life of the financial asset, recorded at inception or purchase.
CECL replaces the loss model currently applicable to loans
held for investment, HTM securities and other receivables
carried at amortized cost, such as employee loans.
• Certain Securities purchased under agreements to resell;
• Certain Deposits, primarily certificates of deposit;
• Certain Securities sold under agreements to repurchase;
• Certain Other secured financings; and
• Certain Borrowings.
The update also eliminates the concept of other-than-
temporary impairment for AFS securities and instead requires
impairments on AFS securities to be recognized in earnings
through an allowance when the fair value is less than
amortized cost and a credit loss exists or the securities are
expected to be sold before recovery of amortized cost.
For certain portfolios, we have determined that there are no
expected credit losses; for example, based on collateral
arrangements for lending and financing transactions, such as
Securities borrowed, Securities purchased under agreements
to resell and certain other portfolios. Also, we have a zero loss
expectation for certain financial assets based on the credit
quality of the borrower or issuer, such as U.S. government
and agency securities.
At transition on January 1, 2020, the adoption of this
accounting standard resulted in an increase in the allowance
for credit losses of $131 million with a corresponding
reduction in Retained earnings of $100 million, net of tax.
The increase in the allowance for credit losses was primarily
attributable to employee loans, commercial real estate loans
and securities, and residential real estate loans, partially offset
by a decrease primarily in secured lending facilities within
corporate loans. Prior period amounts will not be restated.
Critical Accounting Policies
Our financial statements are prepared in accordance with U.S.
GAAP, which requires us to make estimates and assumptions
(see Note 1 to the financial statements). We believe that of our
significant accounting policies (see Note 2 to the financial
statements), the following policies involve a higher degree of
judgment and complexity.
Fair Value
Financial Instruments Measured at Fair Value
A significant number of our financial instruments are carried at
fair value. We make estimates regarding the valuation of assets
and liabilities measured at fair value in preparing the financial
statements. These assets and liabilities include, but are not
limited to:
• Trading assets and Trading liabilities;
• Investment Securities—AFS securities;
Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability (i.e., the exit price) in an
orderly
the
measurement date.
transaction between market participants at
In determining fair value, we use various valuation approaches.
A hierarchy for inputs is used in measuring fair value that
maximizes the use of observable prices and inputs and
minimizes the use of unobservable prices and inputs by requiring
that the relevant observable inputs be used when available. The
hierarchy is broken down into three levels, wherein Level 1
represents quoted prices in active markets, Level 2 represents
valuations based on quoted prices in markets that are not active
or for which all significant inputs are observable, and Level 3
consists of valuation techniques that incorporate significant
unobservable inputs and, therefore, require the greatest use of
judgment.
In periods of market disruption, the observability of prices and
inputs may be reduced for many instruments, which could cause
an instrument to be recategorized from Level 1 to Level 2 or
from Level 2 to Level 3. In addition, a downturn in market
conditions could lead to declines in the valuation of many
instruments. For further information on the definition of fair
value, Level 1, Level 2, Level 3 and related valuation
techniques, and quantitative information about and sensitivity
of significant unobservable inputs used in Level 3 fair value
measurements, see Notes 2 and 3 to the financial statements.
Where appropriate, valuation adjustments are made to account
for various factors such as liquidity risk (bid-ask adjustments),
credit quality, model uncertainty, concentration risk and funding
in order to arrive at fair value. For a further discussion of
valuation adjustments that we apply, see Note 2 to the financial
statements.
Goodwill and Intangible Assets
Goodwill
We test goodwill for impairment on an annual basis as of July 1
and on an interim basis when certain events or circumstances
exist. Evaluating goodwill for impairment requires management
to make significant judgments. Goodwill impairment tests are
performed at the reporting unit level, which is generally at the
level of or one level below our business segments. Goodwill no
longer retains its association with a particular acquisition once
it has been assigned to a reporting unit. As such, all the activities
December 2019 Form 10-K
42
Table of Contents
Management's Discussion and Analysis
of a reporting unit, whether acquired or organically developed,
are available to support the value of the goodwill.
For both the annual and interim tests, we have the option to
either (i) perform a quantitative impairment test or (ii) first
perform a qualitative assessment to determine whether it is more
likely than not that the fair value of a reporting unit is less than
its carrying amount, in which case the quantitative test would
be performed.
When performing a quantitative impairment test, we compare
the fair value of a reporting unit with its carrying amount,
including goodwill. If the fair value of the reporting unit is less
than its carrying amount, the goodwill impairment loss is equal
to the excess of the carrying value over the fair value, limited
by the carrying amount of goodwill allocated to that reporting
unit.
The estimated fair value of the reporting units is derived based
on valuation techniques we believe market participants would
use for each of the reporting units. The estimated fair value is
generally determined by utilizing a discounted cash flow
methodology or methodologies that incorporate price-to-book
and price-to-earnings multiples of certain comparable
companies. At each annual goodwill impairment testing date,
each of our reporting units with goodwill had a fair value that
was substantially in excess of its carrying value.
Intangible Assets
Amortizable intangible assets are amortized over their estimated
useful lives and are reviewed for impairment on an interim basis
when certain events or circumstances exist. An impairment
exists when the carrying amount of the intangible asset exceeds
its fair value. An impairment loss will be recognized if the
carrying amount of the intangible asset is not recoverable and
exceeds its fair value. The carrying amount of the intangible
asset is not recoverable if it exceeds the sum of the expected
undiscounted cash flows.
For both goodwill and intangible assets, to the extent an
impairment loss is recognized, the loss establishes the new cost
basis of the asset. Subsequent reversal of impairment losses is
not permitted. For amortizable intangible assets, the new cost
basis is amortized over the remaining useful life of that asset.
Adverse market or economic events could result in impairment
charges in future periods.
See Notes 2, 3 and 9 to the financial statements for additional
information about goodwill and intangible assets.
Legal and Regulatory Contingencies
In the normal course of business, we have been named, from
time to time, as a defendant in various legal actions, including
arbitrations, class actions and other litigation, arising in
connection with our activities as a global diversified financial
services institution.
Certain of the actual or threatened legal actions include claims
for substantial compensatory and/or punitive damages or claims
for indeterminate amounts of damages. In some cases, the
entities that would otherwise be the primary defendants in such
cases are bankrupt or in financial distress.
We are also involved, from time to time, in other reviews,
investigations and proceedings (both formal and informal) by
governmental and self-regulatory agencies regarding our
business and involving, among other matters, sales and trading
investment management services,
activities, wealth and
financial products or offerings sponsored, underwritten or sold
by us, and accounting and operational matters, certain of which
may result in adverse judgments, settlements, fines, penalties,
injunctions or other relief.
Accruals for litigation and regulatory proceedings are generally
determined on a case-by-case basis. Where available
information indicates that it is probable a liability had been
incurred at the date of the financial statements and we can
reasonably estimate the amount of that loss, we accrue the
estimated loss by a charge to income. In many proceedings,
however, it is inherently difficult to determine whether any loss
is probable or even possible or to estimate the amount of any
loss.
For certain legal proceedings and investigations, we can
estimate possible losses, additional losses, ranges of loss or
ranges of additional loss in excess of amounts accrued. For
certain other legal proceedings and investigations, we cannot
reasonably estimate such losses, particularly for proceedings
and investigations where the factual record is being developed
or contested or where plaintiffs or government entities seek
substantial or indeterminate damages, restitution, disgorgement
or penalties.
through potentially
Numerous issues may need to be resolved before a loss or
additional loss or range of loss or additional range of loss can
be reasonably estimated for a proceeding or investigation,
lengthy discovery and
including
determination of important factual matters, determination of
issues related to class certification and the calculation of
damages or other relief, and addressing novel or unsettled legal
questions relevant to the proceedings or investigations in
question.
Significant judgment is required in deciding when and if to make
these accruals, and the actual cost of a legal claim or regulatory
fine/penalty may ultimately be materially different from the
recorded accruals.
See Note 13 to the financial statements for additional
information on legal contingencies.
43
December 2019 Form 10-K
Table of Contents
Management's Discussion and Analysis
Income Taxes
We are subject to the income and indirect tax laws of the U.S.,
its states and municipalities and those of the foreign jurisdictions
in which we have significant business operations. These tax laws
are complex and subject to different interpretations by the
taxpayer and the relevant governmental taxing authorities. We
must make judgments and interpretations about the application
of these inherently complex tax laws when determining the
provision for income taxes and the expense for indirect taxes
and must also make estimates about when certain items affect
taxable income in the various tax jurisdictions.
Disputes over interpretations of the tax laws may be settled with
the taxing authority upon examination or audit. We periodically
evaluate the likelihood of assessments in each taxing jurisdiction
resulting from current and subsequent years’ examinations, and
unrecognized tax benefits related to potential losses that may
arise from tax audits are established in accordance with the
relevant accounting guidance. Once established, unrecognized
tax benefits are adjusted when there is more information
available or when an event occurs requiring a change.
Our provision for income taxes is composed of current and
deferred taxes. Current income taxes approximate taxes to be
paid or refunded for the current period. Deferred income taxes
reflect the net tax effects of temporary differences between the
financial reporting and tax bases of assets and liabilities and are
measured using the applicable enacted tax rates and laws that
will be in effect when such differences are expected to reverse.
Our deferred tax balances may also include deferred assets
related to tax attribute carryforwards, such as net operating
losses and tax credits that will be realized through reduction of
future tax liabilities and, in some cases, are subject to expiration
if not utilized within certain periods. We perform regular reviews
to ascertain whether deferred tax assets are realizable. These
reviews include management’s estimates and assumptions
regarding future taxable income and incorporate various tax
planning strategies, including strategies that may be available
to tax attribute carryforwards before they expire.
Once the deferred tax asset balances have been determined, we
may record a valuation allowance against the deferred tax asset
balances to reflect the amount we estimate is more likely than
not to be realized at a future date. Both current and deferred
income
to our
taxes may reflect adjustments related
unrecognized tax benefits.
Significant judgment is required in estimating the consolidated
provision for (benefit from) income taxes, current and deferred
tax balances (including valuation allowance, if any), accrued
interest or penalties and uncertain tax positions. Revisions in
estimates and/or the actual costs of a tax assessment may
ultimately be materially different from the recorded accruals and
unrecognized tax benefits, if any.
December 2019 Form 10-K
44
See Note 2 to the financial statements for additional information
on our significant assumptions, judgments and interpretations
associated with the accounting for income taxes and Note 20 to
the financial statements for additional information on our tax
examinations.
Liquidity and Capital Resources
Senior management, with oversight by the Asset/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,
Firm Risk Committee, Asset/Liability
Management Committee, and other committees and control
groups assist in evaluating, monitoring and controlling the
impact that our business activities have on our balance sheet,
liquidity and capital structure. Liquidity and capital matters are
reported regularly to the Board and the Risk Committee of the
Board.
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 segment 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 and
market fluctuations. On a regular basis, we review current
performance versus established thresholds and assess the need
to re-allocate the balance sheet based on business unit needs.
We also monitor key metrics, including asset and liability size
and capital usage.
Total Assets by Business Segment
At December 31, 2019
$ in millions
IS
WM
IM
Total
Assets
Cash and cash equivalents1
$ 67,657 $ 14,247 $
267 $ 82,171
Trading assets at fair value
293,477
47
3,586
297,110
Investment securities
38,524
67,201
— 105,725
Securities purchased under
agreements to resell
Securities borrowed
Customer and other
receivables
Loans, net of allowance2
Other assets3
80,744
106,199
39,743
50,557
14,300
7,480
350
15,190
80,075
13,092
—
88,224
— 106,549
713
55,646
5
130,637
1,975
29,367
Total assets
$ 691,201 $ 197,682 $
6,546 $ 895,429
Table of Contents
Management's Discussion and Analysis
$ in millions
IS
WM
IM
Total
should be diversified; and
At December 31, 2018
• Source, counterparty, currency, region and term of funding
Assets
Cash and cash equivalents1
$ 69,526 $ 17,621 $
49 $ 87,196
Trading assets at fair value
263,870
60
2,369
266,299
Investment securities
23,273
68,559
Securities purchased under
agreements to resell
80,660
17,862
—
—
91,832
98,522
Securities borrowed
Customer and other
receivables
Loans, net of allowance2
Other assets3
116,207
106
— 116,313
35,777
43,380
13,734
16,865
72,194
9,125
656
53,298
5
115,579
1,633
24,492
Total assets
$ 646,427 $ 202,392 $
4,712 $ 853,531
IS—Institutional Securities
WM—Wealth Management
IM—Investment Management
1. Cash and cash equivalents includes Cash and due from banks, Interest bearing
deposits with 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 8 to the financial statements).
3. Other assets primarily includes Goodwill and Intangible assets, premises, equipment
and software, ROU assets related to leases, other investments 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 $895 billion at
December 31, 2019 compared with $854 billion at
December 31, 2018, driven by the Institutional Securities
business segment. Within Institutional Securities, the primary
increases were: Trading assets, primarily corporate equities in
line with market conditions; Investment securities, primarily
U.S. Treasuries; and continued Loan growth. These increases
were partially offset by reduced Securities borrowed resulting
from lower funding requirements. Wealth Management assets
were lower primarily due to decreased Securities purchased
under agreements to resell as a result of lower deposits in this
segment, partially offset by continued Loan growth.
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 following principles guide our Liquidity Risk Management
Framework:
• Sufficient liquid assets should be maintained to cover
maturing liabilities and other planned and contingent
outflows;
• Liquidity Stress Tests should anticipate, and account for,
periods of limited access to funding.
The core components of our Liquidity Risk Management
Framework that support our target liquidity profile are the
Required Liquidity Framework, Liquidity Stress Tests and the
GLR.
Required Liquidity Framework
Our Required Liquidity Framework establishes the amount of
liquidity we must hold in both normal and stressed environments
to ensure that our financial condition and overall soundness are
not adversely affected by an inability (or perceived inability) to
meet our financial obligations in a timely manner. The Required
Liquidity Framework considers the most constraining liquidity
requirement to satisfy all regulatory and internal limits at a
consolidated and legal entity level.
Liquidity Stress Tests
We use Liquidity Stress Tests to model external and
intercompany liquidity flows across multiple scenarios and a
range of time horizons. These scenarios contain various
combinations of idiosyncratic and systemic stress events of
different
duration. The methodology,
implementation, production and analysis of our Liquidity Stress
Tests are important components of the Required Liquidity
Framework.
severity
and
The assumptions used by us in our various Liquidity Stress Test
scenarios include, but are not limited to, the following:
• No government support;
• No access to equity and unsecured debt markets;
• Repayment of all unsecured debt maturing within the stress
horizon;
• Higher haircuts for and significantly lower availability of
secured funding;
• Additional collateral that would be required by trading
counterparties, certain exchanges and clearing organizations
related to credit rating downgrades;
• Additional collateral that would be required due to collateral
substitutions, collateral disputes and uncalled collateral;
• Discretionary unsecured debt buybacks;
• Maturity profile of assets and liabilities should be aligned,
with limited reliance on short-term funding;
• Drawdowns on lending commitments provided to third
parties; and
45
December 2019 Form 10-K
Table of Contents
Management's Discussion and Analysis
• Client cash withdrawals and reduction in customer short
GLR Managed by Bank and Non-Bank Legal Entities
At
December 31,
2019
At
December 31,
2018
Average Daily Balance
Three Months Ended
December 31, 2019
$ in millions
Bank legal entities
Domestic
Foreign
Total Bank legal
entities
$
75,565 $
88,809 $
5,317
4,896
80,882
93,705
Non-Bank legal entities
Domestic:
Parent Company
53,042
64,262
Non-Parent
Company
Total Domestic
Foreign
Total Non-Bank
legal entities
Total
29,656
82,698
53,877
40,936
105,198
50,832
136,575
156,030
$
217,457 $
249,735 $
73,107
5,661
78,768
58,955
31,188
90,143
54,654
144,797
223,565
GLR may fluctuate from period to period based on the overall
size and composition of our balance sheet, the maturity profile
of our unsecured debt and estimates of funding needs in a
stressed environment, among other factors.
Regulatory Liquidity Framework
Liquidity Coverage Ratio
We and our U.S. Bank Subsidiaries are subject to LCR
requirements, including a requirement to calculate each entity’s
LCR on each business day. The requirements are designed to
ensure that banking organizations have sufficient HQLA to
cover net cash outflows arising from significant stress over 30
calendar days, thus promoting the short-term resilience of the
liquidity risk profile of banking organizations.
The regulatory definition of HQLA is substantially the same as
our GLR, with the primary difference being the treatment of
certain cash balances and unencumbered securities.
As of December 31, 2019, we and our U.S. Bank Subsidiaries
are compliant with the minimum required LCR of 100%.
positions that fund long positions.
Liquidity Stress Tests are produced and results are reported at
different levels, including major operating subsidiaries and
major currencies, to capture specific cash requirements and cash
availability across the Firm, including a limited number of asset
sales in a stressed environment. The Liquidity Stress Tests
assume that subsidiaries will use their own liquidity first to fund
their obligations before drawing liquidity from the Parent
Company and that the Parent Company will support its
subsidiaries and will not have access to subsidiaries’ liquidity
reserves. In addition to the assumptions underpinning the
Liquidity Stress Tests, we take into consideration settlement risk
related to intraday settlement and clearing of securities and
financing activities.
At December 31, 2019 and December 31, 2018, we maintained
sufficient liquidity to meet current and contingent funding
obligations as modeled in our Liquidity Stress Tests.
Global Liquidity Reserve
We maintain sufficient liquidity reserves to cover daily funding
needs and to meet strategic liquidity targets sized by the
Required Liquidity Framework and Liquidity Stress Tests. The
size of the GLR is actively managed by us considering the
following components: unsecured debt maturity profile; balance
sheet size and composition; funding needs in a stressed
environment, inclusive of contingent cash outflows; legal entity,
regional and segment liquidity requirements; regulatory
requirements; and collateral requirements.
In addition, our GLR includes a discretionary surplus based on
risk tolerance and is subject to change depending on market and
Firm-specific events. The GLR is held within the Parent
Company and its major operating subsidiaries. The GLR
consists of cash and unencumbered securities sourced from
trading assets, investment securities and securities received as
collateral.
GLR by Type of Investment
$ in millions
Cash deposits with banks1
Cash deposits with central banks1
Unencumbered highly liquid securities:
At
December 31,
2019
At
December 31,
2018
$
9,856 $
34,922
10,441
36,109
U.S. government obligations
88,665
119,138
U.S. agency and agency mortgage-
backed securities
Non-U.S. sovereign obligations2
Other investment grade securities
50,054
31,460
2,500
41,473
39,869
2,705
Total
$
217,457 $
249,735
1. Included in Cash and due from banks and Interest bearing deposits with banks in the
balance sheets.
2. Primarily composed of unencumbered U.K., Japanese, French, German and Brazilian
government obligations.
December 2019 Form 10-K
46
Table of Contents
Management's Discussion and Analysis
HQLA by Type of Asset and LCR
$ in millions
HQLA
Cash deposits with central banks
Securities1
Total
LCR
Average Daily Balance
Three Months Ended
December 31,
2019
September 30,
2019
$
$
29,597
$
148,221
177,818
$
33,053
141,806
174,859
134%
140%
1. Primarily includes U.S. Treasuries, U.S. agency mortgage-backed securities,
sovereign bonds and investment grade corporate bonds.
The decrease in the LCR in the quarter ended December 31,
2019 is primarily due to higher outflows related to secured
funding and lower inflows related to secured lending.
Net Stable Funding Ratio
The NSFR requires banking organizations to maintain
sufficiently stable sources of funding over a one-year horizon.
In 2016, the U.S. banking agencies issued a proposal to
implement the NSFR in the U.S.; however, a final rule has not
yet been issued. If adopted, the requirements would apply to us
and our U.S. Bank Subsidiaries, and we expect to be in
compliance by the effective date of any final rule.
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 include our equity capital, borrowings,
securities sold under agreements to repurchase, 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
The liquid nature of the marketable securities and short-term
receivables arising principally from sales and trading activities
in the Institutional Securities business segment provides us with
flexibility in managing the composition and size of our balance
sheet. Our goal is to achieve an optimal mix of durable secured
and unsecured
investors
principally focus on the quality of the eligible collateral posted.
Accordingly, we actively manage our secured financings based
on the quality of the assets being funded.
financing. Secured
financing
We have established longer tenor secured funding requirements
for less liquid asset classes, for which funding may be at risk in
the event of a market disruption. We define highly liquid assets
as government-issued or government-guaranteed securities with
a high degree of fundability and less liquid assets as those that
do not meet these criteria.
To further minimize the refinancing risk of secured financing
for less liquid assets, we have established concentration limits
to diversify our investor base and reduce the amount of monthly
maturities for secured financing of
liquid assets.
Furthermore, we obtain term secured funding liabilities in
excess of less liquid inventory as an additional risk mitigant to
replace maturing trades in the event that secured financing
markets, or our ability to access them, become limited. As a
component of the Liquidity Risk Management Framework, we
hold a portion of our GLR against the potential disruption to our
secured financing capabilities.
less
We generally maintain a pool of liquid and easily fundable
securities, which takes into account HQLA classifications
consistent with LCR definitions, and other regulatory
requirements, and provides a valuable future source of liquidity.
Collateralized Financing Transactions
$ in millions
Securities purchased under agreements to
resell and Securities borrowed
Securities sold under agreements to
repurchase and Securities loaned
Securities received as collateral1
$ in millions
At
December 31,
2019
At
December 31,
2018
$
$
$
194,773 $
214,835
62,706 $
13,022 $
61,667
7,668
Average Daily Balance
Three Months Ended
December 31,
2019
December 31,
2018
Securities purchased under agreements to
resell and Securities borrowed
Securities sold under agreements to
repurchase and Securities loaned
$
$
210,257 $
213,974
64,870 $
57,677
1. Securities received as collateral are included in Trading assets in the balance sheets.
See "Total Assets by Business Segment" herein for more details
on the assets shown in the previous table and Notes 2 and 7 to
the financial statements for more details on collateralized
financing transactions.
In addition to the collateralized financing transactions shown in
the previous table, we engage in financing transactions
collateralized by customer-owned securities, which are
segregated
in accordance with regulatory requirements.
Receivables under these financing transactions, primarily
margin loans, are included in Customer and other receivables
in the balance sheets, and payables under these financing
transactions, primarily to prime brokerage customers, are
included in Customer and other payables in the balance sheets.
Our risk exposure on these transactions is mitigated by collateral
maintenance policies. We also hold related liquidity reserves.
47
December 2019 Form 10-K
Table of Contents
Management's Discussion and Analysis
Unsecured Financing
We view deposits and borrowings as stable sources of funding
for unencumbered securities and non-security assets. Our
unsecured financings include borrowings and certificates of
deposit carried at fair value, which are primarily composed of:
instruments whose payments and redemption values are linked
to the performance of a specific index, a basket of stocks, a
specific equity security, a commodity, a credit exposure or
basket of credit exposures; and instruments with various
interest-rate-related features, including step-ups, step-downs
and zero coupons. When appropriate, we typically use derivative
products to conduct asset and liability management and to make
adjustments to our interest rate and borrowings risk profile (see
Notes 5 and 12 to the financial statements).
Deposits
$ in millions
Savings and demand deposits:
Brokerage sweep deposits1
Savings and other
Total Savings and demand deposits
Time deposits
Total
At
December 31,
2019
At
December 31,
2018
$
121,077 $
141,255
28,388
149,465
40,891
13,642
154,897
32,923
$
190,356 $
187,820
1. Amounts represent balances swept from client brokerage accounts.
Deposits are primarily sourced from our Wealth Management
clients and are considered to have stable, low-cost funding
characteristics. Total deposits increased in 2019, primarily
driven by increases in preferred Savings and Time deposits.
These were partially offset by a reduction in Brokerage sweep
deposits due to net outflows into investment products and higher
client tax payments.
Borrowings by Remaining Maturity at December 31, 20191
$ in millions
Original maturities of one year or
less
Parent
Company
Subsidiaries
Total
$
500 $
2,067 $
2,567
Original maturities greater than one year
2020
2021
2022
2023
2024
Thereafter
Total
Total Borrowings
$
15,228 $
5,174 $
21,439
16,084
11,779
15,388
67,377
4,646
3,804
2,836
5,718
20,587
20,402
26,085
19,888
14,615
21,106
87,964
$
$
147,295 $
42,765 $
190,060
147,795 $
44,832 $
192,627
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.
Borrowings of $193 billion as of December 31, 2019 were
relatively unchanged compared with $190 billion at
December 31, 2018.
December 2019 Form 10-K
48
We believe that accessing debt investors through multiple
distribution channels helps provide consistent access to the
unsecured markets. In addition, the issuance of borrowings with
original maturities greater than one year allows us to reduce
reliance on short-term credit sensitive instruments. Borrowings
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.
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 also engage in, and may continue to engage in, repurchases
of our borrowings in the ordinary course of business.
For further information on Borrowings, see Note 12 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
certain OTC derivative transactions. When determining credit
ratings, rating agencies consider both company-specific and
industry-wide factors. These include regulatory or legislative
changes, the macroeconomic environment and perceived levels
of support, among other things. See also "Risk Factors—
Liquidity Risk."
Parent Company and U.S. Bank Subsidiaries' Issuer Ratings at
February 19, 2020
DBRS, Inc.
Fitch Ratings, Inc.
Moody’s Investors Service, Inc.
Rating and Investment Information,
Inc.
S&P Global Ratings
Parent Company
Short-Term
Debt
Long-Term
Debt
R-1 (middle)
A (high)
F1
P-2
a-1
A-2
A
A3
A
BBB+
MSBNA
Short-Term
Debt
Long-Term
Debt
Fitch Ratings, Inc.
Moody’s Investors Service, Inc.
S&P Global Ratings
F1
P-1
A-1
A+
A1
A+
Rating
Outlook
Stable
Stable
Positive
Stable
Stable
Rating
Outlook
Stable
Positive
Stable
Table of Contents
Management's Discussion and Analysis
MSPBNA
Short-Term
Debt
Long-Term
Debt
Moody’s Investors Service, Inc.
S&P Global Ratings
P-1
A-1
A1
A+
Rating
Outlook
Positive
Stable
For a description of our capital plan, see “Liquidity and Capital
Resources—Regulatory Requirements—Capital Plans and
Stress Tests.”
Common Stock Dividend Announcement
Announcement date
Amount per share
Date paid
Shareholders of record as of
Preferred Stock Dividend Announcement
Announcement date
Date paid
Shareholders of record as of
January 16, 2020
$0.35
February 14, 2020
January 31, 2020
December 16, 2019
January 15, 2020
December 31, 2019
For additional information on common and preferred stock, see
Note 16 to the financial statements.
Off-Balance Sheet Arrangements and Contractual
Obligations
Off-Balance Sheet Arrangements
We enter into various off-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 14 to the financial statements.
For information on our commitments, obligations under certain
guarantee arrangements and indemnities, see Note 13 to the
financial statements. For further information on our lending
commitments, see “Quantitative and Qualitative Disclosures
about Risk—Credit Risk—Loans and Lending Commitments.”
On February 21, 2020, Moody’s Investors Service, Inc. placed
the Parent Company and U.S. Bank Subsidiaries on review for
possible upgrade, changing their outlooks from Positive to
Ratings Under Review.
Incremental Collateral or Terminating Payments
In connection with certain OTC derivatives and 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 clearing organizations in the event of a future credit
rating downgrade irrespective of whether we are in a net asset
or net liability position. See Note 5 to the financial statements
for additional information on OTC derivatives that contain such
contingent features.
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 other things, the
magnitude of the downgrade, the rating relative to peers, the
rating assigned by the relevant agency pre-downgrade,
individual client behavior and future mitigating actions we
might take. The liquidity impact of additional collateral
requirements is included in our Liquidity Stress Tests.
Capital Management
We view capital as an important source of financial strength and
actively manage our consolidated capital position based upon,
among other things, business opportunities, risks, capital
availability and rates of return together with internal capital
policies, regulatory requirements and rating agency guidelines.
In the future, we may expand or contract our capital base to
address the changing needs of our businesses.
Common Stock Repurchases
in millions, except for per share data
2019
2018
2017
Number of shares
Average price per share
Total
121
97
80
$
$
44.23 $
50.08 $
47.01
5,360 $
4,860 $
3,750
For further information on our common stock repurchases, see
Note 16 to the financial statements.
49
December 2019 Form 10-K
Table of Contents
Management's Discussion and Analysis
Contractual Obligations
Regulatory Capital Requirements
At December 31, 2019
Payments Due in:
2020
2021-2022 2023-2024 Thereafter
Total
$20,402 $
45,973 $
35,721 $
87,964 $190,060
1,663
1,337
2,667
813
6,480
4,252
6,872
5,128
14,541
30,793
20,762
14,082
5,708
622
41,174
763
662
1,349
1,117
2,845
6,074
659
225
288
1,834
We are required to maintain minimum risk-based and leverage-
based capital, and TLAC ratios. For additional information on
TLAC, see “Total Loss-Absorbing Capacity, Long-Term Debt
and Clean Holding Company Requirements” herein.
Risk-Based 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). Capital
standards require certain adjustments to, and deductions from,
capital for purposes of determining these ratios.
In addition
requirements, we are subject to the following buffers:
the minimum risk-based capital ratio
to
$48,504 $
70,272 $
50,566 $ 107,073 $276,415
• A greater than 2.5% Common Equity Tier 1 capital
$ in millions
Borrowings1
Other secured
financings1
Contractual
interest
payments2
Time deposits—
principal and
interest
payments
Operating leases
— premises3
Purchase
obligations4
Total5
1. Amounts presented for Borrowings and Other secured financings are financings with
original maturities greater than one year. For further information on Borrowings and
Other secured financings, see Note 12 to the financial statements.
2. Amounts represent estimated future contractual interest payments related to certain
unsecured borrowings with original maturities greater than one year based on
applicable interest rates at December 31, 2019. These amounts exclude borrowings
carried at fair value. For additional information on borrowings carried at fair value, see
Note 12 to the financial statements.
3. For further information on operating leases covering premises and equipment, see
Note 10 to the financial statements.
4. Purchase obligations for goods and services include payments for, among other things,
consulting, outsourcing, computer and telecommunications maintenance agreements,
and certain transmission, transportation and storage contracts related to the
commodities business.
5. Amounts exclude unrecognized tax benefits, as the timing and amount of future cash
payments are not determinable at this time (see Note 20 to the financial statements
for further information).
Regulatory Requirements
Regulatory Capital Framework
requirements. Regulatory capital
We are an FHC under the Bank Holding Company Act of 1956,
as amended (“BHC Act”), and are subject to the regulation and
oversight of the Federal Reserve. The Federal Reserve
establishes capital requirements for us, including “well-
capitalized” standards, and evaluates our compliance with such
requirements
capital
established by the Federal Reserve 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 (“Dodd-Frank Act”). The
OCC establishes similar capital requirements and standards for
our U.S. Bank Subsidiaries. For us to remain an FHC, we must
remain well-capitalized
in accordance with standards
established by the Federal Reserve, and our U.S. Bank
Subsidiaries must remain well-capitalized in accordance with
standards established by the OCC. For additional information
on regulatory capital requirements for our U.S. Bank
Subsidiaries, see Note 15 to the financial statements.
conservation buffer;
• The Common Equity Tier 1 G-SIB capital surcharge, currently
at 3%; and
• Up to a 2.5% Common Equity Tier 1 CCyB, currently set by
U.S. banking agencies at zero.
In 2018, the requirement for each of these buffers was 75% of
the fully phased-in 2019 requirement noted above. For a further
discussion of the G-SIB capital surcharge, see “G-SIB Capital
Surcharge” herein.
Risk-Weighted Assets. RWA reflects both our on- and off-
balance sheet risk, as well as capital charges attributable to the
risk of loss arising from the following:
• Credit risk: The failure of a borrower, counterparty or issuer
to meet its financial obligations to us;
• Market risk: Adverse changes in the level of one or more
market prices, rates, indices, volatilities, correlations or other
market factors, such as market liquidity; and
• Operational risk: 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).
Our risk-based capital ratios for purposes of determining
regulatory compliance are the lower of the capital ratios
computed under (i) the standardized approaches for calculating
credit risk and market risk RWA (“Standardized Approach”) or
(ii) the applicable advanced approaches for calculating credit
risk, market risk and operational risk RWA (“Advanced
Approach”). The credit risk RWA calculations between the two
approaches differ in that the Standardized Approach requires
calculation of RWA using prescribed risk weights, whereas the
Advanced Approach utilizes models to calculate exposure
amounts and risk weights. At December 31, 2019 and 2018, our
December 2019 Form 10-K
50
Table of Contents
Management's Discussion and Analysis
ratios for determining regulatory compliance are based on the
Standardized Approach rules.
Leverage-Based Regulatory Capital. Minimum leverage-based
capital requirements include a Tier 1 leverage ratio and an SLR.
We are required to maintain a Tier 1 SLR of 5%, inclusive of an
enhanced SLR capital buffer of at least 2%.
Regulatory Capital Ratios
$ in millions
Risk-based capital
At December 31, 2019
Required
Ratio1
Standardized
Advanced
Common Equity Tier 1 capital
$
64,751
$
Tier 1 capital
Total capital
Total RWA
Common Equity Tier 1 capital
ratio
Tier 1 capital ratio
Total capital ratio
$ in millions
Leverage-based capital
Adjusted average assets2
Tier 1 leverage ratio
Supplementary leverage exposure3
SLR
73,443
82,708
64,751
73,443
82,423
394,177
382,496
10.0%
11.5%
13.5%
16.4%
18.6%
21.0%
16.9%
19.2%
21.5%
Required
Ratio1
At
December 31,
2019
$
889,195
4.0%
8.3%
$ 1,155,177
5.0%
6.4%
$ in millions
Risk-based capital
At December 31, 2018
Required
Ratio1
Standardized
Advanced
Common Equity Tier 1 capital
$
62,086
$
Tier 1 capital
Total capital
Total RWA
Common Equity Tier 1 capital
ratio
Tier 1 capital ratio
Total capital ratio
$ in millions
Leverage-based capital
Adjusted average assets2
Tier 1 leverage ratio
Supplementary leverage exposure3
SLR
70,619
80,052
62,086
70,619
79,814
367,309
363,054
8.6%
10.1%
12.1%
16.9%
19.2%
21.8%
17.1%
19.5%
22.0%
Required
Ratio1
At
December 31,
2018
$
843,074
4.0%
8.4%
$ 1,092,672
5.0%
6.5%
1. Required ratios are inclusive of any buffers applicable as of the date presented. For
2018, the required regulatory capital ratios for risk-based capital are under the
transitional rules. 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.
2. Adjusted average assets represents the denominator of the Tier 1 leverage ratio and
is composed of the average daily balance of consolidated on-balance sheet assets
for the quarters ending on the respective balance sheet dates, reduced by disallowed
goodwill, intangible assets, investments in covered funds, defined benefit pension
plan assets, after-tax gain on sale from assets sold into securitizations, investments
in our own capital instruments, certain deferred tax assets and other capital deductions.
3. Supplementary leverage exposure is the sum of Adjusted average assets used in the
Tier 1 leverage ratio and other adjustments, primarily: (i) for derivatives, potential future
exposure and the effective notional principal amount of sold credit protection offset
by qualifying purchased credit protection; (ii) the counterparty credit risk for repo-style
transactions; and (iii) the credit equivalent amount for off-balance sheet exposures.
51
December 2019 Form 10-K
Table of Contents
Management's Discussion and Analysis
Regulatory Capital
RWA Rollforward1
$ in millions
Common Equity Tier 1 capital
At
December 31,
2019
At
December 31,
2018
Change
$ in millions
Credit risk RWA
2019
Standardized
Advanced
Common stock and surplus
$
5,228 $
9,843 $
(4,615)
Balance at December 31, 2018
$
305,531 $
190,595
Retained earnings
AOCI
Regulatory adjustments and deductions:
Net goodwill
Net intangible assets
Other adjustments and
deductions1
Total Common Equity Tier 1
capital
Additional Tier 1 capital
Preferred stock
Noncontrolling interests
Additional Tier 1 capital
Deduction for investments
in covered funds
Total Tier 1 capital
Standardized Tier 2 capital
Subordinated debt
Noncontrolling interests
Eligible allowance for credit
losses
Other adjustments and
deductions
Total Standardized Tier 2
capital
Total Standardized capital
Advanced Tier 2 capital
Subordinated debt
Noncontrolling interests
Eligible credit reserves
Other adjustments and
deductions
Total Advanced Tier 2
capital
Total Advanced capital
$
$
$
$
$
$
$
$
$
$
70,589
(2,788)
(7,081)
(2,012)
64,175
(2,292)
(6,661)
(2,158)
6,414
(496)
(420)
146
815
(821)
1,636
64,751 $
62,086 $
2,665
8,520 $
8,520 $
607
454
9,127 $
8,974 $
(435)
(441)
—
153
153
6
73,443 $
70,619 $
2,824
8,538 $
8,923 $
(385)
143
590
(6)
107
440
(37)
36
150
31
Change related to the following items:
Derivatives
Securities financing transactions
Securitizations
Investment securities
Commitments, guarantees and
loans
Cash
Equity investments
Other credit risk2
Total change in credit risk RWA
Balance at December 31, 2019
Market risk RWA
Balance at December 31, 2018
Change related to the following items:
Regulatory VaR
Regulatory stressed VaR
Incremental risk charge
Comprehensive risk measure
Specific risk:
Non-securitizations
Securitizations
9,265 $
9,433 $
(168)
Total change in market risk RWA
82,708 $
80,052 $
2,656
Balance at December 31, 2019
Operational risk RWA
8,538 $
8,923 $
(385)
Balance at December 31, 2018
$
$
$
$
$
143
305
(6)
107
202
(37)
36
103
31
8,980 $
9,195 $
(215)
82,423 $
79,814 $
2,609
7,526
10,631
469
2,115
12,423
(753)
2,352
2,390
17,008
(844)
722
5,217
11,859
(141)
2,484
2,027
37,153 $
342,684 $
38,332
228,927
61,778 $
61,857
(1,100)
(6,947)
(6,125)
(243)
1,609
2,521
(10,285) $
51,493 $
N/A $
N/A
N/A $
(1,100)
(6,947)
(6,125)
(218)
1,609
2,521
(10,260)
51,597
110,602
(8,630)
101,972
382,496
Change in operational risk RWA
Balance at December 31, 2019
Total RWA
$
394,177 $
Regulatory VaR—VaR for regulatory capital requirements
1. The RWA for each category reflects both on- and off-balance sheet exposures, where
appropriate.
2. Amounts reflect assets not in a defined category, non-material portfolios of exposures
and unsettled transactions, as applicable.
Credit risk RWA increased in 2019 under the Standardized and
Advanced Approaches primarily due to increased exposures in
lending commitments, Derivatives and Investment securities, as
well as an increase in Other credit risk driven by the Firm’s
adoption of the Leases accounting update on January 1, 2019.
RWA under the Standardized Approach also increased due to
higher exposures for Securities financing transactions, while
under the Advanced Approach, in Derivatives, increased
exposure also led to increased RWA related to CVA.
Market risk RWA decreased in 2019 under the Standardized and
Advanced Approaches, primarily due to a decrease in Stressed
VaR driven by reduced equity and interest rate risk, and a
decrease in the Incremental risk charge, mainly as a result of the
improved alignment of hedges and reduced exposures in credit
products.
1. Other adjustments and deductions used in the calculation of Common Equity Tier 1
capital primarily includes net after-tax DVA, the credit spread premium over risk-free
rate for derivative liabilities, defined benefit pension plan assets, after-tax gain on sale
from assets sold into securitizations, investments in our own capital instruments and
certain deferred tax assets.
December 2019 Form 10-K
52
Table of Contents
Management's Discussion and Analysis
The decrease in operational risk RWA under the Advanced
Approach in 2019 reflects a continued reduction in the
magnitude and frequency of internal losses utilized in the
operational risk capital model related to litigation.
requirement equal to the greater of (i) total RWA multiplied by
the sum of 6% plus the higher of the Method 1 or Method 2 G-
SIB capital surcharge applicable to the Parent Company, or (ii)
4.5% of its total leverage exposure.
G-SIB Capital Surcharge
Required and Actual TLAC and Eligible LTD Ratios
the G-SIB’s
first method
We and other U.S. G-SIBs are subject to a risk-based capital
surcharge. A G-SIB must calculate its G-SIB capital surcharge
under two methods and use the higher of the two surcharges.
size,
considers
The
interconnectedness, cross-jurisdictional activity, complexity
and substitutability, which is generally consistent with the
methodology developed by the Basel Committee (“Method 1”).
inputs but replaces
The second method uses similar
substitutability with the use of short-term wholesale funding
(“Method 2”) and generally results in higher surcharges than the
first method. The G-SIB capital surcharge must be satisfied
using Common Equity Tier 1 capital and functions as an
extension of the capital conservation buffer. As of December 31,
2019, our fully phased-in G-SIB surcharge is 3%. In 2018, the
requirement was based on a phase-in amount of 75% of the
applicable surcharge (see “Risk-Based Regulatory Capital”
herein).
Total Loss-Absorbing Capacity, Long-Term Debt and Clean
Holding Company Requirements
The Federal Reserve has established external TLAC, long-term
debt (“LTD”) and clean holding company requirements for top-
tier BHCs of U.S. G-SIBs (“covered BHCs”), including the
Parent Company. These requirements are designed to ensure that
covered BHCs will have enough loss-absorbing resources at the
point of failure to be recapitalized through the conversion of
eligible LTD to equity or otherwise by imposing losses on
eligible LTD or other forms of TLAC where an SPOE resolution
strategy is used (see “Business—Supervision and Regulation—
Financial Holding Company—Resolution and Recovery
Planning” and “Risk Factors—Legal, Regulatory and
Compliance Risk”).
These TLAC and eligible LTD requirements include various
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 contain certain
embedded features, such as a principal or redemption amount
subject to reduction based on the performance of an asset, entity
or index, or a similar feature. In addition, the requirements
provide permanent grandfathering for debt instruments issued
prior to December 31, 2016 that would be eligible LTD but for
having impermissible acceleration clauses or being governed by
foreign law.
A covered BHC is also required to maintain minimum external
TLAC equal to the greater of (i) 18% of total RWA or (ii) 7.5%
of its total leverage exposure (the denominator of its SLR). In
addition, covered BHCs must meet a separate external LTD
$ in millions
External TLAC2
At December 31, 2019
Regulatory
Minimum
Required
Ratio1
Actual
Amount/
Ratio
$
196,888
External TLAC as a % of RWA
18.0%
21.5%
49.9%
External TLAC as a % of
leverage exposure
Eligible LTD3
Eligible LTD as a % of RWA
Eligible LTD as a % of leverage
exposure
7.5%
9.5%
17.0%
9.0%
4.5%
$
113,624
9.0%
28.8%
4.5%
9.8%
1. Required ratios are inclusive of applicable buffers. The final rule imposes TLAC buffer
requirements on top of both the risk-based and leverage exposure-based external
TLAC minimum requirements. The risk-based TLAC buffer is equal to the sum of 2.5%,
the covered BHC's Method 1 G-SIB surcharge and the CCyB, if any, as a percentage
of total RWA. The leverage exposure-based TLAC buffer is equal to 2% of the covered
BHC's total leverage exposure. 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.
2. External TLAC consists of Common Equity Tier 1 capital and Additional Tier 1 capital
(each excluding any noncontrolling minority interests), as well as eligible LTD.
3. Consists of TLAC-eligible LTD reduced by 50% for amounts of unpaid principal due
to be paid in more than one year but less than two years from December 31, 2019.
Furthermore, under the clean holding company requirements of
the final rule, a covered BHC is prohibited from incurring any
external debt with an original maturity of less than one year or
certain other liabilities, regardless of whether the liabilities are
fully secured or otherwise senior to eligible LTD, or entering
into certain other prohibited transactions. Certain other external
liabilities, including those with certain embedded features noted
above, are subject to a cap equal to 5% of the covered BHC’s
outstanding external TLAC amount. We are in compliance with
all relevant TLAC requirements as of December 31, 2019.
The Federal Reserve has proposed modifications to the
enhanced SLR that 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.
Capital Plans and Stress Tests
Pursuant to the Dodd-Frank Act, the Federal Reserve has
adopted capital planning and stress test requirements for large
BHCs, including us, which form part of the Federal Reserve’s
annual CCAR framework.
We must submit an annual capital plan to the Federal Reserve,
taking into account the results of separate annual stress tests
designed by us and the Federal Reserve, so that the Federal
53
December 2019 Form 10-K
including us, by June 30, 2020. We are required to disclose a
summary of the results of our company-run stress tests within
15 days of the date the Federal Reserve discloses the results of
the supervisory stress tests.
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 under the Required Capital
framework, as well as each business segment’s relative
contribution to our total Required Capital.
The Required Capital framework is a risk-based and leverage
use-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. 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 unless a significant business change occurs (e.g.,
acquisition or disposition). 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 common equity. We generally hold Parent common
equity for prospective regulatory requirements, organic growth,
acquisitions and other capital needs.
The Required Capital framework is expected to evolve over time
in response to changes in the business and regulatory
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
$ in billions
Institutional Securities
Wealth Management
Investment Management
Parent
Total
2019
2018
2017
$
40.4 $
40.8 $
18.2
2.5
11.6
16.8
2.6
9.8
$
72.7 $
70.0 $
40.2
17.2
2.4
10.0
69.8
1. The attribution of average common equity to the business segments is a non-GAAP
financial measure. See "Selected Non-GAAP Financial Information" herein.
Table of Contents
Management's Discussion and Analysis
Reserve may assess our systems and processes that incorporate
forward-looking projections of revenues and losses to monitor
and maintain our internal capital adequacy. As banks with less
than $250 billion of total assets, our U.S. Bank Subsidiaries are
not subject to company-run stress-test regulatory requirements.
The capital plan must include a description of all planned capital
actions over a nine-quarter planning horizon, including any
issuance or redemption of a debt or equity capital instrument,
any capital distribution (i.e., payments of dividends or stock
repurchases) and any similar action that the Federal Reserve
determines could impact our consolidated capital. The capital
plan must include a discussion of how we will maintain capital
above the minimum regulatory capital ratios, including any
requirements that may be phased in over the planning horizon,
and how we will serve as a source of strength to our U.S. Bank
Subsidiaries under supervisory stress scenarios. In addition, the
Federal Reserve has issued guidance setting out its heightened
expectations for capital planning practices at certain large
financial institutions, including us.
The capital plan rule requires that large BHCs receive no
objection from the Federal Reserve before making a capital
distribution. In addition, even with a capital plan that has not
been objected to, the BHC must seek the non-objection of the
Federal Reserve before making a capital distribution if, among
other reasons, the BHC would not meet its regulatory capital
requirements after making the proposed capital distribution. A
BHC’s ability to make capital distributions (other than
scheduled payments on Additional Tier 1 and Tier 2 capital
instruments) is also limited if its net capital issuances are less
than the amount indicated in its capital plan.
We submitted our 2019 Capital Plan (“Capital Plan”) and
company-run stress test results to the Federal Reserve on April
5, 2019. On June 21, 2019, the Federal Reserve published
summary results of the Dodd-Frank Act supervisory stress tests
of each large BHC, including us. On June 27, 2019, the Federal
Reserve published summary results of CCAR and announced it
did not object to our 2019 Capital Plan. Our 2019 Capital Plan
includes the repurchase of up to $6.0 billion of outstanding
common stock for the period beginning July 1, 2019 through
June 30, 2020, and an increase in our quarterly common stock
dividend to $0.35 per share from $0.30 per share, beginning with
the common stock dividend announced on July 18, 2019. We
disclosed a summary of the results of our company-run stress
tests on June 21, 2019 on our Investor Relations webpage. In
addition, we submitted the results of our mid-cycle company-
run stress test to the Federal Reserve and on October 28, 2019
disclosed a summary of the results on our Investor Relations
webpage.
For the 2020 capital planning and stress test cycle, we are
required to submit our capital plan and company-run stress test
results to the Federal Reserve by April 5, 2020. The Federal
Reserve is expected to publish summary results of the CCAR
and Dodd-Frank Act supervisory stress tests of each large BHC,
December 2019 Form 10-K
54
Table of Contents
Management's Discussion and Analysis
Resolution and Recovery Planning
Regulatory Developments
Pursuant to the Dodd-Frank Act, we are required to periodically
submit to the Federal Reserve and the FDIC a resolution plan
that describes our strategy for a rapid and orderly resolution
under the U.S. Bankruptcy Code in the event of our material
financial distress or failure. We submitted our 2019 resolution
plan on June 28, 2019.
Our preferred resolution strategy is an SPOE strategy. In line
with our SPOE strategy, the Parent Company has transferred,
and has agreed to transfer on an ongoing basis, certain assets to
its wholly owned, direct subsidiary Morgan Stanley Holdings
LLC (the “Funding IHC”). In addition, the Parent Company has
entered into an amended and restated support agreement with
its material entities (including the Funding IHC) and certain
other subsidiaries. In the event of a resolution scenario, the
Parent Company would be obligated to contribute all of its
Contributable Assets to the material entities and/or the Funding
IHC. The Funding IHC would be obligated to provide capital
and liquidity, as applicable, to the material entities.
The obligations of the Parent Company and the Funding IHC
under the 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 and certain other assets), and the assets of the Funding
IHC. As a result, claims of our material entities, including the
Funding IHC, with respect to the secured assets, are effectively
senior to unsecured obligations of the Parent Company.
In December 2019, we received joint feedback on our 2019
resolution plan from the Federal Reserve and the FDIC. The
feedback confirmed that there are no deficiencies in our 2019
resolution plan and that we had successfully addressed a prior
shortcoming identified by the agencies in the review of our 2017
resolution plan. The agencies noted one shortcoming in our 2019
resolution plan related to certain mechanisms intended to
facilitate our SPOE strategy which must be addressed prior to
our next resolution plan submission in 2021.
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” and “Risk
Factors—Legal, Regulatory and Compliance Risk.”
Proposed Rule to Amend the Covered Fund Provisions of the
Volcker Rule
The Federal financial regulatory agencies responsible for the
Volcker Rule’s implementing regulations have proposed a rule
that would revise the prohibition on certain investments by
banking entities with defined covered funds. The proposed rule
would add certain new exclusions from the definition of covered
fund, while streamlining others. It would also simplify certain
restrictions on inter-affiliate relationships with covered funds.
Final Rule on Standardized Approach for Counterparty Credit
Risk
The U.S. banking agencies have issued a final rule to incorporate
the standardized approach for counterparty credit risk (“SA-
CCR”), a new derivatives counterparty exposure methodology,
into the regulatory capital framework and related regulatory
standards. SA-CCR replaces the current exposure method, on a
mandatory basis, in our and our U.S. Bank Subsidiaries’
Standardized Approach RWA, Supplementary Leverage Ratio
exposure calculations, and in all central counterparty default
fund contribution calculations in the regulatory capital
framework. SA-CCR is available as an alternative in our and
our U.S. Bank Subsidiaries’ Advanced Approach RWA for trade
exposures, in single counterparty credit limits applicable to us,
and in bank lending limits applicable to our U.S. Bank
Subsidiaries. The final rule requires us and our U.S. Bank
Subsidiaries to implement SA-CCR by January 1, 2022, with
early adoption permitted.
Proposed Revisions to the Regulatory Capital Treatment for
Investments in Certain Unsecured Debt Instruments Issued
by G-SIBs
The Federal Reserve, the OCC and the FDIC have issued a
proposed rule that would, among other things, modify the
regulatory capital framework for Advanced Approach banking
organizations, including us. Such firms would be required to
make certain deductions from regulatory capital for their
investments in certain unsecured debt instruments (including
eligible LTD in the TLAC framework) issued by the Parent
Company and other G-SIBs.
Proposed Stress Buffer Requirements
The Federal Reserve issued a proposal in 2018 to integrate its
annual capital planning and stress testing requirements with
existing applicable 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 Standardized Approach risk-based capital
55
December 2019 Form 10-K
Table of Contents
Management's Discussion and Analysis
requirements and Tier 1
requirements.
leverage
regulatory capital
Proposed Modifications to the Enhanced SLR and to the SLR
Applicable to Our U.S. Bank Subsidiaries
The Federal Reserve has 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 G-SIB capital surcharge.
Under the proposal, our enhanced SLR buffer would become
1.5%, for a total enhanced SLR requirement of 4.5%, assuming
that our current G-SIB capital surcharge remains the same when
the proposal becomes effective.
The Federal Reserve and the OCC have also proposed to modify
the well-capitalized SLR standard applicable to our U.S. Bank
Subsidiaries. The requirement would change from the current
6% to 3% plus 50% of our current G-SIB capital surcharge, for
a total well-capitalized SLR requirement of 4.5% for our U.S.
Bank Subsidiaries, assuming that our G-SIB capital surcharge
remains the same when the proposal becomes effective.
Other Matters
U.K. Withdrawal from the E.U.
On January 31, 2020, the U.K. withdrew from the E.U. under
the terms of a withdrawal agreement between the U.K. and the
E.U. The withdrawal agreement provides for a transition period
to the end of December 2020, during which time the U.K. will
continue to apply E.U. law as if it were a member state, and U.K.
firms’ rights to provide financial services in E.U. member states
will continue. Access to the E.U. market after the transition
period remains subject to negotiation.
We have prepared the structure of our European operations for
a range of potential outcomes, including for the possibility that
U.K. financial firms’ access to E.U. markets after the transition
period is limited, and we expect to be able to continue to serve
our clients and customers under each of these potential
outcomes.
For more information on the U.K.’s withdrawal from the E.U.,
our related preparations and the potential impact on our
operations, see “Risk Factors—International Risk.” For further
information regarding our exposure to the U.K., see also
“Quantitative and Qualitative Disclosures about Risk—Country
and Other Risks.”
Under Standardized Approach risk-based capital requirements,
the stress capital buffer would replace the existing Common
Equity Tier 1 capital conservation buffer, which is 2.5%. 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
or (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 1 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, for purposes of determining the size
of Stress Buffer Requirements, the proposal would include only
projected capital actions to planned common stock dividends in
the fourth through seventh quarters of the 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 Standardized Approach risk-based
capital requirements or the Tier 1 leverage ratio, inclusive of
Stress Buffer Requirements, or the Advanced Approach or SLR
or TLAC requirements, inclusive of applicable buffers.
The Federal Reserve has not yet taken action to finalize or
implement Stress Buffer Requirements.
December 2019 Form 10-K
56
Table of Contents
Management's Discussion and Analysis
Planned Replacement of London Interbank Offered Rate and
Replacement or Reform of Other Interest Rates
Central banks around the world, including the Federal Reserve,
have commissioned committees and working groups of market
participants and official sector representatives to replace LIBOR
interest rate benchmarks
and replace or reform other
(collectively, the “IBORs”).
Accordingly, we have established and are undertaking a
Firmwide IBOR transition plan to promote the transition to
alternative reference rates, which takes into account the
considerable uncertainty regarding the availability of LIBOR
beyond 2021. Our transition plan includes a number of key steps,
including continued engagement with central bank and industry
working groups and regulators (including participation and
leadership on key committees), active client engagement,
internal operational readiness, and risk management, among
other things. Our transition plan is overseen by a global steering
committee, with senior management oversight. As part of our
Firmwide
identifying, assessing and
monitoring risks associated with the expected discontinuation
or unavailability of one or more of the IBORs.
initiative, we are
We are a party to a significant number of IBOR-linked contracts,
many of which extend beyond 2021, comprising derivatives,
securitizations and floating rate notes, loans and mortgages. Our
review of these contracts includes assessing the impact of
applicable fallbacks and any amendments that may be warranted
or appropriate. We are also taking steps to update operational
processes (including to support alternative reference rates),
models, and associated infrastructure, as well as planning for
certain client outreach to amend fallbacks or seek voluntary
conversions of outstanding IBOR products where practicable.
In addition, as part of the transition to alternative reference rates,
we are making markets in products linked to such rates,
including SOFR, the alternative rate to U.S. dollar LIBOR
selected by the Alternative Reference Rates Committee
convened by the Federal Reserve Board and the Federal Reserve
Bank of New York, and also began issuing debt linked to SOFR.
For a further discussion of the expected replacement of the
IBORs and/or reform of interest rate benchmarks, and the related
risks and our transition plan, see “Risk Factors—Legal,
Regulatory and Compliance Risk.”
57
December 2019 Form 10-K
Table of Contents
Quantitative and Qualitative Disclosures about Risk
Risk Management
Overview
Risk is an inherent part of our businesses and activities. We
believe effective risk management is vital to the success of our
business activities. Accordingly, we have an Enterprise Risk
Management (“ERM”) framework to integrate the diverse roles
of risk management into a holistic enterprise structure and to
facilitate the incorporation of risk assessment into decision-
making processes across the Firm.
We have policies and procedures in place to identify, measure,
monitor, advise, challenge and control the principal risks
involved in the activities of the Institutional Securities, Wealth
Management and Investment Management business segments,
as well as at the Parent Company level. The principal risks
involved in our business activities include market (including
non-trading risks), credit, operational, model, compliance,
cybersecurity, liquidity, strategic, reputational and conduct risk.
Strategic risk is integrated into our business planning, embedded
in the evaluation of all principal risks and overseen by the Board.
The cornerstone of our risk management philosophy is the
pursuit of risk-adjusted returns through prudent risk taking that
protects our capital base and franchise. This philosophy is
implemented through the ERM framework. Five key principles
underlie
integrity, comprehensiveness,
independence, accountability and transparency. To help ensure
the efficacy of risk management, which is an essential
component of our reputation, senior management requires
this philosophy:
thorough and frequent communication and the appropriate
escalation of risk matters. The fast-paced, complex and
constantly evolving nature of global financial markets requires
us to maintain a risk management culture that is incisive,
knowledgeable about specialized products and markets, and
subject to ongoing review and enhancement.
Our risk appetite defines the types of risk that the Firm is willing
to accept in pursuit of our strategic objectives and business plan,
taking into account the interests of clients and fiduciary duties
to shareholders, as well as capital and other regulatory
requirements. This risk appetite is embedded in our risk culture
and linked to our short-term and long-term strategic, capital and
financial plans, as well as compensation programs. This risk
appetite and the related Board-level risk limits and risk tolerance
statements are reviewed and approved by the Risk Committee
of the Board (“BRC”) and the Board on at least an annual basis.
Risk Governance Structure
Risk management at the Firm requires independent Firm-level
oversight, accountability of our business divisions, and effective
communication of risk matters across the Firm, to senior
management and ultimately to the Board. Our risk governance
structure is set forth in the following chart and also includes risk
managers, committees, and groups within and across business
segments and operating legal entities. The ERM framework,
composed of
independent but complementary entities,
facilitates efficient and comprehensive supervision of our risk
exposures and processes.
RRP—Resolution and Recovery Planning
1. Committees include the Capital Commitment Committee, Global Large Loan Committee, Equity Underwriting Committee, Leveraged Finance Underwriting Committee and Municipal
Capital Commitment Committee.
2. Committees include the Securities Risk Committee, Wealth Management Risk Committee and Investment Management Risk Committee.
December 2019 Form 10-K
58
Table of Contents
Risk Disclosures
Morgan Stanley Board of Directors
The Board has oversight of the ERM framework and is
responsible for helping to ensure that our risks are managed in
a sound manner. The Board has authorized the committees
within the ERM framework to help facilitate our risk oversight
responsibilities. As set forth in our Corporate Governance
Policies, the Board also oversees, and receives reports on, our
financial performance, strategy and business plans, as well as
our practices and procedures relating to reputational and
franchise risk, and culture, values and conduct.
Risk Committee of the Board
The BRC assists the Board in its oversight of the ERM
framework; oversees major risk exposures of the Firm, including
market, credit, model and liquidity risk, against established risk
measurement methodologies and the steps management has
taken to monitor and control such exposures; oversees our risk
appetite statement, including risk limits and tolerances; reviews
capital, liquidity and funding strategy and related guidelines and
policies; reviews the contingency funding plan and capital
planning process; oversees our significant risk management and
the
risk assessment guidelines and policies; oversees
performance of the Chief Risk Officer; reviews reports from our
Strategic Transactions Committee, CCAR Committee and RRP
Committee; reviews new product risk, emerging risks and
regulatory matters; and reviews the Internal Audit Department
reports on the assessment of the risk management, liquidity and
capital functions. The BRC reports to the Board on a regular
basis and coordinates with other Board committees with respect
to oversight of risk management and risk assessment guidelines.
Audit Committee of the Board
The Audit Committee of the Board (“BAC”) oversees the
integrity of our financial statements, compliance with legal and
regulatory requirements, and system of internal controls;
oversees risk management and risk assessment guidelines in
coordination with the Board, the BRC, and the Operations and
Technology Committee of the Board (“BOTC”); reviews the
major legal and compliance risk exposures of the Firm and the
steps management has taken to monitor and control such
exposures; selects, determines the fees, evaluates and, when
appropriate, replaces the independent auditor; oversees the
qualifications,
independence and performance of our
independent auditor and pre-approves audit and permitted non-
audit services; oversees the performance of our Global Audit
Director; and, after review, recommends to the Board the
acceptance and inclusion of the annual audited financial
statements in the Firm’s annual report on Form 10-K. The BAC
reports to the Board on a regular basis.
Operations and Technology Committee of the Board
The BOTC oversees our operations and technology strategy and
significant investments in support of such strategy; operations,
technology and operational risk, including information security,
fraud, vendor, data protection, business continuity and
cybersecurity risks, and the steps management has taken to
monitor and control such exposures; and risk management and
risk assessment guidelines in coordination with the Board, BRC
and BAC, and policies regarding operations, technology and
operational risk. The BOTC reports to the Board on a regular
basis.
Firm Risk Committee
The Board has also authorized the Firm Risk Committee
(“FRC”), a management committee appointed and chaired by
the Chief Executive Officer, which includes the most senior
officers of the Firm, including the Chief Risk Officer, Chief
Financial Officer and Chief Legal Officer, to help oversee the
ERM framework. The FRC’s responsibilities include: oversight
of our risk management principles, procedures and limits; the
monitoring of capital levels and material market, credit,
operational, model, liquidity, legal, compliance and reputational
risk matters, and other risks, as appropriate; and the steps
management has taken to monitor and manage such risks. The
FRC also establishes and communicates risk tolerance,
including aggregate Firm limits and tolerances, as appropriate.
The Governance Process Review Subcommittee of the FRC
oversees governance and process issues on behalf of the FRC.
The FRC reports to the Board, the BAC, the BOTC and the BRC
through the Chief Risk Officer, Chief Financial Officer and
Chief Legal Officer.
Functional Risk and Control Committees
Functional risk and control committees and other committees
within
facilitate efficient and
comprehensive supervision of our risk exposures and processes.
the ERM
framework
Each business segment has a risk committee that is responsible
for helping to ensure that the business segment, as applicable,
adheres to established limits for market, credit, operational and
other risks; implements risk measurement, monitoring, and
management policies, procedures, controls and systems that are
consistent with the risk framework established by the FRC; and
reviews, on a periodic basis, our aggregate risk exposures, risk
exception experience, and the efficacy of our risk identification,
measurement, monitoring and management policies and
procedures, and related controls.
Chief Risk Officer
The Chief Risk Officer, who is independent of business units,
reports to the BRC and the Chief Executive Officer. The Chief
Risk Officer oversees compliance with our risk limits; approves
exceptions to our risk limits; independently reviews material
market, credit, liquidity, model and operational risks; and
reviews results of risk management processes with the Board,
the BRC and the BAC, as appropriate. The Chief Risk Officer
also coordinates with the Chief Financial Officer regarding
59
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Risk Disclosures
capital and liquidity management and works with the
Compensation, Management Development and Succession
Committee of the Board to help ensure that the structure and
design of incentive compensation arrangements do not
encourage unnecessary and excessive risk taking.
internal factors or regulatory requests. In addition to regular
reports to the BAC, the Global Audit Director, who reports
functionally to the BAC and administratively to the Chief
Executive Officer, periodically reports to the BRC and BOTC
on risk-related control issues.
Independent Risk Management Functions
Culture, Values and Conduct of Employees
The risk management functions (Market Risk, Credit Risk,
Operational Risk, Model Risk and Liquidity Risk Management
departments) are independent of our business units and report
to the Chief Risk Officer. These functions assist senior
management and the FRC in monitoring and controlling our risk
through a number of control processes. Each function maintains
its own risk governance structure with specified individuals and
committees responsible for aspects of managing risk. Further
discussion about the responsibilities of the risk management
functions may be found under “Market Risk,” “Credit Risk,”
“Operational Risk,” “Model Risk” and “Liquidity Risk” herein.
Support and Control Groups
Our support and control groups include the Legal and
Compliance Division, the Finance Division, Technology
Division, Operations Division,
the Human Resources
Department, Corporate Services and Firm Resilience. Our
support and control groups coordinate with the business segment
control groups to review the risk monitoring and risk
management policies and procedures relating to, among other
things, controls over financial reporting and disclosure; each
business segment’s market, credit and operational risk profile;
liquidity risks; model risks; sales practices; reputational, legal
enforceability, compliance, conduct and regulatory risk; and
technological risks. Participation by the senior officers of the
Firm and business segment control groups helps ensure that risk
policies and procedures, exceptions to risk limits, new products
and business ventures, and transactions with risk elements
undergo thorough review.
Internal Audit Department
The Internal Audit Department provides independent risk and
control assessment. The Internal Audit Department provides an
independent assessment of the design and effectiveness of our
control environment and risk management processes using a
risk-based audit coverage model and audit execution
methodology developed from professional auditing standards.
The Internal Audit Department also reviews and tests our
compliance with internal guidelines set for risk management
and risk monitoring, as well as external rules and regulations
governing the industry. It effects these responsibilities through
periodic reviews (with specified minimum frequency) of our
processes, activities, products or information systems; targeted
reviews of specific controls and activities; pre-implementation
or initiative reviews of new or significantly changed processes,
activities, products or information systems; and special
investigations and retrospective reviews required as a result of
Employees of the Firm are accountable for conducting
themselves in accordance with our core values: Putting Clients
First, Doing the Right Thing, Leading with Exceptional Ideas
and Giving Back. We are committed to reinforcing and
confirming adherence to our core values through our governance
framework, tone from the top, management oversight, risk
management and controls, and three lines of defense structure
(business, control functions such as Risk Management and
Compliance, and Internal Audit).
The Board is responsible for overseeing the Firm’s practices and
procedures relating to culture, values and conduct, as set forth
in the Firm’s Corporate Governance Policies. Our Culture,
Values and Conduct Committee is the senior management
committee that oversees the Firmwide culture, values and
conduct program. A fundamental building block of this program
is the Firm’s Code of Conduct, which establishes standards for
employee conduct that further reinforce the Firm’s commitment
to integrity and ethical conduct. Every new hire and every
employee annually must certify to their understanding of and
adherence to the Code of Conduct. The Firm’s Global Conduct
Risk Management Policy also sets out a consistent global
framework for managing Conduct Risk (i.e., the risk arising
from misconduct by employees or contingent workers) and
Conduct Risk incidents at the Firm.
The employee annual performance review process includes
evaluation of employee conduct related to risk management
practices and the Firm’s expectations. We also have several
mutually reinforcing processes to identify employee conduct
that may have an impact on employment status, current year
compensation and/or prior year compensation. For example, the
Global Incentive Compensation Discretion Policy sets forth
standards for managers when making annual compensation
decisions and specifically provides that managers must consider
whether their employees effectively managed and/or supervised
risk control practices during the performance year. Management
committees from control functions periodically meet to discuss
employees whose conduct is not in line with our expectations.
These results are incorporated into identified employees’
performance reviews and compensation and promotion
decisions.
The Firm’s clawback and cancellation provisions apply to
deferred incentive compensation and cover a broad scope of
employee conduct, including any act or omission (including
with respect to direct supervisory responsibilities) that
constitutes a breach of obligation to the Firm or causes a
restatement of the Firm’s financial results, constitutes a violation
December 2019 Form 10-K
60
Table of Contents
Risk Disclosures
of the Firm’s global risk management principles, policies and
standards, or causes a loss of revenue associated with a position
on which the employee was paid and the employee operated
outside of internal control policies.
Risk Limits Framework
Risk limits and quantitative metrics provide the basis for
monitoring risk taking activity and avoiding outsized risk taking.
Our risk-taking capacity is sized through the Firm’s capital
planning process where losses are estimated under the Firm’s
BHC Severely Adverse stress testing scenario. We also maintain
a comprehensive suite of risk limits and quantitative metrics to
support and implement our risk appetite statement. Our risk
limits support linkages between the overall risk appetite, which
is reviewed by the Board, and more granular risk-taking
decisions and activities.
Risk limits, once established, are reviewed and updated on at
least an annual basis, with more frequent updates as necessary.
Board-level risk limits address the most important Firmwide
aggregations of risk, including, but not limited to, stressed
market, credit and liquidity risks. Additional risk limits
approved by the FRC address more specific types of risk and
are bound by the higher-level Board risk limits.
Risk Management Process
In subsequent sections, we discuss our risk management policies
and procedures for our primary risks. This discussion primarily
focuses on our Institutional Securities business segment's
trading activities and corporate lending and related activities.
We believe that these activities generate a substantial portion of
our primary risks. These sections and the estimated amounts of
our risk exposure generated by our statistical analyses are
forward-looking statements. However, the analyses used to
assess such risks are not predictions of future events, and actual
results may vary significantly from such analyses due to events
in the markets in which we operate and certain other factors
described in the following paragraphs.
Market Risk
Market risk refers to the risk that a change in the level of one or
more market prices, rates, indices, volatilities, correlations or
other market factors, such as market liquidity, will result in
losses for a position or portfolio. 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 our VaR for market
risk exposures is generated. In addition, we incur non-trading
market risk within the Wealth Management and Investment
Management business segments. The Wealth Management
business segment primarily incurs non-trading market risk from
lending and deposit-taking activities. The
Investment
Management business segment primarily incurs non-trading
market risk from capital investments in alternative and other
funds.
Market risk includes non-trading interest rate risk. Non-trading
interest rate risk in the banking book (amounts classified for
regulatory capital purposes under the banking book regime)
refers to the exposure that a change in interest rates will result
in prospective earnings changes for assets and liabilities in the
banking book.
Sound market risk management is an integral part of our culture.
The various business units and trading desks are responsible for
ensuring that market risk exposures are well-managed and
prudent. The control groups help ensure that these risks are
measured and closely monitored and are made transparent to
senior management. The Market Risk Department is responsible
for ensuring transparency of material market risks, monitoring
compliance with established
limits and escalating risk
concentrations to appropriate senior management.
To execute these responsibilities, the Market Risk Department
monitors our risk against limits on aggregate risk exposures,
performs a variety of risk analyses, routinely reports risk
summaries, and maintains our VaR and scenario analysis
systems. Market risk is also monitored through various
measures: by use of statistics (including VaR and related
analytical measures); by measures of position sensitivity; and
through routine stress testing, which measures the impact on the
value of existing portfolios of specified changes in market
factors and scenarios designed by the Market Risk Department
in collaboration with the business units. The material risks
identified by these processes are summarized in reports
produced by the Market Risk Department that are circulated to
and discussed with senior management, the FRC, the BRC and
the Board.
Trading Risks
Primary Market Risk Exposures and Market Risk
Management
During 2019, we had exposures to a wide range of interest rates,
equity prices, foreign exchange rates and commodity prices—
and the associated implied volatilities and spreads—related to
the global markets in which we conduct our trading activities.
We are exposed to interest rate and credit spread risk as a result
of our market-making activities and other trading in interest rate-
sensitive financial instruments (e.g., risk arising from changes
in the level or implied volatility of interest rates, the timing of
mortgage prepayments, the shape of the yield curve and credit
spreads). The activities from which those exposures arise and
the markets in which we are active include, but are not limited
to, the following: derivatives, and corporate and government
debt across both developed and emerging markets and asset-
backed debt, including mortgage-related securities.
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December 2019 Form 10-K
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Risk Disclosures
We are exposed to equity price and implied volatility risk as a
result of making markets in equity securities and derivatives and
maintaining other positions, including positions in non-public
entities. Positions in non-public entities may include, but are not
limited to, exposures to private equity, venture capital, private
partnerships, real estate funds and other funds. Such positions
are less liquid, have longer investment horizons and are more
difficult to hedge than listed equities.
We are exposed to foreign exchange rate and implied volatility
risk as a result of making markets in foreign currencies and
foreign currency derivatives, from maintaining foreign
exchange positions and from holding non-U.S. dollar-
denominated financial instruments.
We are exposed to commodity price and implied volatility risk
as a result of market-making activities in commodity products
related primarily to electricity, natural gas, oil and precious
metals. Commodity exposures are subject to periods of high
price volatility as a result of changes in supply and demand.
These changes can be caused by weather conditions; physical
production and transportation; or geopolitical and other events
that affect the available supply and level of demand for these
commodities.
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.,
futures, forwards, swaps and options). Hedging activities may
not always provide effective mitigation against trading losses
due to differences in the terms, specific characteristics or other
basis risks that may exist between the hedge instrument and the
risk exposure that is being hedged.
We manage the market risk associated with our trading activities
on a Firmwide basis, on a worldwide trading division level and
on an individual product basis. We manage and monitor our
market risk exposures in such a way as to maintain a portfolio
that we believe is well-diversified in the aggregate with respect
to market risk factors and that reflects our aggregate risk
tolerance as established by our senior management.
Aggregate market risk limits have been approved for the Firm
across all divisions worldwide. Additional market risk limits are
assigned to trading desks and, as appropriate, products and
regions. Trading division risk managers, desk risk managers,
traders and the Market Risk Department monitor market risk
measures against limits in accordance with policies set by our
senior management.
Value-at-Risk
The statistical technique known as VaR is one of the tools we
use to measure, monitor and review the market risk exposures
of our trading portfolios. The Market Risk Department
December 2019 Form 10-K
62
calculates and distributes daily VaR-based risk measures to
various levels of management.
Beginning July 1, 2019, we estimate VaR using a model based
on a one-year equal weighted historical simulation for general
market risk factors and name-specific risk in corporate shares
and related derivatives, and Monte Carlo simulation for name-
specific risk in bonds, loans and related derivatives. The model
constructs a distribution of hypothetical daily changes in the
value of trading portfolios based on historical observation of
daily changes in key market indices or other market risk factors,
and information on the sensitivity of the portfolio values to these
market risk factor changes.
Prior to July 1, 2019, our VaR model used four years of historical
data with a volatility adjustment to reflect current market
conditions.
VaR for risk management purposes (“Management VaR”) is
computed at a 95% level of confidence over a one-day time
horizon, which is a useful indicator of possible trading losses
resulting from adverse daily market moves. The 95%/one-day
VaR corresponds to the unrealized loss in portfolio value that,
based on historically observed market risk factor movements,
would have been exceeded with a frequency of 5%, or five times
in every 100 trading days, if the portfolio were held constant for
one day.
Our VaR model generally takes into account linear and non-
linear exposures to equity and commodity price risk, interest
rate risk, credit spread risk and foreign exchange rates. The
model also takes into account linear exposures to implied
volatility risks for all asset classes and non-linear exposures to
implied volatility risks for equity, commodity and foreign
exchange referenced products. The VaR model also captures
certain implied correlation risks associated with portfolio credit
derivatives, as well as certain basis risks (e.g., corporate debt
and related credit derivatives).
We use VaR as one of a range of risk management tools. Among
their benefits, VaR models permit estimation of a portfolio’s
aggregate market risk exposure, incorporating a range of varied
market risks and portfolio assets. One key element of the VaR
model is that it reflects risk reduction due to portfolio
diversification or hedging activities. However, VaR has various
limitations, which include, but are not limited to: use of historical
changes in market risk factors, which may not be accurate
predictors of future market conditions and may not fully
incorporate the risk of extreme market events that are outsized
relative to observed historical market behavior or reflect the
historical distribution of results beyond the 95% confidence
interval; and reporting of losses in a single day, which does not
reflect the risk of positions that cannot be liquidated or hedged
in one day. A small proportion of market risk generated by
trading positions is not included in VaR.
Table of Contents
Risk Disclosures
The modeling of the risk characteristics of some positions relies
on approximations that, under certain circumstances, could
produce significantly different results from those produced
using more precise measures. VaR is most appropriate as a risk
measure for trading positions in liquid financial markets and
will understate the risk associated with severe events, such as
periods of extreme illiquidity. We are aware of these and other
limitations and, therefore, use VaR as only one component in
our risk management oversight process. This process also
incorporates stress testing and scenario analyses and extensive
risk monitoring, analysis and control at the trading desk, division
and Firm levels.
Our VaR model evolves over time in response to changes in the
composition of trading portfolios and to improvements in
modeling
techniques and systems capabilities. We are
committed to continuous review and enhancement of VaR
methodologies and assumptions in order to capture evolving
risks associated with changes in market structure and dynamics.
As part of our regular process improvements, additional
systematic and name-specific risk factors may be added to
improve the VaR model’s ability to more accurately estimate
risks to specific asset classes or industry sectors.
Since the reported VaR statistics are estimates based on
historical data, VaR should not be viewed as predictive of our
future revenues or financial performance or of our ability to
monitor and manage risk. There can be no assurance that our
actual losses on a particular day will not exceed the VaR amounts
indicated in the following tables and paragraphs or that such
losses will not occur more than five times in 100 trading days
for a 95%/one-day VaR. VaR does not predict the magnitude of
losses that, should they occur, may be significantly greater than
the VaR amount.
VaR statistics are not readily comparable across firms because
of differences in the firms’ portfolios, modeling assumptions
and methodologies. These differences can result in materially
different VaR estimates across firms for similar portfolios. The
impact of such differences varies depending on the factor history
assumptions, the frequency with which the factor history is
updated and the confidence level. As a result, VaR statistics are
more useful when interpreted as indicators of trends in a firm’s
risk profile rather than as an absolute measure of risk to be
compared across firms.
24
11
6
10
30
13
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.
95%/One-Day Management VaR
$ in millions
2019
Period
End
Average
High2
Low2
Interest rate and credit spread
$
26 $
29 $
43 $
Equity price
Foreign exchange rate
Commodity price
Less: Diversification benefit1
11
10
10
15
13
14
22
20
22
(27)
(35)
N/A
N/A
Primary Risk Categories
$
30 $
36 $
47 $
Credit Portfolio
Less: Diversification benefit1
15
(10)
16
(11)
19
N/A
N/A
Total Management VaR
$
35 $
41 $
51 $
33
$ in millions
20183
Period
End
Average
High2
Low2
Interest rate and credit spread
$
44 $
34 $
53 $
25
Equity price
Foreign exchange rate
Commodity price
Less: Diversification benefit1
12
11
13
14
10
10
18
16
18
9
6
6
(27)
(29)
N/A
N/A
Primary Risk Categories
$
53 $
39 $
64 $
Credit Portfolio
Less: Diversification benefit1
14
(12)
11
(8)
16
N/A
Total Management VaR
$
55 $
42 $
62 $
31
8
N/A
34
1. Diversification benefit equals the difference between the total Management VaR and
the sum of the component VaRs. This benefit arises because the simulated one-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.
3. 2018 amounts have been revised to present the results of the new VaR model, in
conformance with the 2019 presentation. The difference between the VaR measures
produced by the new and old models was not significant.
Average total Management VaR remained relatively unchanged
from 2018. Average Management VaR for the Primary Risk
Categories decreased from 2018 as reduced interest rate and
credit spread risk was offset by increased Commodity and
Foreign Exchange risk within the Fixed Income Division.
Our regulators have approved the same VaR model we use for
risk management purposes for use in regulatory calculations.
Distribution of VaR Statistics and Net Revenues
The portfolio of positions used for Management VaR differs
from that used for Regulatory VaR. Management VaR contains
certain positions that are excluded from Regulatory VaR.
Examples include counterparty 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 a period-end, annual average, and annual
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 a 95%/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.
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December 2019 Form 10-K
Table of Contents
Risk Disclosures
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. There were no days in 2019 on which trading losses
exceeded VaR.
Daily 95%/One-Day Total Management VaR for 2019
($ in millions)
Daily Net Trading Revenues for 2019
($ in millions)
The previous histogram shows the distribution of daily net
trading revenues for 2019. Daily net trading revenues include
December 2019 Form 10-K
64
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. Certain items such as fees, commissions and net
interest income are excluded from daily net trading revenues
and the VaR model. Revenues required for Regulatory VaR
backtesting further exclude intraday trading.
Non-Trading Risks
that sensitivity analysis
is an appropriate
We believe
representation of our non-trading risks. The following
sensitivity analyses cover substantially all of the non-trading
risk in our portfolio.
Credit Spread Risk Sensitivity1
$ in millions
Derivatives
Funding liabilities2
At
December 31,
2019
At
December 31,
2018
$
6 $
42
6
34
1. Amounts represent the potential gain for each 1 bps widening of our credit spread.
2. Relates to Borrowings carried at fair value.
Credit spread risk sensitivity for funding liabilities as of
December 31, 2019 has increased compared with December 31,
2018, primarily as a result of new issuances of Borrowings
carried at fair value in the Fixed Income Division of the
Institutional Securities business segment.
U.S. Bank Subsidiaries’ Net Interest Income Sensitivity Analysis
$ in millions
Basis point change
+100
-100
At
December 31,
2019
At
December 31,
2018
$
151 $
(642)
182
(428)
The previous 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 are applied to our 12-month forecast,
which incorporates market expectations of interest rates and our
forecasted business activity.
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, including non-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 market re-pricing behavior
and other factors. The change in sensitivity to interest rates
between December 31, 2019 and December 31, 2018 is
primarily driven by lower market rates and changes in our asset-
liability profile.
Table of Contents
Risk Disclosures
Investments Sensitivity, Including Related Performance Fees
$ in millions
Investments related to Investment
Management activities
Other investments:
MUMSS
Other Firm investments
Loss from 10% Decline
At
December 31,
2019
At
December 31,
2018
$
367 $
169
195
298
165
179
MUMSS—Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
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 is 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-based fees, as applicable.
The change in investments sensitivity related to Investment
Management activities between December 31, 2019 and
December 31, 2018 is primarily driven by higher unrealized
carried interest and investment gains, primarily from an Asia
private equity fund.
Equity Market Sensitivity
In the Wealth Management and Investment Management
business segments, certain fee-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 to institutions and individuals
through our Institutional Securities and Wealth Management
business segments.
We incur credit risk in our Institutional Securities business
segment through a variety of activities, including, but not limited
to, the following:
• extending credit to clients through loans and lending
commitments;
• entering into swap or other derivative contracts under which
counterparties may have obligations to make payments to us;
• providing short- or long-term funding that is secured by
physical or financial collateral whose value may at times be
insufficient to fully cover the repayment amount;
• posting margin and/or collateral to clearinghouses, clearing
agencies, exchanges, banks, securities firms and other
financial counterparties;
• placing funds on deposit at other financial institutions to
support our clearing and settlement obligations; and
• investing or trading in securities and loan pools, whereby the
value of these assets may fluctuate based on realized or
expected defaults on the underlying obligations or loans.
We incur credit risk in our Wealth Management business
segment, primarily through lending to individuals and entities,
including, but not limited to, the following:
• margin loans collateralized by securities;
• securities-based lending and other forms of secured loans,
including tailored lending, to high net worth clients;
• single-family residential mortgage loans in conforming, non-
conforming or HELOC form, primarily to existing Wealth
Management clients; and
• employee loans granted primarily to recruit certain Wealth
Management representatives.
Monitoring and Control
In order to help protect us from losses, the Credit Risk
Management Department (“CRM”) establishes Firmwide
practices to evaluate, monitor and control credit risk at the
transaction, obligor and portfolio levels. CRM approves
extensions of credit, evaluates the creditworthiness of the
counterparties and borrowers on a regular basis, and helps ensure
that credit exposure is actively monitored and managed. The
evaluation of counterparties and borrowers includes an
assessment of the probability that an obligor will default on its
financial obligations and any losses that may occur when an
obligor defaults. In addition, credit risk exposure is actively
managed by credit professionals and committees within CRM
and through various risk committees, whose membership
includes individuals from CRM. A comprehensive and global
Credit Limits Framework is utilized to manage credit risk levels
across the Firm. The Credit Limits Framework is calibrated
within our risk tolerance and includes single-name limits and
portfolio concentration limits by country, industry and product
type.
CRM helps ensure timely and transparent communication of
material credit risks, compliance with established limits and
escalation of risk concentrations
to appropriate senior
management. CRM also works closely with the Market Risk
Department and applicable business units to monitor risk
65
December 2019 Form 10-K
Table of Contents
Risk Disclosures
exposures and to perform stress tests to identify, analyze and
control credit risk concentrations arising from lending and
trading activities. The stress tests shock market factors (e.g.,
interest rates, commodity prices, credit spreads), risk parameters
(e.g., default probabilities and loss given default), recovery rates
and expected losses in order to assess the impact of stresses on
exposures, profit and loss, and our capital position. Stress tests
are conducted in accordance with our established policies and
procedures.
Credit Evaluation
The evaluation of corporate and institutional counterparties and
borrowers includes assigning credit ratings, which reflect an
assessment of an obligor’s probability of default and loss given
default. Credit evaluations typically involve the assessment of
financial statements; leverage; liquidity; capital strength; asset
composition and quality; market capitalization; access to capital
markets; adequacy of collateral, if applicable; and, in the case
of certain loans, cash flow projections and debt service
requirements. CRM also evaluates strategy, market position,
industry dynamics, management and other factors that could
affect the obligor’s risk profile. Additionally, CRM evaluates
the relative position of our exposure in the borrower’s capital
structure and relative recovery prospects, as well as other
structural elements of the particular transaction.
The evaluation of consumer borrowers is tailored to the specific
type of lending. Securities-based loans are evaluated based on
factors that include, but are not limited to, the amount of the
loan and the amount, quality, diversification, price volatility and
liquidity of the collateral. The underwriting of residential real
estate loans includes, but is not limited to, review of the obligor’s
debt-to-income ratio, net worth, liquidity, collateral, loan-to-
value ratio and industry standard credit scoring models (e.g.,
FICO scores). Subsequent credit monitoring for individual loans
is performed at the portfolio level, and collateral values are
monitored on an ongoing basis.
Credit risk metrics assigned to our borrowers during the
evaluation process are incorporated into CRM maintenance of
the allowance for loan losses for loans held for investment. Such
allowance serves as a reserve for probable inherent losses, as
well as probable losses related to loans identified as impaired.
For more information on the allowance for loan losses, see Notes
2 and 8 to the financial statements.
Risk Mitigation
We may seek to mitigate credit risk from our lending and trading
activities in multiple ways, including collateral provisions,
guarantees and hedges. At the transaction level, we seek to
mitigate risk through management of key risk elements such as
size, tenor, financial covenants, seniority and collateral. We
actively hedge our lending and derivatives exposures. Hedging
activities consist of the purchase or sale of positions in related
securities and financial instruments, including a variety of
derivative products (e.g., futures, forwards, swaps, and options).
Additionally, we may sell, assign or syndicate loans and lending
commitments to other financial institutions in the primary and
secondary loan markets.
In connection with our derivatives trading activities, we
generally enter into master netting agreements and collateral
arrangements with counterparties. These agreements provide us
with the ability to demand collateral, as well as to liquidate
collateral and offset receivables and payables covered under the
same master agreement in the event of a counterparty default.
A collateral management group monitors collateral levels
against requirements and oversees the administration of the
collateral function. See Note 7 to the financial statements for
additional information about our collateralized transactions.
Loans and Lending Commitments
$ in millions
Corporate
Consumer
Residential real estate
Commercial real estate
Loans held for investment,
gross of allowance
Allowance for loan losses
Loans held for investment, net
of allowance
Corporate
Residential real estate
Commercial real estate
Loans held for sale
Corporate
Residential real estate
Commercial real estate
Loans held at fair value
Total loans
Lending commitments2
Total loans and lending
commitments2
At December 31, 2019
IS
WM
IM1
Total
$ 30,431 $ 18,320 $
5 $ 48,756
— 31,610
— 30,184
7,859
—
38,290
80,114
(297)
(52)
37,993
80,062
10,515
—
2,049
12,564
7,785
1,192
2,098
11,075
—
13
—
13
—
—
—
—
61,632
80,075
—
—
—
5
—
5
—
—
—
—
251
—
—
251
256
31,610
30,184
7,859
118,409
(349)
118,060
10,515
13
2,049
12,577
8,036
1,192
2,098
11,326
141,963
106,886
13,161
21
120,068
$ 168,518 $ 93,236 $
277 $ 262,031
December 2019 Form 10-K
66
Table of Contents
Risk Disclosures
$ in millions
Corporate
Consumer
Residential real estate
Commercial real estate3
Loans held for investment,
gross of allowance
Allowance for loan losses
Loans held for investment, net
of allowance
Corporate
Residential real estate
Commercial real estate3
Loans held for sale
Corporate
Residential real estate
Commercial real estate3
Loans held at fair value
Total loans
Lending commitments2
Total loans and lending
commitments2
At December 31, 2018
IS
WM
IM1
Total
$ 20,020 $ 16,884 $
5 $ 36,909
— 27,868
— 27,466
7,810
—
27,830
72,218
(193)
(45)
27,637
72,173
13,886
1
1,856
15,743
9,150
1,153
601
10,904
—
21
—
21
—
—
—
—
54,284
72,194
—
—
—
5
—
5
—
—
—
—
21
—
—
21
26
27,868
27,466
7,810
100,053
(238)
99,815
13,886
22
1,856
15,764
9,171
1,153
601
10,925
126,504
loans and
Credit exposure arising from our
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, industry, facility structure,
loan-to-value ratio, debt service ratio, collateral and covenants.
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.
The aggregate allowance for loans and lending commitment
losses increased during 2019, primarily within the Institutional
Securities business segment due
lending
commitment growth, deterioration of select credits and certain
environmental factors. See Notes 8 and 13 to the financial
statements for further information.
loan and
to
Status of Loans Held for Investment
95,065
10,663
— 105,728
$ 149,349 $ 82,857 $
26 $ 232,232
Current
Nonaccrual1
At December 31, 2019
At December 31, 2018
IS
WM
IS
WM
99.0%
1.0%
99.9%
0.1%
99.8%
0.2%
99.9%
0.1%
1. Investment Management business segment loans are related to certain of our activities
as an investment advisor and manager. At December 31, 2019, loans held at fair value
are the result of the consolidation of a CLO, managed by Investment Management,
composed primarily of senior secured corporate loans.
2. Lending commitments represent the notional amount of legally binding obligations to
provide funding to clients for 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.
3. Beginning in 2019, loans previously referred to as Wholesale real estate are referred
to as Commercial real estate.
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. Loans and lending commitments are either
held for investment, held for sale or carried at fair value. For
more information on these loan classifications, see Note 2 to the
financial statements. In 2019, total loans and lending
commitments increased by approximately $30 billion, primarily
in Corporate within the Institutional Securities business segment
due to growth in secured lending facilities and increases in event-
driven lending commitments. Also contributing to the increase
was growth in Consumer securities-based lending, Residential
real estate loans and tailored lending within the Wealth
Management business segment.
See Notes 3, 4, 8 and 13 to the financial statements for further
information.
Allowance for Loans and Lending Commitments Held for
Investment
$ in millions
Loans
Lending commitments
Total allowance for loans and
lending commitments
At
December 31,
2019
At
December 31,
2018
$
$
349 $
241
590 $
238
203
441
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.
Institutional Securities Loans and Lending Commitments1
$ in millions
Loans
AA
A
BBB
NIG
Unrated2
Total loans
Lending commitments
AAA
AA
A
BBB
NIG
Unrated2
Total lending
commitments
At December 31, 2019
Contractual Years to Maturity
Less than 1
1-3
3-5
Over 5
Total
$
7 $
50 $
— $
5 $
62
955
2,297
923
5,589
516
3,592
13,051
16,824
12,047
117
82
131
16,427
23,468
16,286
—
2,838
6,461
7,548
4,657
—
50
908
7,287
13,780
10,351
9
—
2,509
9,371
20,560
15,395
107
277
949
2,592
1,628
5,451
—
—
298
753
3,997
7
2,671
12,427
44,514
1,958
61,632
50
6,255
23,417
42,641
34,400
123
21,504
32,385
47,942
5,055
106,886
Total exposure
$
37,931 $ 55,853 $ 64,228 $10,506 $ 168,518
67
December 2019 Form 10-K
Table of Contents
Risk Disclosures
At December 31, 2018
Contractual Years to Maturity
Less than 1
1-3
3-5
Over 5
Total
$
7 $
430 $
— $
19 $
456
565
3,775
7,151
88
1,580
4,697
12,882
95
858
4,251
9,313
160
11,586
19,684
14,582
90
2,491
2,892
2,993
1,681
8
75
1,177
6,006
—
2,863
9,895
11,825
19,461
10,604
16,075
5,751
—
38
—
267
495
5,889
1,762
8,432
—
—
502
638
3,270
13,218
35,235
2,105
54,284
165
6,531
19,295
34,917
34,111
46
$ in millions
Loans
AA
A
BBB
NIG
Unrated2
Total loans
Lending commitments
AAA
AA
A
BBB
NIG
Unrated2
Total lending
commitments
Total exposure
$
21,741 $ 49,371 $ 62,914 $15,323 $ 149,349
10,155
29,687
48,332
6,891
95,065
collateralized loans and lending commitments generally provide
for overcollateralization. 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 and/or
a decline in the underlying collateral value. The Firm monitors
collateral levels against the requirements of lending agreements.
In addition, we participate in securitization activities whereby
we transfer certain loans, primarily Commercial real estate, to
an SPE, which in turn securitizes the loans. See Note 14 to the
financial statements for information about our securitization
activities.
Institutional Securities Corporate Loans1
$ in millions
Corporate relationship and
event-driven lending2
Secured lending facilities3
Securities-based lending and other4
Total Corporate
At
December 31,
2019
At
December 31,
2018
$
$
11,638 $
29,654
7,439
48,731 $
13,317
21,408
8,331
43,056
NIG–Non-investment grade
1. Counterparty credit ratings are internally determined by CRM.
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 Risk
—Market Risk” herein.
Institutional Securities Loans and Lending Commitments by
Industry
1. Amounts include loans held for investment, gross of allowance, loans held for sale
and loans measured at fair value. Loans at fair value are included in Trading assets
in the balance sheets.
2. Relationship and event-driven loans typically consist of revolving lines of credit, term
loans and bridge loans. For additional information on event-driven loans, see
“Institutional Securities Event-Driven Loans and Lending Commitments” herein.
3. Secured lending facilities includes loans provided to clients to warehouse loans
secured by underlying real estate and other assets.
4. Securities-based lending and other includes financing extended to sales and trading
customers and corporate loans purchased in the secondary market.
$ in millions
Financials
Real estate
Healthcare
Industrials
Communications services
Utilities
Consumer staples
Consumer discretionary
Energy
Information technology
Materials
Insurance
Other
Total
At
December 31,
2019
At
December 31,
2018
Institutional Securities Event-Driven Loans and Lending
Commitments
$
40,992 $
28,348
14,113
13,136
12,165
9,905
9,724
9,589
9,461
9,201
5,577
3,755
2,552
32,655
24,133
10,158
13,701
11,244
9,856
7,921
8,314
9,847
9,896
5,969
3,744
1,911
$
168,518 $
149,349
At December 31, 2019
Contractual Years to Maturity
$ in millions
Loans
Lending commitments
Total loans and lending
commitments
Less than 1
1-3
3-5
Over 5
Total
$
$
1,194 $ 1,024 $
839 $
390 $ 3,447
7,921
5,012
2,285
3,090
18,308
9,115 $ 6,036 $ 3,124 $ 3,480 $21,755
At December 31, 2018
Contractual Years to Maturity
$ in millions
Loans
Lending commitments
Total loans and lending
commitments
Less than 1
1-3
3-5
Over 5
Total
$
$
2,582 $
287 $
656 $ 1,618 $ 5,143
1,506
2,456
2,877
3,658
10,497
4,088 $ 2,743 $ 3,533 $ 5,276 $15,640
The principal Institutional Securities business segment lending
activities include Corporate and Commercial real estate loans.
Our 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.
Event-driven loans and lending commitments, which comprise
a portion of corporate loans and lending commitments, are
associated with a particular event or transaction, such as to
support client merger, acquisition, recapitalization or project
finance activities. Balances may fluctuate as such lending is
related to transactions that vary in timing and size from period
to period.
We also extend short- and long-term secured lending facilities
with various types of collateral, including residential real estate,
commercial real estate, corporate and financial assets. These
December 2019 Form 10-K
68
Table of Contents
Risk Disclosures
Wealth Management Loans and Lending Commitments
At December 31, 2019
Contractual Years to Maturity
$ in millions
Less than 1
1-3
3-5
Over 5
Total
In 2019, Loans and Lending commitments associated with the
increased by
Wealth Management business
approximately 13%, primarily due to growth in Securities-based
lending, Residential real estate loans, and tailored lending.
segment
Securities-based lending
and other loans
Residential real estate
loans
Total loans
$
41,863 $ 3,972 $ 2,783 $ 1,284 $49,902
Customer and Other Receivables
13
11
— 30,149
30,173
Margin Loans
$
41,876 $ 3,983 $ 2,783 $31,433 $80,075
Lending commitments
10,219
2,564
71
307
13,161
Total loans and lending
commitments
$
52,095 $ 6,547 $ 2,854 $31,740 $93,236
$ in millions
Customer receivables representing margin
loans
$ 22,216 $ 9,700 $ 31,916
At December 31, 2019
IS
WM
Total
At December 31, 2018
Contractual Years to Maturity
$ in millions
At December 31, 2018
IS
WM
Total
$ in millions
Less than 1
1-3
3-5
Over 5
Total
Securities-based lending
and other loans
Residential real estate
loans
Total loans
$
38,144 $ 3,573 $ 2,004 $ 1,006 $44,727
—
30
1
27,436
27,467
$
38,144 $ 3,603 $ 2,005 $28,442 $72,194
Lending commitments
9,197
1,151
42
273
10,663
Total loans and lending
commitments
$
47,341 $ 4,754 $ 2,047 $28,715 $82,857
The principal Wealth Management business segment lending
activities include securities-based lending and residential real
estate loans.
Securities-based lending allows clients to borrow money against
the value of qualifying securities, generally for any purpose
other than purchasing securities. We establish approved credit
lines against qualifying securities and monitor limits daily and,
pursuant to such guidelines, require customers to deposit
additional collateral, or reduce debt positions, when necessary.
These credit lines are primarily uncommitted loan facilities, as
we reserve the right to not make any advances or may terminate
these credit lines at any time. Factors considered in the review
of these loans include, but are not limited to, the loan amount,
the client’s credit profile, the degree of leverage, collateral
diversification, price volatility and liquidity of the collateral.
Residential real estate loans consist of first and second lien
mortgages, including HELOCs. Our underwriting policy is
designed to ensure that all borrowers pass an assessment of
capacity and willingness to pay, which includes an analysis
utilizing industry standard credit scoring models (e.g., FICO
scores), debt-to-income ratios and assets of the borrower. Loan-
to-value ratios are determined based on independent third-party
property appraisals and valuations, and security lien positions
are established through title and ownership reports. The vast
majority of mortgage loans, including HELOCs, are held for
investment in the Wealth Management business segment’s loan
portfolio.
Customer receivables representing margin
loans
$ 14,842 $ 11,383 $ 26,225
The Institutional Securities and Wealth Management business
segments provide margin lending arrangements, which allow
customers 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.
Amounts may fluctuate from period to period as overall client
balances change as a result of market levels, client positioning
and leverage.
Employee Loans
$ in millions
Balance
Allowance for loan losses
Balance, net
Remaining repayment term, weighted
average in years
At
December 31,
2019
At
December 31,
2018
$
$
2,980 $
(61)
2,919 $
4.8
3,415
(63)
3,352
4.3
In 2019, the balance of employee loans decreased as a result of
the roll-off of certain acquisition-related employee retention
loans and repayments, partially offset by new note issuances.
Employee loans are granted in conjunction with a program
established primarily to recruit certain Wealth Management
representatives, are full recourse and generally require periodic
repayments. We establish an allowance for loan amounts we do
not consider recoverable, and the related provision is recorded
in Compensation and benefits expense.
69
December 2019 Form 10-K
Table of Contents
Risk Disclosures
Derivatives
Fair Value of OTC Derivative Assets
Counterparty Credit Rating1
$ in millions
AAA
AA
A
BBB
NIG
Total
At December 31, 2019
<1 year
1-3 years
3-5 years
Over 5 years
Total, gross
$
371 $
9,195 $ 31,789 $ 22,757 $
6,328 $ 70,440
378
502
5,150
4,448
17,707
11,495
9,903
6,881
9,016
3,421
43,746
25,155
3,689
24,675
70,765
40,542
14,587
154,258
$
4,940 $ 43,468 $ 130,164 $ 81,675 $ 33,352 $ 293,599
Counterparty netting
(2,172)
(33,521)
(103,452)
(62,345)
(19,514)
(221,004)
Cash and securities
collateral
(2,641)
(8,134)
(22,319)
(14,570)
(10,475)
(58,139)
Total, net
$
127 $
1,813 $
4,393 $
4,760 $
3,363 $ 14,456
Counterparty Credit Rating1
$ in millions
AAA
AA
A
BBB
NIG
Total
At December 31, 2018
<1 year
1-3 years
3-5 years
Over 5 years
Total, gross
$
878 $
7,430 $ 38,718 $ 15,009 $
7,183 $ 69,218
664
621
3,535
2,362
2,096
9,725
22,239
10,255
11,673
6,014
7,097
2,751
42,617
23,155
67,166
36,087
11,112
127,625
$
5,698 $ 21,613 $ 139,796 $ 67,365 $ 28,143 $ 262,615
Counterparty netting
(2,325)
(13,771)
(113,045)
(49,658)
(16,681)
(195,480)
Cash and securities
collateral
(3,214)
(5,766)
(21,931)
(12,702)
(8,269)
(51,882)
Total, net
$
159 $
2,076 $
4,820 $
5,005 $
3,193 $ 15,253
$ in millions
Industry
Utilities
Financials
Healthcare
Industrials
Regional governments
Information technology
Not-for-profit organizations
Energy
Sovereign governments
Communications services
Consumer discretionary
Materials
Real estate
Insurance
Consumer staples
Other
Total
At
December 31,
2019
At
December 31,
2018
$
4,275 $
3,448
991
914
791
659
657
524
403
381
370
325
315
214
129
60
4,324
4,480
787
1,335
779
695
583
199
385
373
188
275
283
235
216
116
$
14,456 $
15,253
1. Counterparty credit ratings are determined internally by CRM.
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. For a description of our risk mitigation strategies,
see “Credit Risk—Risk Mitigation” herein.
December 2019 Form 10-K
70
Credit Derivatives
A credit derivative is a contract between a seller and buyer of
protection against the risk of a credit event occurring on one or
more debt obligations issued by a specified reference entity. The
buyer typically pays a periodic premium over the life of the
contract and is protected for the period. If a credit event occurs,
the seller is required to make payment to the beneficiary based
on the terms of the credit derivative contract. Credit events, as
defined in the contract, may be one or more of the following
defined events: bankruptcy, dissolution or insolvency of the
referenced entity, failure to pay, obligation acceleration,
repudiation, payment moratorium and restructuring.
We trade in a variety of credit derivatives and may either
purchase or write protection on a single name or portfolio of
referenced entities. In transactions referencing a portfolio of
entities or securities, protection may be limited to a tranche of
exposure or a single name within the portfolio. We are an active
market maker in the credit derivatives markets. As a market
maker, we work to earn a bid-offer spread on client flow business
and manage any residual credit or correlation risk on a portfolio
basis. Further, we use credit derivatives to manage our exposure
to residential and commercial mortgage loans and corporate
lending exposures. The effectiveness of our CDS protection as
a hedge of our exposures may vary depending upon a number
of factors, including the contractual terms of the CDS.
We actively monitor our counterparty credit risk related to credit
derivatives. A majority of our counterparties are composed of
banks, broker-dealers, insurance and other financial institutions.
Contracts with these counterparties may include provisions
related to counterparty rating downgrades, which may result in
the counterparty posting additional collateral to us. As with all
derivative contracts, we consider counterparty credit risk in the
valuation of our positions and recognize CVAs as appropriate
within Trading revenues in the income statements.
For additional credit exposure information on our credit
derivative portfolio, see Note 5 to the financial statements.
Country Risk
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.
Our obligor credit evaluation process may also identify indirect
exposures, whereby an obligor has vulnerability or exposure to
another country or jurisdiction. Examples of indirect exposures
include mutual funds that invest in a single country, offshore
companies whose assets reside in another country to that of the
offshore jurisdiction and finance company subsidiaries of
corporations. Indirect exposures identified through the credit
Table of Contents
Risk Disclosures
evaluation process may result in a reclassification of country
risk.
We conduct periodic stress testing that seeks to measure the
impact on our credit and market exposures of shocks stemming
from negative economic or political scenarios. When deemed
appropriate by our risk managers, the stress test scenarios
include possible contagion effects and second order risks. This
analysis, and results of the stress tests, may result in the
amendment of limits or exposure mitigation.
Our sovereign exposures consist of financial contracts and
obligations entered into with sovereign and local governments.
Our non-sovereign exposures consist of financial contracts and
obligations entered into primarily with corporations and
financial institutions. Index credit derivatives are included in
the following 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 or
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 row based on the country of
the CDS issuer. Further, the notional amount of the CDS adjusted
for the fair value of the receivable or payable is reflected in the
Net Inventory row based on the country of the underlying
reference entity.
Top 10 Non-U.S. Country Exposures at December 31, 2019
United Kingdom
$ in millions
Net inventory1
Net counterparty exposure2
Loans
Lending commitments
Exposure before hedges
Hedges3
Net exposure
Japan
$ in millions
Net inventory1
Net counterparty exposure2
Loans
Lending commitments
Exposure before hedges
Hedges3
Net exposure
Sovereigns Non-sovereigns
Total
$
(1,106) $
1,958 $
852
—
—
—
(1,106)
(312)
10,583
10,583
2,845
5,452
2,845
5,452
20,838
19,732
(1,350)
(1,662)
$
(1,418) $
19,488 $ 18,070
Sovereigns Non-sovereigns
Total
$
2,175 $
776 $
2,951
26
—
—
2,201
(93)
3,657
3,683
730
2
730
2
5,165
7,366
(131)
(224)
$
2,108 $
5,034 $
7,142
Germany
$ in millions
Net inventory1
Net counterparty exposure2
Loans
Lending commitments
Exposure before hedges
Hedges3
Net exposure
Spain
$ in millions
Net inventory1
Net counterparty exposure2
Loans
Lending commitments
Exposure before hedges
Hedges3
Net exposure
China
$ in millions
Net inventory1
Net counterparty exposure2
Loans
Lending commitments
Exposure before hedges
Hedges3
Net exposure
France
$ in millions
Net inventory1
Net counterparty exposure2
Loans
Lending commitments
Exposure before hedges
Hedges3
Net exposure
Canada
$ in millions
Net inventory1
Net counterparty exposure2
Loans
Lending commitments
Exposure before hedges
Hedges3
Net exposure
Sovereigns Non-sovereigns
Total
$
(352) $
228 $
(124)
100
—
—
(252)
(230)
2,383
1,610
3,685
7,906
2,483
1,610
3,685
7,654
(869)
(1,099)
$
(482) $
7,037 $
6,555
Sovereigns Non-sovereigns
Total
$
182 $
—
—
—
182
—
(80) $
270
102
270
3,828
3,828
745
745
4,763
4,945
(137)
(137)
$
182 $
4,626 $
4,808
Sovereigns Non-sovereigns
Total
$
(637) $
1,007 $
47
—
—
(590)
(82)
370
247
1,950
1,716
4,283
200
1,950
1,716
4,873
(80)
(162)
$
(672) $
4,793 $
4,121
Sovereigns Non-sovereigns
Total
$
(1,720) $
181 $ (1,539)
—
—
—
(1,720)
(6)
2,070
2,070
620
3,375
6,246
620
3,375
4,526
(600)
(606)
$
(1,726) $
5,646 $
3,920
Sovereigns Non-sovereigns
Total
$
(490) $
236 $
(254)
109
—
—
(381)
—
2,000
2,109
182
1,439
3,857
182
1,439
3,476
(152)
(152)
$
(381) $
3,705 $
3,324
71
December 2019 Form 10-K
Table of Contents
Risk Disclosures
Netherlands
$ in millions
Net inventory1
Net counterparty exposure2
Loans
Lending commitments
Exposure before hedges
Hedges3
Net exposure
Australia
$ in millions
Net inventory1
Net counterparty exposure2
Loans
Lending commitments
Exposure before hedges
Hedges3
Net exposure
India
$ in millions
Net inventory1
Net counterparty exposure2
Loans
Sovereigns Non-sovereigns
Total
$
46 $
545 $
—
—
—
46
748
946
1,103
3,342
591
748
946
1,103
3,388
(32)
14 $
$
(158)
(190)
3,184 $
3,198
Sovereigns Non-sovereigns
Total
$
761 $
293 $
1,054
17
—
—
778
—
632
291
978
649
291
978
2,194
2,972
(103)
(103)
$
778 $
2,091 $
2,869
Sovereigns Non-sovereigns
Total
$
1,273 $
556 $
1,829
—
—
518
247
518
247
Exposure before hedges
1,273
1,321
2,594
Net exposure
$
1,273 $
1,321 $
2,594
1. 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 the fair value of any receivable or payable).
2. Net counterparty exposure (e.g., repurchase transactions, securities lending and OTC
derivatives) is net of the benefit of collateral received and also is net by counterparty
when legally enforceable master netting agreements are in place. For more
information, see “Additional Information—Top 10 Non-U.S. Country Exposures”
herein.
3. Amounts represent net CDS hedges (purchased and sold) on net counterparty
exposure and lending executed by trading desks responsible for hedging counterparty
and lending credit risk exposures. Amounts are based on the CDS notional amount
assuming zero recovery adjusted for any fair value receivable or payable. For further
description of the contractual terms for purchased credit protection and whether they
may limit the effectiveness of our hedges, see “Quantitative and Qualitative
Disclosures about Risk—Credit Risk—Derivatives" herein.
Additional Information—Top 10 Non-U.S. Country
Exposures
Collateral Held against Net Counterparty Exposure1
$ in millions
Counterparty credit exposure
Collateral2
At
December 31,
2019
Germany
United Kingdom
Other
Italy and Germany
$
U.K., U.S. and Spain
Japan, U.S. and France
11,478
9,374
17,312
1. The benefit of collateral received is reflected in the Top 10 Non-U.S. Country Exposures
at December 31, 2019.
2. Collateral primarily consists of cash and government obligations.
December 2019 Form 10-K
72
Country Risk Exposures Related to the U.K.
At December 31, 2019, our country risk exposures in the U.K.
included net exposures of $18,070 million (as shown in the Top
10 Non-U.S. Country Exposures table) and overnight deposits
of $6,378 million. The $19,488 million of exposures to non-
sovereigns were diversified across both names and sectors and
include $6,804 million to U.K.-focused counterparties that
generate more than one-third of their revenues in the U.K.,
$4,817 million to geographically diversified counterparties, and
$5,946 million to exchanges and clearinghouses.
In addition to our country risk exposure, we disclose our cross-
in “Financial Statements and
border
Supplement
Data
Supplementary
(Unaudited).”
Data—Financial
risk exposure
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).
We have established an operational risk framework to identify,
measure, monitor and control risk across the Firm. Effective
operational risk management is essential to reducing the impact
of operational risk incidents and mitigating legal, regulatory and
reputational risks. The framework is continually evolving to
account for changes in the Firm and to respond to the changing
regulatory and business environment.
We have implemented operational risk data and assessment
systems to monitor and analyze internal and external operational
risk events, to assess business environment and internal control
factors, and to perform scenario analysis. The collected data
elements are incorporated in the operational risk capital model.
The model encompasses both quantitative and qualitative
elements. Internal loss data and scenario analysis results are
direct inputs to the capital model, while external operational
incidents, business environment and internal control factors are
evaluated as part of the scenario analysis process.
In addition, we employ a variety of risk processes and mitigants
to manage our operational risk exposures. These include a
governance framework, a comprehensive risk management
program and insurance. Operational risks and associated risk
exposures are assessed relative to the risk tolerance reviewed
and confirmed by the Board and are prioritized accordingly.
The breadth and range of operational risk are such that the types
of mitigating activities are wide-ranging. Examples of activities
include: continuous enhancement of defenses against cyber
Table of Contents
Risk Disclosures
limit operational
attacks; use of legal agreements and contracts to transfer and/
risk exposures; due diligence;
or
implementation of enhanced policies and procedures;
technology
exception
management processing controls; and segregation of duties.
change management
controls;
Primary responsibility for the management of operational risk
is with the business segments, the control groups and the
business managers therein. The business managers maintain
processes and controls designed to identify, assess, manage,
mitigate and report operational risk. Each of the business
segments has a designated operational risk coordinator. The
operational risk coordinator regularly reviews operational risk
issues and reports to our senior management within each
business. Each control group also has a designated operational
risk coordinator and a forum for discussing operational risk
matters with our senior management. Oversight of operational
risk is provided by the Operational Risk Oversight Committee,
legal entity risk committees, regional risk committees and senior
management. In the event of a merger; joint venture; divestiture;
reorganization; or creation of a new legal entity, a new product,
or a business activity, operational risks are considered, and any
necessary changes in processes or controls are implemented.
The Operational Risk Department provides independent
oversight of operational risk and assesses, measures and
monitors operational risk against tolerance. The Operational
Risk Department works with the divisions and control groups
to help ensure a transparent, consistent and comprehensive
framework for managing operational risk within each area and
across the Firm.
The Operational Risk Department scope includes oversight of
technology risk, cybersecurity risk, information security risk,
the fraud risk management and prevention program, and third-
party risk management (supplier and affiliate risk oversight and
assessment).
Cybersecurity
security
cybersecurity
Our
policies,
and information
procedures, and technologies are designed to protect our own,
our client and our employee data against unauthorized
disclosure, modification or misuse and are also designed to
address regulatory requirements. These policies and procedures
cover a broad range of areas, including: identification of internal
and external threats, access control, data security, protective
controls, detection of malicious or unauthorized activity,
incident response and recovery planning.
Business Continuity Management and Disaster Recovery
operations, technology, suppliers and/or facilities. The business
continuity management program’s core functions are business
continuity planning and crisis management. As part of business
continuity planning, our business units maintain business
continuity plans, identifying processes and strategies to continue
business-critical processes during a business continuity event.
Crisis management is the process of identifying and managing
our operations during business continuity events. Disaster
recovery plans supporting business continuity are in place for
critical technology assets and systems across the Firm.
Third Party Risk Management
In connection with our ongoing operations, we utilize the
services of third party suppliers, which we anticipate will
continue and may increase in the future. These services include,
for example, outsourced processing and support functions and
other professional services. Our risk-based approach
to
managing exposure to these services includes the performance
of due diligence, implementation of service level and other
contractual agreements, consideration of operational risks and
ongoing monitoring of third-party suppliers’ performance. We
maintain and continue to enhance our third-party risk
management program which includes appropriate governance,
policies, procedures and technology that supports alignment
with our risk tolerance and is designed to meet regulatory
third-party risk management program
requirements. The
includes the adoption of appropriate risk management controls
and practices through the supplier management life cycle,
including, but not limited to, assessment of information security,
service failure, financial stability, disaster recoverability,
reputational risk, contractual risk and safeguards against
corruption.
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 our 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 strategy.
Sound model risk management is an integral part of our Risk
Management Framework. The Model Risk Management
Department (“MRM”) is a distinct department in Risk
Management responsible for the oversight of model risk.
We maintain global programs for business continuity
management and technology disaster recovery that facilitate
activities designed to mitigate our risk during a business
continuity event. A business continuity event is an interruption
with potential impact to normal business activity of our people,
MRM establishes a model risk tolerance in line with our risk
appetite. The tolerance is based on an assessment of the
materiality of the risk of financial loss or reputational damage
due to errors in design, implementation and/or inappropriate use
of models. The tolerance is monitored through model-specific
73
December 2019 Form 10-K
funding risk across the Firm. See also “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital 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 AML, terrorist
financing, and anti-corruption rules and regulations. We are
generally subject to extensive regulation in the different
jurisdictions in which we conduct our business (see also
“Business—Supervision and Regulation” and “Risk Factors”).
statutory and
We have established procedures based on legal and regulatory
requirements on a worldwide basis that are designed to facilitate
regulatory
compliance with applicable
requirements and to require that our policies relating to business
conduct, ethics and practices are followed globally. In addition,
we have established procedures to mitigate the risk that a
counterparty’s performance obligations will be unenforceable,
including consideration of counterparty legal authority and
capacity, adequacy of legal documentation, the permissibility
of a transaction under applicable law and whether applicable
bankruptcy or insolvency laws limit or alter contractual
remedies. The heightened legal and regulatory focus on the
financial services and banking industries globally presents a
continuing business challenge for us.
Table of Contents
Risk Disclosures
and aggregate business-level assessments, which are based upon
qualitative and quantitative factors.
A guiding principle for managing model risk is the “effective
challenge” of models. The effective challenge of models is
defined as critical analysis by objective, informed parties who
can identify model limitations and assumptions and drive
appropriate changes. MRM provides effective challenge of
models, independently validates and approves models for use,
annually recertifies models, identifies and tracks remediation
plans for model limitations and reports on model risk metrics.
The department also oversees the development of controls to
support a complete and accurate Firmwide model inventory.
Liquidity Risk
Liquidity risk refers to the risk that we will be unable to finance
our operations due to a loss of access to the capital markets or
difficulty in liquidating our assets. Liquidity risk also
encompasses our ability (or perceived ability) to meet our
financial obligations without experiencing significant business
disruption or reputational damage that may threaten our viability
as a going concern. Liquidity risk also encompasses the
associated funding risks triggered by the market or idiosyncratic
stress events that may negatively affect our liquidity and may
impact our ability to raise new funding. Generally, we incur
liquidity and funding risk as a result of our trading, lending,
investing and client facilitation activities.
Our Liquidity Risk Management Framework is critical to
helping ensure that we maintain sufficient liquidity reserves and
durable funding sources to meet our daily obligations and to
withstand unanticipated stress events. The Liquidity Risk
Department is a distinct area in Risk Management responsible
for the oversight and monitoring of liquidity risk. The Liquidity
Risk Department ensures transparency of material liquidity and
funding risks, compliance with established risk limits and
escalation of risk concentrations
to appropriate senior
management.
To execute these responsibilities, the Liquidity Risk Department
establishes limits in line with our risk appetite, identifies and
analyzes emerging liquidity and funding risks to ensure such
risks are appropriately mitigated, monitors and reports risk
exposures against metrics and limits, and reviews the
methodologies and assumptions underpinning our Liquidity
Stress Tests to ensure sufficient liquidity and funding under a
range of adverse scenarios.
responsibility
The Treasury Department and applicable business units have
primary
for evaluating, monitoring and
controlling the liquidity and funding risks arising from our
business activities and for maintaining processes and controls
to manage the key risks inherent in their respective areas. The
Liquidity Risk Department coordinates with the Treasury
Department and these business units to help ensure a consistent
and comprehensive framework for managing liquidity and
December 2019 Form 10-K
74
Table of Contents
Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Morgan Stanley:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets
of Morgan Stanley and subsidiaries (the “Firm”) as of December
31, 2019 and 2018, the related consolidated income statements,
comprehensive income statements, cash flow statements and
statements of changes in total equity for each of the three years
ended December 31, 2019, 2018, and 2017, and the related notes
(collectively referred to as the “financial statements”). In our
opinion, the financial statements present fairly, in all material
respects, the financial position of the Firm as of December 31,
2019 and 2018, and the results of its operations and its cash
flows for each of the three years ended December 31, 2019,
2018, and 2017, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States)
(PCAOB), the Firm’s internal control over financial reporting
as of December 31, 2019, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 27, 2020, expressed
an unqualified opinion on the Firm’s internal control over
financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Firm’s
management. Our responsibility is to express an opinion on the
Firm’s financial statements based on our audits. 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 audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our
audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising
from the current-period audit of the financial statements that
was communicated or required to be communicated to the audit
committee and that (1) relates to accounts or disclosures that are
material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any
way our opinion on the financial statements, taken as a whole,
and we are not, by communicating the critical audit matter
below, providing a separate opinion on the critical audit matter
or on the accounts or disclosures to which it relates.
Valuation of Level 3 Financial Assets and Liabilities Carried
at Fair Value - Refer to Note 3 to the financial statements
Critical Audit Matter Description
The Firm’s trading and financing activities result in the Firm
carrying material financial instruments having limited price
transparency. These financial instruments can span a broad array
of product types and generally include derivative, security and
lending positions, as well as borrowings carried at fair value.
These financial instruments are generally classified as Level 3
financial assets or liabilities in conformity with accounting
principles generally accepted in the United States of America.
therefore more easily
Unlike financial instruments whose values or inputs are readily
observable and
independently
corroborated, the valuation of financial instruments classified
as Level 3 is inherently subjective, and often involves the use of
proprietary valuation models whose underlying algorithms and
valuation methodologies are complex.
75
December 2019 Form 10-K
Table of Contents
Given the Firm uses complex valuation models and model inputs
that are not observable in the marketplace to determine the fair
value of Level 3 financial assets and liabilities carried at fair
value, performing audit procedures
the
appropriateness of these models and inputs involved a high
degree of auditor judgment, specialized skills, and an increased
extent of testing.
to evaluate
How the Critical Audit Matter Was Addressed in the Audit
• We
• We tested the design and operating effectiveness of the Firm’s
valuation controls, including model review and price
verification for the appropriateness of valuation methodology
including inputs and assumptions used.
independently evaluated
the appropriateness of
management’s
valuation methodologies,
including the input assumptions, considering the expected
assumptions of other market participants, and external data,
when available.
significant
• We developed independent valuation estimates for certain
financial instrument selections, using externally sourced
inputs and independent valuation models, and used such
estimates to further evaluate management’s fair value
measurement by investigating the differences exceeding
established thresholds between our estimate and that of the
Firm, including; comparing the fair value estimate with
similar transactions; and, evaluating the Firm’s assumptions
inclusive of the inputs.
• We tested the revenues arising from the valuation estimate on
trade date for certain structured transactions involving Level
3 financial instruments. In performing such procedures, we
also developed independent valuation estimates for certain
structured transaction selections, as well as tested the
valuation assumptions and methodologies used by the
Company. Those procedures also included evaluating
whether the methods were consistent with relevant Company
valuation policies and agreeing relevant cash flows to
underlying support.
• We assessed the consistency by which management has
applied significant and unobservable valuation assumptions.
• We performed a retrospective assessment of management’s
valuation estimates for a sample of financial instrument
selections by comparing such estimates
to relevant
transactions.
/s/ Deloitte & Touche LLP
New York, New York
February 27, 2020
We have served as the Firm’s auditor since 1997.
December 2019 Form 10-K
76
Table of Contents
Consolidated Income Statements
in millions, except per share data
Revenues
Investment banking
Trading
Investments
Commissions and fees
Asset management
Other
Total non-interest revenues
Interest income
Interest expense
Net interest
Net revenues
Non-interest expenses
Compensation and benefits
Occupancy and equipment
Brokerage, clearing and exchange fees
Information processing and communications
Marketing and business development
Professional services
Other
Total non-interest expenses
Income from continuing operations before income taxes
Provision for income taxes
Income from continuing operations
Income (loss) from discontinued operations, net of income taxes
Net income
Net income applicable to noncontrolling interests
Net income applicable to Morgan Stanley
Preferred stock dividends and other
Earnings applicable to Morgan Stanley common shareholders
Earnings per basic common share
Income from continuing operations
Income (loss) from discontinued operations
Earnings per basic common share
Earnings per diluted common share
Income from continuing operations
Income (loss) from discontinued operations
Earnings per diluted common share
Average common shares outstanding
Basic
Diluted
2019
2018
2017
$
6,163 $
6,482 $
11,095
1,540
3,919
13,083
925
36,725
17,098
12,404
4,694
41,419
11,551
437
4,190
12,898
743
36,301
13,892
10,086
3,806
40,107
6,003
11,116
820
4,061
11,797
848
34,645
8,997
5,697
3,300
37,945
18,837
17,632
17,166
1,428
2,493
2,194
660
2,137
2,369
30,118
11,301
2,064
9,237
—
1,391
2,393
2,016
691
2,265
2,482
28,870
11,237
2,350
8,887
(4)
9,237 $
8,883 $
195
135
9,042 $
8,748 $
530
526
8,512 $
8,222 $
5.26 $
—
5.26 $
5.19 $
—
5.19 $
4.81 $
—
4.81 $
4.73 $
—
4.73 $
1,329
2,093
1,791
609
2,169
2,385
27,542
10,403
4,168
6,235
(19)
6,216
105
6,111
523
5,588
3.15
(0.01)
3.14
3.08
(0.01)
3.07
1,617
1,640
1,708
1,738
1,780
1,821
$
$
$
$
$
$
$
See Notes to Consolidated Financial Statements
77
December 2019 Form 10-K
Table of Contents
Consolidated Comprehensive Income Statements
$ in millions
Net income
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments
Change in net unrealized gains (losses) on available-for-sale securities
Pension, postretirement and other
Change in net debt valuation adjustment
Total other comprehensive income (loss)
Comprehensive income
Net income applicable to noncontrolling interests
Other comprehensive income (loss) applicable to noncontrolling interests
Comprehensive income applicable to Morgan Stanley
2019
2018
2017
9,237 $
8,883 $
6,216
3 $
(90) $
1,137
(66)
(1,639)
(565) $
8,672 $
195
(69)
(272)
137
1,517
1,292 $
10,175 $
135
87
8,546 $
9,953 $
251
41
(117)
(588)
(413)
5,803
105
4
5,694
$
$
$
$
$
December 2019 Form 10-K
78
See Notes to Consolidated Financial Statements
Table of Contents
Consolidated Balance Sheets
$ in millions, except share data
Assets
Cash and cash equivalents:
Cash and due from banks
Interest bearing deposits with banks
Restricted cash
Trading assets at fair value ($128,386 and $120,437 were pledged to various parties)
Investment securities (includes $62,223 and $61,061 at fair value)
Securities purchased under agreements to resell (includes $4 and $— at fair value)
Securities borrowed
Customer and other receivables
Loans:
Held for investment (net of allowance of $349 and $238)
Held for sale
Goodwill
Intangible assets (net of accumulated amortization of $3,204 and $2,877)
Other assets
Total assets
Liabilities
Deposits (includes $2,099 and $442 at fair value)
Trading liabilities at fair value
Securities sold under agreements to repurchase (includes $733 and $812 at fair value)
Securities loaned
Other secured financings (includes $7,809 and $5,245 at fair value)
Customer and other payables
Other liabilities and accrued expenses
Borrowings (includes $64,461 and $51,184 at fair value)
Total liabilities
Commitments and contingent liabilities (see Note 13)
Equity
Morgan Stanley shareholders’ equity:
Preferred stock
Common stock, $0.01 par value:
Shares authorized: 3,500,000,000; Shares issued: 2,038,893,979; Shares outstanding: 1,593,973,680 and
1,699,828,943
Additional paid-in capital
Retained earnings
Employee stock trusts
Accumulated other comprehensive income (loss)
Common stock held in treasury at cost, $0.01 par value (444,920,299 and 339,065,036 shares)
Common stock issued to employee stock trusts
Total Morgan Stanley shareholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
At
December 31,
2019
At
December 31,
2018
$
4,293 $
45,366
32,512
297,110
105,725
88,224
106,549
55,646
118,060
12,577
7,143
2,107
20,117
895,429 $
190,356 $
133,356
54,200
8,506
14,698
197,834
21,155
192,627
812,732
$
$
30,541
21,299
35,356
266,299
91,832
98,522
116,313
53,298
99,815
15,764
6,688
2,163
15,641
853,531
187,820
126,747
49,759
11,908
9,466
179,559
17,204
189,662
772,125
8,520
8,520
20
23,935
70,589
2,918
(2,788)
(18,727)
(2,918)
81,549
1,148
82,697
20
23,794
64,175
2,836
(2,292)
(13,971)
(2,836)
80,246
1,160
81,406
$
895,429 $
853,531
See Notes to Consolidated Financial Statements
79
December 2019 Form 10-K
Table of Contents
Consolidated Statements of Changes in Total Equity
$ in millions
Preferred Stock
Beginning Balance
Issuance of preferred stock
Redemption of preferred stock1
Ending balance
Common Stock
Beginning and ending balance
Additional Paid-in Capital
Beginning balance
Cumulative adjustments for accounting changes2
Share-based award activity
Issuance of preferred stock
Other net increases (decreases)
Ending balance
Retained Earnings
Beginning balance
Cumulative adjustments for accounting changes2
Net income applicable to Morgan Stanley
Preferred stock dividends3
Common stock dividends3
Other net increases (decreases)
Ending balance
Employee Stock Trusts
Beginning balance
Share-based award activity
Ending balance
Accumulated Other Comprehensive Income (Loss)
Beginning balance
Cumulative adjustments for accounting changes2
Net change in Accumulated other comprehensive income (loss)
Ending balance
Common Stock Held In Treasury at Cost
Beginning balance
Share-based award activity
Repurchases of common stock and employee tax withholdings
Ending balance
Common Stock Issued to Employee Stock Trusts
Beginning balance
Share-based award activity
Ending balance
Noncontrolling Interests
Beginning balance
Net income applicable to noncontrolling interests
Net change in Accumulated other comprehensive income (loss)
Other net increases (decreases)
Ending balance
Total Equity
2019
2018
2017
$
8,520 $
8,520 $
500
(500)
8,520
—
—
8,520
7,520
1,000
—
8,520
20
20
20
23,794
23,545
23,271
—
131
(3)
13
—
249
—
—
45
306
(6)
(71)
23,935
23,794
23,545
64,175
63
9,042
(524)
(2,161)
(6)
70,589
2,836
82
2,918
(2,292)
—
(496)
(2,788)
(13,971)
1,198
(5,954)
(18,727)
(2,836)
(82)
(2,918)
1,160
195
(69)
(138)
1,148
57,577
306
8,748
(526)
(1,930)
—
64,175
2,907
(71)
2,836
(3,060)
(437)
1,205
(2,292)
(9,211)
806
(5,566)
(13,971)
(2,907)
71
(2,836)
1,075
135
87
(137)
1,160
$
82,697 $
81,406 $
53,679
(35)
6,111
(523)
(1,655)
—
57,577
2,851
56
2,907
(2,643)
—
(417)
(3,060)
(5,797)
878
(4,292)
(9,211)
(2,851)
(56)
(2,907)
1,127
105
4
(161)
1,075
78,466
1. See Note 16 for information regarding the notice of redemption and reclassification of Series G Preferred Stock.
2. See Notes 2 and 16 for further information regarding cumulative adjustments for accounting changes.
3. See Note 16 for information regarding dividends per share for each class of stock.
December 2019 Form 10-K
80
See Notes to Consolidated Financial Statements
Table of Contents
Consolidated Cash Flow Statements
$ in millions
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
2019
2018
2017
$
9,237 $
8,883 $
6,216
Deferred income taxes
Stock-based compensation expense
Depreciation and amortization
Provision for (Release of) credit losses on lending activities
Other operating adjustments
Changes in assets and liabilities:
Trading assets, net of Trading liabilities
Securities borrowed
Securities loaned
Customer and other receivables and other assets
Customer and other payables and other liabilities
Securities purchased under agreements to resell
Securities sold under agreements to repurchase
Net cash provided by (used for) operating activities
Cash flows from investing activities
Proceeds from (payments for):
Other assets—Premises, equipment and software, net
Changes in loans, net
Investment securities:
Purchases
Proceeds from sales
Proceeds from paydowns and maturities
Other investing activities
Net cash provided by (used for) investing activities
Cash flows from financing activities
Net proceeds from (payments for):
Other secured financings
Deposits
Proceeds from:
Issuance of preferred stock, net of issuance costs
Issuance of Borrowings
Payments for:
Borrowings
Repurchases of common stock and employee tax withholdings
Cash dividends
Other financing activities
Net cash provided by (used for) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, at beginning of period
Cash and cash equivalents, at end of period
Cash and cash equivalents:
Cash and due from banks
Interest bearing deposits with banks
Restricted cash
Cash and cash equivalents, at end of period
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest
Income taxes, net of refunds
165
1,153
2,643
162
(195)
(13,668)
9,764
(3,402)
233
19,942
10,298
4,441
40,773
(1,826)
(17,359)
(42,586)
17,151
12,012
(953)
(33,561)
3,695
2,513
497
30,605
449
920
1,844
(15)
199
23,732
7,697
(1,684)
(728)
(13,063)
(14,264)
(6,665)
7,305
(1,865)
(8,794)
(27,800)
3,208
12,668
(298)
(22,881)
(1,226)
28,384
—
40,059
(40,548)
(34,781)
(5,954)
(2,627)
(147)
(11,966)
(271)
(5,025)
87,196
(5,566)
(2,375)
(290)
24,205
(1,828)
6,801
80,395
82,171 $
87,196 $
4,293 $
30,541 $
45,366
32,512
82,171 $
21,299
35,356
87,196 $
2,747
1,026
1,753
29
153
(27,588)
1,226
(2,252)
(9,315)
2,007
17,697
1,796
(4,505)
(1,629)
(12,125)
(23,962)
18,131
7,445
(251)
(12,391)
(1,573)
3,573
994
55,416
(35,825)
(4,292)
(2,085)
53
16,261
3,670
3,035
77,360
80,395
24,816
21,348
34,231
80,395
12,511 $
1,908
9,977 $
1,377
5,377
1,390
$
$
$
$
See Notes to Consolidated Financial Statements
81
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
1. Introduction and Basis of Presentation
The Firm
Morgan Stanley 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,
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 Terms and Acronyms” for the
definition of certain terms and acronyms used throughout this
Form 10-K.
institutions
financial
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 foreign exchange and commodities. Lending
activities include originating corporate loans and commercial
real estate loans, providing secured lending facilities, and
extending financing to sales and trading customers. Other
activities
include Asia wealth management services,
investments and research.
Wealth Management provides a comprehensive array of
financial services and solutions to individual investors and
small to medium-sized businesses and institutions covering:
brokerage and investment advisory services; financial and
wealth planning services; stock plan administration services;
annuity and insurance products; securities-based lending,
residential real estate loans and other lending products;
banking; and retirement plan services.
Investment Management provides a broad range of investment
strategies and products that span geographies, asset classes,
and public and private markets to a diverse group of clients
across institutional and intermediary channels. Strategies and
products, which are offered through a variety of investment
liquidity and
vehicles,
alternative/other products. Institutional clients
include
defined benefit/defined contribution plans, foundations,
endowments, government entities, sovereign wealth funds,
include equity, fixed
income,
December 2019 Form 10-K
82
insurance companies,
fund sponsors and
third-party
corporations. Individual clients are generally served through
intermediaries,
including affiliated and non-affiliated
distributors.
Basis of Financial Information
The financial statements are prepared in accordance with U.S.
GAAP, which requires the Firm to make estimates and
assumptions regarding the valuations of certain financial
instruments, the valuations 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 financial statements and related disclosures. The Firm
believes that the estimates utilized in the preparation of its
financial statements are prudent and reasonable. Actual results
could differ materially from these estimates.
Certain reclassifications have been made to prior periods to
conform to the current presentation. The Notes are an integral
part of the Firm's financial statements. The Firm has evaluated
subsequent events for adjustment to or disclosure in these
financial statements through the date of this report and has not
identified any recordable or disclosable events not otherwise
reported in these financial statements or the notes thereto.
Consolidation
The 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 VIEs (see
Note 14). Intercompany balances and transactions have been
eliminated. For consolidated subsidiaries that are not 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 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 balance sheets.
For entities where the total equity investment at risk is sufficient
to enable the entity to finance its activities without additional
subordinated financial support and the equity holders bear the
economic residual risks and returns of the entity and have the
power to direct the activities of the entity that most significantly
affect its economic performance, the Firm consolidates those
entities it controls either through a majority voting interest or
otherwise. For VIEs (i.e., entities that do not meet the
aforementioned criteria), the Firm consolidates those entities
where it has the power to make the decisions that most
significantly affect the economic performance of the VIE and
has the obligation to absorb losses or the right to receive benefits
that could potentially be significant to the VIE.
Table of Contents
Notes to Consolidated Financial Statements
For investments in entities in which the Firm does not have a
controlling financial interest but has significant influence over
operating and financial decisions, it applies the equity method
of accounting with net gains and losses recorded within Other
revenues (see Note 10) unless the Firm has elected to measure
the investment at fair value, in which case net gains and losses
are recorded within Investments revenues (see Note 3).
Equity and partnership interests held by entities qualifying for
accounting purposes as investment companies are carried at fair
value.
The Firm’s significant regulated U.S. and international
subsidiaries include Morgan Stanley & Co. LLC (“MS&Co.”),
Morgan Stanley Smith Barney LLC (“MSSB”), Morgan Stanley
& Co. International plc (“MSIP”), Morgan Stanley MUFG
Securities Co., Ltd. (“MSMS”), Morgan Stanley Bank, N.A.
(“MSBNA”) and Morgan Stanley Private Bank, National
Association (“MSPBNA”).
the relevant non-interest expenses 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 revenues are
not probable of a significant reversal. Advisory costs are
recognized as incurred in the relevant non-interest expenses line
items, including those 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.
Consolidated Cash Flow Statements Presentation
Asset Management Revenues
For purposes of the cash flow statements, cash and cash
equivalents consist of Cash and due from banks, Interest bearing
deposits with banks and Restricted cash. Cash and cash
equivalents includes highly liquid investments with original
maturities of three months or less that are held for investment
purposes and are readily convertible to known amounts of cash.
Restricted cash includes cash in banks subject to withdrawal
restrictions, restricted deposits held as compensating balances
and cash segregated in compliance with federal or other
regulations.
2. Significant Accounting Policies
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. These policies reflect the adoption of
Revenue from Contracts with Customers on January 1, 2018.
Please see “Accounting Updates Adopted” herein for the more
significant differences in policies applied in prior periods.
Investment Banking
Revenues from investment banking activities consist of
revenues earned from underwriting, primarily equity and fixed
income securities and loan syndications, and advisory fees,
primarily for mergers, acquisitions and restructurings.
Underwriting revenues are generally recognized on trade date
if there is no uncertainty or contingency related to the amount
to be paid. Underwriting costs are deferred and recognized in
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.
Performance-based fees not in the form of carried interest are
recorded when the annual performance target is met and the
revenues are not probable of a significant reversal.
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-interest expenses line items.
Carried Interest
The Firm is entitled to receive performance-based fees in the
form of carried interest when the return in certain funds exceeds
specified performance targets. 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.
See Note 21 for information regarding the net cumulative
unrealized amount of performance-based fee revenues at risk of
83
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
reversal. See Note 13 for information regarding general partner
guarantees, which include potential obligations to return
performance fee distributions previously received.
Other Items
commodities, is presented in the accompanying balance sheets
on a net-by-counterparty basis, when appropriate. Additionally,
the Firm nets the fair value of cash collateral paid or received
against the fair value amounts recognized for net derivative
positions executed with the same counterparty under the same
master netting agreement.
Revenues from certain commodities-related contracts are
recognized as the promised goods or services are delivered to
the customer.
Fair Value Option
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 of 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.
Fair Value of Financial Instruments
Instruments within Trading assets and Trading liabilities are
measured at fair value, either as required or allowed by
accounting guidance. These financial instruments primarily
represent the Firm’s trading and investment positions and
include both cash and derivative products. In addition, securities
classified as AFS are measured at fair value.
Gains and losses on instruments carried at fair value are reflected
in Trading revenues, Investments revenues or Investment
banking revenues in the income statements, except for AFS
securities (see “Investment Securities—AFS and HTM
securities” section herein and Note 6) and derivatives accounted
for as hedges (see “Hedge Accounting” herein and Note 5).
Interest income and interest expense are recorded within the
income statements depending on the nature of the instrument
and related market conventions. When interest is included as a
component of the instruments’ fair value, interest is included
within Trading revenues or Investments revenues. Otherwise, it
is included within Interest income or Interest expense. Dividend
income is recorded in Trading revenues or Investments revenues
depending on the business activity.
The fair value of OTC financial instruments, including
derivative contracts related to financial instruments and
The Firm has elected to measure certain eligible instruments at
fair value, including Securities purchased under agreements to
resell, Loans and lending commitments, equity method
investments and certain other assets, Deposits, Securities sold
under agreements to repurchase, Other secured financings and
Borrowings.
Fair Value Measurement—Definition and Hierarchy
Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability (i.e., the “exit price”) in an
orderly
the
measurement date.
transaction between market participants at
Fair value is a market-based measure considered from the
perspective of a market participant rather than an entity-specific
measure. Therefore, even when market assumptions are not
readily available, assumptions are set to reflect those that the
Firm believes market participants would use in pricing the asset
or liability at the measurement date. Where the Firm manages
a group of financial assets, financial liabilities, and nonfinancial
items accounted for as derivatives on the basis of its net exposure
to either market risks or credit risk, the Firm measures the fair
value of that group of financial instruments consistently with
how market participants would price the net risk exposure at the
measurement date.
In determining fair value, the Firm uses various valuation
approaches and establishes a hierarchy for inputs used in
measuring fair value that requires the most observable inputs be
used when available.
Observable inputs are inputs that market participants would use
in pricing the asset or liability that were developed based on
market data obtained from sources independent of the Firm.
Unobservable inputs are inputs that reflect assumptions the Firm
believes other market participants would use in pricing the asset
or liability that are developed based on the best information
available in the circumstances. The fair value hierarchy is broken
down into three levels based on the observability of inputs as
follows, with Level 1 being the highest and Level 3 being the
lowest level:
Level 1. Valuations based on quoted prices in active markets
that the Firm has the ability to access for identical assets or
liabilities. Valuation adjustments, block discounts and discounts
for entity-specific restrictions that would not transfer to market
participants are not applied to Level 1 instruments. Since
December 2019 Form 10-K
84
Table of Contents
Notes to Consolidated Financial Statements
valuations are based on quoted prices that are readily and
regularly available in an active market, valuation of these
products does not entail a significant degree of judgment.
Level 2. Valuations based on one or more quoted prices in
markets that are not active or for which all significant inputs are
observable, either directly or indirectly.
Level 3. Valuations based on inputs that are unobservable and
significant to the overall fair value measurement.
The availability of observable inputs can vary from product to
product and is affected by a wide variety of factors, including
the type of product, whether the product is new and not yet
established in the marketplace, the liquidity of markets and other
characteristics particular to the product. To the extent that
valuation is based on models or inputs that are less observable
or unobservable in the market, the determination of fair value
requires more judgment. Accordingly, the degree of judgment
exercised by the Firm in determining fair value is greatest for
instruments categorized in Level 3 of the fair value hierarchy.
The Firm considers prices and inputs that are current as of the
measurement date, including during periods of market
dislocation. In periods of market dislocation, the observability
of prices and inputs may be reduced for many instruments. This
condition could cause an instrument to be reclassified from
Level 1 to Level 2 or from Level 2 to Level 3 of the fair value
hierarchy.
In certain cases, the inputs used to measure fair value may fall
into different levels of the fair value hierarchy. In such cases,
the total fair value amount is disclosed in the level appropriate
for the lowest level input that is significant to the total fair value
of the asset or liability.
Valuation Techniques
Many cash instruments and OTC derivative contracts have bid
and ask prices that can be observed in the marketplace. Bid prices
reflect the highest price that a party is willing to pay for an asset.
Ask prices represent the lowest price that a party is willing to
accept for an asset. The Firm carries positions at the point within
the bid-ask range that meets its best estimate of fair value. For
offsetting positions in the same financial instrument, the same
price within the bid-ask spread is used to measure both the long
and short positions.
Fair value for many cash instruments and OTC derivative
contracts is derived using pricing models. Pricing models take
into account the contract terms, as well as multiple inputs,
including, where applicable, commodity prices, equity prices,
rate yield curves, credit curves, correlation,
interest
creditworthiness of the counterparty, creditworthiness of the
Firm, option volatility and currency rates.
Where appropriate, valuation adjustments are made to account
for various factors such as liquidity risk (bid-ask adjustments),
credit quality, model uncertainty and concentration risk and
funding. Adjustments for liquidity risk adjust model-derived
mid-market amounts of Level 2 and Level 3 financial
instruments for the bid-mid or mid-ask spread required to
properly reflect the exit price of a risk position. Bid-mid and
mid-ask spreads are marked to levels observed in trade activity,
broker quotes or other external third-party data. Where these
spreads are unobservable for the particular position in question,
spreads are derived from observable levels of similar positions.
The Firm applies credit-related valuation adjustments to its
Borrowings for which the fair value option was elected and to
OTC derivatives. The Firm considers the impact of changes in
its own credit spreads based upon observations of the secondary
bond market spreads when measuring the fair value for
Borrowings.
For OTC derivatives, the impact of changes in both the Firm’s
and the counterparty’s credit rating is considered when
measuring fair value. In determining the expected exposure, the
Firm simulates the distribution of the future exposure to a
counterparty, then applies market-based default probabilities to
the future exposure, leveraging external third-party CDS spread
data. Where CDS spread data are unavailable for a specific
counterparty, bond market spreads, CDS spread data based on
the counterparty’s credit rating or CDS spread data that reference
a comparable counterparty may be utilized. The Firm also
considers collateral held and legally enforceable master netting
agreements that mitigate its exposure to each counterparty.
Adjustments for model uncertainty are taken for positions whose
underlying models are reliant on significant inputs that are
neither directly nor indirectly observable, hence requiring
reliance on established theoretical concepts in their derivation.
These adjustments are derived by making assessments of the
possible degree of variability using statistical approaches and
market-based information where possible.
The Firm may apply concentration adjustments to certain of its
OTC derivative portfolios to reflect the additional cost of closing
out a particularly large risk exposure. Where possible, these
adjustments are based on observable market information, but
in many instances, significant judgment is required to estimate
the costs of closing out concentrated risk exposures due to the
lack of liquidity in the marketplace.
The Firm applies an FVA in the fair value measurements of OTC
uncollateralized or partially collateralized derivatives and in
collateralized derivatives where the terms of the agreement do
not permit the reuse of the collateral received. In general, FVA
reflects a market funding risk premium inherent in the noted
derivative instruments. The methodology for measuring FVA
leverages the Firm’s existing credit-related valuation adjustment
calculation methodologies, which apply to both assets and
liabilities.
85
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
See Note 3 for a description of valuation techniques applied to
the major categories of financial instruments measured at fair
value.
Assets and Liabilities Measured at Fair Value on a Non-
recurring Basis
Certain of the Firm’s assets and liabilities are measured at fair
value on a non-recurring basis. The Firm incurs losses or gains
for any adjustments of these assets or liabilities to fair value.
For assets and liabilities measured at fair value on a non-
recurring basis, fair value is determined by using various
valuation approaches. The same hierarchy for inputs as
described above, which requires that observable inputs be used
when available, is used in measuring fair value for these items.
For further information on financial assets and liabilities that
are measured at fair value on a recurring and non-recurring basis,
see Note 3.
Offsetting of Derivative Instruments
In connection with its derivative activities, the Firm generally
enters into master netting agreements and collateral agreements
with its counterparties. These agreements provide the Firm with
the right, in the event of a default by the counterparty, to net a
counterparty’s rights and obligations under the agreement and
to liquidate and set off cash collateral against any net amount
owed by the counterparty. Derivatives with enforceable master
netting agreements are reported net of cash collateral received
and posted.
However, in certain circumstances, the Firm may not have such
an agreement in place; the relevant insolvency regime may not
support the enforceability of the master netting agreement or
collateral agreement; or the Firm may not have sought legal
advice to support the enforceability of the agreement. In cases
where the Firm has not determined an agreement to be
enforceable, the related amounts are not offset (see Note 5).
The Firm’s policy is generally to receive securities and cash
posted as collateral (with rights of rehypothecation), irrespective
of the enforceability determination regarding the master netting
and collateral agreement. In certain cases, the Firm may agree
for such collateral to be posted to a third-party custodian under
a control agreement that enables it to take control of such
collateral in the event of a counterparty default. The
enforceability of the master netting agreement is taken into
account in the Firm’s risk management practices and application
of counterparty credit limits.
For information related to offsetting of derivatives and certain
collateralized transactions, see Notes 5 and 7, respectively.
December 2019 Form 10-K
86
Hedge Accounting
The Firm applies hedge accounting using various derivative
financial instruments for the following types of hedges: hedges
of changes in the fair value of assets and liabilities due to the
risk being hedged (fair value hedges); and hedges of net
investments in foreign operations whose functional currency is
different from the reporting currency of the Parent Company
(net investment hedges). These financial instruments are
included within Trading assets—Derivative and other contracts
or Trading liabilities—Derivative and other contracts in the
balance sheets. For hedges where hedge accounting is being
applied, the Firm performs effectiveness testing and other
procedures.
Fair Value Hedges—Interest Rate Risk
The Firm’s designated fair value hedges consist of interest rate
swaps designated as hedges of changes in the benchmark interest
rate of certain fixed rate AFS securities and senior borrowings.
In the fourth quarter of 2019, the Firm also began designating
interest rate swaps as fair value hedges of changes in the
benchmark interest rate of certain fixed rate deposits. The Firm
is permitted to hedge the full, or part of the, contractual term of
the hedged instrument. The Firm uses regression analysis to
perform an ongoing prospective and retrospective assessment
of the effectiveness of these hedging relationships. A hedging
relationship is deemed effective if the change in fair value of
the hedging instrument (derivative) and the change in fair value
of the hedged item (AFS security, deposit liability or borrowing),
due to changes in the benchmark interest rate, offset within a
range of 80% to 125%. The Firm considers the impact of
valuation adjustments related to counterparty credit spreads and
its own credit spreads to determine whether they would cause
the hedging relationship to be ineffective.
For qualifying fair value hedges of benchmark interest rates, the
change in the fair value of the derivative, offset by the change
in the fair value attributable to the change in the benchmark
interest rate risk of the hedged asset (liability), is recognized in
earnings each period as a component of Interest income
(expense). For AFS securities, the change in fair value of the
hedged item due to changes other than the risk being hedged
will continue to be reported in OCI. When a derivative is de-
designated as a hedge, any basis adjustment remaining on the
hedged asset (liability) is amortized to Interest income (expense)
over the remaining life of the asset (liability) using the effective
interest method.
Net Investment Hedges
The Firm uses forward foreign exchange contracts to manage a
portion of the currency exposure relating to its net investments
in foreign operations. To the extent that the notional amounts of
the hedging instruments equal the portion of the investments
being hedged and the underlying exchange rate of the derivative
hedging instrument is the same as the exchange rate between
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Notes to Consolidated Financial Statements
the functional currency of the investee and the intermediate
parent entity’s functional currency, it is considered to be
perfectly effective, with no income statement recognition. If
these exchange rates are not the same, the Firm uses regression
analysis to assess the prospective and retrospective effectiveness
of the hedge relationships. The gain or loss from revaluing
hedges of net investments in foreign operations at the spot rate
is reported within AOCI. The forward points on the hedging
instruments are excluded from hedge effectiveness testing and
changes in the fair value of this excluded component are
recorded currently in Interest income.
For further information on derivative instruments and hedging
activities, see Note 5.
Investment Securities—Available-for-Sale and Held-to-
Maturity
AFS securities are reported at fair value in the balance sheets
with unrealized gains and losses reported in AOCI, net of tax,
unless such securities are designated in a fair value hedge.
Interest income, including amortization of premiums and
accretion of discounts, is included in Interest income in the
income statements. Realized gains and losses on sales of AFS
securities are classified within Other revenues in the income
statements (see Note 6). The Firm utilizes the “first-in, first-out”
method as the basis for determining the cost of AFS securities.
HTM securities are reported at amortized cost in the balance
sheets. Interest income, including amortization of premiums and
accretion of discounts on HTM securities, is included in Interest
income in the income statements.
OTTI
AFS securities and HTM securities with a current fair value less
than their amortized cost are analyzed as part of the Firm’s
periodic assessment of temporary versus OTTI at the individual
security level. A temporary impairment is recognized in AOCI
for AFS securities. OTTI is recognized in the income statements
with the exception of the non-credit portion related to a security
that the Firm does not intend to sell and is not likely to be required
to sell, which is recognized in AOCI.
For AFS securities that the Firm either has the intent to sell or
that the Firm is likely to be required to sell before recovery of
its amortized cost basis, the impairment is considered OTTI.
For those AFS securities that the Firm does not have the intent
to sell or is not likely to be required to sell, and for all HTM
securities, the Firm evaluates whether it expects to recover the
entire amortized cost basis of the security. If the Firm does not
expect to recover the entire amortized cost of those AFS or HTM
securities, the impairment is considered OTTI, and the Firm
determines what portion of the impairment relates to a credit
loss and what portion relates to non-credit factors.
A credit loss exists if the present value of cash flows expected
to be collected (discounted at the implicit interest rate at
acquisition of the security or discounted at the effective yield
for securities
in prepayment
assumptions) is less than the amortized cost basis of the security.
Changes in prepayment assumptions alone are not considered
to result in a credit loss.
incorporate changes
that
When determining if a credit loss exists, the Firm considers
relevant information, including:
• the length of time and the extent to which the fair value has
been less than the amortized cost basis;
• adverse conditions specifically related to the security, its
industry or geographic area;
• changes in the financial condition of the issuer of the security,
the presence of explicit or implicit guarantees of repayment
by the U.S. Government for U.S. Government and Agency
securities or, in the case of an asset-backed debt security,
changes in the financial condition of the underlying loan
obligors;
• the historical and implied volatility of the fair value of the
security;
• the payment structure of the debt security and the likelihood
of the issuer being able to make payments that increase in the
future;
• failure of the issuer of the security to make scheduled interest
or principal payments;
• the current rating and any changes to the rating of the security
by a rating agency;
• recoveries or additional declines in fair value after the balance
sheet date.
When estimating the present value of expected cash flows,
information utilized includes the remaining payment terms of
the security, prepayment speeds, financial condition of the
issuer(s), expected defaults and the value of any underlying
collateral.
Loans
The Firm accounts for loans based on the following categories:
loans held for investment; loans held for sale; and loans at fair
value.
Loans Held for Investment
Loans held for investment are reported at outstanding principal
adjusted for any charge-offs, the allowance for loan losses, any
unamortized deferred fees or costs for originated loans, and any
unamortized premiums or discounts for purchased loans.
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December 2019 Form 10-K
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Notes to Consolidated Financial Statements
Interest Income. Interest income on performing loans held for
investment is accrued and recognized as interest income at the
contractual rate of interest. Purchase price discounts or
premiums, as well as net deferred loan fees or costs, are
amortized into interest income over the life of the loan to produce
a level rate of return.
Allowance for Loan Losses. The allowance for loan losses
represents an estimate of probable losses related to loans
specifically identified for impairment in addition to the probable
losses inherent in the held-for-investment loan portfolio.
The Firm utilizes the U.S. banking agencies’ definition of
criticized exposures, which consist of the Special Mention,
Substandard, Doubtful and Loss categories as credit quality
indicators. For further information on the credit quality
indicators, see Note 8. Substandard loans are regularly reviewed
for impairment. Factors considered by management when
determining impairment include payment status, fair value of
collateral, and probability of collecting scheduled principal and
interest payments when due. The impairment analysis required
depends on the nature and type of loans. Loans classified as
Doubtful or Loss are considered impaired.
There are two components of the allowance for loan losses: the
specific allowance component and the inherent allowance
component.
The specific allowance component of the allowance for loan
losses is used to estimate probable losses for exposures that have
been specifically identified for impairment analysis by the Firm
and determined to be impaired. When a loan is specifically
identified for impairment, the impairment is measured based on
the present value of expected future cash flows discounted at
the loan’s effective interest rate or the observable market price
of the loan or the fair value of the collateral if the loan is collateral
dependent. A loan is collateral dependent if the repayment of
the loan is expected to be provided solely by the sale or operation
of the underlying collateral. If the present value of the expected
future cash flows (or alternatively, the observable market price
of the loan or the fair value of the collateral) is less than the
recorded investment in the loan, then the Firm recognizes an
allowance and a charge to the provision for loan losses within
Other revenues.
The inherent allowance component of the allowance for loan
losses represents an estimate of the probable losses inherent in
the loan portfolio and includes loans that have not been identified
as impaired. The Firm maintains methodologies by loan product
for calculating an allowance for loan losses that estimates the
inherent losses in the loan portfolio. Generally, inherent losses
in the portfolio for non-impaired loans are estimated using
statistical analysis and judgment regarding the exposure at
default, the probability of default and the loss given default.
Qualitative and environmental factors such as economic and
business conditions, nature and volume of the portfolio, and
December 2019 Form 10-K
88
lending terms and volume and severity of past due loans may
also be considered in the calculations. The allowance for loan
losses is maintained at a level to ensure that it is reasonably
likely to adequately absorb the estimated probable losses
inherent in the portfolio. When the Firm recognizes an
allowance, there is also a charge to the provision for loan losses
within Other revenues.
Troubled Debt Restructurings. The Firm may modify the
terms of certain loans for economic or legal reasons related to
a borrower’s financial difficulties by granting one or more
concessions that the Firm would not otherwise consider. Such
modifications are accounted for and reported as a TDR. A loan
that has been modified in a TDR is generally considered to be
impaired and is evaluated for the extent of impairment using the
Firm’s specific allowance methodology. TDRs are also
generally classified as nonaccrual and may be returned to accrual
status only after considering the borrower’s sustained repayment
performance for a reasonable period.
Nonaccrual Loans. The Firm places loans on nonaccrual
status if principal or interest is past due for a period of 90 days
or more or payment of principal or interest is in doubt unless
the obligation is well-secured and in the process of collection.
A loan is considered past due when a payment due according to
the contractual terms of the loan agreement has not been remitted
by the borrower. Substandard loans, if identified as impaired,
are categorized as nonaccrual, as are loans classified as Doubtful
or Loss.
Payments received on nonaccrual loans held for investment are
applied to principal if there is doubt regarding the ultimate
collectibility of principal. If collection of the principal of
nonaccrual loans held for investment is not in doubt, interest
income is realized on a cash basis. If neither principal nor interest
collection is in doubt, loans are placed on accrual status and
interest income is recognized using the effective interest
method. Loans that are on nonaccrual status may not be restored
to accrual status until all delinquent principal and/or interest has
been brought current after a reasonable period of performance,
typically a minimum of six months.
Charge-offs. The Firm charges off a loan in the period that it
is deemed uncollectible and records a reduction in the allowance
for loan losses and the balance of the loan. In general, any portion
of the recorded investment in a collateral dependent loan
(including any capitalized accrued interest, net deferred loan
fees or costs, and unamortized premium or discount) in excess
of the fair value of the collateral that can be identified as
uncollectible, and is therefore deemed a confirmed loss, is
charged off against the allowance for loan losses. In addition,
for loan transfers from loans held for investment to loans held
for sale, at the time of transfer any reduction in the loan value
is reflected as a charge-off of the recorded investment, resulting
in a new cost basis.
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Notes to Consolidated Financial Statements
Lending Commitments. The Firm records the liability and
related expense for the credit exposure related to commitments
to fund loans that will be held for investment in a manner similar
to outstanding loans discussed above. The analysis also
incorporates a credit conversion factor, which is the expected
utilization of the undrawn commitment. The liability and
expense for the credit exposure are recorded in Other liabilities
and accrued expenses in the balance sheets, and Other non-
interest expenses in the income statements, respectively. For
more information regarding loan commitments, standby letters
of credit and financial guarantees, see Note 13.
Loans Held for Sale
Loans held for sale are measured at the lower of cost or fair
value, with valuation changes recorded in Other revenues. The
Firm determines the valuation allowance on an individual loan
basis, except for residential mortgage loans for which the
valuation allowance is determined at the loan product level. Any
decreases in fair value below the initial carrying amount and
any recoveries in fair value up to the initial carrying amount are
recorded in Other revenues. Increases in fair value above initial
carrying value are not recognized.
Interest income on loans held for sale is accrued and recognized
based on the contractual rate of interest. Loan origination fees
or costs and purchase price discounts or premiums are deferred
as an adjustment to the loan’s cost basis until the related loan is
sold and, as such, are included in the periodic determination of
the lower of cost or fair value adjustments and the gain or loss
recognized at the time of sale.
Lending Commitments. Commitments to fund mortgage loans
held for sale are derivatives and are reported in Trading assets
or Trading liabilities in the balance sheets with an offset to
Trading revenues in the income statements.
For commitments to fund non-mortgage loans the Firm records
the liability and related expense for the fair value exposure below
cost of such commitments in Other liabilities and accrued
expenses in the balance sheets with an offset to Other revenues
in the income statements.
Loans and lending commitments held for sale are subject to the
nonaccrual policies described above in the Loans Held for
Investment—Nonaccrual Loans section. Because loans and
lending commitments held for sale are recognized at the lower
of cost or fair value, the allowance for loan losses and charge-
off policies does not apply to these loans.
Loans at Fair Value
Loans for which the fair value option is elected are carried at
fair value, with changes in fair value recognized in earnings.
Loans carried at fair value are not evaluated for purposes of
recording an allowance for loan losses. For further information
on loans carried at fair value and classified as Trading assets and
Trading liabilities, see Note 3.
Lending Commitments. The Firm records the liability and related
expense for the fair value exposure related to commitments to
fund loans that will be measured at fair value. The liability is
recorded in Trading liabilities in the balance sheets, and the
expense is recorded in Trading revenues in the income
statements.
Loans and lending commitments at fair value are subject to the
nonaccrual policies described above in the Loans Held for
Investment—Nonaccrual Loans section. Because such loans
and lending commitments are reported at fair value, the
allowance for loan losses and charge-off policies do not apply
to these loans.
For further information on loans, see Note 8.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when the
Firm has relinquished control over the transferred assets. Any
related gain or loss on sale is recorded in Net revenues. Transfers
that are not accounted for as sales are treated as collateralized
financings. Securities borrowed or purchased under agreements
to resell and securities loaned or sold under agreements to
repurchase are treated as collateralized financings (see Note 7).
Securities purchased under agreements to resell (“reverse
repurchase agreements”) and Securities sold under agreements
to repurchase (“repurchase agreements”) are carried in the
balance sheets at the amount of cash paid or received, plus
accrued interest, except for certain reverse repurchase and
repurchase agreements for which the Firm has elected the fair
value option (see Note 4). Where appropriate, repurchase
agreements and reverse repurchase agreements with the same
counterparty are reported on a net basis. Securities borrowed
and securities loaned are recorded at the amount of cash
collateral advanced or received.
In instances where the Firm is the lender in securities-for-
securities transactions and is permitted to sell or repledge these
securities, the fair value of the collateral received is reported in
Trading assets, and the related obligation to return the collateral
is reported in Trading liabilities in the balance sheets. Securities-
for-securities transactions where the Firm is the borrower are
not included in the balance sheets.
Premises, Equipment and Software Costs
Premises, equipment and software costs consist of buildings,
leasehold improvements, furniture, fixtures, computer and
communications equipment, power generation assets and
software (externally purchased and developed for internal use).
Premises, equipment and software costs are stated at cost less
accumulated depreciation and amortization and are included in
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December 2019 Form 10-K
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Notes to Consolidated Financial Statements
in
Other assets
the balance sheets. Depreciation and
amortization are provided by the straight-line method over the
estimated useful life of the asset.
Estimated Useful Lives of Assets
in years
Buildings
Leasehold improvements—Building
Leasehold improvements—Other
Furniture and fixtures
Computer and communications equipment
Power generation assets
Software costs
Estimated Useful Life
39
term of lease to 25
term of lease to 15
7
3 to 9
15 to 29
2 to 10
Premises, equipment and software costs are tested for
impairment whenever events or changes in circumstances
suggest that an asset’s carrying value may not be fully
recoverable.
Goodwill and Intangible Assets
The Firm tests goodwill for impairment on an annual basis and
on an interim basis when certain events or circumstances exist.
The Firm tests goodwill for impairment at the reporting unit
level, which is generally at the level of or one level below its
business segments. For both the annual and interim tests, the
Firm has the option to either (i) perform a quantitative
impairment test or (ii) first perform a qualitative assessment to
determine whether it is more likely than not that the fair value
of a reporting unit is less than its carrying amount, in which case
the quantitative test would be performed.
When performing a quantitative impairment test, the Firm
compares the fair value of a reporting unit with its carrying
amount, including goodwill. If the fair value of the reporting
unit is less than its carrying amount, the goodwill impairment
loss is equal to the excess of the carrying value over the fair
value, limited to the carrying amount of goodwill allocated to
that reporting unit.
The estimated fair values of the reporting units are derived based
on valuation techniques the Firm believes market participants
would use for each respective reporting unit. The estimated fair
values are generally determined by utilizing a discounted cash
flow methodology or methodologies that incorporate price-to-
book and price-to-earnings multiples of certain comparable
companies.
Intangible assets are amortized over their estimated useful lives
and are reviewed for impairment on an interim basis when
impairment indicators are present. Impairment losses are
recorded within Other expenses in the income statements.
Earnings per Common Share
Basic EPS is computed by dividing earnings available to Morgan
Stanley common shareholders by the weighted average number
December 2019 Form 10-K
90
of common shares outstanding for the period. Earnings available
to Morgan Stanley common shareholders represents net income
applicable to Morgan Stanley reduced by preferred stock
dividends. Common shares outstanding include common stock
and vested RSUs where recipients have satisfied either the
explicit vesting terms or retirement-eligibility requirements.
Diluted EPS reflects the assumed conversion of all dilutive
securities.
Share-based awards that pay dividend equivalents subject to
vesting are included in diluted shares outstanding (if dilutive)
under the treasury stock method.
The Firm has granted PSUs that vest and convert to shares of
common stock only if predetermined performance and market
goals are satisfied. Since the issuance of the shares is contingent
upon the satisfaction of certain conditions, the PSUs are
included in diluted EPS based on the number of shares (if any)
that would be issuable if the end of the reporting period was the
end of the contingency period.
For further information on diluted earnings (loss) per common
share, see Note 16 to the financial statements.
Deferred Compensation
Stock-Based Compensation
The Firm measures compensation expense for stock-based
awards at fair value. The Firm determines the fair value of RSUs
(including PSUs with non-market performance conditions)
based on the grant-date fair value of its common stock, measured
as the volume-weighted average price on the date of grant
(“VWAP”). The fair value of RSUs not entitled to dividends
until conversion is measured at VWAP reduced by the present
value of dividends expected to be paid on the underlying shares
prior to scheduled conversion date. PSUs that contain market-
based conditions are valued using a Monte Carlo valuation
model.
Compensation expense is recognized over the relevant vesting
period for each separate vesting portion of the award.
Compensation expense for awards with performance conditions
is recognized based on the probable outcome of the performance
condition at each reporting date. Compensation expense for
awards with market-based conditions is recognized irrespective
of the probability of the market condition being achieved and is
not reversed if the market condition is not met. The Firm
accounts for forfeitures as they occur.
Stock-based awards generally contain claw back and
cancellation provisions. Certain awards provide the Firm
discretion to claw back or cancel all or a portion of the award
under specified circumstances. Compensation expense for those
awards is adjusted for changes in the fair value of the Firm’s
common stock or the relevant model valuation, as appropriate,
until conversion, exercise or expiration.
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Notes to Consolidated Financial Statements
Employee Stock Trusts
Carried Interest Compensation
In connection with certain stock-based compensation plans, the
Firm, at its discretion, has established employee stock trusts to
provide common stock voting rights to certain employees who
hold outstanding RSUs. The assets of the employee stock trusts
are consolidated with those of the Firm and are generally
accounted for in a manner similar to treasury stock, where the
shares of common stock outstanding reported in Common stock
issued to employee stock trusts are offset by an equal amount
reported in Employee stock trusts in the balance sheets.
The Firm uses the grant-date fair value of stock-based
compensation as the basis for recognition of the assets in the
employee stock trusts. Subsequent changes in the fair value are
not recognized as the Firm’s stock-based compensation plans
must be settled by delivery of a fixed number of shares of the
Firm’s common stock.
Deferred Cash-Based Compensation
Compensation expense for deferred cash-based compensation
plans is calculated based on the notional value of the award
granted, adjusted for changes in the fair value of the referenced
investments that employees select. Compensation expense is
recognized over the relevant vesting period for each separate
vesting portion of deferred awards. Compensation expense for
these awards is adjusted based on notional earnings of the
referenced investments until distribution.
The Firm invests directly, as a principal, in financial instruments
or other investments to economically hedge its obligations under
its deferred cash-based compensation plans. Changes in the
value of such investments made by the Firm are recorded in
Trading revenues and Investments revenues. Although changes
in compensation expense resulting from changes in the fair value
of the referenced investments will generally be offset by changes
in the fair value of investments made by the Firm, there is
typically a timing difference between the immediate recognition
of gains and losses on the Firm’s investments and the deferred
recognition of the related compensation expense over the
vesting period.
Retirement-Eligible Employee Compensation
For year-end stock-based awards and deferred cash-based
compensation awards anticipated to be granted to retirement-
eligible employees under award terms that do not contain a
future service requirement, the Firm accrues the estimated cost
of the awards over the course of the calendar year preceding the
grant date, which reflects the period over which the
compensation is earned.
The Firm generally recognizes compensation expense for any
portion of carried interest (both realized and unrealized) that is
allocated to employees. For information on performance-based
fees in the form of carried interest, which are directly related to
carried interest compensation, see “Revenue Recognition—
Carried Interest” herein.
Income Taxes
Deferred tax assets and liabilities are recorded based upon the
temporary differences between the financial statement and
income tax bases of assets and liabilities using currently enacted
tax rates in effect for the year in which the differences are
expected to reverse. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income tax
expense (benefit) in the period that includes the enactment date.
Such effects are recorded in income tax expense (benefit) from
continuing operations regardless of where deferred taxes were
originally recorded.
The Firm recognizes net deferred tax assets to the extent that it
believes these assets are more likely than not to be realized. In
making such a determination, the Firm considers all available
positive and negative evidence, including future reversals of
existing taxable temporary differences, projected future taxable
income, tax planning strategies and results of recent operations.
When performing the assessment, the Firm considers all types
of deferred tax assets in combination with each other, regardless
of the origin of the underlying temporary difference. If a deferred
tax asset is determined to be unrealizable, a valuation allowance
is established. If the Firm subsequently determines that it would
be able to realize deferred tax assets in excess of their net
recorded amount, it would make an adjustment to the deferred
tax asset valuation allowance, which would reduce the provision
for income taxes.
The Firm recognizes tax expense associated with GILTI
included in the Tax Cuts and Jobs Act (“Tax Act”) as it is incurred
as part of the current income taxes to be paid or refunded for the
current period.
Uncertain tax positions are recorded on the basis of a two-step
process, whereby (i) the Firm determines whether it is more
likely than not that the tax positions will be sustained on the
basis of the technical merits of the position and (ii) for those tax
positions that meet this threshold, the Firm recognizes the largest
amount of tax benefit that is more likely than not to be realized
upon ultimate settlement with the related tax authority. Interest
and penalties related to unrecognized tax benefits are recognized
as a component of the provision for income taxes.
Foreign Currencies
Assets and liabilities of operations with non-U.S. dollar
functional currencies are translated at year-end rates of
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December 2019 Form 10-K
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Notes to Consolidated Financial Statements
exchange. Gains or losses resulting from translating foreign
currency financial statements, net of hedge gains or losses and
related tax effects, are reflected in AOCI in the balance sheets.
Gains or losses resulting from remeasurement of foreign
currency transactions are included in net income, and amounts
recognized in the income statement are translated at the rate of
exchange on the respective date of recognition for each amount.
redesignated hedging relationships. This update did not impact
the Firm’s pre-existing hedges.
Accounting Update Adopted in 2018
See Note 16 for a summary of the Retained earnings impact of
this adoption.
Accounting Updates Adopted in 2019
Revenue Recognition
The Firm adopted Revenues from Contracts with Customers
using
the modified retrospective method. Our revenue
recognition policies are reflective of this update since adoption,
while 2017 revenues and expenses remain as presented under
the prior accounting policy.
The more significant differences to the accounting policy in
place prior to adoption were: (i) the presentation of certain costs
related to underwriting and advisory activities in that such costs
were recorded net of Investment Banking revenues versus the
current practice of recording the costs in the relevant non-
compensation expense line item; (ii) the presentation of certain
costs related to the selling and distribution of investment funds
in that such costs were recorded net of Asset Management
revenues versus the current practice of recording the costs in the
relevant non-compensation expense
the
recognition of certain performance-based fees from fund
management activities not in the form of carried interest that
were recognized quarterly versus the current practice of
deferring the revenues until the fees are not probable of a
significant reversal, and; (iv) the timing of the recognition of
advisory fees in that such fees were recorded when realizable
versus the current practice of recognizing the fees 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.
item; (iii)
line
See Note 16 for a summary of the Retained earnings impact of
these adoptions.
Leases
Upon the adoption of Leases, the Firm began recognizing in the
balance sheet leases with terms exceeding one year as right-of-
use (“ROU”) assets and corresponding liabilities. The adoption
resulted in an increase to Retained earnings of approximately
$63 million, net of tax, related to deferred revenue from
previously recorded sale-leaseback transactions. At transition
on January 1, 2019, the adoption also resulted in a balance sheet
gross-up of approximately $4 billion reflected in Other assets
and Other liabilities and accrued expenses. See Note 10 for lease
disclosures, including amounts reflected in the December 31,
2019 balance sheet. Prior period amounts were not restated.
As allowed by the guidance, the Firm elected not to reassess the
following at transition: whether existing contracts are or contain
leases; and for existing leases, lease classification and initial
direct costs. In addition, the Firm continues to account for
existing land easements as service contracts.
Both at transition and for new leases thereafter, ROU assets and
lease liabilities are initially recognized based on the present
value of the future minimum lease payments over the lease term,
including non-lease components such as fixed common area
maintenance costs and other fixed costs such as real estate taxes
and insurance.
The discount rates used in determining the present value of
leases are the Firm’s incremental borrowing rates, developed
based upon each lease’s term and currency of payment. The lease
term includes options to extend or terminate the lease when it
is reasonably certain that the Firm will exercise that option. For
operating leases, the ROU assets also include any prepaid lease
payments and initial direct costs incurred and are reduced by
lease incentives. For these leases, lease expense is recognized
on a straight-line basis over the lease term if the ROU asset has
not been impaired or abandoned.
Derivatives and Hedging (ASU 2018-16)
The amendments in this update permit use of the OIS rate based
on the Secured Overnight Financing Rate as a U.S. benchmark
interest rate for hedge accounting purposes. The Firm adopted
this update on a prospective basis for qualifying new or
December 2019 Form 10-K
92
Table of Contents
Notes to Consolidated Financial Statements
3. Fair Values
Recurring Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring
Basis
$ in millions
Assets at fair value
Trading assets:
U.S. Treasury and
agency securities
Other sovereign
government
obligations
State and municipal
securities
MABS
Loans and lending
commitments2
Corporate and other
debt
Corporate equities3
Derivative and other
contracts:
Interest rate
Credit
Foreign exchange
Equity
Commodity and
other
Netting1
Total derivative and
other contracts
Investments4
Physical
commodities
Total trading assets4
Investment securities
—AFS
Securities purchased
under agreements to
resell
Total assets at fair
value
At December 31, 2019
At December 31, 2019
Level 1
Level 2
Level 3 Netting1
Total
$ in millions
Level 1
Level 2
Level 3 Netting1
Total
$ 36,866 $ 28,992 $
22 $
— $ 65,880
23,402
4,347
5
1
438
2,790
1,690
—
—
—
6,253
5,073
— 22,124
1,396
—
—
—
—
—
27,754
2,791
2,128
11,326
23,520
123,942
652
97
— 124,691
1,265
182,977
1,239
— 185,481
—
15
6,658
64,260
1,219
48,927
654
145
922
1,079
7,255
2,924
—
—
—
—
7,312
64,420
51,068
11,258
(2,794)
(235,947)
(993)
(47,804)
(287,538)
$
— $ 1,920 $
179 $
— $
2,099
Liabilities at fair value
Deposits
Trading liabilities:
U.S. Treasury and
agency securities
Other sovereign
government
obligations
Corporate and other
debt
Derivative and other
contracts:
Interest rate
Credit
Foreign exchange
Equity
Commodity and
other
Netting1
Total derivative and
other contracts
Securities sold under
agreements to
repurchase
11,191
34
21,837
1,332
—
7,410
Corporate equities3
63,002
79
—
1
—
36
462
530
176
—
11,225
—
—
—
23,170
7,410
63,117
— 172,631
—
—
—
—
7,921
67,655
52,868
9,624
1,144
171,025
—
6
7,391
67,473
1,200
49,062
2,606
1,194
7,118
1,312
(2,794) (235,947)
(993)
(42,531)
(282,265)
750
66,122
4,093
(42,531)
28,434
Total trading liabilities
96,780
74,977
4,130
(42,531)
133,356
74,130
4,891
(47,804)
32,001
784
481
252
858
—
1,907
—
—
—
1,591
1,907
Other secured
financings
Borrowings
—
—
733
—
7,700
109
— 60,373
4,088
—
—
—
733
7,809
64,461
185,475
143,137
12,781
(47,804)
293,589
Total liabilities at fair
value
$ 96,780 $145,703 $ 8,506 $ (42,531) $ 208,458
32,902
29,321
—
4
—
—
—
62,223
—
4
$218,377 $172,462 $12,781 $ (47,804) $ 355,816
93
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
$ in millions
Assets at fair value
Trading assets:
U.S. Treasury and
agency securities
Other sovereign
government
obligations
State and municipal
securities
MABS
Loans and lending
commitments2
Corporate and other
debt
Corporate equities3
Derivative and other
contracts:
Interest rate
Credit
Foreign exchange
Equity
Commodity and
other
Netting1
Total derivative and
other contracts
Investments4
Physical
commodities
Total trading assets4
Investment securities
—AFS
Intangible assets
Total assets at fair
value
At December 31, 2018
At December 31, 2018
Level 1
Level 2
Level 3 Netting1
Total
$ in millions
Level 1
Level 2
Level 3 Netting1
Total
$ 38,767 $ 29,594 $
54 $
— $ 68,415
28,395
5,529
17
—
—
—
—
3,161
2,154
148
354
4,055
6,870
18,129
1,076
93,626
522
95
—
—
—
—
—
—
33,941
3,309
2,508
10,925
19,205
94,243
2,793
155,027
1,045
— 158,865
—
62
5,707
63,023
421
161
1,256
45,596
1,022
963
8,517
2,992
—
—
—
—
6,128
63,246
47,874
12,472
(4,151)
(210,190)
(896)
(44,175)
(259,412)
Liabilities at fair value
Deposits
Trading liabilities:
U.S. Treasury and
agency securities
Other sovereign
government
obligations
Corporate and other
debt
Corporate equities3
Derivative and other
contracts:
Interest rate
Credit
Foreign exchange
Equity
Commodity and
other
Netting1
Total derivative and
other contracts
$
— $
415 $
27 $
— $
442
11,272
543
21,391
1,454
—
56,064
8,550
199
2,927
142,746
—
41
5,772
63,379
—
—
1
15
427
381
86
1,042
47,091
2,507
1,228
6,872
940
—
11,815
—
—
—
22,845
8,551
56,278
— 146,100
—
—
—
—
6,153
63,506
50,640
9,040
(4,151)
(210,190)
(896)
(32,944)
(248,181)
1,087
55,670
3,445
(32,944)
27,258
Total trading liabilities
89,814
66,416
3,461
(32,944)
126,747
Securities sold under
agreements to
repurchase
67,680
4,745
(44,175)
29,173
923
412
293
757
—
536
—
—
—
1,462
Other secured
financings
536
Borrowings
—
—
—
812
—
5,037
208
47,378
3,806
—
—
—
812
5,245
51,184
162,123
131,653
14,116
(44,175)
263,717
Total liabilities at fair
value
$89,814 $ 120,058 $ 7,502 $ (32,944) $ 184,430
36,399
24,662
—
5
—
—
—
—
61,061
5
$198,522 $ 156,320 $14,116 $ (44,175) $ 324,783
MABS—Mortgage- and asset-backed securities
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.” Positions classified within the same level that are with the same
counterparty are netted within that level. For further information on derivative
instruments and hedging activities, see Note 5.
2. For a further breakdown by type, see the following Detail of 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 based on NAV per share,
which are not classified in the fair value hierarchy. For additional disclosure about such
investments, see “Net Asset Value Measurements” herein.
Detail of Loans and Lending Commitments at Fair Value
$ in millions
Corporate
Residential real estate
Commercial real estate
Total
At
December 31,
2019
At
December 31,
2018
$
$
8,036 $
1,192
2,098
9,171
1,153
601
11,326 $
10,925
Unsettled Fair Value of Futures Contracts1
$ in millions
At
December 31,
2019
At
December 31,
2018
Customer and other receivables, net
$
365 $
615
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.
December 2019 Form 10-K
94
Table of Contents
Notes to Consolidated Financial Statements
Valuation Techniques for Assets and Liabilities Measured at Fair Value on a Recurring Basis
Asset and Liability/Valuation Technique
U.S. Treasury and Agency Securities
U.S. Treasury Securities
• Fair value is determined using quoted market prices.
U.S. Agency Securities
• Non-callable agency-issued debt securities are generally valued using quoted market prices, and callable
agency-issued debt securities are valued by benchmarking model-derived prices to quoted market prices
and trade data for comparable instruments.
• The fair value of agency mortgage pass-through pool securities is model-driven based on spreads of
comparable to-be-announced securities.
• CMOs are generally valued using quoted market prices and trade data adjusted by subsequent changes
in related indices for comparable instruments.
Other Sovereign Government Obligations
• Fair value is determined using quoted prices in active markets when available. When not available, quoted
prices in less-active markets are used. In the absence of position-specific quoted prices, fair value may
be determined through benchmarking from comparable instruments.
State and Municipal Securities
• Fair value is determined using recently executed transactions, market price quotations or pricing models
that factor in, where applicable, interest rates, bond or CDS spreads, adjusted for any basis difference
between cash and derivative instruments.
Valuation Hierarchy
Classification
• Level 1
• Level 1 - on-the-run agency
issued debt securities if actively
traded and inputs are observable
• Generally Level 2 - all other
agency issued debt securities,
agency mortgage pass-through
pool securities and CMOs if
actively traded and inputs are
observable
• Level 3 - in instances where the
trading activity is limited or inputs
are unobservable
• Generally Level 1
• Level 2 - if the market is less
active or prices are dispersed
• Level 3 - in instances where the
prices are unobservable
• Generally Level 2 - if value based
on observable market data for
comparable instruments
• Level 3 in instances where
market data is not observable
RMBS, CMBS, ABS (collectively known as Mortgage- and Asset-backed securities (“MABS”))
• Generally Level 2 - if value based
• Mortgage- and asset-backed securities may be valued based on price or spread data obtained from
observed transactions or independent external parties such as vendors or brokers.
• When position-specific external price data are not observable, the fair value determination may require
benchmarking to comparable instruments, and/or analyzing expected credit losses, default and recovery
rates, and/or applying discounted cash flow techniques. When evaluating the comparable instruments
for use in the valuation of each security, security collateral-specific attributes, including payment priority,
credit enhancement levels, type of collateral, delinquency rates and loss severity, are considered. In
addition, for RMBS borrowers, FICO scores and the level of documentation for the loan are considered.
• Market standard cash flow models may be utilized to model the specific collateral composition and cash
flow structure of each transaction. Key inputs to these models are market spreads, forecasted credit
losses, and default and prepayment rates for each asset category.
• Valuation levels of RMBS and CMBS indices are used as an additional data point for benchmarking
on observable market data for
comparable instruments
• Level 3 - if external prices or
significant spread inputs are
unobservable, or if the
comparability assessment
involves significant subjectivity
related to property type
differences, cash flows,
performance or other inputs
purposes or to price outright index positions.
Loans and Lending Commitments
• Fair value of corporate loans is determined using recently executed transactions, market price quotations
(where observable), implied yields from comparable debt, market observable CDS spread levels obtained
from independent external parties adjusted for any basis difference between cash and derivative
instruments, along with proprietary valuation models and default recovery analysis where such
transactions and quotations are unobservable.
• Fair value of contingent corporate lending commitments is determined by using executed transactions
on comparable loans and the anticipated market price based on pricing indications from syndicate banks
and customers. The valuation of loans and lending commitments also takes into account fee income that
is considered an attribute of the contract.
• Fair value of mortgage loans is determined using observable prices based on transactional data or third-
party pricing for comparable instruments, when available.
• Where position-specific external prices are not observable, fair value is estimated based on benchmarking
to prices and rates observed in the primary market for similar loan or borrower types or based on the
present value of expected future cash flows using the Firm’s best available estimates of the key
assumptions, including forecasted credit losses, prepayment rates, forward yield curves and discount
rates commensurate with the risks involved or a methodology that utilizes the capital structure and credit
spreads of recent comparable securitization transactions.
• Fair value of equity margin loans is determined by discounting future interest cash flows, net of estimated
credit losses. The estimated credit losses are derived by benchmarking to market observable CDS
spreads, implied debt yields or volatility metrics of the loan collateral.
Corporate and Other Debt
Corporate Bonds
• Fair value is determined using recently executed transactions, market price quotations, bond spreads
and CDS spreads obtained from independent external parties, such as vendors and brokers, adjusted
for any basis difference between cash and derivative instruments.
• The spread data used are for the same maturity as the bond. If the spread data do not reference the
issuer, then data that reference comparable issuers are used. When position-specific external price data
are not observable, fair value is determined based on either benchmarking to comparable instruments
or cash flow models with yield curves, bond or single-name CDS spreads and recovery rates as significant
inputs.
• Level 2 - if value based on
observable market data for
comparable instruments
• Level 3 - in instances where
prices or significant spread inputs
are unobservable
• Generally Level 2 - if value based
on observable market data for
comparable instruments
• Level 3 - in instances where prices
or significant spread inputs are
unobservable
95
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
Asset and Liability/Valuation Technique
CDO
• The Firm holds cash CDOs that typically reference a tranche of an underlying synthetic portfolio of single-
name CDS spreads collateralized by corporate bonds (CLN) or cash portfolio of ABS/loans (“asset-backed
CDOs”).
• Credit correlation, a primary input used to determine the fair value of CLNs, is usually unobservable and
derived using a benchmarking technique. Other model inputs such as credit spreads, including collateral
spreads, and interest rates are typically observable.
• Asset-backed CDOs are valued based on an evaluation of the market and model input parameters sourced
from comparable instruments as indicated by market activity. Each asset-backed CDO position is
evaluated independently taking into consideration available comparable market levels, underlying
collateral performance and pricing, deal structures and liquidity.
Corporate Equities
• Exchange-traded equity securities are generally valued based on quoted prices from the exchange. To
the extent these securities are actively traded, valuation adjustments are not applied.
• Unlisted equity securities are generally valued based on an assessment of each security, considering
rounds of financing and third-party transactions, discounted cash flow analyses and market-based
information, including comparable transactions, trading multiples and changes in market outlook, among
other factors.
• Listed fund units are generally marked to the exchange-traded price if actively traded, or NAV if not.
Unlisted fund units are generally marked to NAV.
Derivative and Other Contracts
Listed Derivative Contracts
• Listed derivatives that are actively traded are valued based on quoted prices from the exchange.
• Listed derivatives that are not actively traded are valued using the same techniques as those applied to
OTC derivatives as noted below.
OTC Derivative Contracts
• OTC derivative contracts include forward, swap and option contracts related to interest rates, foreign
currencies, credit standing of reference entities, equity prices or commodity prices.
• Depending on the product and the terms of the transaction, the fair value of OTC derivative products can
be modeled using a series of techniques, including closed-form analytic formulas, such as the Black-
Scholes option-pricing model, simulation models or a combination thereof. Many pricing models do not
entail material subjectivity as the methodologies employed do not necessitate significant judgment since
model inputs may be observed from actively quoted markets, as is the case for generic interest rate
swaps, many equity, commodity and foreign currency option contracts, and certain CDS. In the case of
more established derivative products, the pricing models used by the Firm are widely accepted by the
financial services industry.
• More complex OTC derivative products are typically less liquid and require more judgment in the
implementation of the valuation technique since direct trading activity or quotes are unobservable. This
includes certain types of interest rate derivatives with both volatility and correlation exposure, equity,
commodity or foreign currency derivatives that are either longer-dated or include exposure to multiple
underlyings, and credit derivatives, including CDS on certain mortgage- or asset-backed securities and
basket CDS. Where required inputs are unobservable, relationships to observable data points, based on
historical and/or implied observations, may be employed as a technique to estimate the model input
values.
For further information on the valuation techniques for OTC derivative products, see Note 2.
Investments
• Investments include direct investments in equity securities, as well as various investment management
funds, which include investments made in connection with certain employee deferred compensation plans.
• Exchange-traded direct equity investments are generally valued based on quoted prices from the
exchange.
• For direct investments, initially, the transaction price is generally considered by the Firm as the exit price
and is its best estimate of fair value.
• After initial recognition, in determining the fair value of non-exchange-traded internally and externally
managed funds, the Firm generally considers the NAV of the fund provided by the fund manager to be
the best estimate of fair value. These investments are included in the Fund Interests table in the "Net
Asset Value Measurements" section herein.
• For non-exchange-traded investments either held directly or held within internally managed funds, fair
value after initial recognition is based on an assessment of each underlying investment, considering
rounds of financing and third-party transactions, discounted cash flow analyses and market-based
information, including comparable Firm transactions, trading multiples and changes in market outlook,
among other factors.
Physical Commodities
• The Firm trades various physical commodities, including natural gas and precious metals.
• Fair value is determined using observable inputs, including broker quotations and published indices.
Valuation Hierarchy
Classification
• Level 2 - when either comparable
market transactions are
observable, or credit correlation
input is insignificant
• Level 3 - when either comparable
market transactions are
unobservable, or the credit
correlation input is significant
• Generally Level 1 - exchange-
traded securities and fund units if
actively traded
• Level 2 - exchange-traded
securities if not actively traded, or
if undergoing a recent M&A event
or corporate action
• Level 3 - exchange-traded
securities if not actively traded, or
if undergoing an aged M&A event
or corporate action
• Level 1 - listed derivatives that are
actively traded
• Level 2 - listed derivatives that are
not actively traded
• Generally Level 2 - OTC
derivative products valued using
observable inputs, or where the
unobservable input is not deemed
significant
• Level 3 - OTC derivative products
for which the unobservable input
is deemed significant
• Level 1 - exchange-traded direct
equity investments in an active
market
• Level 2 - non-exchange-traded
direct equity investments and
investments in various investment
management funds if valued
based on rounds of financing or
third-party transactions;
exchange-traded direct equity
investments if not actively traded
• Level 3 - non-exchange-traded
direct equity investments and
investments in various investment
management funds where rounds
of financing or third-party
transactions are not available
• Level 2
December 2019 Form 10-K
96
Table of Contents
Notes to Consolidated Financial Statements
Asset and Liability/Valuation Technique
Investment Securities—AFS Securities
• AFS securities are composed of U.S. government and agency securities (e.g., U.S. Treasury securities,
agency-issued debt, agency mortgage pass-through securities and CMOs), CMBS, ABS, state and
municipal securities, and corporate bonds.
For further information on the determination of fair value, refer to the corresponding asset/liability Valuation
Technique described herein for the same instruments.
Deposits
Certificates of Deposit
• The Firm issues FDIC-insured certificates of deposit that pay either fixed coupons or that have repayment
terms linked to the performance of debt or equity securities, indices or currencies. The fair value of these
certificates of deposit is determined using valuation models that incorporate observable inputs referencing
identical or comparable securities, including prices to which the deposits are linked, interest rate yield
curves, option volatility and currency rates, equity prices, and the impact of the Firm’s own credit spreads,
adjusted for the impact of the FDIC insurance, which is based on vanilla deposit issuance rates.
Valuation Hierarchy
Classification
• For further information on the
determination of valuation
hierarchy classification, see the
corresponding Valuation
Hierarchy Classification described
herein.
• Generally Level 2
• Level 3 - in instances where the
unobservable input is deemed
significant
Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase
• Generally Level 2
• Fair value is computed using a standard cash flow discounting methodology.
• The inputs to the valuation include contractual cash flows and collateral funding spreads, which are the
incremental spread over the OIS rate for a specific collateral rate (which refers to the rate applicable to
a specific type of security pledged as collateral).
Other Secured Financings
• Other secured financings are composed of short-dated notes secured by Corporate equities, agreements
to repurchase Physical commodities, the liabilities related to sales of Loans and lending commitments
accounted for as financings, and contracts which are not classified as OTC derivatives because they fail
net investment criteria.
For further information on the determination of valuation hierarchy classification, see the corresponding
Valuation Hierarchy Classification described herein.
Borrowings
• The Firm carries certain borrowings at fair value which are primarily composed of: instruments whose
payments and redemption values are linked to the performance of a specific index, a basket of stocks, a
specific equity security, a commodity, a credit exposure or basket of credit exposures; and instruments
with various interest-rate-related features including step-ups, step-downs, and zero coupons.
• Fair value is determined using valuation models for the derivative and debt portions of the instruments.
These models incorporate observable inputs referencing identical or comparable securities, including
prices to which the instruments are linked, interest rate yield curves, option volatility and currency rates,
and commodity or equity prices.
• Independent, external and traded prices are considered as well as the impact of the Firm’s own credit
spreads which are based on observed secondary bond market spreads.
• For further information on the
determination of valuation
hierarchy classification, see the
corresponding Valuation
Hierarchy Classification described
herein.
• Generally Level 2
• Level 3 - in instances where the
unobservable inputs are deemed
significant
97
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
Rollforward of Level 3 Assets and Liabilities Measured at Fair
Value on a Recurring Basis
$ in millions
$ in millions
2019
2019
2018
2018
2017
2017
U.S. Treasury and agency securities
U.S. Treasury and agency securities
Beginning balance
Beginning balance
$
$
54 $
54 $
— $
— $
$ in millions
$ in millions
Corporate equities
Corporate equities
Beginning balance
Beginning balance
Realized and unrealized gains (losses)
Realized and unrealized gains (losses)
Purchases
Purchases
Sales
Sales
Net transfers
Net transfers
Ending balance
Ending balance
Unrealized gains (losses)
Unrealized gains (losses)
Investments
Investments
Beginning balance
Beginning balance
Realized and unrealized gains (losses)
Realized and unrealized gains (losses)
Purchases
Purchases
Sales
Sales
Settlements
Settlements
Net transfers
Net transfers
Ending balance
Ending balance
Unrealized gains (losses)
Unrealized gains (losses)
Net derivatives: Interest rate
Net derivatives: Interest rate
Beginning balance
Beginning balance
4
4
17
17
(54)
(54)
1
1
1
1
53
53
—
—
—
—
22 $
22 $
4 $
4 $
54 $
54 $
1 $
1 $
17 $
17 $
1 $
1 $
(3)
(3)
7
7
(6)
(6)
(10)
(10)
—
—
41
41
(26)
(26)
1
1
5 $
5 $
(3) $
(3) $
17 $
17 $
— $
— $
74
74
(1)
(1)
—
—
(240)
(240)
167
167
—
—
—
—
6
6
—
—
—
—
(5)
(5)
—
—
1
1
—
—
148 $
148 $
8 $
8 $
250
250
Realized and unrealized gains (losses)
Realized and unrealized gains (losses)
—
—
—
—
(147)
(147)
—
—
—
—
147
147
(9)
(9)
2
2
1 $
1 $
148 $
148 $
— $
— $
— $
— $
354 $
354 $
423 $
423 $
(16)
(16)
132
132
(175)
(175)
(44)
(44)
187
187
82
82
177
177
(338)
(338)
(17)
(17)
27
27
438 $
438 $
354 $
354 $
3
3
6
6
(83)
(83)
(168)
(168)
8
8
—
—
217
217
47
47
289
289
(158)
(158)
(37)
(37)
65
65
423
423
Purchases
Purchases
Issuances
Issuances
Settlements
Settlements
Net transfers
Net transfers
Ending balance
Ending balance
Unrealized gains (losses)
Unrealized gains (losses)
Net derivatives: Credit
Net derivatives: Credit
Beginning balance
Beginning balance
Realized and unrealized gains (losses)
Realized and unrealized gains (losses)
Purchases
Purchases
Issuances
Issuances
Settlements
Settlements
Net transfers
Net transfers
Ending balance
Ending balance
(57) $
(57) $
(9) $
(9) $
(7)
(7)
Unrealized gains (losses)
Unrealized gains (losses)
Net derivatives: Foreign exchange
Net derivatives: Foreign exchange
Realized and unrealized gains (losses)
Realized and unrealized gains (losses)
Purchases
Purchases
Sales
Sales
Net transfers
Net transfers
Ending balance
Ending balance
Unrealized gains (losses)
Unrealized gains (losses)
Other sovereign government obligations
Other sovereign government obligations
Beginning balance
Beginning balance
Realized and unrealized gains (losses)
Realized and unrealized gains (losses)
Purchases
Purchases
Sales
Sales
Net transfers
Net transfers
Ending balance
Ending balance
Unrealized gains (losses)
Unrealized gains (losses)
State and municipal securities
State and municipal securities
Beginning balance
Beginning balance
Realized and unrealized gains (losses)
Realized and unrealized gains (losses)
Purchases
Purchases
Sales
Sales
Net transfers
Net transfers
Ending balance
Ending balance
Unrealized gains (losses)
Unrealized gains (losses)
MABS
MABS
Beginning balance
Beginning balance
Realized and unrealized gains (losses)
Realized and unrealized gains (losses)
Purchases
Purchases
Sales
Sales
Settlements
Settlements
Net transfers
Net transfers
Ending balance
Ending balance
Unrealized gains (losses)
Unrealized gains (losses)
Loans and lending commitments
Loans and lending commitments
Beginning balance
Beginning balance
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
6,870 $
6,870 $
5,945 $
5,945 $
5,122
5,122
Beginning balance
Beginning balance
Realized and unrealized gains (losses)
Realized and unrealized gains (losses)
38
38
(100)
(100)
182
182
Realized and unrealized gains (losses)
Realized and unrealized gains (losses)
Purchases
Purchases
Sales
Sales
Settlements
Settlements
Net transfers
Net transfers
Ending balance
Ending balance
Unrealized gains (losses)
Unrealized gains (losses)
Corporate and other debt
Corporate and other debt
Beginning balance
Beginning balance
Realized and unrealized gains (losses)
Realized and unrealized gains (losses)
Purchases
Purchases
Sales
Sales
Settlements
Settlements
Net transfers
Net transfers
Ending balance
Ending balance
Unrealized gains (losses)
Unrealized gains (losses)
2,337
2,337
5,746
5,746
3,616
3,616
(1,268)
(1,268)
(2,529)
(2,529)
(1,561)
(1,561)
(2,291)
(2,291)
(2,281)
(2,281)
(1,463)
(1,463)
(613)
(613)
89
89
49
49
5,073 $
5,073 $
6,870 $
6,870 $
5,945
5,945
(9) $
(9) $
(137) $
(137) $
131
131
$
$
$
$
$
$
1,076 $
1,076 $
701 $
701 $
418
418
650
650
(729)
(729)
(7)
(7)
(12)
(12)
106
106
734
734
(251)
(251)
(11)
(11)
(203)
(203)
$
$
$
$
1,396 $
1,396 $
1,076 $
1,076 $
361 $
361 $
70 $
70 $
475
475
82
82
487
487
(420)
(420)
(9)
(9)
86
86
701
701
23
23
Purchases
Purchases
Issuances
Issuances
Settlements
Settlements
Net transfers
Net transfers
Ending balance
Ending balance
Unrealized gains (losses)
Unrealized gains (losses)
Net derivatives: Equity
Net derivatives: Equity
Beginning balance
Beginning balance
Realized and unrealized gains (losses)
Realized and unrealized gains (losses)
Purchases
Purchases
Issuances
Issuances
Settlements
Settlements
Net transfers1
Net transfers1
Ending balance
Ending balance
Unrealized gains (losses)
Unrealized gains (losses)
December 2019 Form 10-K
98
2019
2019
2018
2018
2017
2017
$
$
95 $
95 $
166 $
166 $
(161)
(161)
(632)
(632)
(8)
(8)
32
32
(271)
(271)
249
249
97 $
97 $
1 $
1 $
29
29
13
13
48
48
95 $
95 $
17 $
17 $
757 $
757 $
1,020 $
1,020 $
78
78
40
40
(41)
(41)
—
—
24
24
(25)
(25)
149
149
(212)
(212)
—
—
(175)
(175)
446
446
(54)
(54)
173
173
233
233
166
166
(6)
(6)
958
958
96
96
102
102
(57)
(57)
(78)
(78)
(1)
(1)
858 $
858 $
757 $
757 $
1,020
1,020
67 $
67 $
(27) $
(27) $
88
88
618 $
618 $
1,218 $
1,218 $
17
17
98
98
(16)
(16)
1
1
59
59
111
111
63
63
(19)
(19)
(172)
(172)
(583)
(583)
420
420
322
322
29
29
(18)
(18)
608
608
(143)
(143)
777 $
777 $
618 $
618 $
1,218
1,218
87 $
87 $
140 $
140 $
341
341
40 $
40 $
41 $
41 $
(373)
(373)
(24)
(24)
144
144
(190)
(190)
111
111
43
43
33
33
13
13
(95)
(95)
56
56
(8)
(8)
124 $
124 $
(17) $
(17) $
40 $
40 $
23 $
23 $
75 $
75 $
(112) $
(112) $
(295)
(295)
179
179
2
2
—
—
7
7
180
180
3
3
(1)
(1)
2
2
4
4
(43)
(43)
—
—
(1)
(1)
455
455
3
3
41
41
(18)
(18)
(43)
(43)
(108)
(108)
—
—
(1)
(1)
31
31
9
9
(31) $
(31) $
75 $
75 $
(112)
(112)
(187) $
(187) $
118 $
118 $
(89)
(89)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$ (1,485) $
$ (1,485) $
1,208 $
1,208 $
(260)
(260)
155
155
305
305
122
122
184
184
136
136
988
988
(643)
(643)
(1,179)
(1,179)
(524)
(524)
242
242
307
307
314
314
(2,255)
(2,255)
396
396
28
28
$ (1,684) $ (1,485) $
$ (1,684) $ (1,485) $
1,208
1,208
$
$
(194) $
(194) $
211 $
211 $
159
159
Table of Contents
Notes to Consolidated Financial Statements
$ in millions
2019
2018
2017
Net derivatives: Commodity and other
Beginning balance
$
2,052 $
1,446 $
1,600
Realized and unrealized gains (losses)
Purchases
Issuances
Settlements
Net transfers
Ending balance
Unrealized gains (losses)
Deposits
Beginning balance
Realized and unrealized losses (gains)
Issuances
Settlements
Net transfers
Ending balance
Unrealized losses (gains)
Nonderivative trading liabilities
Beginning balance
Realized and unrealized losses (gains)
Purchases
Sales
Net transfers
Ending balance
Unrealized losses (gains)
$
$
$
$
$
$
$
$
Securities sold under agreements to repurchase
Beginning balance
Issuances
Net transfers
Ending balance
Unrealized losses (gains)
Other secured financings
Beginning balance
Realized and unrealized losses (gains)
Issuances
Settlements
Net transfers
Ending balance
Unrealized losses (gains)
Borrowings
Beginning balance
$
$
$
$
$
$
73
152
(92)
(611)
38
500
34
(18)
(81)
171
515
24
(57)
(343)
(293)
1,612 $
2,052 $
1,446
(113) $
272 $
20
27 $
47 $
20
101
(15)
46
(1)
9
(2)
(26)
179 $
20 $
27 $
(1) $
16 $
25 $
(21)
(65)
38
69
(6)
(18)
9
6
37 $
(21) $
16 $
(7) $
42
3
12
(3)
(7)
47
3
71
(1)
(139)
20
74
25
—
— $
150 $
149
—
—
— $
— $
—
(150)
— $
— $
1
—
150
—
208 $
239 $
434
5
—
(8)
(96)
(39)
8
(17)
17
109 $
208 $
5 $
(39) $
35
64
(251)
(43)
239
28
in the previous 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.
The unrealized gains (losses) during the period for assets and
liabilities within the Level 3 category 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 income statements.
Additionally, in the previous tables, consolidations of VIEs are
included in Purchases and deconsolidations of VIEs are included
in Settlements.
Significant Unobservable Inputs Used in Recurring and
Nonrecurring Level 3 Fair Value Measurements
Valuation Techniques and Unobservable Inputs
Balance / Range (Average1)
$ in millions,except
inputs
At December 31, 2019
At December 31, 2018
Assets at Fair Value on a Recurring Basis
$
$
$
$
U.S. Treasury and
agency securities
Comparable pricing:
Bond price
State and
municipal
securities
Comparable pricing:
Bond price
MABS
Comparable pricing:
Bond price
Loans and lending
commitments
Margin loan model:
Discount rate
Volatility skew
Credit Spread
Comparable pricing:
22
$
54
N/M
100 to 104 points
(100 points)
1
$
148
N/M 94 to 100 points (96 points)
438
$
354
0 to 96 points (47 points)
0 to 97 points (38 points)
5,073
$
6,870
1% to 9% (2%)
1% to 7% (2%)
15% to 80% (28%)
19% to 56% (28%)
9 to 39 bps (19 bps)
14 to 90 bps (36 bps)
$
3,806 $
2,984 $
2,014
Loan price
69 to 100 points (93 points)
60 to 101 points (95 points)
Realized and unrealized losses (gains)
728
(385)
196
Issuances
Settlements
Net transfers
Ending balance
Unrealized losses (gains)
Portion of Unrealized losses (gains)
recorded in OCI—Change in net DVA
1,181
1,554
1,968
(950)
(677)
(274)
(73)
(424)
(770)
$
$
4,088 $
3,806 $
2,984
600 $
(379) $
173
182
(184)
76
1. During 2018, the Firm transferred from Level 3 to Level 2 $2.4 billion of Equity
Derivatives due to a reduction in the significance of the unobservable inputs relating
to volatility.
Level 3 instruments may be hedged with instruments classified
in Level 1 and Level 2. The realized and unrealized gains (losses)
for assets and liabilities within the Level 3 category presented
Corporate and
other debt
$
Comparable pricing:
1,396
$
1,076
Bond price
11 to 108 points (84 points)
12 to 100 points (72 points)
Discounted cash flow:
Recovery rate
Discount rate
Option model:
At the money
volatility
35%
N/M
20%
15% to 21% (16%)
21%
24% to 78% (50%)
99
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
$ in millions,except
$ in millions,except
inputs
inputs
Corporate equities
Corporate equities
Comparable pricing:
Comparable pricing:
Equity price
Equity price
Investments
Investments
Discounted cash flow:
Discounted cash flow:
$
$
$
$
WACC
WACC
Exit multiple
Exit multiple
Market approach:
Market approach:
EBITDA multiple
EBITDA multiple
Comparable pricing:
Comparable pricing:
Equity price
Equity price
Bond volatility
Bond volatility
Inflation volatility
Inflation volatility
IR curve
IR curve
Credit
Credit
$
$
Credit default swap model:
Credit default swap model:
Cash-synthetic
Cash-synthetic
basis
basis
Bond price
Bond price
Credit spread
Credit spread
Funding spread
Funding spread
Correlation model:
Correlation model:
Credit correlation
Credit correlation
Foreign exchange2
Foreign exchange2
$
$
Option model:
Option model:
$
$
$
$
IR curve
IR curve
Contingency
Contingency
probability
probability
Equity2
Equity2
Option model:
Option model:
At the money
At the money
volatility
volatility
Volatility skew
Volatility skew
Equity correlation
Equity correlation
FX correlation
FX correlation
IR correlation
IR correlation
Commodity and
Commodity and
other
other
Option model:
Option model:
Forward power
Forward power
price
price
Commodity volatility
Commodity volatility
Cross-commodity
Cross-commodity
correlation
correlation
Balance / Range (Average1)
Balance / Range (Average1)
Balance / Range (Average1)
Balance / Range (Average1)
At December 31, 2019
At December 31, 2019
At December 31, 2018
At December 31, 2018
$ in millions,except
$ in millions,except
inputs
inputs
At December 31, 2019
At December 31, 2019
At December 31, 2018
At December 31, 2018
95
95
Liabilities Measured at Fair Value on a Recurring Basis
Liabilities Measured at Fair Value on a Recurring Basis
97
97
$
$
100%
100%
858
858
$
$
100%
100%
757
757
8% to 17% (15%)
8% to 17% (15%)
9% to 15% (10%)
9% to 15% (10%)
7 to 16 times (11 times)
7 to 16 times (11 times)
7 to 10 times (10 times)
7 to 10 times (10 times)
Discounted cash flow:
Discounted cash flow:
Deposits
Deposits
Option model:
Option model:
At the money
At the money
volatility
volatility
Other secured
Other secured
financings
financings
Funding spread
Funding spread
Option model:
Option model:
Volatility skew
Volatility skew
At the money
At the money
volatility
volatility
Borrowings
Borrowings
Option model:
Option model:
At the money
At the money
volatility
volatility
Volatility skew
Volatility skew
$
$
$
$
$
$
179
179
$
$
16% to 37% (20%)
16% to 37% (20%)
109
109
$
$
27
27
N/M
N/M
208
208
111 to 124 bps (117 bps)
111 to 124 bps (117 bps)
103 to 193 bps (148 bps)
103 to 193 bps (148 bps)
N/M
N/M
N/M
N/M
-1%
-1%
10% to 40% (25%)
10% to 40% (25%)
4,088
4,088
$
$
3,806
3,806
5% to 44% (21%)
5% to 44% (21%)
5% to 35% (22%)
5% to 35% (22%)
-2% to 0% (0%)
-2% to 0% (0%)
-2% to 0% (0%)
-2% to 0% (0%)
Equity correlation
Equity correlation
38% to 94% (78%)
38% to 94% (78%)
45% to 98% (85%)
45% to 98% (85%)
Equity - FX
Equity - FX
correlation
correlation
IR Correlation
IR Correlation
-75% to 26% (-25%)
-75% to 26% (-25%)
-75% to 50% (-27%)
-75% to 50% (-27%)
N/M
N/M
58% to 97% (85% / 91%)
58% to 97% (85% / 91%)
IR FX Correlation
IR FX Correlation
-26% to 10% (-7% / -7%)
-26% to 10% (-7% / -7%)
28% to 58% (44% / 44%)
28% to 58% (44% / 44%)
Nonrecurring Fair Value Measurement
Nonrecurring Fair Value Measurement
7 to 24 times (11 times)
7 to 24 times (11 times)
6 to 24 times (12 times)
6 to 24 times (12 times)
75% to 100% (99%)
75% to 100% (99%)
75% to 100% (96%)
75% to 100% (96%)
Net derivative and other contracts:
Net derivative and other contracts:
Interest rate
Interest rate
Option model:
Option model:
$
$
777
777
$
$
618
618
IR volatility skew
IR volatility skew
24% to 156% (63% / 59%)
24% to 156% (63% / 59%)
22% to 95% (48% / 51%)
22% to 95% (48% / 51%)
IR curve correlation
IR curve correlation
47% to 90% (72% / 72%)
47% to 90% (72% / 72%)
4% to 15% (13% / 14%)
4% to 15% (13% / 14%)
N/M
N/M
N/M
N/M
24% to 63% (44% / 41%)
24% to 63% (44% / 41%)
23% to 65% (44% / 40%)
23% to 65% (44% / 40%)
1%
1%
124
124
$
$
1%
1%
40
40
6 points
6 points
8 to 9 points (9 points)
8 to 9 points (9 points)
Loans
Loans
$
$
1,500
1,500
$
$
1,380
1,380
0 to 104 points (45 points)
0 to 104 points (45 points)
0 to 75 points (26 points)
0 to 75 points (26 points)
Corporate loan model:
Corporate loan model:
9 to 469 bps (81 bps)
9 to 469 bps (81 bps)
246 to 499 bps (380 bps)
246 to 499 bps (380 bps)
47 to 117 bps (84 bps)
47 to 117 bps (84 bps)
47 to 98 bps (93 bps)
47 to 98 bps (93 bps)
Credit spread
Credit spread
Warehouse model:
Warehouse model:
Credit spread
Credit spread
69 to 446 bps (225 bps)
69 to 446 bps (225 bps)
97 to 434 bps (181 bps)
97 to 434 bps (181 bps)
287 to 318 bps (297 bps)
287 to 318 bps (297 bps)
223 to 313 bps (247 bps)
223 to 313 bps (247 bps)
29% to 62% (36%)
29% to 62% (36%)
36% to 69% (44%)
36% to 69% (44%)
(31) $
(31) $
75
75
IR - FX correlation
IR - FX correlation
32% to 56% (46% / 46%)
32% to 56% (46% / 46%)
53% to 56% (55% / 55%)
53% to 56% (55% / 55%)
IR volatility skew
IR volatility skew
24% to 156% (63% / 59%)
24% to 156% (63% / 59%)
22% to 95% (48% / 51%)
22% to 95% (48% / 51%)
Points—Percentage of par
IR—Interest rate
FX—Foreign exchange
1. A single amount is disclosed for range and average when there is no significant
difference between the minimum, maximum and average. Amounts represent
weighted averages except where simple averages and the median of the inputs are
more relevant.
10% to 11% (10% / 10%)
10% to 11% (10% / 10%)
N/M
N/M
2. Includes derivative contracts with multiple risks (i.e., hybrid products).
85% to 95% (94% / 95%)
85% to 95% (94% / 95%)
90% to 95% (93% / 95%)
90% to 95% (93% / 95%)
(1,684) $
(1,684) $
(1,485)
(1,485)
9% to 90% (36%)
9% to 90% (36%)
17% to 63% (38%)
17% to 63% (38%)
-2% to 0% (-1%)
-2% to 0% (-1%)
-2% to 0% (-1%)
-2% to 0% (-1%)
5% to 98% (70%)
5% to 98% (70%)
5% to 96% (71%)
5% to 96% (71%)
-79% to 60% (-37%)
-79% to 60% (-37%)
-60% to 55% (-26%)
-60% to 55% (-26%)
-11% to 44% (18% / 16%)
-11% to 44% (18% / 16%)
-7% to 45% (15% / 12%)
-7% to 45% (15% / 12%)
1,612
1,612
$
$
2,052
2,052
$3 to $182 ($28) per MWh
$3 to $182 ($28) per MWh
$3 to $185 ($31) per MWh
$3 to $185 ($31) per MWh
7% to 183% (18%)
7% to 183% (18%)
7% to 187% (17%)
7% to 187% (17%)
43% to 99% (93%)
43% to 99% (93%)
5% to 99% (93%)
5% to 99% (93%)
The previous tables provide information on the valuation
techniques, significant unobservable inputs, and the 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 of financial instruments.
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. There are no
predictable
significant
relationships between multiple
unobservable inputs attributable to a given valuation technique.
An increase (decrease) to the following significant unobservable
inputs would generally result in a higher (lower) fair value.
• Comparable bond or loan price: A pricing input used when
prices for the identical instrument are not available.
Significant subjectivity may be involved when fair value is
determined using pricing data available for comparable
December 2019 Form 10-K
100
Table of Contents
Notes to Consolidated Financial Statements
instruments. Valuation using comparable instruments can be
done by calculating an implied yield (or spread over a liquid
benchmark) from the price of a comparable bond or loan, then
adjusting that yield (or spread) to derive a value for the bond
or loan. The adjustment to yield (or spread) should account
for relevant differences in the bonds or loans such as maturity
or credit quality. Alternatively, a price-to-price basis can be
assumed between the comparable instrument and the bond or
loan being valued in order to establish the value of the bond
or loan.
• Comparable equity price: A price derived from equity raises,
share buybacks and external bid levels, etc. A discount or
premium may be included in the fair value estimate.
• Contingency probability: Probability associated with the
realization of an underlying event upon which the value of an
asset is contingent.
• EBITDA multiple / Exit multiple: The ratio of Enterprise Value
to EBITDA, where Enterprise Value is the aggregate value of
equity and debt minus cash and cash equivalents. The
EBITDA multiple reflects the value of the company in terms
of its full-year EBITDA, whereas the exit multiple reflects
the value of the company in terms of its full-year expected
EBITDA at exit. Either multiple allows comparison between
companies from an operational perspective as the effect of
capital structure, taxation and depreciation/amortization is
excluded.
• Recovery rate: Amount expressed as a percentage of par that
is expected to be received when a credit event occurs.
An increase (decrease) to the following significant unobservable
inputs would generally result in a lower (higher) fair value.
• Cash-synthetic basis: The measure of the price differential
between cash financial instruments and their synthetic
derivative-based equivalents. The range disclosed in the
previous table signifies the number of points by which the
synthetic bond equivalent price is higher than the quoted price
of the underlying cash bonds.
• Credit spread: The credit spread reflects the additional net
yield an investor can earn from a security with more credit
risk relative to one with less credit risk. The credit spread of
a particular security is often quoted in relation to the yield on
a credit risk-free benchmark security or reference rate,
typically either U.S. Treasury or LIBOR.
• Funding spread: The cost of borrowing defined as the
incremental spread over the OIS rate for a specific collateral
rate (which refers to the rate applicable to a specific type of
security pledged as collateral).
• WACC: WACC represents the theoretical rate of return
required to debt and equity investors. The WACC is used in
a discounted cash flow model that calculates the value of the
equity. The model assumes that the cash flow assumptions,
including projections, are fully reflected in the current equity
value, while the debt to equity ratio is held constant.
An increase (decrease) to the following significant unobservable
inputs would generally result in an impact to the fair value, but
the magnitude and direction of the impact would depend on
whether the Firm is long or short the exposure.
• Correlation: A pricing input where the payoff is driven by
more than one underlying risk. Correlation is a measure of
the relationship between the movement of two variables (i.e.,
how the change in one variable influences a change in the
other variable).
• Interest rate curve: The term structure of interest rates
(relationship between interest rates and the time to maturity)
and a market’s measure of future interest rates at the time of
observation. An interest rate curve is used to set interest rate
and foreign exchange derivative cash flows and is a pricing
input used in the discounting of any OTC derivative cash flow.
• Volatility: The measure of variability in possible returns for
an instrument given how much that instrument changes in
value over time. Volatility is a pricing input for options and,
generally, the lower the volatility, the less risky the option.
The level of volatility used in the valuation of a particular
option depends on a number of factors, including the nature
of the risk underlying that option, the tenor and the strike price
of the option.
• Volatility skew: The measure of the difference in implied
volatility for options with identical underliers and expiry dates
but with different strikes.
Net Asset Value Measurements
Fund Interests
$ in millions
Private equity
Real estate
Hedge1
Total
At December 31, 2019
At December 31, 2018
Carrying
Value
Commitment
Carrying
Value
Commitment
$
$
2,078 $
450 $
1,374 $
1,349
94
150
4
1,105
103
3,521 $
604 $
2,582 $
316
161
4
481
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-based 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 the fund investments are accounted for under
the equity method or fair value.
101
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
Private Equity. Funds
that pursue multiple strategies,
including leveraged buyouts, venture capital, infrastructure
growth capital, distressed investments and mezzanine capital.
In addition, the funds may be structured with a focus on specific
geographic regions.
Real Estate. Funds that invest in real estate assets such as
commercial office buildings, retail properties, multi-family
residential properties, developments or hotels. In addition, the
funds may be structured with a focus on specific geographic
regions.
Investments in private equity and real estate funds generally are
not redeemable due to the closed-end nature of these funds.
Instead, distributions from each fund will be received as the
underlying investments of the funds are disposed and monetized.
Hedge. Funds that pursue various investment strategies,
including long-short equity, fixed income/credit, event-driven
and multi-strategy.
See Note 13 for information regarding general partner
guarantees, which include potential obligations to return
performance fee distributions previously received. See Note 21
for information regarding carried interest at risk of reversal.
Nonredeemable Funds by Contractual Maturity
$ in millions
Less than 5 years
5-10 years
Over 10 years
Total
Carrying Value at December 31, 2019
Private Equity
Real Estate
$
$
1,205 $
842
31
2,078 $
1,041
202
106
1,349
December 2019 Form 10-K
102
Nonrecurring Fair Value Measurements
Carrying and Fair Values
$ in millions
Assets
Loans
Other assets—Other investments
Total
Liabilities
Other liabilities and accrued
expenses—Lending commitments
Total
$ in millions
Assets
Loans
Other assets—Other investments
Total
Liabilities
Other liabilities and accrued
expenses—Lending commitments
Total
At December 31, 2019
Level 31
Total
Level 2
$
$
$
$
$
$
$
$
1,543 $
1,500 $
3,043
—
113
113
1,543 $
1,613 $
3,156
132 $
132 $
69 $
69 $
201
201
At December 31, 2018
Level 31
Level 2
Total
2,307 $
1,380 $
3,687
14
100
114
2,321 $
1,480 $
3,801
292 $
292 $
65 $
65 $
357
357
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
$ in millions
2019
2018
2017
Assets
Loans2
Other assets—Other investments3
Other assets—Premises, equipment
and software4
Total
Liabilities
Other liabilities and accrued
expenses—Lending commitments2
Total
$
$
$
$
18 $
(56)
(22)
(68) $
(56)
(46)
(60) $
(170) $
87 $
87 $
(48) $
(48) $
18
(66)
(25)
(73)
75
75
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, they are recorded in Other expenses.
2. Nonrecurring 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 CDS
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 generally include
write-offs related to the disposal of certain assets.
Table of Contents
Notes to Consolidated Financial Statements
Financial Instruments Not Measured at Fair Value
Carrying
Value
$ in millions
Financial assets
Cash and cash equivalents:
At December 31, 2019
Fair Value
Level 1
Level 2
Level 3
Total
$ in millions
At December 31, 2018
Fair Value
Level 1
Level 2
Level 3
Total
Carrying
Value
$
4,293 $ 4,293 $
— $
— $ 4,293
45,366
45,366
32,512
32,512
—
—
— 45,366
— 32,512
Financial assets
Cash and cash equivalents:
Cash and due from
banks
Interest bearing
deposits with banks
Restricted cash
Investment securities—
$
30,541 $ 30,541 $
— $
— $ 30,541
21,299
21,299
35,356
35,356
—
—
— 21,299
— 35,356
43,502
30,661
12,683
789
44,133
HTM
30,771
17,473
12,018
474
29,965
88,220
106,549
51,134
130,637
— 86,794
1,442
88,236
— 106,551
— 106,551
— 48,215
2,872
51,087
— 22,293 108,059
130,352
495
—
495
—
495
Securities purchased
under agreements to
resell
Securities borrowed
Customer and other
receivables1
Loans2
Other assets
Financial liabilities
98,522
116,313
47,972
115,579
— 97,611
866
98,477
— 116,312
— 116,312
— 44,620
3,219
47,839
— 25,604
90,121
115,725
461
—
461
—
461
53,467
— 53,486
— 53,486
—
—
8,506
6,800
—
92
8,506
6,892
— 195,035
— 195,035
8,506
6,889
195,035
128,166
Commitment
Amount
— 133,563
10
133,573
Borrowings
Securities sold under
agreements to
repurchase
Securities loaned
Other secured financings
Customer and other
payables1
48,947
11,908
4,221
176,561
138,478
Commitment
Amount
— 48,385
525
48,910
— 11,906
— 11,906
—
3,233
994
4,227
— 176,561
— 176,561
— 140,085
30
140,115
Cash and due from
banks
Interest bearing
deposits with banks
Restricted cash
Investment securities—
HTM
Securities purchased
under agreements to
resell
Securities borrowed
Customer and other
receivables1
Loans2
Other assets
Financial liabilities
Securities sold under
agreements to
repurchase
Securities loaned
Other secured financings
Customer and other
payables1
Borrowings
Deposits
$
188,257 $
— $188,639 $
— $188,639
Deposits
$
187,378 $
— $187,372 $
— $187,372
Lending
commitments3
$
119,004 $
— $
748 $
338 $ 1,086
Lending
commitments3
$
104,844 $
— $ 1,249 $
321 $ 1,570
1. Accrued interest and dividend receivables and payables have been excluded. Carrying
value approximates fair value for these receivables and payables.
2. Amounts include loans measured at fair value on a nonrecurring basis.
3. Represents Lending commitments accounted for as Held for Investment and Held for
Sale. For a further discussion on lending commitments, see Note 13.
The previous tables exclude certain financial instruments such
as equity method investments and all non-financial assets and
liabilities such as the value of the long-term relationships with
the Firm’s deposit customers.
4. Fair Value Option
The Firm has 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.
103
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
Borrowings Measured at Fair Value on a Recurring Basis
Difference between Contractual Principal and Fair Value1
$ in millions
At
December 31,
2019
At
December 31,
2018
Business Unit Responsible for Risk Management
Equity
Interest rates
Commodities
Credit
Foreign exchange
Total
$
$
30,214 $
27,298
4,501
1,246
1,202
24,494
22,343
2,735
856
756
64,461 $
51,184
Net Revenues from Borrowings under the Fair Value Option
$ in millions
Trading revenues
Interest expense
Net revenues1
2019
2018
2017
$ (6,932) $
2,679 $ (4,507)
375
321
443
$ (7,307) $
2,358 $ (4,950)
$ in millions
Loans and other debt2
Nonaccrual loans2
Borrowings3
At
December 31,
2019
At
December 31,
2018
$
13,037 $
10,849
(1,665)
13,094
10,831
2,657
1. Amounts indicate contractual principal greater than or (less than) fair value.
2. 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.
3. Excludes borrowings where the repayment of the initial principal amount fluctuates
based on changes in a reference price or index.
tables exclude non-recourse debt
The previous
from
consolidated VIEs, liabilities related to transfers of financial
assets treated as collateralized financings, pledged commodities
and other liabilities that have specified assets attributable to
them.
1. Amounts do not reflect any gains or losses from related economic hedges.
Fair Value Loans on Nonaccrual Status
Gains (losses) from changes in fair value are recorded in Trading
revenues and are mainly attributable to movements in the
reference price or index, interest rates or foreign exchange rates.
Gains (Losses) Due to Changes in Instrument-Specific Credit
Risk
$ in millions
2019
Borrowings
Loans and other debt1
Lending commitments
Other
2018
Borrowings
Loans and other debt1
Lending commitments
Other
2017
Borrowings
Loans and other debt1
Lending commitments
Other
Trading
Revenues
OCI
$
$
$
(11) $
(2,140)
223
(2)
—
—
—
(30)
(24) $
1,962
165
(3)
(32)
(12) $
159
(2)
—
—
—
41
(903)
—
—
(7)
$ in millions
Cumulative pre-tax DVA
gain (loss) recognized in
AOCI
At
December 31,
2019
At
December 31,
2018
$
(1,998) $
172
1. Loans and other debt instrument-specific credit gains (losses) were determined by
excluding the non-credit components of gains and losses.
$ in millions
Nonaccrual loans
Nonaccrual loans 90 or more
days past due
At
December 31,
2019
At
December 31,
2018
$
$
1,100 $
330 $
1,497
812
5. Derivative Instruments and Hedging Activities
The Firm trades and makes markets globally in listed futures,
OTC swaps,
forwards, options and other derivatives
referencing, among other things, interest rates, equities,
currencies,
investment grade and non-investment grade
corporate credits, loans, bonds, U.S. and other sovereign
securities, emerging market bonds and loans, credit indices,
ABS indices, property indices, mortgage-related and other ABS,
and real estate loan products. The Firm uses these instruments
for market-making, foreign currency exposure management,
and asset and liability management.
The Firm manages its market-making 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., futures, forwards, swaps and options). The Firm
manages the market risk associated with its market-making
activities on a Firmwide basis, on a worldwide trading division
level and on an individual product basis.
December 2019 Form 10-K
104
Table of Contents
Notes to Consolidated Financial Statements
Derivative Fair Values
At December 31, 2019
At December 31, 2018
Assets
Assets
$ in millions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
$ in millions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
Designated as accounting hedges
Interest rate
Foreign exchange
Total
$
673 $
— $
— $
41
714
1
1
—
—
673
42
715
Interest rate
Foreign exchange
Total
$
512 $
1 $
— $
27
539
8
9
—
—
513
35
548
Not designated as accounting hedges
Not designated as accounting hedges
Interest rate
Credit
Foreign exchange
Equity
Commodity and other
Total
179,450
4,895
62,957
27,621
9,306
4,839
2,417
1,399
—
—
519
184,808
Interest rate
—
22
7,312
64,378
Credit
Foreign exchange
23,447
51,068
Equity
1,952
11,258
Commodity and other
153,768
4,630
61,846
24,590
10,538
3,887
1,498
1,310
—
—
697
158,352
—
55
6,128
63,211
23,284
47,874
1,934
12,472
284,229
8,655
25,940
318,824
Total
255,372
6,695
25,970
288,037
Total gross derivatives
$ 284,943 $ 8,656 $
25,940 $ 319,539
Total gross derivatives
$ 255,911 $ 6,704 $
25,970 $ 288,585
Amounts offset
Counterparty netting
Cash collateral netting
Total in Trading assets
Amounts not offset1
Amounts offset
(213,710)
(7,294)
(24,037)
(245,041)
Counterparty netting
(190,220)
(5,260)
(24,548)
(220,028)
(41,222)
(1,275)
— (42,497)
Cash collateral netting
(38,204)
(1,180)
— (39,384)
$ 30,011 $
87 $
1,903 $ 32,001
Total in Trading assets
Amounts not offset1
$ 27,487 $
264 $
1,422 $ 29,173
Financial instruments collateral
(15,596)
—
—
— (15,596)
Financial instruments collateral
(12,467)
—
(46)
Other cash collateral
(31)
—
—
— (12,467)
—
(31)
(46)
Other cash collateral
Net amounts
$ 14,369 $
87 $
1,903 $ 16,359
Net amounts
$ 14,989 $
264 $
1,422 $ 16,675
Net amounts for which master netting or collateral agreements
are not in place or may not be legally enforceable
$
1,900
are not in place or may not be legally enforceable
$
2,206
Net amounts for which master netting or collateral agreements
Liabilities
Liabilities
$ in millions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
$ in millions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
Designated as accounting hedges
Interest rate
Foreign exchange
Total
$
1 $
— $
— $
121
122
38
38
—
—
1
159
160
Interest rate
Foreign exchange
Total
$
176 $
— $
— $
62
238
24
24
—
—
176
86
262
Not designated as accounting hedges
Not designated as accounting hedges
Interest rate
Credit
Foreign exchange
Equity
Commodity and other
Total
168,597
4,798
65,965
30,135
7,713
3,597
3,123
1,492
—
—
436
172,630
Interest rate
—
39
7,921
67,496
Credit
Foreign exchange
22,733
52,868
Equity
1,911
9,624
Commodity and other
142,592
4,545
62,099
27,119
6,983
2,669
1,608
1,302
—
—
663
145,924
—
19
6,153
63,420
23,521
50,640
2,057
9,040
277,208
8,212
25,119
310,539
Total
243,338
5,579
26,260
275,177
Total gross derivatives
$ 277,330 $ 8,250 $
25,119 $ 310,699
Total gross derivatives
$ 243,576 $ 5,603 $
26,260 $ 275,439
Amounts offset
Counterparty netting
Cash collateral netting
Total in Trading liabilities
Amounts not offset1
Financial instruments collateral
Other cash collateral
Net amounts
Amounts offset
(213,710)
(7,294)
(24,037)
(245,041)
Counterparty netting
(190,220)
(5,260)
(24,548)
(220,028)
(36,392)
(832)
— (37,224)
Cash collateral netting
(27,860)
(293)
— (28,153)
$ 27,228 $
124 $
1,082 $ 28,434
Total in Trading liabilities
Amounts not offset1
$ 25,496 $
50 $
1,712 $ 27,258
(7,747)
(14)
—
—
(287)
(8,034)
Financial instruments collateral
—
(14)
Other cash collateral
(4,709)
(53)
—
(1)
(766)
(5,475)
—
(54)
$ 19,467 $
124 $
795 $ 20,386
Net amounts
$ 20,734 $
49 $
946 $ 21,729
Net amounts for which master netting or collateral agreements
are not in place or may not be legally enforceable
$
3,680
are not in place or may not be legally enforceable
$
4,773
Net amounts for which master netting or collateral agreements
1. 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.
105
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
See Note 3 for information related to the unsettled fair value of
futures contracts not designated as accounting hedges, which
are excluded from the previous tables.
$ in billions
Liabilities
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Derivative Notionals
At December 31, 2019
$ in billions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
Assets
Interest rate
Credit
Not designated as accounting hedges
$
14 $
94 $
— $
108
Foreign exchange
2
16
—
94
—
—
2
110
Equity
Commodity and other
Total
Interest rate
Foreign exchange
Total
Interest rate
Credit
Foreign exchange
Equity
Commodity and other
Total
136
2,667
429
99
79
91
—
—
—
10
419
61
215
2,768
848
160
7,561
7,568
1,222
16,351
Total gross derivatives
$
7,577 $ 7,662 $
1,222 $ 16,461
$ in billions
Liabilities
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
Designated as accounting hedges
Interest rate
Foreign exchange
Total
$
2 $
107 $
— $
109
5
7
1
108
—
—
6
115
Not designated as accounting hedges
4,946
5,735
781
11,462
162
2,451
389
72
73
114
—
—
—
17
602
65
235
2,582
991
137
8,020
5,922
1,465
15,407
its exposure.
The Firm believes that the notional amounts of derivative
contracts generally overstate
In most
circumstances, notional amounts are used only as a reference
point from which to calculate amounts owed between the parties
to the contract. Furthermore, notional amounts do not reflect the
benefit of legally enforceable netting arrangements or risk
mitigating transactions.
Gains (Losses) on Accounting Hedges
4,230
7,398
732
12,360
Total gross derivatives
$
8,027 $ 6,030 $
1,465 $ 15,522
Interest rate
Foreign exchange
Total
$
— $
71 $
— $
9
9
2
73
—
—
71
11
82
Not designated as accounting hedges
2019
$ in millions
Fair value hedges—Recognized in Interest income1
2018
2017
Interest rate contracts
Investment Securities—AFS
$
(10) $
10
(4) $
4
—
—
Interest rate
Credit
Foreign exchange
Equity
Commodity and other
Total
4,185
6,866
666
11,717
Fair value hedges—Recognized in Interest expense
153
2,841
455
85
84
91
—
—
—
14
515
61
237
2,946
970
146
Interest rate contracts
Deposits2
Borrowings
$
4,212 $ (1,529) $ (1,591)
7
—
—
(4,288)
1,511
1,393
Net investment hedges—Foreign exchange contracts
7,719
7,041
1,256
16,016
Recognized in OCI
$
14 $
295 $
(365)
Total gross derivatives
$
7,728 $ 7,114 $
1,256 $ 16,098
Forward points excluded from hedge
effectiveness testing—Recognized in
Interest income
136
68
(20)
At December 31, 2018
Assets
$ in billions
Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total
Designated as accounting hedges
Interest rate
Foreign exchange
Total
$
15 $
52 $
— $
5
20
1
53
—
—
67
6
73
Not designated as accounting hedges
Interest rate
Credit
Foreign exchange
Equity
Commodity and other
Total
4,807
6,708
1,157
12,672
162
2,436
373
97
74
118
—
—
—
14
371
67
236
2,568
744
164
7,875
6,900
1,609
16,384
Total gross derivatives
$
7,895 $ 6,953 $
1,609 $ 16,457
December 2019 Form 10-K
106
Table of Contents
Notes to Consolidated Financial Statements
Fair Value Hedges—Hedged Items
$ in millions
Investment securities—AFS1
Carrying amount3 currently or previously
hedged
Basis adjustments included in carrying
amount4
Deposits2
Carrying amount3 currently or previously
hedged
Basis adjustments included in carrying
amount4
Borrowings
Carrying amount3 currently or previously
hedged
Basis adjustments included in carrying
amount4
$
$
$
$
$
$
At
December 31,
2019
At
December 31,
2018
event of one-notch or two-notch downgrade scenarios based on
the relevant contractual downgrade triggers.
Maximum Potential Payout/Notional of Credit Protection Sold1
917 $
201
$ in billions
< 1
1-3
3-5
Over 5
Total
Years to Maturity at December 31, 2019
14 $
5,435 $
(7) $
4
—
—
102,456 $
102,899
Single-name CDS
Investment grade
Non-investment grade
Total
Index and basket CDS
Investment grade
Non-investment grade
Total
Total CDS sold
2,593 $
(1,689)
Other credit contracts
$
$
$
$
$
$
16 $
17 $
33 $
9 $
9
9
16
1
75
35
25 $
26 $
49 $
10 $
110
4 $
7 $
46 $
11 $
7
4
17
10
68
38
11 $
11 $
63 $
21 $
106
36 $
37 $
112 $
31 $
216
—
—
—
—
—
36 $
37 $
112 $
31 $
216
1. The Firm began designating interest rate swaps as fair value hedges of certain AFS
securities in the third quarter of 2018.
2. The Firm began designating interest rate swaps as fair value hedges of certain
Deposits in the fourth quarter of 2019.
3. Carrying amount represents amortized cost basis.
4. Hedge accounting basis adjustments for AFS securities, Deposits and Borrowings are
primarily related to outstanding hedges.
Derivatives with Credit Risk-Related Contingencies
Net Derivative Liabilities and Collateral Posted
$ in millions
Net derivative liabilities with credit risk-
related contingent features
Collateral posted
At
December 31,
2019
At
December 31,
2018
$
21,620 $
17,392
16,403
11,981
The previous 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.
Incremental Collateral and Termination Payments upon
Potential Future Ratings Downgrade
$ in millions
One-notch downgrade
Two-notch downgrade
Bilateral downgrade agreements included in the amounts
above1
At
December 31,
2019
$
$
254
328
498
1. Amount 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.
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 S&P Global Ratings.
The previous 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
Total credit protection sold
CDS protection sold with identical protection purchased
$
187
$ in billions
Single-name CDS
Investment grade
Non-investment grade
Total
Index and basket CDS
Investment grade
Non-investment grade
Total
Total CDS sold
Other credit contracts
Total credit protection sold
Years to Maturity at December 31, 2018
< 1
1-3
3-5
Over 5
Total
$
$
$
$
$
$
22 $
24 $
19 $
8 $
10
11
9
1
73
31
32 $
35 $
28 $
9 $
104
5 $
10 $
61 $
7 $
5
6
13
13
83
37
10 $
16 $
74 $
20 $
120
42 $
51 $
102 $
29 $
224
—
—
—
—
—
42 $
51 $
102 $
29 $
224
CDS protection sold with identical protection purchased
$
210
Fair Value Asset (Liability) of Credit Protection Sold1
$ in millions
Single-name CDS
Investment grade
Non-investment grade
Total
Index and basket CDS
Investment grade
Non-investment grade
Total
Total CDS sold
Other credit contracts
Total credit protection sold
At
December 31,
2019
At
December 31,
2018
$
$
$
$
$
$
1,057 $
(540)
517 $
1,052 $
134
1,186 $
1,703 $
(17)
1,686 $
118
(403)
(285)
314
(1,413)
(1,099)
(1,384)
(14)
(1,398)
1. Investment grade/non-investment grade determination is based on the internal credit
rating of the reference obligation. 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.
107
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
Protection Purchased with CDS
$ in billions
Single name
Index and basket
Tranched index and basket
Total
$ in millions
Single name
Index and basket
Tranched index and basket
Total
Notional
At
December 31,
2019
At
December 31,
2018
$
$
118 $
103
15
236 $
116
117
14
247
Fair Value Asset (Liability)
At
December 31,
2019
At
December 31,
2018
$
$
(723) $
(1,139)
(450)
(2,312) $
277
1,333
(251)
1,359
The Firm enters into credit derivatives, principally 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.
The fair value amounts as shown in the previous tables are prior
to cash collateral or counterparty netting.
The purchase of credit protection does not represent the sole
manner in which the Firm risk manages its exposure to credit
derivatives. The Firm manages its exposure to these derivative
contracts through a variety of risk mitigation strategies, which
include managing the credit and correlation risk across single-
name, non-tranched indices and baskets, tranched indices and
baskets, and cash positions. Aggregate market risk limits have
been established for credit derivatives, and market risk measures
are routinely monitored against these limits. The Firm may also
recover amounts on the underlying reference obligation
delivered to the Firm under CDS where credit protection was
sold.
Single-Name CDS. A CDS protects the buyer against the loss
of principal on a bond or loan in case of a default by the issuer.
The protection buyer pays a periodic premium (generally
quarterly) over the life of the contract and is protected for the
period. The Firm, in turn, performs under a CDS if a credit event
as defined under the contract occurs. Typical credit events
include bankruptcy, dissolution or insolvency of the referenced
entity, failure to pay and restructuring of the obligations of the
referenced entity.
Index and Basket CDS. Index and basket CDS are products
where credit protection is provided on a portfolio of single-name
CDS. Generally, in the event of a default on one of the underlying
names, the Firm pays a pro rata portion of the total notional
amount of the CDS.
The Firm also enters into tranched index and basket CDS where
credit protection is provided on a particular portion of the
portfolio loss distribution. The most junior tranches cover initial
defaults, and once losses exceed the notional of the tranche, they
are passed on to the next most senior tranche in the capital
structure.
Other Credit Contracts. The Firm has invested in CLNs and
CDOs, which are hybrid instruments containing embedded
derivatives, in which credit protection has been sold to the issuer
of the note. If there is a credit event of a reference entity
underlying the instrument, the principal balance of the note may
not be repaid in full to the Firm.
December 2019 Form 10-K
108
Table of Contents
Notes to Consolidated Financial Statements
6. Investment Securities
AFS and HTM Securities
$ in millions
AFS securities
At December 31, 2019
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$ in millions
AFS securities
At December 31, 2018
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
U.S. government and agency securities:
U.S. government and agency securities:
$ 32,465 $
224 $
111 $ 32,578
$
36,268 $
40 $
656 $ 35,652
U.S. Treasury securities
U.S. agency securities1
Total U.S. government and
agency securities
Corporate and other debt:
Agency CMBS
Corporate bonds
State and municipal
securities
FFELP student loan
ABS2
Total corporate and other
debt
Total AFS securities
HTM securities
U.S. Treasury securities
U.S. agency securities1
Total U.S. government and
agency securities
Corporate and other debt:
Non-agency CMBS
Total HTM securities
Total investment
securities
20,725
53,190
4,810
1,891
481
1,580
8,762
61,952
30,145
12,589
42,734
768
43,502
249
473
55
17
22
1
95
568
568
151
719
22
741
100
20,874
211
53,452
57
1
—
28
4,808
1,907
503
1,553
86
297
8,771
62,223
52
57
30,661
12,683
109
43,344
1
789
110
44,133
$ 105,454 $
1,309 $
407 $106,356
U.S. government and agency securities:
U.S. Treasury securities
U.S. agency securities1
Total U.S. government and
agency securities
Corporate and other debt:
Agency CMBS
Non-agency CMBS
Corporate bonds
State and municipal
securities
FFELP student loan
ABS2
Total corporate and other
debt
Total AFS securities
HTM securities
U.S. Treasury securities
U.S. agency securities1
Total U.S. government and
agency securities
Corporate and other debt:
Non-agency CMBS
Total HTM securities
Total investment
securities
U.S. government and agency securities:
20,740
57,008
1,054
461
1,585
200
1,967
5,267
62,275
17,832
12,456
30,288
483
30,771
10
50
—
—
—
2
10
12
62
44
8
52
—
52
497
20,253
1,153
55,905
62
14
32
—
15
992
447
1,553
202
1,962
123
5,156
1,276
61,061
403
446
17,473
12,018
849
29,491
9
474
858
29,965
$
93,046 $
114 $
2,134 $ 91,026
1. U.S. agency securities consist mainly of agency-issued debt, agency mortgage pass-
through pool securities and CMOs.
2. Underlying loans are backed by a guarantee, ultimately from the U.S. Department of
Education, of at least 95% of the principal balance and interest outstanding.
109
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
Investment Securities in an Unrealized Loss Position
$ in millions
AFS securities
U.S. government and agency securities:
U.S. Treasury securities
U.S. agency securities
Total U.S. government and agency securities
Corporate and other debt:
Agency CMBS
Corporate bonds
FFELP student loan ABS
Total corporate and other debt
Total AFS securities
HTM securities
U.S. government and agency securities:
U.S. Treasury securities
U.S. agency securities
Total U.S. government and agency securities
Corporate and other debt:
Non-agency CMBS
Total HTM securities
Total investment securities
$ in millions
AFS securities
U.S. government and agency securities:
U.S. Treasury securities
U.S. agency securities
Total U.S. government and agency securities
Corporate and other debt:
Agency CMBS
Non-agency CMBS
Corporate bonds
FFELP student loan ABS
Total corporate and other debt
Total AFS securities
HTM securities
U.S. government and agency securities:
U.S. Treasury securities
U.S. agency securities
Total U.S. government and agency securities
Corporate and other debt:
Non-agency CMBS
Total HTM securities
Total investment securities
At December 31, 2019
Less than 12 Months
12 Months or Longer
Total
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
$
4,793 $
28 $
7,904 $
83 $
12,697 $
2,641
7,434
2,294
194
91
2,579
10,013
6,042
2,524
8,566
167
8,733
20
48
26
1
—
27
75
52
18
70
1
71
7,697
15,601
681
44
1,165
1,890
17,491
651
2,420
3,071
65
3,136
80
163
31
—
28
59
222
—
39
39
—
39
10,338
23,035
2,975
238
1,256
4,469
6,693
4,944
11,637
232
11,869
27,504
297
111
100
211
57
1
28
86
52
57
109
1
110
407
$
18,746 $
146 $
20,627 $
261 $
39,373 $
At December 31, 2018
Less than 12 Months
12 Months or Longer
Total
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
$
19,937 $
541 $
5,994 $
115 $
25,931 $
12,904
32,841
808
—
470
1,366
2,644
383
924
62
—
7
15
84
35,485
1,008
—
410
410
206
616
—
1
1
1
2
4,142
10,136
—
446
1,010
—
1,456
11,592
11,161
10,004
21,165
216
21,381
114
229
—
14
25
—
39
17,046
42,977
808
446
1,480
1,366
4,100
268
47,077
403
445
848
8
856
11,161
10,414
21,575
422
21,997
656
497
1,153
62
14
32
15
123
1,276
403
446
849
9
858
$
36,101 $
1,010 $
32,973 $
1,124 $
69,074 $
2,134
December 2019 Form 10-K
110
Table of Contents
Notes to Consolidated Financial Statements
that are other-than-temporarily
The Firm believes there are no securities in an unrealized loss
impaired after
position
performing the analysis described in Note 2. For AFS 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 the
amortized cost basis. Furthermore, for both AFS and HTM
securities, the securities have not experienced credit losses as
the unrealized losses reported in the previous table are primarily
due to higher interest rates since those securities were purchased.
See Note 14 for additional information on securities issued by
VIEs, including U.S. agency mortgage-backed securities, non-
agency CMBS and FFELP student loan ABS.
Investment Securities by Contractual Maturity
$ in millions
$ in millions
AFS securities
AFS securities
At December 31, 2019
At December 31, 2019
Amortized
Amortized
Cost
Cost
Fair
Fair
Value
Value
Annualized
Annualized
Average
Average
Yield
Yield
U.S. government and agency securities:
U.S. government and agency securities:
U.S. Treasury securities:
U.S. Treasury securities:
Due within 1 year
Due within 1 year
$
$
2,293 $
2,293 $
2,302
2,302
After 1 year through 5 years
After 1 year through 5 years
After 5 years through 10 years
After 5 years through 10 years
Total
Total
U.S. agency securities:
U.S. agency securities:
Due within 1 year
Due within 1 year
After 1 year through 5 years
After 1 year through 5 years
After 5 years through 10 years
After 5 years through 10 years
After 10 years
After 10 years
Total
Total
Total U.S. government and agency
Total U.S. government and agency
securities
securities
Corporate and other debt:
Corporate and other debt:
Agency CMBS:
Agency CMBS:
After 1 year through 5 years
After 1 year through 5 years
After 5 years through 10 years
After 5 years through 10 years
After 10 years
After 10 years
Total
Total
Corporate bonds:
Corporate bonds:
Due within 1 year
Due within 1 year
After 1 year through 5 years
After 1 year through 5 years
After 5 years through 10 years
After 5 years through 10 years
Total
Total
State and municipal securities:
State and municipal securities:
After 1 year through 5 years
After 1 year through 5 years
After 5 years through 10 years
After 5 years through 10 years
After 10 years
After 10 years
Total
Total
FFELP student loan ABS:
FFELP student loan ABS:
After 1 year through 5 years
After 1 year through 5 years
After 5 years through 10 years
After 5 years through 10 years
After 10 years
After 10 years
Total
Total
Total corporate and other debt
Total corporate and other debt
Total AFS securities
Total AFS securities
25,919
25,919
4,253
4,253
32,465
32,465
310
310
362
362
1,380
1,380
18,673
18,673
20,725
20,725
26,037
26,037
4,239
4,239
32,578
32,578
310
310
359
359
1,373
1,373
18,832
18,832
20,874
20,874
2.2%
2.2%
1.8%
1.8%
1.7%
1.7%
1.0%
1.0%
1.4%
1.4%
1.8%
1.8%
2.4%
2.4%
53,190
53,190
53,452
53,452
2.0%
2.0%
606
606
3,280
3,280
924
924
4,810
4,810
43
43
1,448
1,448
400
400
1,891
1,891
36
36
71
71
374
374
481
481
71
71
377
377
1,132
1,132
1,580
1,580
8,762
8,762
603
603
3,305
3,305
900
900
4,808
4,808
43
43
1,462
1,462
402
402
1,907
1,907
37
37
72
72
394
394
503
503
69
69
367
367
1,117
1,117
1,553
1,553
8,771
8,771
61,952
61,952
62,223
62,223
1.8%
1.8%
2.5%
2.5%
2.0%
2.0%
1.7%
1.7%
2.6%
2.6%
2.9%
2.9%
3.1%
3.1%
2.2%
2.2%
4.7%
4.7%
0.8%
0.8%
0.8%
0.8%
1.2%
1.2%
2.2%
2.2%
2.0%
2.0%
$ in millions
$ in millions
HTM securities
HTM securities
At December 31, 2019
At December 31, 2019
Amortized
Amortized
Cost
Cost
Fair
Fair
Value
Value
Annualized
Annualized
Average
Average
Yield
Yield
U.S. government and agency securities:
U.S. government and agency securities:
U.S. Treasury securities:
U.S. Treasury securities:
Due within 1 year
Due within 1 year
$
$
2,436 $
2,436 $
2,452
2,452
After 1 year through 5 years
After 1 year through 5 years
18,026
18,026
18,254
18,254
After 5 years through 10 years
After 5 years through 10 years
After 10 years
After 10 years
Total
Total
U.S. agency securities:
U.S. agency securities:
After 5 years through 10 years
After 5 years through 10 years
After 10 years
After 10 years
Total
Total
Total U.S. government and agency
Total U.S. government and agency
securities
securities
Corporate and other debt:
Corporate and other debt:
Non-agency CMBS:
Non-agency CMBS:
Due within 1 year
Due within 1 year
After 1 year through 5 years
After 1 year through 5 years
After 5 years through 10 years
After 5 years through 10 years
After 10 years
After 10 years
Total corporate and other debt
Total corporate and other debt
8,600
8,600
1,083
1,083
8,842
8,842
1,113
1,113
30,145
30,145
30,661
30,661
46
46
12,543
12,543
12,589
12,589
45
45
12,638
12,638
12,683
12,683
91
91
125
125
514
514
38
38
768
768
91
91
125
125
532
532
41
41
789
789
Total HTM securities
Total HTM securities
43,502
43,502
44,133
44,133
Total investment securities
Total investment securities
$
$
105,454 $
105,454 $
106,356
106,356
42,734
42,734
43,344
43,344
2.3%
2.3%
2.5%
2.5%
2.1%
2.1%
2.2%
2.2%
2.5%
2.5%
1.8%
1.8%
2.6%
2.6%
4.9%
4.9%
5.5%
5.5%
5.3%
5.3%
2.1%
2.1%
4.0%
4.0%
2.3%
2.3%
2.2%
2.2%
Gross Realized Gains (Losses) on Sales of AFS Securities
$ in millions
Gross realized gains
Gross realized (losses)
Total1
2019
2018
2017
$
$
113 $
12 $
(10)
103 $
(4)
8 $
46
(11)
35
1. Realized gains and losses are recognized in Other revenues in the income statements.
111
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
7. Collateralized Transactions
Offsetting of Certain 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.
The Firm manages credit exposure arising from such
transactions by, in appropriate circumstances, entering into
master netting agreements and collateral agreements with its
counterparties. These agreements provide the Firm with the
right, in the event of a default by the counterparty, to net a
counterparty's rights and obligations under the agreement and
to liquidate and set off collateral held by the Firm against the
net amount owed by the counterparty.
The Firm’s policy is generally to take possession of securities
purchased or borrowed in connection with securities purchased
under agreements to resell and securities borrowed transactions,
respectively, and to receive cash and securities delivered under
securities sold under agreements to repurchase or securities
loaned transactions (with rights of rehypothecation).
The Firm also monitors the fair value of the underlying securities
as compared with the related receivable or payable, including
accrued interest, and, as necessary, requests additional
collateral, as provided under the applicable agreement to ensure
such transactions are adequately collateralized, or the return of
excess collateral.
The risk related to a decline in the market value of collateral
pledged or received is managed by setting appropriate market-
based margin requirements. Increases in collateral margin calls
on secured financing due to market value declines may be
mitigated by increases in collateral margin calls on securities
purchased under agreements to resell and securities borrowed
transactions with similar quality collateral. Additionally, the
Firm may request lower quality collateral pledged be replaced
with higher quality collateral through collateral substitution
rights in the underlying agreements.
The Firm actively manages its secured financings in a manner
that reduces the potential refinancing risk of secured financings
of less liquid assets and also considers the quality of collateral
when negotiating collateral eligibility with counterparties. The
Firm utilizes shorter term secured financing for highly liquid
assets and has established longer tenor limits for less liquid
assets, for which funding may be at risk in the event of a market
disruption.
At December 31, 2019
Gross
Amounts
Amounts
Offset
Balance
Sheet Net
Amounts
Amounts
Not Offset1
Net
Amounts
$247,545 $ (159,321) $ 88,224 $ (85,200) $ 3,024
109,528
(2,979)
106,549
(101,850)
4,699
$213,519 $ (159,319) $ 54,200 $ (44,549) $ 9,651
$ in millions
Assets
Securities
purchased under
agreements to
resell
Securities
borrowed
Liabilities
Securities sold
under
agreements to
repurchase
Securities loaned
11,487
(2,981)
8,506
(8,324)
182
Net amounts for which master netting agreements are not in place or
may not be legally enforceable
Securities purchased under agreements to resell
Securities borrowed
Securities sold under agreements to repurchase
Securities loaned
$ 2,255
1,181
8,033
101
At December 31, 2018
Gross
Amounts
Amounts
Offset
Balance
Sheet Net
Amounts
Amounts
Not Offset1
Net
Amounts
$262,976 $ (164,454) $ 98,522 $ (95,610) $ 2,912
134,711
(18,398)
116,313
(112,551)
3,762
$214,213 $ (164,454) $ 49,759 $ (41,095) $ 8,664
$ in millions
Assets
Securities
purchased under
agreements to
resell
Securities
borrowed
Liabilities
Securities sold
under
agreements to
repurchase
Securities loaned
30,306
(18,398)
11,908
(11,677)
231
Net amounts for which master netting agreements are not in place or
may not be legally enforceable
Securities purchased under agreements to resell
Securities borrowed
Securities sold under agreements to repurchase
Securities loaned
$ 2,579
724
6,762
191
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.
For information related to offsetting of derivatives, see Note 5.
December 2019 Form 10-K
112
Table of Contents
Notes to Consolidated Financial Statements
Gross Secured Financing Balances by Remaining Contractual
Maturity
Carrying Value of Assets Loaned or Pledged without
Counterparty Right to Sell or Repledge
$ in millions
Securities sold under
agreements to
repurchase
At December 31, 2019
Overnight
and Open
Less than
30 Days
30-90
Days
Over
90 Days
Total
$ in millions
Trading assets
Loans (gross of allowance for loan losses)
$ 67,158 $ 81,300 $26,904 $ 38,157 $213,519
Total
At
December 31,
2019
At
December 31,
2018
$
$
41,201 $
39,430
750
—
41,951 $
39,430
Securities loaned
2,378
3,286
516
5,307
11,487
Total included in the
offsetting disclosure
Trading liabilities—
Obligation to return
securities received
as collateral
$ 69,536 $ 84,586 $27,420 $ 43,464 $225,006
23,877
—
—
— 23,877
Total
$ 93,413 $ 84,586 $27,420 $ 43,464 $248,883
$ in millions
Securities sold under
agreements to
repurchase
At December 31, 2018
Overnight
and Open
Less than
30 Days
30-90
Days
Over
90 Days
Total
$ 56,503 $ 93,427 $35,692 $ 28,591 $214,213
Securities loaned
18,397
3,609
1,985
6,315
30,306
Total included in the
offsetting disclosure
Trading liabilities—
Obligation to return
securities received
as collateral
$ 74,900 $ 97,036 $37,677 $ 34,906 $244,519
17,594
—
—
— 17,594
Total
$ 92,494 $ 97,036 $37,677 $ 34,906 $262,113
The Firm pledges certain of its trading assets and loans to
collateralize securities sold under agreements to repurchase,
securities loaned, other secured financings and derivatives and
to cover customer short sales. 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 balance sheets.
Fair Value of Collateral Received with Right to Sell or Repledge
$ in millions
Collateral received with right to sell
or repledge
Collateral that was sold or repledged1
539,412
$
679,280 $
639,610
487,983
At
December 31,
2019
At
December 31,
2018
Gross Secured Financing Balances by Class of Collateral
Pledged
dealers.
Restricted Cash and Segregated Securities
1. Does not include securities used to meet federal regulations for the Firm’s U.S. broker-
$ in millions
At
December 31,
2019
At
December 31,
2018
Securities sold under agreements to repurchase
U.S. Treasury and agency securities
$
68,895 $
68,487
State and municipal securities
905
925
Other sovereign government obligations
109,414
120,432
$ in millions
Restricted cash
Segregated securities1
Total
At
December 31,
2019
At
December 31,
2018
$
$
32,512 $
25,061
57,573 $
35,356
26,877
62,233
ABS
Corporate and other debt
Corporate equities
Other
Total
Securities loaned
Other sovereign government obligations
Corporate equities
Other
Total
Total included in the offsetting disclosure
2,218
6,066
25,563
458
3,017
8,719
12,079
554
213,519 $
214,213
3,026 $
8,422
39
19,021
10,800
485
11,487 $
30,306
225,006 $
244,519
$
$
$
$
Trading liabilities—Obligation to return securities received as collateral
Corporate equities
Other
Total
Total
$
$
$
23,873 $
17,594
4
—
23,877 $
17,594
248,883 $
262,113
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 balance sheets.
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 this collateral 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.
113
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
Concentration Based on the Firm’s Total Assets
At
December 31,
2019
At
December 31,
2018
U.S. government and agency securities
and other sovereign government
obligations
Trading assets1
Off balance sheet—Collateral received2
10%
12%
12%
17%
1. Other sovereign government obligations included in Trading assets primarily consist
of the U.K., Japan and Australia at December 31, 2019, and UK., Japan and Brazil at
December 31, 2018.
2. Collateral received is primarily related to Securities purchased under agreements to
resell and Securities borrowed.
The Firm is subject to concentration risk by holding large
positions in certain types of securities, loans or commitments to
purchase securities of a single issuer, including sovereign
governments and other entities, issuers located in a particular
country or geographic area, public and private issuers involving
developing countries or issuers engaged in a particular industry.
Positions taken and underwriting and financing commitments,
including those made in connection with the Firm’s private
equity, principal investment and lending activities, often involve
substantial amounts and significant exposure to individual
issuers and businesses, including investment grade and non-
investment grade issuers.
Customer Margin Lending
$ in millions
At
December 31,
2019
At
December 31,
2018
Customer receivables representing margin
loans
$
31,916 $
26,225
The Firm provides margin lending arrangements which allow
customers to borrow against the value of qualifying securities.
Receivables under margin lending arrangements are included
within Customer and other receivables in the balance sheets.
Under these agreements and transactions, the Firm receives
collateral, which includes 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.
Margin loans are extended on a demand basis and generally are
not committed facilities. Factors considered in the review of
margin loans are the amount of the loan, the intended purpose,
the degree of leverage being employed in the account and the
amount of collateral, as well as an overall evaluation of the
portfolio to ensure proper diversification or, in the case of
concentrated positions, appropriate liquidity of the underlying
collateral or potential hedging strategies to reduce risk.
Underlying collateral for margin loans is reviewed with respect
December 2019 Form 10-K
114
to the liquidity of the proposed collateral positions, valuation of
securities, historic trading range, volatility analysis and an
evaluation of industry concentrations. For these transactions,
adherence to the Firm’s collateral policies significantly limits
its credit exposure in the event of a customer default. The Firm
may request additional margin collateral from customers, if
appropriate, and, if necessary, may sell securities that have not
been paid for or purchase securities sold but not delivered from
customers.
Other Secured Financings
Other secured financings include the liabilities related to
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, and certain ELNs and other
secured borrowings. These liabilities are generally payable from
the cash flows of the related assets, which are accounted for as
Trading assets (see Notes 12 and 14).
8. Loans, Lending Commitments and Allowance
for Credit Losses
The Firm’s loan portfolio consists of the following types of
loans:
• Corporate. Corporate loans primarily include commercial
and industrial lending used for general corporate purposes,
working capital and liquidity, event-driven loans, secured
lending facilities, and securities-based lending. Event-driven
loans support client merger, acquisition, recapitalization or
project finance activities. Corporate loans are structured as
revolving lines of credit, letter of credit facilities, term loans
and bridge loans. Risk factors considered in determining the
allowance for corporate loans include the borrower’s financial
strength, industry, facility structure, collateral and covenants
along with other qualitative factors.
• Consumer. Consumer loans include unsecured loans and
securities-based lending, which allows clients to borrow
money against the value of qualifying securities for any
suitable purpose other than purchasing, trading, or carrying
securities or refinancing margin debt. The majority of
consumer loans are structured as revolving lines of credit. The
allowance methodology for unsecured loans considers the
specific attributes of the loan, as well as the borrower’s source
of repayment. The allowance methodology for securities-
based lending considers the collateral type underlying the loan
(e.g., diversified securities, concentrated securities or
restricted stock).
• Residential Real Estate. Residential real estate loans mainly
include non-conforming loans and HELOC. The allowance
methodology for non-conforming residential mortgage loans
considers several factors, including, but not limited to, loan-
to-value ratio, FICO score, home price index and delinquency
status. The methodology for HELOC considers credit limits
Table of Contents
Notes to Consolidated Financial Statements
and utilization rates in addition to the factors considered for
non-conforming residential mortgages.
• Commercial Real Estate. Commercial real estate loans
include owner-occupied loans and income-producing loans.
The principal risk factors for determining the allowance for
commercial real estate loans are the underlying collateral type,
loan-to-value ratio and debt service ratio.
Loans by Type
$ in millions
Corporate
Consumer
Residential real estate
Commercial real estate1
Total loans, gross
Allowance for loan losses
At December 31, 2019
Loans Held
for Investment
Loans Held
for Sale
Total Loans
$
48,756 $
10,515 $
31,610
30,184
7,859
118,409
(349)
—
13
2,049
12,577
—
59,271
31,610
30,197
9,908
130,986
(349)
Total loans, net
$
118,060 $
12,577 $
130,637
Fixed rate loans, net
Floating or adjustable rate loans, net
Loans to non-U.S. borrowers, net
$
22,716
107,921
21,617
$ in millions
Corporate
Consumer
Residential real estate
Commercial real estate1
Total loans, gross
Allowance for loan losses
At December 31, 2018
Loans Held
for Investment
Loans Held
for Sale
Total Loans
$
36,909 $
13,886 $
27,868
27,466
7,810
100,053
(238)
—
22
1,856
15,764
—
50,795
27,868
27,488
9,666
115,817
(238)
Total loans, net
$
99,815 $
15,764 $
115,579
Fixed rate loans, net
Floating or adjustable rate loans, net
Loans to non-U.S. borrowers, net
$
15,632
99,947
17,568
1. Beginning in 2019, loans previously referred to as Wholesale real estate are referred
to as Commercial real estate.
See Note 3 for further information regarding Loans and lending
commitments held at fair value. See Note 13 for details of current
commitments to lend in the future.
Credit Quality
CRM evaluates new obligors before credit transactions are
initially approved and at least annually thereafter for corporate
and commercial real estate loans. For corporate loans, credit
evaluations typically involve the evaluation of financial
statements, assessment of leverage, liquidity, capital strength,
asset composition and quality, market capitalization and access
to capital markets, cash flow projections and debt service
requirements, and the adequacy of collateral, if applicable. CRM
also evaluates strategy, market position, industry dynamics,
obligor’s management and other factors that could affect an
obligor’s risk profile.
For commercial real estate loans, the credit evaluation is focused
on property and transaction metrics, including property type,
loan-to-value ratio, occupancy levels, debt service ratio,
prevailing capitalization rates and market dynamics.
For residential real estate and consumer loans, the initial credit
evaluation typically includes, but is not limited to, review of the
obligor’s income, net worth, liquidity, collateral, loan-to-value
ratio and credit bureau
information. Subsequent credit
monitoring for residential real estate loans is performed at the
portfolio level. Consumer loan collateral values are monitored
on an ongoing basis.
The Firm utilizes the following credit quality indicators, which
are consistent with U.S. banking agencies’ definitions of
criticized exposures, as applicable, in its credit monitoring
process for loans held for investment:
• Pass. A credit exposure rated Pass has a continued
expectation of timely repayment, all obligations of the
borrower are current, and the obligor complies with material
terms and conditions of the lending agreement.
• Special Mention. Extensions of credit that have potential
weakness that deserve management’s close attention and, if
left uncorrected, may, at some future date, result in the
deterioration of the repayment prospects or collateral position.
• Substandard. Obligor has a well-defined weakness that
jeopardizes the repayment of the debt and has a high
probability of payment default with the distinct possibility
that the Firm will sustain some loss if noted deficiencies are
not corrected.
• Doubtful. Inherent weakness in the exposure makes the
collection or repayment in full, based on existing facts,
conditions and circumstances, highly improbable, and the
amount of loss is uncertain.
• Loss. Extensions of credit classified as loss are considered
uncollectible and are charged off.
Loans considered as Doubtful or Loss are considered impaired.
Substandard loans are regularly reviewed for impairment. For
further information, see Note 2.
115
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
Loans Held for Investment before Allowance by Credit Quality1
$ in millions
Corporate Consumer
Residential
Real Estate
Commercial
Real Estate
Total
$ in millions
Loans
At December 31, 2019
$ 47,681 $
31,605 $
30,060 $
7,664 $117,010
With allowance
Pass
Special
mention
Substandard
Doubtful
Total
464
605
6
—
5
—
28
96
—
3
192
—
495
898
6
$ 48,756 $
31,610 $
30,184 $
7,859 $118,409
At December 31, 2018
$ in millions
Corporate Consumer
Residential
Real Estate
Commercial
Real Estate
Total
Pass
Special
mention
Substandard
Doubtful
Total
$ 36,217 $
27,863 $
27,387 $
7,378 $ 98,845
492
200
—
5
—
—
—
79
—
312
120
—
809
399
—
$ 36,909 $
27,868 $
27,466 $
7,810 $100,053
1. There were no loans held for investment considered Loss as of December 31, 2019
and 2018.
Impaired Loans and Lending Commitments before Allowance
At December 31, 2019
Corporate Consumer
Residential
Real Estate
Commercial
Real Estate Total
$ in millions
Loans
With allowance
$
268 $
— $
— $
85 $ 353
Without
allowance1
Total impaired
loans
UPB
Lending
commitments
32
$
300 $
309
5
5 $
5
87
— 124
87 $
90
85 $ 477
85
489
With allowance
$
4 $
— $
— $
14 $ 18
32
—
—
—
32
Without
allowance1
Total impaired
lending
commitments
At December 31, 2018
Corporate Consumer
Residential
Real Estate
Commercial
Real Estate Total
$
$
$
24 $
— $
— $
— $ 24
32
—
69
— 101
56 $
63
— $
—
69 $
70
— $ 125
— 133
19 $
— $
— $
— $ 19
34
—
—
—
34
$
53 $
— $
— $
— $ 53
Without
allowance1
Total impaired
loans
UPB
Lending
commitments
With allowance
Without
allowance1
Total impaired
lending
commitments
1. At December 31, 2019 and December 31, 2018, no allowance was recorded for these
loans and lending commitments as the present value of the expected future cash flows
or value of the collateral held equaled or exceeded the carrying value.
Loans and lending commitments in the previous table have been
evaluated for a specific allowance. All remaining loans and
lending commitments are assessed under the inherent allowance
methodology.
Impaired Loans and Total Allowance by Region
$ in millions
Impaired loans
Total Allowance for loan
losses
At December 31, 2019
Americas
EMEA
Asia
Total
$
392 $
85 $
— $
477
270
76
3
349
$ in millions
Impaired loans
Total Allowance for loan
losses
At December 31, 2018
Americas
EMEA
Asia
Total
$
125 $
— $
— $
125
193
42
3
238
$
36 $
— $
— $
14 $ 50
Troubled Debt Restructurings
$ in millions
Loans
Lending commitments
Allowance for loan losses and lending
commitments
At
December 31,
2019
At
December 31,
2018
$
92 $
32
16
38
45
4
Impaired loans and lending commitments classified as held for
investment within corporate loans include TDRs. These
restructurings typically include modifications of interest rates,
collateral requirements, other loan covenants and payment
extensions.
December 2019 Form 10-K
116
Table of Contents
Notes to Consolidated Financial Statements
Allowance for Loan Losses Rollforward
Allowance for Lending Commitments Rollforward
$ in millions
Corporate Consumer
Residential
Real Estate
Commercial
Real Estate
Total
$ in millions
Corporate Consumer
Residential
Real Estate
Commercial
Real Estate
Total
December 31,
2018
Gross
charge-offs
Recoveries
Net recoveries
(charge-offs)
Provision
(release)
Other
December 31,
2019
Inherent
Specific
$
144 $
7 $
20 $
67 $ 238
—
—
—
104
(7)
241 $
212 $
29
$
$
—
—
—
1
—
8 $
8 $
—
(2)
—
(2)
7
—
25 $
25 $
—
—
—
—
8
—
(2)
—
(2)
120
(7)
75 $ 349
73 $ 318
2
31
$ in millions
Corporate Consumer
Residential
Real Estate
Commercial
Real Estate
Total
December 31,
2017
Gross charge-
offs
Recoveries
Net recoveries
(charge-offs)
Provision
(release)1
Other
December 31,
2018
Inherent
Specific
$
126 $
4 $
24 $
70 $ 224
(5)
54
49
(29)
(2)
—
—
—
3
—
$
$
144 $
139 $
5
7 $
7 $
—
(1)
—
(1)
(3)
—
20 $
20 $
—
—
—
—
5
(8)
(6)
54
48
(24)
(10)
67 $ 238
67 $ 233
—
5
December 31,
2018
Provision
(release)
Other
December 31,
2019
Inherent
Specific
$
198 $
2 $
— $
3 $ 203
38
(4)
232 $
230 $
2
$
$
—
—
2 $
2 $
—
—
—
— $
— $
—
4
—
42
(4)
7 $ 241
7 $ 239
—
2
$ in millions
Corporate Consumer
Residential
Real Estate
Commercial
Real Estate
Total
December 31,
2017
Provision
(release)
Other
December 31,
2018
Inherent
Specific
$
194 $
1 $
— $
3 $ 198
7
(3)
198 $
193 $
5
$
$
1
—
2 $
2 $
—
—
—
— $
— $
—
1
(1)
9
(4)
3 $ 203
3 $ 198
—
5
$ in millions
Corporate Consumer
Residential
Real Estate
Commercial
Real Estate
Total
December 31,
2016
Provision
(release)
Other
December 31,
2017
Inherent
Specific
$
185 $
1 $
— $
4 $ 190
8
1
194 $
192 $
2
$
$
—
—
1 $
1 $
—
—
—
— $
— $
—
(1)
—
7
1
3 $ 198
3 $ 196
—
2
$ in millions
Corporate Consumer
Residential
Real Estate
Commercial
Real Estate
Total
Employee Loans
December 31,
2016
Gross charge-
offs
Recoveries
Net recoveries
(charge-offs)
Provision
(release)
Other
December 31,
2017
Inherent
Specific
$
195 $
4 $
20 $
55 $ 274
(75)
1
(74)
5
—
—
—
—
—
—
—
—
—
4
—
—
—
—
13
2
(75)
1
(74)
22
2
$
$
126 $
119 $
7
4 $
4 $
—
24 $
24 $
—
70 $ 224
70 $ 217
—
7
1. During 2018, the release was primarily due to the recovery of an energy industry
related loan charged off in 2017.
$ in millions
Balance
Allowance for loan losses
Balance, net
Remaining repayment term, weighted
average in years
At
December 31,
2019
At
December 31,
2018
$
$
2,980 $
(61)
2,919 $
4.8
3,415
(63)
3,352
4.3
Employee loans are granted in conjunction with a program
established primarily to recruit certain Wealth Management
representatives, are full recourse and generally require periodic
repayments. These loans are recorded in Customer and other
receivables in the balance sheets. The Firm establishes an
allowance for loan amounts it does not consider recoverable,
and the related provision is recorded in Compensation and
benefits expense.
117
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
9. Goodwill and Intangible Assets
Goodwill Rollforward
$ in millions
IS
WM
IM
Total
At December 31, 2017¹
$
295 $ 5,533 $
769 $ 6,597
Foreign currency and other
Acquired
(21)
—
—
—
—
112
(21)
112
At December 31, 2018¹
$
274 $ 5,533 $
881 $ 6,688
$ in millions
Investments
Foreign currency and other
Acquired2
At December 31, 20191
Accumulated impairments3
(13)
—
(1)
469
—
—
(14)
469
$ in millions
Income (loss)1
$
$
261 $ 6,001 $
881 $ 7,143
673 $
— $
27 $
700
10. Other Assets—Equity Method Investments
and Leases
Equity Method Investments
At
December 31,
2019
At
December 31,
2018
$
2,363 $
2,432
2019
2018
2017
$
(81) $
20 $
(34)
IS—Institutional Securities
WM—Wealth Management
IM—Investment Management
1. Balances represent the amount of the Firm’s goodwill after accumulated impairments.
2. Amounts reflect the impact of the Firm's acquisition of Solium Capital Inc. in the second
quarter of 2019.
3. Accumulated impairments were recorded prior to the periods shown. There were no
impairments recorded in 2019, 2018 or 2017.
The Firm's annual goodwill impairment testing as of July 1,
2019 and 2018 did not indicate any goodwill impairment, as
reporting units with goodwill had a fair value that was
substantially in excess of carrying value.
1. Includes impairments of the Investment Management business segment’s equity
method investments as follows: in 2019, $41 million related to a third-party asset
manager; in 2018 and 2017, $46 million and $53 million, respectively, related to a
separate third-party asset manager.
Equity method investments, other than investments in certain
fund interests, are summarized above and are included in Other
assets in the balance sheets with related income or loss included
in Other revenues in the income statements. See "Net Asset
Value Measurements—Fund Interests" in Note 3 for the carrying
value of certain of the Firm’s fund interests, which are composed
of general and limited partnership interests, as well as any related
carried interest.
Net Amortizable Intangible Assets Rollforward1
Japanese Securities Joint Venture
$ in millions
IS
WM
IM
Total
At December 31, 2017
$
349 $ 2,092 $
4 $ 2,445
$ in millions
2019
2018
2017
Income from investment in MUMSS
$
17 $
105 $
123
Acquired
Disposals
Amortization expense
Other
At December 31, 2018
Acquired2
Disposals
Amortization expense
Other
—
(6)
(70)
(3)
—
—
(264)
—
66
—
(10)
—
66
(6)
(344)
(3)
$
270 $ 1,828 $
60 $ 2,158
3
(29)
(35)
18
270
—
(271)
1
—
—
(8)
—
273
(29)
(314)
19
At December 31, 2019
$
227 $ 1,828 $
52 $ 2,107
Gross Amortizable Intangible Assets by Type1
At December 31, 2019
At December 31, 2018
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
$ in millions
Tradenames
Customer relationships
Management contracts
Other
Total
$
291 $
71 $
286 $
4,321
482
217
2,703
4,067
327
103
507
175
$
5,311 $
3,204 $
5,035 $
Estimated annual amortization expense for the next five years
$
60
2,446
311
60
2,877
307
1. Amounts exclude $5 million of mortgage servicing rights in 2018.
2. Amounts principally reflect the impact of the Firm's acquisition of Solium Capital Inc.
in the second quarter of 2019.
December 2019 Form 10-K
118
The Firm and Mitsubishi UFJ Financial Group, Inc. (“MUFG”)
formed a joint venture in Japan comprising their respective
investment banking and securities businesses by forming two
joint venture companies, Mitsubishi UFJ Morgan Stanley
Securities Co., Ltd. (“MUMSS”) and Morgan Stanley MUFG
Securities Co., Ltd. (“MSMS”) (the “Joint Venture”). The Firm
owns a 40% economic interest in the Joint Venture and MUFG
owns the other 60%.
The Firm’s 40% voting interest in MUMSS is accounted for
under the equity method within the Institutional Securities
business segment, and is included in the equity method
investment balances above. The Firm consolidates MSMS into
the Institutional Securities business segment, based on its 51%
voting interest.
The Firm engages in transactions in the ordinary course of
business with MUFG and its affiliates; for example, investment
banking, financial advisory, sales and trading, derivatives,
investment management, lending, securitization and other
financial services transactions. Such transactions are on
substantially the same terms as those that would be available to
unrelated third parties for comparable transactions.
Table of Contents
Notes to Consolidated Financial Statements
Leases
Minimum Future Lease Commitments (under Previous GAAP)
The Firm’s leases are principally non-cancelable operating real
estate leases.
Balance Sheet Amounts Related to Leases
$ in millions
Other assets—ROU assets
Other liabilities and accrued expenses—Lease liabilities
Weighted average:
Remaining lease term, in years
Discount rate
Lease Liabilities
$ in millions
2020
2021
2022
2023
2024
Thereafter
Total undiscounted cash flows
Imputed interest
Amount on balance sheet
Committed leases not yet commenced
Lease Costs
$ in millions
Fixed costs
Variable costs1
Less: Sublease income
Total lease cost, net
At
December 31,
2019
$
3,998
4,778
9.7
3.6%
At
December 31,
2019
$
$
$
$
$
763
703
646
593
524
2,845
6,074
(1,296)
4,778
55
2019
670
152
(6)
816
1. Includes common area maintenance charges and other variable costs not included in
$ in millions
the measurement of ROU assets and lease liabilities.
Cash Flows Statement Supplemental Information
$ in millions
Cash outflows—Lease liabilities
Non-cash—ROU assets recorded for new and modified
leases
2019
$
685
514
2020
2021
2022
2023
2024
Thereafter
Total
$ in millions
2019
2020
2021
2022
2023
Thereafter
Total
Total minimum rental income to be received in the future
under non-cancelable operating subleases
$ in millions
Rent expense
At
December 31,
2018
$
$
$
677
657
602
555
507
2,639
5,637
7
2018
2017
753
704
Occupancy lease agreements, in addition to base rentals,
generally provide for rent and operating expense escalations
resulting from increased assessments for real estate taxes and
other charges.
11. Deposits
Deposits
$ in millions
Savings and demand deposits
Time deposits
Total
Deposits subject to FDIC insurance
Time deposits that equal or exceed the
FDIC insurance limit
Time Deposit Maturities
At
December 31,
2019
At
December 31,
2018
$
$
$
$
149,465 $
154,897
40,891
190,356 $
149,966 $
32,923
187,820
144,515
12 $
11
At
December 31,
2019
$
20,481
10,567
3,507
3,231
2,465
640
$
40,891
119
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
12. Borrowings and Other Secured Financings
Maturities and Terms of Borrowings
Parent Company
Subsidiaries
$ in millions
Fixed
Rate
Variable
Rate1
Fixed
Rate
Variable
Rate1
Original maturities of one year or less:
At
December 31,
2019
At
December 31,
2018
Next 12
months2
$
500
$
— $ — $ 2,067 $
2,567
$
1,545
Original maturities greater than one year:
$
— $
— $ — $
— $
— $
2019
2020
2021
2022
2023
2024
10,909
13,616
6,576
8,632
13,360
4,319
7,823
9,508
3,147
2,028
14
18
16
14
14
5,160
4,628
3,788
2,822
5,704
20,402
26,085
19,888
14,615
21,106
87,964
24,694
21,280
24,642
16,785
13,938
16,405
70,373
options used to economically hedge the embedded features are
derivatives and also are carried at fair value. Changes in fair
value related to the notes and economic hedges are reported in
Trading revenues. See Notes 2 and 4 for further information on
borrowings carried at fair value.
Senior Debt Subject to Put Options or Liquidity Obligations
$ in millions
At
December 31,
2019
At
December 31,
2018
Put options embedded in debt agreements
Liquidity obligations1
$
$
290 $
1,344 $
520
1,284
1. Includes obligations to support secondary market trading.
Subordinated Debt
Thereafter
52,941
14,436
125
20,462
Total
Total
$106,034
$41,261
$201
$ 42,564 $
190,060
borrowings
$106,534
$41,261
$201
$ 44,631 $
192,627
$
$
188,117
189,662
Contractual weighted average coupon
4.5%
4.5%
2019
2018
Subordinated debt generally is issued to meet the capital
requirements of the Firm or its regulated subsidiaries and
primarily is U.S. dollar denominated. Maturities of subordinated
notes range from 2022 to 2027.
Rates for Borrowings with Original Maturities Greater than One
Year
Contractual weighted average coupon1
Effective weighted average coupon after swaps
At December 31,
2019
2018
2017
3.4% 3.5% 3.3%
2.9% 3.6% 2.5%
1. Weighted average coupon was calculated utilizing U.S. and non-U.S. dollar interest
rates and excludes financial instruments for which the fair value option was elected.
In general, other than securities inventories and customer
balances financed by secured funding sources, the majority of
the Firm’s assets are financed with a combination of deposits,
short-term funding, floating rate long-term debt or fixed rate
long-term debt swapped to a floating rate. The Firm uses interest
rate swaps to more closely match these borrowings to the
duration, holding period and interest rate characteristics of the
assets being funded and to manage interest rate risk. These swaps
effectively convert certain of the Firm’s fixed rate borrowings
into floating rate obligations. In addition, for non-U.S. dollar
currency borrowings that are not used to fund assets in the same
currency, the Firm has entered into currency swaps that
effectively convert the borrowings into U.S. dollar obligations.
The Firm’s use of swaps for asset and liability management
affects its effective average borrowing rate.
Weighted
average
coupon at
period end3
3.6%
2.1% 6.6%
N/M
3.4%
3.5%
1. Variable rate borrowings bear interest based on a variety of indices, including LIBOR,
federal funds rates and SOFR. Amounts include notes carried at fair value with various
payment provisions, including notes linked to the performance of a specific index, a
basket of stocks, a specific equity security, a commodity, a credit exposure or basket
of credit exposures, and instruments with various interest-rate-related features,
including step-ups, step-downs and zero coupons.
2. The amount shown for the Parent Company represents amounts due to holders of
the Firm's Series G preferred stock for which a notice of redemption was issued. See
Note 16 for further information.
3. Only includes borrowings with original maturities greater than one year. Weighted
average coupon is calculated utilizing U.S. and non-U.S. dollar interest rates and
excludes financial instruments for which the fair value option was elected. Virtually all
of the variable rate notes issued by subsidiaries are carried at fair value so a weighted
average coupon is not meaningful.
Borrowings with Original Maturities Greater than One Year
$ in millions
Senior
Subordinated
Total
At
December 31,
2019
At
December 31,
2018
$
$
179,519 $
178,027
10,541
10,090
190,060 $
188,117
Weighted average stated maturity, in years
6.9
6.5
Certain senior debt securities are denominated in various non-
U.S. dollar currencies and may be structured to provide a return
that is linked to equity, credit, commodity or other indices (e.g.,
the consumer price index). Senior debt also may be structured
to be callable by the Firm or extendible at the option of holders
of the senior debt securities.
The Firm’s Borrowings also include notes carried and managed
on a fair value basis. These include instruments whose payments
and redemption values are linked to the performance of a specific
index, a basket of stocks, a specific equity security, a commodity,
a credit exposure or basket of credit exposures, and instruments
with various interest-rate-related features, including step-ups,
step-downs and zero coupons. To minimize the exposure from
such instruments, the Firm has entered into various swap
contracts and purchased options that effectively convert the
borrowing costs into floating rates. The swaps and purchased
December 2019 Form 10-K
120
Table of Contents
Notes to Consolidated Financial Statements
Other Secured Financings
$ in millions
Original maturities:
One year or less
Greater than one year
Transfers of assets accounted for as
secured financings
At
December 31,
2019
At
December 31,
2018
7,103
6,480
1,115
2,036
6,772
658
9,466
Total
$
14,698 $
Maturities and Terms of Other Secured Financings
$ in millions
At December 31, 2019
Fixed
Rate
Variable
Rate1
Total
At
December 31,
2018
Original maturities of one year or less:
Next 12 months
$
2,785
$
4,318
$ 7,103
$
2,036
Original maturities greater than one year:
2019
2020
2021
2022
2023
2024
Thereafter
Total
Weighted average
coupon at
period-end2
$
— $
— $
— $
764
698
227
—
—
356
899
412
—
2,655
12
457
1,663
1,110
227
2,655
12
813
$
2,045
$
4,435
$ 6,480
$
5,900
599
1
86
26
12
148
6,772
0.8%
2.5%
2.4%
2.5%
1. Variable rate other secured financings bear interest based on a variety of indices,
including LIBOR and federal funds rates. Amounts include notes carried at fair value
with various payment provisions, including notes linked to equity, credit, commodity
or other indices.
2. Includes only other secured financings with original maturities greater than one year.
Weighted average coupon is calculated utilizing U.S. and non-U.S. dollar interest rates
and excludes other secured financings that are linked to non-interest indices and for
which the fair value option was elected.
Other secured financings include the liabilities related to certain
ELNs, transfers of financial assets that are accounted for as
financings rather than sales, pledged commodities, consolidated
VIEs where the Firm is deemed to be the primary beneficiary
and other secured borrowings. These liabilities are generally
payable from the cash flows of the related assets accounted for
as Trading assets. See Note 14 for further information on other
secured financings related to VIEs and securitization activities.
Maturities of Transfers of Assets Accounted for as Secured
Financings1
$ in millions
2019
2020
2021
2022
2023
2024
Thereafter
Total
At
December 31,
2019
At
December 31,
2018
$
— $
208
225
46
334
—
302
$
1,115 $
40
62
29
33
—
—
494
658
1. Excludes Securities sold under agreements to repurchase and Securities loaned.
For transfers of assets that fail to meet accounting criteria for a
sale, the Firm continues to record the assets and recognizes the
associated liabilities in the balance sheets.
13. Commitments, Guarantees and Contingencies
Commitments
$ in millions
Lending:
Corporate
Consumer
Residential and
Commercial real
estate
Forward-starting
secured financing
receivables
Underwriting
Investment activities
Letters of credit and
other financial
guarantees
Years to Maturity at December 31, 2019
Less
than 1
1-3
3-5
Over 5
Total
$ 23,507 $ 34,542 $ 47,924 $
5,110 $ 111,083
7,835
28
379
378
63,313
637
706
186
223
—
275
2
4
88
—
—
60
—
—
7,867
273
1,118
11,601
75,137
—
262
637
1,303
2
190
Total
$ 96,563 $ 35,448 $ 48,076 $ 17,248 $ 197,335
Corporate lending commitments participated to third parties
$
8,003
Forward-starting secured financing receivables settled within three
business days of the balance sheet date
$ 52,438
Since commitments associated with these instruments may
expire unused, the amounts shown do not necessarily reflect the
actual future cash funding requirements.
Types of Commitments
Lending Commitments. Lending commitments primarily
represent the notional amount of legally binding obligations to
provide funding to clients for different types of loan transactions.
This category also includes commitments in loan form provided
to clearinghouses or associated depositories of which the Firm
is a member and are contingent upon the default of a
clearinghouse member or other stress event. For syndications
that are led by the Firm, the lending commitments accepted by
the borrower but not yet closed are net of the amounts agreed
121
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Notes to Consolidated Financial Statements
to by counterparties that will participate in the syndication. For
syndications that the Firm participates in and does not lead,
lending commitments accepted by the borrower but not yet
closed include only the amount that the Firm expects it will be
allocated from the lead syndicate bank. Due to the nature of the
Firm’s obligations under the commitments, these amounts
include certain commitments participated to third parties.
Forward-Starting Secured Financing Receivables. This
amount includes securities purchased under agreements to resell
and securities borrowed that the Firm has entered into prior to
the balance sheet date that will settle after the balance sheet date.
Also included are commitments to enter into securities
purchased under agreements to resell that are provided to certain
clearinghouses or associated depositories of which the Firm is
a member and are contingent upon the default of a clearinghouse
member or other stress event. These transactions are primarily
secured by collateral from U.S. government agency securities
and other sovereign government obligations when they are
funded.
Guarantees
Obligations under Guarantee Arrangements at December 31,
2019
Maximum Potential Payout/Notional
Years to Maturity
$ in millions
Less
than 1
1-3
3-5
Over 5
Total
Credit derivatives
$
36,334 $ 37,080 $ 111,758 $ 30,547 $ 215,719
Other credit contracts
—
—
—
117
117
Non-credit derivatives
1,590,947 1,240,195
393,248
699,043
3,923,433
Standby letters of credit
and other financial
guarantees issued1
Market value guarantees
Liquidity facilities
Whole loan sales
guarantees
Securitization
representations and
warranties
General partner
guarantees
1,282
76
4,599
—
—
59
Client clearing guarantees
18,565
836
1,386
4,201
82
—
—
—
128
—
—
—
—
—
12
—
7,705
158
4,599
—
—
23,196
23,196
67,928
67,928
71
—
270
18,565
Underwriting Commitments. The Firm provides underwriting
commitments in connection with its capital raising sources to a
diverse group of corporate and other institutional clients.
$ in millions
Credit derivatives2
Investment Activities. The Firm sponsors several non-
consolidated investment management funds for third-party
investors where it typically acts as general partner of, and
investment advisor to, these funds and typically commits to
invest a minority of the capital of such funds, with subscribing
third-party investors contributing the majority. The Firm has
contractual capital commitments, guarantees and counterparty
arrangements with respect to these investment management
funds.
Other credit contracts
Non-credit derivatives2
Standby letters of credit and other financial guarantees issued1
Market value guarantees
Liquidity facilities
Whole loan sales guarantees
Securitization representations and warranties3
General partner guarantees
Client clearing guarantees
Carrying
Amount
Asset
(Liability)
$
1,703
(17)
(45,794)
226
—
6
—
(42)
(42)
—
third-party banks
Letters of Credit and Other Financial Guarantees. The Firm
has outstanding letters of credit and other financial guarantees
issued by
the Firm’s
counterparties. The Firm is contingently liable for these letters
of credit and other financial guarantees, which are primarily
used to provide collateral for securities and commodities traded
and to satisfy various margin requirements in lieu of depositing
cash or securities with these counterparties.
to certain of
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. The carrying amounts of derivative contracts that meet the accounting definition of a
guarantee are shown on a gross basis.
3. Primarily related to residential mortgage securitizations.
Types of Guarantees
Derivative Contracts. Certain derivative contracts meet the
accounting definition of a guarantee, including certain written
options, contingent forward contracts and CDS (see Note 5
regarding credit derivatives in which the Firm has sold credit
protection to the counterparty). All derivative contracts that
could meet this accounting definition of a guarantee are included
in the previous table, with the notional amount used as the
maximum potential payout for certain derivative contracts, such
as written interest rate caps and written foreign currency options.
The Firm evaluates collateral requirements for all derivatives,
including derivatives that do not meet the accounting definition
of a guarantee. For the effects of cash collateral and counterparty
netting, see Note 5.
In certain situations, collateral may be held by the Firm for those
contracts that meet the definition of a guarantee. Generally, the
December 2019 Form 10-K
122
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Notes to Consolidated Financial Statements
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.
Standby Letters of Credit and Other Financial Guarantees
Issued. In connection with its corporate lending business and
other corporate activities, the Firm provides standby letters of
credit and other financial guarantees to counterparties. Such
arrangements represent obligations to make payments to third
parties if the counterparty fails to fulfill its obligation under a
borrowing arrangement or other contractual obligation. A
majority of the Firm’s standby letters of credit are provided on
behalf of counterparties that are investment grade. If the
counterparty fails to fulfill its contractual obligation, the Firm
has access to collateral or recourse that would approximate its
obligation.
Market Value Guarantees. Market value guarantees are issued
to guarantee timely payment of a specified return to investors
in certain affordable housing tax credit funds. These guarantees
are designed to return an investor’s contribution to a fund and
the investor’s share of tax losses and tax credits expected to be
generated by a fund.
Liquidity Facilities. The Firm has entered into liquidity facilities
with SPEs and other counterparties, whereby the Firm is
required to make certain payments if losses or defaults occur.
Primarily, the Firm acts as liquidity provider to municipal bond
securitization SPEs and for standalone municipal bonds in
which the holders of beneficial interests issued by these SPEs
or the holders of the individual bonds, respectively, have the
right to tender their interests for purchase by the Firm on
specified dates at a specified price. The Firm often may have
recourse to the underlying assets held by the SPEs in the event
payments are required under such liquidity facilities, as well as
make-whole or recourse provisions with the trust sponsors. The
recourse amount often exceeds the maximum potential payout
amount of the guarantee. Substantially all of the underlying
assets in the SPEs are investment grade. Liquidity facilities
provided to municipal tender option bond trusts are classified
as derivatives.
Whole Loan Sales Guarantees. The Firm has provided, or
otherwise agreed to be responsible for, representations and
warranties regarding certain whole loan sales. Under certain
circumstances, the Firm may be required to repurchase such
assets or make other payments related to such assets if such
representations and warranties are breached. The Firm’s
maximum potential payout related to such representations and
warranties is equal to the current UPB of such loans. Since the
Firm no longer services these loans, it has no information on the
current UPB of those loans, and accordingly, the amount
included in the previous table represents the UPB at the time of
the whole loan sale or at the time when the Firm last serviced
any of those loans. The current UPB balances could be
substantially lower than the maximum potential payout amount
included in the previous table. The related liability primarily
relates to sales of loans to the federal mortgage agencies.
business
Institutional
Securitization Representations and Warranties. As part of the
segment’s
Securities
Firm’s
securitizations and related activities, 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. The extent and nature of the
representations and warranties, if any, vary among different
securitizations. Under certain circumstances, the Firm may be
required to repurchase certain assets or make other payments
related to such assets if such representations and warranties are
breached. The maximum potential amount of future payments
the Firm could be required to make would be equal to the current
outstanding balances of, or losses associated with, the assets
subject to breaches of such representations and warranties. The
amount included in the previous table for the maximum potential
payout includes the current UPB or historical losses where
known, and the UPB at the time of sale when the current UPB
is not known.
General Partner Guarantees. As a general partner in certain
investment management funds, the Firm receives certain
distributions from the partnerships when the return exceeds
specified performance targets according to the provisions of the
partnership agreements. The Firm may be required to return all
or a portion of such distributions to the limited partners in the
event the limited partners do not achieve a certain return as
specified in the various partnership agreements, subject to
certain limitations.
Client Clearing Guarantees. In 2019, the Firm became a
sponsoring member of the Government Securities Division of
the FICC's Sponsored Clearing Model. Clients of the Firm, as
sponsored members, can transact in overnight securities
repurchase and resale agreements, which are cleared through
FICC. As sponsoring member, the Firm guarantees to FICC the
prompt and full payment and performance of its clients’
obligations. The amount included in the previous table
represents the maximum potential payout the Firm could be
responsible for through the guarantee it provides. The Firm
minimizes credit exposure under this guarantee by obtaining a
security interest in its sponsored member clients’ collateral and
their contractual rights under sponsored member transactions.
Therefore, the Firm's exposure is estimated to be an amount
substantially lower than the maximum potential payout amount.
The collateral amount in which the Firm has a security interest
is approximately equal to the maximum potential payout amount
of the guarantee.
Other Guarantees and Indemnities
In the normal course of business, the Firm provides guarantees
and indemnifications in a variety of transactions. These
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Notes to Consolidated Financial Statements
provisions generally are standard contractual terms. Certain of
these guarantees and indemnifications are described below:
arrangements is remote given the level of its due diligence in
its role as investment banking advisor.
• Indemnities. The Firm provides standard indemnities to
counterparties for certain contingent exposures and taxes,
including U.S. and foreign withholding taxes, on interest and
other payments made on derivatives, securities and stock
lending transactions, certain annuity products and other
financial arrangements. These indemnity payments could be
required based on a change in the tax laws, a change in
interpretation of applicable tax rulings or a change in factual
circumstances. Certain contracts contain provisions that
enable the Firm to terminate the agreement upon the
occurrence of such events. The maximum potential amount
of future payments that the Firm could be required to make
under these indemnifications cannot be estimated.
• Exchange/Clearinghouse Member Guarantees. The Firm is
a member of various exchanges and clearinghouses that trade
and clear securities and/or derivative contracts. Associated
with its membership, the Firm may be required to pay a certain
amount as determined by the exchange or the clearinghouse
in case of a default of any of its members or pay a proportionate
share of the financial obligations of another member that may
default on its obligations to the exchange or the clearinghouse.
While
rules governing different exchange or
clearinghouse memberships and the forms of these guarantees
may vary, in general the Firm’s obligations under these rules
would arise only if the exchange or clearinghouse had
previously exhausted its resources.
the
In addition, some clearinghouse rules require members to
assume a proportionate share of losses resulting from the
clearinghouse’s investment of guarantee fund contributions
and initial margin, and of other losses unrelated to the default
of a clearing member, if such losses exceed the specified
resources allocated for such purpose by the clearinghouse.
The maximum potential payout under these rules cannot be
estimated. The Firm has not recorded any contingent liability
in its financial statements for these agreements and believes
that any potential requirement to make payments under these
agreements is remote.
• Merger and Acquisition Guarantees. The Firm may, from time
to time, in its role as investment banking advisor be required
to provide guarantees in connection with certain European
merger and acquisition transactions. If required by the
regulating authorities, the Firm provides a guarantee that the
acquirer in the merger and acquisition transaction has or will
have sufficient funds to complete the transaction and would
then be required to make the acquisition payments in the event
the acquirer’s funds are insufficient at the completion date of
the transaction. These arrangements generally cover the time
frame from the transaction offer date to its closing date and,
therefore, are generally short term in nature. The Firm believes
the likelihood of any payment by the Firm under these
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 financial statements.
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 litigation, arising in connection with its
activities as a global diversified financial services institution.
Certain of the actual or threatened legal actions include claims
for substantial compensatory and/or punitive damages or claims
for indeterminate amounts of damages. In some cases, the
entities that would otherwise be the primary defendants in such
cases are bankrupt or are in financial distress. These actions have
included, but are not limited to, residential mortgage and credit
crisis-related matters.
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 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 millions
Legal expenses
2019
2018
2017
$
221 $
206 $
342
The Firm’s future legal expenses may fluctuate from period to
period, given the current environment regarding government
investigations and private litigation affecting global financial
services firms, including the Firm.
In many proceedings and investigations, however, it is
inherently difficult to determine whether any loss is probable or
even possible or to estimate the amount of any loss. 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
December 2019 Form 10-K
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Notes to Consolidated Financial Statements
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 government entities seek
substantial or indeterminate damages, restitution, disgorgement
or penalties. Numerous issues may need to be resolved,
lengthy discovery and
including
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.
through potentially
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 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, styled China
Development Industrial Bank v. Morgan Stanley & Co.
Incorporated et al., which is pending in the Supreme Court of
the State of New York, New York County ("Supreme Court of
NY”). The complaint relates to a $275 million CDS referencing
the super senior portion of the STACK 2006-1 CDO. The
complaint asserts claims for common law fraud, fraudulent
inducement and fraudulent concealment and alleges that the
Firm misrepresented the risks of the STACK 2006-1 CDO to
CDIB, and that the Firm knew that the assets backing the CDO
were of poor quality when it entered into the CDS with CDIB.
The complaint seeks compensatory damages related to the
approximately $228 million that CDIB alleges it has already lost
under the CDS, rescission of CDIB’s obligation to pay an
additional $12 million, punitive damages, equitable relief, fees
and costs. On February 28, 2011, the court denied the Firm’s
motion to dismiss the complaint. On December 21, 2018, the
court denied the Firm’s motion for summary judgment and
granted in part the Firm’s motion for sanctions relating to
spoliation of evidence. On January 24, 2019, CDIB filed a notice
of appeal from the court’s December 21, 2018 order, and on
January 25, 2019, the Firm filed a notice of appeal from the same
order. On March 7, 2019, the court denied the relief that CDIB
sought in a motion to clarify and resettle the portion of the court’s
December 21, 2018 order granting spoliation sanctions. On
December 5, 2019, the Appellate Division, First Department
(“First Department”) heard the parties’ cross appeals. Based on
currently available information, the Firm believes it could incur
a loss in this action of up to approximately $240 million plus
pre- and post-judgment interest, fees and costs.
On July 8, 2013, U.S. Bank National Association, in its capacity
as trustee, filed a complaint against the Firm styled U.S. Bank
National Association, solely in its capacity as Trustee of the
Morgan Stanley Mortgage Loan Trust 2007-2AX (MSM
2007-2AX) v. Morgan Stanley Mortgage Capital Holdings LLC,
Successor-by-Merger to Morgan Stanley Mortgage Capital Inc.
and GreenPoint Mortgage Funding, Inc., pending in the
Supreme Court of NY. The complaint asserts claims for breach
of contract and alleges, among other things, that the loans in the
trust, which had an original principal balance of approximately
$650 million, breached various representations and warranties.
The complaint seeks, among other relief, specific performance
of the loan breach remedy procedures in the transaction
documents, unspecified damages and interest. On November 24,
2014, the court granted in part and denied in part the Firm’s
motion to dismiss the complaint. On April 4, 2019, the court
denied the Firm’s motion to renew its motion to dismiss. 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, plus pre- 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 23, 2014, Financial Guaranty Insurance
Company (“FGIC”) filed a complaint against the Firm in the
Supreme Court of NY styled Financial Guaranty Insurance
Company v. Morgan Stanley ABS Capital I Inc. et al. relating to
the Morgan Stanley ABS Capital I Inc. Trust 2007-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 September 13, 2018, the First
Department affirmed in part and reversed in part the lower
court’s order denying the Firm’s motion to dismiss. On
December 20, 2018, the First Department denied plaintiff’s
motion for leave to appeal its decision to the New York Court
of Appeals ("Court of Appeals") or, in the alternative, for re-
argument. 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 FGIC that the Firm did
not repurchase, plus pre- and post- judgment interest, fees and
125
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
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 styled
Deutsche Bank National Trust Company solely in its capacity
as Trustee of the Morgan Stanley ABS Capital I Inc. Trust 2007-
NC4 v. Morgan Stanley Mortgage Capital Holdings LLC as
Successor-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
October 19, 2018, the court granted the Firm’s motion for leave
to amend its answer and to stay the case pending resolution of
Deutsche Bank National Trust Company’s appeal to the Court
of Appeals in another case, styled Deutsche Bank National Trust
Company v. Barclays Bank PLC, regarding the applicable statute
of limitations. On January 17, 2019, the First Department
reversed the trial court’s order to the extent that it had granted
in part the Firm’s motion to dismiss the complaint. On June 4,
2019, the First Department granted the Firm’s motion for leave
to appeal to the Court of Appeals. 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, plus pre- 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.
Tax
In matters styled Case number 15/3637 and Case number
15/4353, the Dutch Tax Authority (“Dutch Authority”) has
challenged, in the District Court in Amsterdam, the prior set-off
by the Firm of approximately €124 million (approximately $139
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. On April 26, 2018, the District Court in Amsterdam
December 2019 Form 10-K
126
issued a decision dismissing the Dutch Authority’s claims. On
June 4, 2018, the Dutch Authority filed an appeal before the
Court of Appeal in Amsterdam in matters re-styled Case number
18/00318 and Case number 18/00319. On June 26 and July 2,
2019, a hearing of the Dutch Authority’s appeal was held. Based
on currently available information, the Firm believes that it
could incur a loss in this action of up to approximately €124
million (approximately $139 million) plus accrued interest.
14. Variable Interest Entities and Securitization
Activities
Overview
The Firm is involved with various SPEs in the normal course of
business. In most cases, these entities are deemed to be VIEs.
The Firm’s variable interests in VIEs include debt and equity
interests, commitments, guarantees, derivative instruments and
certain fees. The Firm’s involvement with VIEs arises primarily
from:
• Interests purchased in connection with market-making
activities, securities held in its Investment securities portfolio
and retained interests held as a result of securitization
activities, including re-securitization transactions.
• Guarantees
issued and residual
connection with municipal bond securitizations.
interests retained
in
• Loans made to and investments in VIEs that hold debt, equity,
real estate or other assets.
• Derivatives entered into with VIEs.
• Structuring of CLNs or other asset-repackaged notes designed
to meet the investment objectives of clients.
• Other structured transactions designed to provide tax-efficient
yields to the Firm or its clients.
The Firm determines whether it is the primary beneficiary of a
VIE upon its initial involvement with the VIE and reassesses
whether it is the primary beneficiary on an ongoing basis as long
as it has any continuing involvement with the VIE. This
determination is based upon an analysis of the design of the VIE,
including the VIE’s structure and activities, the power to make
significant economic decisions held by the Firm and by other
parties, and the variable interests owned by the Firm and other
parties.
The power to make the most significant economic decisions may
take a number of different forms in different types of VIEs. The
Firm considers servicing or collateral management decisions as
representing the power to make the most significant economic
decisions in transactions such as securitizations or CDOs. As a
result, the Firm does not consolidate securitizations or CDOs
for which it does not act as the servicer or collateral manager
Table of Contents
Notes to Consolidated Financial Statements
unless it holds certain other rights to replace the servicer or
collateral manager or to require the liquidation of the entity. If
the Firm serves as servicer or collateral manager, or has certain
other rights described in the previous sentence, the Firm
analyzes the interests in the VIE that it holds and consolidates
only those VIEs for which it holds a potentially significant
interest in the VIE.
For many transactions, such as re-securitization transactions,
CLNs and other asset-repackaged notes, there are no significant
economic decisions made on an ongoing basis. In these cases,
the Firm focuses its analysis on decisions made prior to the initial
closing of the transaction and at the termination of the
transaction. The Firm concluded in most of these transactions
that decisions made prior to the initial closing were shared
between the Firm and the initial investors based upon the nature
of the assets, including whether the assets were issued in a
transaction sponsored by the Firm and the extent of the
information available to the Firm and to investors, the number,
nature and involvement of investors, other rights held by the
Firm and
legal
documentation and the level of continuing involvement by the
Firm, including the amount and type of interests owned by the
Firm and by other investors. The Firm focused its control
decision on any right held by the Firm or investors related to the
termination of the VIE. Most re-securitization transactions,
CLNs and other asset-repackaged notes have no such
termination rights.
the standardization of
investors,
the
Consolidated VIE Assets and Liabilities by Type of Activity
$ in millions
VIE Assets VIE Liabilities VIE Assets VIE Liabilities
At December 31, 2019
At December 31, 2018
OSF
MABS1
Other2
Total
$
696 $
391 $
267 $
265
987
4
66
59
809
$
1,948 $
461 $
1,135 $
—
38
48
86
OSF—Other structured financings
1. Amounts include transactions backed by residential mortgage loans, commercial
mortgage loans and other types of assets, including consumer or commercial assets.
and may be in loan or security form. The value of assets is determined based on the
fair value of the liabilities and the interests owned by the Firm in such VIEs as the fair
values for the liabilities and interests owned are more observable.
2. Other primarily includes operating entities, investment funds and structured
transactions.
Consolidated VIE Assets and Liabilities by Balance Sheet
Caption
$ in millions
Assets
Cash and cash equivalents:
At
December 31,
2019
At
December 31,
2018
Cash and due from banks
$
315 $
Restricted cash
Trading assets at fair value
Customer and other receivables
Goodwill
Intangible assets
Other assets
Total
Liabilities
Other secured financings
Other liabilities and accrued expenses
Total
Noncontrolling interests
173
943
18
—
111
388
77
171
314
25
18
128
402
$
$
$
$
1,948 $
1,135
422 $
39
461 $
192 $
64
22
86
106
Consolidated VIE assets and liabilities are presented in the
previous tables after intercompany eliminations. Generally,
most assets owned by consolidated VIEs cannot be removed
unilaterally by the Firm and are not available to the Firm while
the related liabilities issued by consolidated VIEs are non-
recourse to the Firm. However, in certain 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 net assets
recognized in its financial statements, net of amounts absorbed
by third-party variable interest holders.
Non-consolidated VIEs
At December 31, 2019
$ in millions
MABS1
CDO
MTOB
OSF
Other2
VIE assets (UPB)
Maximum exposure to loss3
$ 125,603 $ 2,976 $
6,965 $ 2,288 $ 51,305
Debt and equity
interests
Derivative and other
contracts
Commitments,
guarantees and
other
$ 16,314 $
240 $
— $ 1,009 $ 11,977
—
—
4,599
—
2,995
631
—
—
—
266
Total
$ 16,945 $
240 $
4,599 $ 1,009 $ 15,238
Carrying value of variable interests—Assets
Debt and equity
interests
Derivative and other
contracts
$ 16,314 $
240 $
— $ 1,008 $ 11,977
—
—
6
—
388
Total
Additional VIE assets owned4
$ 16,314 $
240 $
6 $ 1,008 $ 12,365
$ 11,453
Carrying value of variable interests—Liabilities
Derivative and other
contracts
$
— $
— $
— $
— $
444
127
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
At December 31, 20185
Detail of Mortgage- and Asset-Backed Securitization Assets
$ in millions
MABS1
CDO
MTOB
OSF
Other2
VIE assets (UPB)
Maximum exposure to loss3
$ 106,197 $ 10,848 $
7,014 $ 3,314 $ 38,603
$ 15,671 $ 1,169 $
— $ 1,622 $ 7,967
guarantees and other
1,073
—
235
509
Total
$ 16,744 $ 1,172 $
4,449 $ 1,857 $ 10,244
Carrying value of variable interests—Assets
—
3
Debt and equity
interests
Derivative and other
contracts
Commitments,
At December 31, 2019
At December 31, 20181
$ in millions
UPB
Debt and
Equity
Interests
Debt and
Equity
Interests
UPB
Residential mortgages
$ 30,353 $
3,993 $ 27,594 $
4,581
4,327
U.S. agency
collateralized
mortgage obligations
Other consumer or
commercial loans
36,366
6,365
14,969
3,443
4,992
2,075
8,133
3,320
—
4,449
—
1,768
Commercial mortgages
53,892
3,881
55,501
Debt and equity
interests
Derivative and other
contracts
$ 15,671 $ 1,169 $
— $ 1,205 $ 7,967
Total
$ 125,603 $
16,314 $ 106,197 $
15,671
—
—
6
—
87
1. The balances as of December 31, 2018 were revised as noted in the Non-consolidated
VIEs table herein.
Total
Additional VIE assets owned4
$ 15,671 $ 1,169 $
Carrying value of variable interests—Liabilities
6 $ 1,205 $ 8,054
$ 12,059
Securitization Activities
Derivative and other
contracts
$
— $
— $
— $
— $
185
MTOB—Municipal tender option bonds
1. Amounts include transactions backed by residential mortgage loans, commercial
mortgage loans and other types of assets, including consumer or commercial assets.
and may be in loan or security form.
2. Other primarily includes exposures to commercial real estate property and investment
funds.
3. Where notional amounts are utilized in quantifying the maximum exposure related to
derivatives, such amounts do not reflect changes in fair value recorded by the Firm.
4. Additional VIE assets owned represents the carrying value of total exposure to non-
consolidated VIEs for which the maximum exposure to loss is less than specific
thresholds, primarily interests issued by securitization SPEs. The Firm’s primary risk
exposure is to the most subordinate class of beneficial interest and maximum exposure
to loss generally equals the fair value of the assets owned. These assets are primarily
included in Trading assets and Investment securities and are measured at fair value
(see Note 3). The Firm does not provide additional support in these transactions
through contractual facilities, guarantees or similar derivatives.
5. The carrying value and maximum exposure to loss of variable interests related to
MABS and Other have been revised to reflect the addition of approximately $11 billion
in loans to VIEs that were previously excluded. The VIE asset (UPB) amounts have
also been revised by approximately $54 billion. This disclosure-only revision did not
impact the Firm's balance sheets.
The majority of the VIEs included in the previous tables are
sponsored by unrelated parties; examples of the Firm’s
involvement with these VIEs include its secondary market-
making activities and the securities held in its Investment
securities portfolio (see Note 6).
The Firm’s maximum exposure to loss is dependent on the nature
of the Firm’s variable interest in the VIE and is limited to the
notional amounts of certain liquidity facilities and other credit
support, total return swaps and written put options, as well as
the fair value of certain other derivatives and investments the
Firm has made in the VIE.
The Firm’s maximum exposure to loss in the previous tables
does not include the offsetting benefit of hedges or any
reductions associated with 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.
Liabilities issued by VIEs generally are non-recourse to the
Firm.
In a securitization transaction, the Firm transfers assets
(generally commercial or residential mortgage loans or
securities) to an SPE, sells to investors most of the beneficial
interests, such as notes or certificates, issued by the SPE, and,
in many cases, retains other beneficial interests. The purchase
of the transferred assets by the SPE is financed through the sale
of these interests.
In many securitization transactions involving commercial
mortgage loans, the Firm transfers a portion of the assets to the
SPE with unrelated parties transferring the remaining assets. In
addition, mainly in securitization transactions involving
residential mortgage loans, the Firm may also enter into
derivative transactions, primarily interest rate swaps or interest
rate caps, with the SPE.
Although not obligated, the Firm generally makes a market in
the securities issued by SPEs in securitization transactions. As
a market maker, the Firm offers to buy these securities from,
and sell these securities to, investors. Securities purchased
through these market-making activities are not considered to be
retained interests; these beneficial interests generally are
included in Trading assets—Corporate and other debt and are
measured at fair value.
The Firm enters into derivatives, generally interest rate swaps
and interest rate caps, with a senior payment priority in many
securitization transactions. The risks associated with these and
similar derivatives with SPEs are essentially the same as similar
derivatives with non-SPE counterparties and are managed as
part of the Firm’s overall exposure. See Note 5 for further
information on derivative instruments and hedging activities.
Investment Securities
The Firm holds securities issued by VIEs within the Investment
securities portfolio. These securities are composed of those
related to transactions sponsored by the federal mortgage
agencies and predominantly the most senior securities issued by
VIEs backed by student loans and commercial mortgage loans.
December 2019 Form 10-K
128
Table of Contents
Notes to Consolidated Financial Statements
Transactions sponsored by the federal mortgage agencies
include an explicit or implicit guarantee provided by the U.S.
government. Additionally, the Firm holds certain commercial
mortgage-backed securities issued by VIEs retained as a result
of the Firm's securitization activities. See Note 6 for further
information on the Investment securities portfolio.
Municipal Tender Option Bond Trusts
In a municipal tender option bond trust transaction, the client
transfers a municipal bond to a trust. The trust issues short-term
securities that the Firm, as the remarketing agent, sells to
investors. The client generally retains a residual interest. The
short-term securities are supported by a liquidity facility
pursuant to which the investors may put their short-term
interests. In most programs, a third-party provider will provide
such liquidity facility; in some programs, the Firm provides this
liquidity facility.
The Firm may, in lieu of purchasing short-term securities for
remarketing, decide to extend a temporary loan to the trust. The
client can generally terminate the transaction at any time. The
liquidity provider can generally terminate the transaction upon
the occurrence of certain events. When the transaction is
terminated, the municipal bond is generally sold or returned to
the client. Any losses suffered by the liquidity provider upon the
sale of the bond are the responsibility of the client. This
obligation is generally collateralized. Liquidity facilities
provided to municipal tender option bond trusts are classified
as derivatives. The Firm consolidates any municipal tender
option bond trusts in which it holds the residual interest.
Credit Protection Purchased through Credit-Linked Notes
CLN transactions are designed to provide investors with
exposure to certain credit risk on referenced assets. In these
transactions, the Firm transfers assets (generally high-quality
securities or money market investments) to an SPE, enters into
a derivative transaction in which the SPE sells protection on an
unrelated referenced asset or group of assets, through a credit
derivative, and sells the securities issued by the SPE to investors.
In some transactions, the Firm may also enter into interest rate
or currency swaps with the SPE. Depending on the structure,
the assets and liabilities of the SPE may be consolidated and
recognized in the Firm’s balance sheets or accounted for as a
sale of assets.
Upon the occurrence of a credit event related to the referenced
asset, the SPE will deliver securities collateral as payment to the
Firm, which exposes the Firm to changes in the collateral’s
value.
Derivative payments by the SPE are collateralized. The risks
associated with these and similar derivatives with SPEs are
essentially the same as those with non-SPE counterparties and
are managed as part of the Firm’s overall exposure.
Other Structured Financings
The Firm invests in interests issued by entities that develop and
own low-income communities (including low-income housing
projects) and entities that construct and own facilities that will
generate energy from renewable resources. The interests entitle
the Firm to a share of tax credits and tax losses generated by
these projects. In addition, the Firm has issued guarantees to
investors in certain low-income housing funds. The guarantees
are designed to return an investor’s contribution to a fund and
the investor’s share of tax losses and tax credits expected to be
generated by the fund. The Firm is also involved with entities
designed to provide tax-efficient yields to the Firm or its clients.
Collateralized Loan and Debt Obligations
CLOs and CDOs are SPEs that purchase a pool of assets
consisting of corporate loans, corporate bonds, ABS or synthetic
exposures on similar assets through derivatives, and issue
multiple tranches of debt and equity securities to investors. The
Firm underwrites the securities issued in certain CLO
transactions on behalf of unaffiliated sponsors and provides
advisory services to these unaffiliated sponsors. The Firm sells
corporate loans to many of these SPEs, in some cases
representing a significant portion of the total assets purchased.
Although not obligated, the Firm generally makes a market in
the securities issued by SPEs in these transactions and may retain
unsold securities. These beneficial interests are included in
Trading assets and are measured at fair value.
Equity-Linked Notes
ELN transactions are designed to provide investors with
exposure to certain risks related to the specific equity security,
equity index or other index. In an ELN transaction, the Firm
typically transfers to an SPE either a note issued by the Firm,
the payments on which are linked to the performance of a
specific equity security, equity index or other index, or debt
securities issued by other companies and a derivative contract,
the terms of which will relate to the performance of a specific
equity security, equity index or other index. These ELN
transactions with SPEs were not consolidated at December 31,
2019 or December 31, 2018.
129
December 2019 Form 10-K
At December 31, 20192
RML
CML
U.S. Agency
CMO
CLN and
Other3
$ in millions
Retained interests
Investment grade
$ 9,850 $ 86,203 $
19,132 $
8,410
Non-investment grade
Total
Fair Value at December 31, 2018
Level 2
Level 3
Total
$
$
1,580 $
13 $
1,593
174
252
426
1,754 $
265 $
2,019
Table of Contents
Notes to Consolidated Financial Statements
Transferred Assets with Continuing Involvement1
$ in millions
SPE assets (UPB)4
Retained interests
Investment grade
Non-investment grade
Total
$
$
29 $
720 $
2,376 $
17
254
—
46 $
974 $
2,376 $
Interests purchased in the secondary market
Investment grade
Non-investment grade
Total
Derivative assets
Derivative liabilities
$
$
$
6 $
197 $
75
51
81 $
248 $
— $
— $
—
—
77 $
—
77 $
— $
—
$ in millions
SPE assets (UPB)4
Retained interests
Investment grade
Non-investment grade
Total
December 31, 2018
RML
CML
U.S. Agency
CMO
CLN and
Other3
$14,376 $ 68,593 $
16,594 $ 14,608
$
$
17 $
483 $
1,573 $
4
212
—
21 $
695 $
1,573 $
Interests purchased in the secondary market
Investment grade
Non-investment grade
Total
Derivative assets
Derivative liabilities
$
$
$
7 $
91 $
102 $
28
71
35 $
162 $
— $
— $
—
—
—
102 $
— $
—
1
92
93
—
—
—
339
145
3
210
213
—
—
—
216
178
$ in millions
Retained interests
Investment grade
Non-investment grade
Total
Fair Value at December 31, 2019
Level 2
Level 3
Total
$
$
2,401 $
6
4 $
97
2,407 $
101 $
2,405
103
2,508
Interests purchased in the secondary market
Investment grade
Non-investment grade
Total
Derivative assets
Derivative liabilities
$
$
$
278 $
68
346 $
337 $
144
2 $
58
60 $
2 $
1
280
126
406
339
145
December 2019 Form 10-K
130
Interests purchased in the secondary market
Investment grade
Non-investment grade
Total
Derivative assets
Derivative liabilities
$
$
$
193 $
83
276 $
121 $
175
7 $
16
23 $
95 $
3
200
99
299
216
178
RML—Residential mortgage loans
CML—Commercial mortgage loans
1. The Transferred Assets with Continuing Involvement tables include transactions with
SPEs in which the Firm, acting as principal, transferred financial assets with continuing
involvement and received sales treatment. See Note 12 for information on certain
other transfers of assets to SPEs which are accounted for as financings.
2. As permitted by applicable guidance, certain transfers of assets where the Firm’s only
continuing involvement is a derivative are only reported in the following Assets Sold
with Retained Exposure table, and are no longer also included in this table. At
December 31, 2018 these transactions were included in CLN and Other and comprised
approximately $8 billion in UPB, $20 million in Derivative assets and $119 million in
Derivative liabilities.
3. Amounts include CLO transactions managed by unrelated third parties.
4. Amounts include assets transferred by unrelated transferors.
Transferred assets are carried at fair value prior to securitization,
and any changes in fair value are recognized in the income
statements. The Firm may act as underwriter of the beneficial
interests issued by these securitization vehicles, for which
Investment banking revenues are recognized. 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 balance sheets with changes
in fair value recognized in the income statements. Fair value for
these interests is measured using techniques that are consistent
with the valuation techniques applied to the Firm’s major
categories of assets and liabilities as described in Notes 2 and
3.
Proceeds from New Securitization Transactions and Sales of
Loans
$ in millions
New transactions1
2019
2018
2017
$ 34,464 $ 23,821 $ 23,939
Retained interests
Sales of corporate loans to CLO SPEs1, 2
7,403
2
2,904
317
2,337
191
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 by non-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 13).
Table of Contents
Notes to Consolidated Financial Statements
Assets Sold with Retained Exposure
• Up to a 2.5% Common Equity Tier 1 CCyB, currently set by
$ in millions
Gross cash proceeds from sale of assets1
Fair value
Assets sold
Derivative assets recognized
in the balance sheets
Derivative liabilities recognized
in the balance sheets
December 31,
2019
December 31,
2018
$
$
38,661 $
27,121
39,137 $
26,524
647
152
164
763
1. The carrying value of assets derecognized at the time of sale approximates gross
cash proceeds.
The Firm enters into transactions in which it sells securities,
primarily equities, and contemporaneously enters into bilateral
OTC derivatives with the purchasers of the securities, through
which it retains exposure to the sold securities.
15. Regulatory Requirements
Regulatory Capital Framework
The Firm is an FHC under the Bank Holding Company Act of
1956, as amended, and is subject to the regulation and oversight
of the Board of Governors of the Federal Reserve System
(“Federal Reserve”). The Federal Reserve establishes capital
requirements for the Firm, including well-capitalized standards,
and evaluates the Firm’s compliance with such capital
requirements. The OCC establishes similar capital requirements
and standards for MSBNA and MSPBNA (collectively, the
“U.S. Bank Subsidiaries”). The regulatory capital requirements
are largely based on the Basel III capital standards established
by the Basel Committee on Banking Supervision and also
implement certain provisions of the Dodd-Frank Wall Street
Reform and Consumer Protection Act.
Regulatory Capital Requirements
The Firm is required to maintain minimum risk-based and
leverage-based capital
regulatory capital
requirements. A summary of the calculations of regulatory
capital, RWA and transition provisions follows.
ratios under
Minimum risk-based capital ratio requirements apply to
Common Equity Tier 1 capital, Tier 1 capital and Total capital
(which includes Tier 2 capital). Capital standards require certain
adjustments to, and deductions from, capital for purposes of
determining these ratios.
In addition
requirements, the Firm is subject to the following buffers:
the minimum risk-based capital ratio
to
• A greater than 2.5% Common Equity Tier 1 capital
conservation buffer;
• The Common Equity Tier 1 G-SIB capital surcharge, currently
at 3%; and
U.S. banking agencies at zero.
In 2018, the requirement for each of these buffers was 75% of
the fully phased-in 2019 requirement noted above.
Risk-Weighted Assets
RWA reflects both the Firm’s on- and off-balance sheet risk, as
well as capital charges attributable to the risk of loss arising from
the following:
• Credit risk: The failure of a borrower, counterparty or issuer
to meet its financial obligations to the Firm;
• Market risk: Adverse changes in the level of one or more
market prices, rates, indices, volatilities, correlations or other
market factors, such as market liquidity; and
• Operational risk: 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).
The Firm’s risk-based capital ratios for purposes of determining
regulatory compliance are the lower of the 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 December 31, 2019 and December 31, 2018,
the Firm’s risk-based capital ratios are based on the Standardized
Approach rules.
Minimum leverage-based capital requirements include a Tier 1
leverage ratio and an SLR. The Firm is required to maintain a
Tier 1 SLR of 5%, inclusive of an enhanced SLR capital buffer
of at least 2%.
The Firm’s Regulatory Capital and Capital Ratios
$ in millions
Risk-based capital
Common Equity Tier 1 capital
Tier 1 capital
Total capital
Total RWA
Leverage-based capital
Tier 1 leverage
Adjusted average assets2
SLR
At December 31, 2019
Required
Ratio1
Amount
Ratio
10.0% $
64,751
16.4%
11.5%
13.5%
73,443
18.6%
82,708
21.0%
394,177
4.0% $
73,443
8.3%
889,195
5.0%
73,443
6.4%
Supplementary leverage exposure3
1,155,177
131
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
$ in millions
Risk-based capital
At December 31, 2018
Required
Ratio1
Amount
Ratio
MSBNA’s Regulatory Capital
$ in millions
Common Equity Tier 1 capital
8.6% $
62,086
16.9%
Risk-based capital
10.1%
12.1%
70,619
19.2%
Common Equity Tier 1 capital
80,052
21.8%
367,309
Tier 1 capital
Total capital
Tier 1 capital
Total capital
Total RWA
Leverage-based capital
Tier 1 leverage
Adjusted average assets2
SLR
4.0% $
70,619
8.4%
843,074
5.0%
70,619
6.5%
Supplementary leverage exposure3
1,092,672
1. Required ratios are inclusive of any buffers applicable as of the date presented. For
2018, the required regulatory capital ratios for risk-based capital are under the
transitional rules. Failure to maintain the buffers would 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.
2. Adjusted average assets represents the denominator of the Tier 1 leverage ratio and
is composed of the average daily balance of consolidated on-balance sheet assets
for the quarters ending on the respective balance sheet dates, reduced by disallowed
goodwill, intangible assets, investments in covered funds, defined benefit pension
plan assets, after-tax gain on sale from assets sold into securitizations, investments
in the Firm's own capital instruments, certain defined tax assets and other capital
deductions.
3. Supplementary leverage exposure is the sum of Adjusted average assets used in the
Tier 1 leverage ratio and other adjustments, primarily: (i) for derivatives, potential future
exposure and the effective notional principal amount of sold credit protection offset
by qualifying purchased credit protection; (ii) the counterparty credit risk for repo-style
transactions; and (iii) the credit equivalent amount for off-balance sheet exposures.
U.S. Bank Subsidiaries’ Regulatory Capital and Capital
Ratios
The OCC establishes capital requirements for the Firm’s U.S.
Bank Subsidiaries and evaluates their compliance with such
capital requirements. Regulatory capital requirements for the
U.S. Bank Subsidiaries are calculated in a similar manner to the
Firm’s regulatory capital requirements, although G-SIB capital
surcharge requirements do not apply to the U.S. Bank
Subsidiaries.
The OCC’s regulatory capital framework includes Prompt
Corrective Action (“PCA”) standards,
including “well-
capitalized” PCA standards that are based on specified
regulatory capital ratio minimums. For the Firm to remain an
FHC, the U.S. Bank Subsidiaries must remain well-capitalized
in accordance with the OCC’s PCA standards. In addition,
failure by the U.S. Bank Subsidiaries to meet minimum capital
requirements may result in 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.
At December 31, 2019 and December 31, 2018, the U.S. Bank
Subsidiaries’ risk-based capital ratios are based on the
Standardized Approach rules. In each period, the ratios exceeded
well-capitalized requirements.
December 2019 Form 10-K
132
At December 31, 2019
Required
Ratio1
Amount
Ratio
6.5% $ 15,919
18.5%
8.0% 15,919
18.5%
10.0% 16,282
18.9%
5.0% $ 15,919
11.3%
6.0% 15,919
8.7%
At December 31, 2018
Required
Ratio1
Amount
Ratio
6.5% $ 15,221
19.5%
8.0% 15,221
19.5%
10.0% 15,484
19.8%
5.0% $ 15,221
10.5%
6.0% 15,221
8.2%
At December 31, 2019
Required
Ratio1
Amount
Ratio
6.5% $
7,962
24.8%
8.0%
7,962
24.8%
10.0%
8,016
25.0%
5.0% $
7,962
6.0%
7,962
9.9%
9.4%
At December 31, 2018
Required
Ratio1
Amount
Ratio
6.5% $
7,183
25.2%
8.0%
7,183
25.2%
10.0%
7,229
25.4%
5.0% $
7,183
10.0%
6.0%
7,183
9.6%
Leverage-based capital
Tier 1 leverage
SLR
$ in millions
Risk-based capital
Common Equity Tier 1 capital
Tier 1 capital
Total capital
Leverage-based capital
Tier 1 leverage
SLR
MSPBNA’s Regulatory Capital
$ in millions
Risk-based capital
Common Equity Tier 1 capital
Tier 1 capital
Total capital
Leverage-based capital
Tier 1 leverage
SLR
$ in millions
Risk-based capital
Common Equity Tier 1 capital
Tier 1 capital
Total capital
Leverage-based capital
Tier 1 leverage
SLR
1. Ratios that are required in order to be considered well-capitalized for U.S. regulatory
purposes.
U.S. Broker-Dealer Regulatory Capital Requirements
MS&Co. Regulatory Capital
$ in millions
Net capital
Excess net capital
At
December 31,
2019
At
December 31,
2018
$
13,708 $
10,686
13,797
11,333
MS&Co. is a registered U.S. broker-dealer and registered
futures commission merchant and, accordingly, is subject to the
Table of Contents
Notes to Consolidated Financial Statements
minimum net capital requirements of the SEC and the CFTC.
MS&Co. has consistently operated with capital in excess of its
regulatory capital requirements.
16. Total Equity
Morgan Stanley Shareholders’ Equity
As an Alternative Net Capital broker-dealer, and in accordance
with Securities Exchange Act of 1934 (“Exchange Act”) Rule
15c3-1, Appendix E, 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 December 31, 2019 and December 31, 2018,
MS&Co. has exceeded its net capital requirement and has
tentative net capital in excess of the minimum and notification
requirements.
MSSB Regulatory Capital
$ in millions
Net capital
Excess net capital
At
December 31,
2019
At
December 31,
2018
$
3,387 $
3,238
3,455
3,313
MSSB 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 has
consistently operated with capital in excess of its regulatory
capital requirements.
Other Regulated Subsidiaries
MSIP, a London-based broker-dealer subsidiary, is subject to
the capital requirements of the PRA, and 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. and non-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.
Restrictions on Payments
The regulatory capital requirements referred to above, and
certain covenants contained in various agreements governing
indebtedness of the Firm, may restrict the Firm’s ability to
withdraw capital from its subsidiaries. The following table
represents net assets of consolidated subsidiaries that may be
restricted as to the payment of cash dividends and advances to
the Parent Company.
$ in millions
Restricted net assets
At
December 31,
2019
At
December 31,
2018
$
33,213 $
29,222
Common Stock
Rollforward of Common Stock Outstanding
in millions
Shares outstanding at beginning of period
Treasury stock purchases1
Other2
Shares outstanding at end of period
2019
2018
1,700
(135)
29
1,788
(110)
22
1,594
1,700
1. The Firm’s Board has authorized the repurchase of the Firm’s outstanding stock under
a share repurchase program (“Share Repurchase Program”). In addition to the Firm’s
Share Repurchase Program, Treasury stock purchases include repurchases of
common stock for employee tax withholding.
2. Other includes net shares issued to and forfeited from Employee stock trusts and
issued for RSU conversions.
Share Repurchases
$ in millions
2019
2018
Repurchases of common stock under the Firm’s
Share Repurchase Program
$
5,360 $
4,860
The Firm’s 2019 Capital Plan (“Capital Plan”) includes the share
repurchase of up to $6.0 billion of outstanding common stock
for the period beginning July 1, 2019 through June 30, 2020.
Additionally, the Capital Plan includes quarterly common stock
dividends of up to $0.35 per share, beginning with the common
stock dividend announced on July 18, 2019.
A portion of common stock repurchases was conducted under
a sales plan with MUFG, whereby MUFG sold shares of the
Firm’s common stock to the Firm, as part of the Firm’s Share
Repurchase Program. 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 Board of Governors
of the Federal Reserve System and has no impact on the strategic
alliance between MUFG and the Firm, including the joint
ventures in Japan.
Pursuant to the Share Repurchase Program, the Firm considers,
among other things, business segment capital needs, as well as
stock-based compensation and benefit plan requirements. Share
repurchases under the program will be exercised from time to
time at prices the Firm deems appropriate subject to various
factors, including the Firm’s capital position and market
conditions. The share repurchases may be effected through open
market purchases or privately negotiated transactions, including
through Rule 10b5-1 plans, and may be suspended at any time.
Share repurchases by the Firm are subject to regulatory non-
objection.
Common Stock Dividends per Share
Dividends declared per common share
$ 1.30 $ 1.10 $ 0.90
2019
2018
2017
133
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
Common Shares Outstanding for Basic and Diluted EPS
Preferred Stock Issuance Description
in millions
2019
2018
2017
Weighted average common shares outstanding,
basic
1,617
1,708
1,780
Series1, 2
A
C5
E
F
H
I
J
K
L6
A
C
E
F
G2
H3
I
J4
K
L
Shares
Issued
Depositary
Shares
per Share
Redemption
Price
per Share3
Date4
44,000
1,000
$
25,000
July 15, 2011
1,160,791
34,500
34,000
52,000
40,000
60,000
40,000
20,000
N/A
1,000
1,000
25
1,000
25
1,000
1,000
1,100 October 15, 2011
25,000 October 15, 2023
25,000
January 15, 2024
25,000
July 15, 2019
25,000 October 15, 2024
25,000
25,000
July 15, 2020
April 15, 2027
25,000
January 15, 2025
1. All shares issued are non-cumulative. Each share has a par value of $0.01, except
Series C.
2. Dividends on Series A are based on a floating rate, and dividends on Series C and L
are based on a fixed rate. Dividends on all other Series are based on a fixed-to-floating
rate.
3. Series A and C are redeemable at the redemption price plus accrued and unpaid
dividends, regardless of whether dividends are actually declared, up to but excluding
the date of redemption. All other Series are redeemable at the redemption price plus
any declared and unpaid dividends, up to but excluding the date fixed for redemption.
4. Series A and C are redeemable at the Firm’s option, in whole or in part, on or after the
redemption date. All other Series are redeemable at the Firm’s option (i) in whole or
in part, from time to time, on any dividend payment date on or after the redemption
date or (ii) in whole but not in part at any time within 90 days following a regulatory
capital treatment event (as described in the terms of that series).
5. Series C is non-voting perpetual preferred stock. Dividends on the Series C preferred
stock are payable, on a non-cumulative basis, as and if declared by the Board, in cash,
at the rate of 10% per annum of the liquidation preference of $1,000 per share.
6. Series L Preferred Stock was issued on November 25, 2019.
Preferred Stock Dividends
2019
2018
2017
Per
Share1 Total
Per
Share1 Total
Per
Share1 Total
$ 1,014 $ 44
$ 1,011 $ 45
$ 1,014 $ 45
100
1,781
1,719
1,242
1,418
1,594
1,388
1,463
169
52
60
60
24
74
64
84
59
3
100
1,781
1,719
1,656
1,363
1,594
1,388
1,463
—
52
61
58
33
71
64
83
59
—
100
1,781
1,719
1,656
1,363
1,594
1,388
1,402
—
52
61
58
33
71
64
83
56
—
Total
$524
$526
$523
1. Dividends on all series are payable quarterly, unless otherwise noted.
2. Dividends declared on Series G following the issuance of the notice of redemption
were recognized as Interest expense and are excluded from 2019 amounts.
3. Series H was payable semiannually until July 15, 2019, and is now payable quarterly.
4. Series J is payable semiannually until July 15, 2020, and then quarterly thereafter.
Total
$
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 in 2009.
$ in millions, except per share
data
Series
Effect of dilutive Stock options, RSUs and PSUs
23
30
41
Weighted average common shares
outstanding and common stock equivalents,
diluted
Weighted average antidilutive common stock
equivalents (excluded from the computation of
diluted EPS)
1,640
1,738
1,821
2
1
—
Preferred Stock
$ in millions,
except per
share data
Series
A
C1
E
F
G
H
I
J
K
L
Shares
Outstanding
Carrying Value
At
December 31,
2019
Liquidation
Preference
per Share
At
December 31,
2019
At
December 31,
2018
44,000 $
25,000 $
1,100 $
1,100
519,882
34,500
34,000
—
52,000
40,000
60,000
40,000
20,000
1,000
25,000
25,000
—
25,000
25,000
25,000
25,000
25,000
408
862
850
—
1,300
1,000
1,500
1,000
500
408
862
850
500
1,300
1,000
1,500
1,000
—
8,520
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
and is included in Tier 1 capital in accordance with regulatory
capital requirements (see Note 15).
On November 25, 2019, the Firm announced the redemption in
whole of its outstanding Series G preferred stock. On notice of
redemption, the amount due to holders of Series G Preferred
Stock was reclassified to Borrowings, and on January 15, 2020
the redemption settled at the carrying value of $500 million.
December 2019 Form 10-K
134
Table of Contents
Notes to Consolidated Financial Statements
Comprehensive Income (Loss)
Accumulated Comprehensive Income (Loss)1
Foreign
Currency
Translation
Adjustments
AFS
Securities
Pensions,
Postretirement
and Other
DVA
Total
$
(986) $
(588) $
(474) $ (595) $ (2,643)
20181
$ in millions
Pre-tax
Gain
(Loss)
Income Tax
Benefit
(Provision)
After-tax
Gain
(Loss)
Non-
controlling
Interests
Net
Foreign currency translation adjustments
OCI activity
Reclassified to
earnings
Net OCI
$
(11) $
(79) $
(90) $
24 $
(114)
—
—
—
—
—
$
(11) $
(79) $
(90) $
24 $
(114)
$ in millions
December 31,
2016
OCI during the
period
December 31,
2017
Cumulative
adjustment for
accounting
change2
OCI during the
period
December 31,
2018
OCI during the
period
December 31,
2019
219
41
(117)
(560)
(417)
Change in net unrealized gains (losses) on AFS securities
(767)
(547)
(591)
(1,155)
(3,060)
OCI activity
Reclassified to
earnings
Net OCI
$ (346) $
80 $
(266) $
— $
(266)
(8)
2
(6)
—
(6)
$ (354) $
82 $
(272) $
— $
(272)
(8)
(111)
(124)
(194)
(437)
Pension, postretirement and other
(114)
(272)
137
1,454
1,205
(889)
(930)
(578)
105
(2,292)
OCI activity
Reclassified to
earnings
Net OCI
$
156 $
(37) $
119 $
— $
119
26
(8)
18
—
18
$
182 $
(45) $
137 $
— $
137
(8)
1,137
(66)
(1,559)
(496)
Change in net DVA
$
(897) $
207 $
(644) $ (1,454) $ (2,788)
1. Amounts are net of tax and noncontrolling interests.
2. The cumulative adjustment for accounting changes is primarily the effect of the
adoption of the accounting update Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income. This adjustment was recorded as of
January 1, 2018 to reclassify certain income tax effects related to the enactment of
the Tax Act from AOCI to Retained earnings, primarily related to the remeasurement
of deferred tax assets and liabilities resulting from the reduction in the corporate income
tax rate to 21%. See Note 2 for further information.
Components of Period Changes in OCI
$ in millions
Pre-tax
Gain
(Loss)
Income
Tax Benefit
(Provision)
After-tax
Gain
(Loss)
Non-
controlling
Interests
Foreign currency translation adjustments
2019
6 $
(3) $
3 $
11 $
(8)
OCI activity
Reclassified to
earnings
Net OCI
$ 1,947 $
(472) $
1,475 $
63 $ 1,412
56
(14)
42
—
42
$ 2,003 $
(486) $
1,517 $
63 $ 1,454
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
Reclassified to
earnings
Net OCI
$
$
64 $
187 $
251 $
32 $
219
—
—
—
—
—
64 $
187 $
251 $
32 $
219
OCI activity
Reclassified to
earnings
Net OCI
$
$
OCI activity
Reclassified to
earnings
Net OCI
OCI activity
Reclassified to
earnings
Net OCI
Change in net DVA
OCI activity
Reclassified to
earnings
Net OCI
Net
Change in net unrealized gains (losses) on AFS securities
OCI activity
Reclassified to
earnings
$
100 $
(36) $
64 $
— $
64
(35)
12
(23)
—
— $
(23)
41
—
6 $
—
(3) $
—
—
3 $
11 $
—
(8)
Net OCI
$
65 $
(24) $
41 $
Pension, postretirement and other
Change in net unrealized gains (losses) on AFS securities
$ 1,588 $
(373) $
1,215 $
— $ 1,215
OCI activity
Reclassified to
earnings
$ (193) $
75 $
(118) $
— $
(118)
2
(1)
1
—
1
(103)
25
(78)
—
(78)
Net OCI
$ (191) $
74 $
(117) $
— $
(117)
$ 1,485 $
(348) $
1,137 $
— $ 1,137
Change in net DVA
Pension, postretirement and other
$
(98) $
25 $
(73) $
— $
(73)
OCI activity
Reclassified to
earnings
$ (922) $
325 $
(597) $
(28) $
(569)
12
(3)
9
—
9
12
(5)
7
—
7
Net OCI
$ (910) $
322 $
(588) $
(28) $
(560)
$
(86) $
20 $
(66) $
— $
(66)
$ (2,181) $
533 $ (1,648) $
(80) $ (1,568)
11
(2)
9
—
9
$ (2,170) $
531 $ (1,639) $
(80) $ (1,559)
1. Exclusive of cumulative adjustments related to the adoption of certain accounting
updates in 2018. Refer to the table below and Note 2 for further information.
135
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
Cumulative Adjustments to Retained Earnings Related to
Adoption of Accounting Updates
17. Interest Income and Interest Expense
$ in millions
63
Interest income
2019
2018
2017
$ in millions
Leases
$ in millions
Revenues from contracts with customers
Derivatives and hedging—targeted improvements to
accounting for hedging activities
Reclassification of certain tax effects from AOCI
Other1
Total
$ in millions
Improvements to employee share-based payment
accounting2
Intra-entity transfers of assets other than inventory
Total
2019
2018
2017
$
$
$
$
$
(32)
(99)
443
(6)
306
(30)
(5)
(35)
1. Other includes the adoption of accounting updates related to Recognition and
Measurement of Financial Assets and Financial Liabilities (other than the provision
around presenting unrealized DVA in OCI, which the Firm previously adopted) and
Derecognition of Nonfinancial Assets. The impact of these adoptions on Retained
earnings was not significant.
2. In addition to the Retained earnings impact, this adoption also resulted in a $45 million
increase to Additional paid-in capital.
Cumulative Foreign Currency Translation Adjustments
$ in millions
Associated with net investments in
subsidiaries with a non-U.S. dollar
functional currency
Hedges, net of tax
Total
Carrying value of net investments in non-
U.S. dollar functional currency subsidiaries
subject to hedges
At
December 31,
2019
At
December 31,
2018
$
$
$
(1,874) $
(1,851)
977
(897) $
962
(889)
13,440 $
11,608
Cumulative foreign currency translation adjustments include
gains or losses resulting from translating foreign currency
financial statements from their respective functional currencies
to U.S. dollars, net of hedge gains or losses and related tax
effects. The Firm uses foreign currency contracts to manage the
currency exposure relating to its net investments in non-U.S.
dollar functional currency subsidiaries and determines the
amount of exposure to hedge on a pre-tax basis. The Firm may
also elect not to hedge its net investments in certain foreign
operations due to market conditions or other reasons, including
the availability of various currency contracts at acceptable costs.
Information relating to the effects on cumulative foreign
currency translation adjustments that resulted from the
translation of foreign currency financial statements and from
gains and losses from hedges of the Firm’s net investments in
non-U.S. dollar functional currency subsidiaries is summarized
in the previous table.
December 2019 Form 10-K
136
Investment securities
$
2,175 $
1,744 $
1,334
Loans
4,783
4,249
3,298
Securities purchased under agreements to
resell and Securities borrowed1
Trading assets, net of Trading liabilities
Customer receivables and Other2
3,485
2,899
3,756
1,976
2,392
3,531
169
2,029
2,167
Total interest income
$ 17,098 $ 13,892 $
8,997
Interest expense
Deposits
Borrowings
Securities sold under agreements to
repurchase and Securities loaned3
Customer payables and Other4
Total interest expense
Net interest
$
1,885 $
1,255 $
187
5,052
5,031
4,285
2,609
2,858
1,898
1,902
1,237
(12)
$ 12,404 $ 10,086 $
5,697
$
4,694 $
3,806 $
3,300
1. Includes fees paid on Securities borrowed.
2. Includes interest from Cash and cash equivalents.
3. Includes fees received on Securities loaned.
4. Includes fees received from prime brokerage customers for stock loan transactions
entered into to cover customers’ short positions.
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.
18. Deferred Compensation Plans and Carried
Interest Compensation
Stock-Based Compensation Plans
Certain employees of the Firm participate in the Firm's stock-
based compensation plans. These plans include RSUs and PSUs,
the details of which are further outlined below.
Stock-Based Compensation Expense
$ in millions
RSUs
PSUs
Total1
Includes:
2019
2018
2017
$
1,064 $
892 $
89
28
951
75
$
1,153 $
920 $
1,026
Retirement-eligible awards2
$
111 $
110 $
85
1. Net of forfeitures.
2. Relates to stock-based compensation anticipated to be awarded in January of the
following year that does not contain a future service requirement.
Tax Benefit Related to Stock-Based Compensation Expense
$ in millions
Tax benefit1
2019
2018
2017
$
243 $
193 $
225
1. Excludes income tax consequences related to employee share-based award
conversions.
Table of Contents
Notes to Consolidated Financial Statements
Unrecognized Compensation Cost Related to Stock-Based
Awards Granted
Vested and Unvested RSU Activity
$ in millions
To be recognized in:
2020
2021
Thereafter
Total
At
December 31,
20191
$
$
394
168
30
592
1. Amounts do not include forfeitures, cancellations, accelerations, future adjustments
to fair value for certain awards, or 2019 performance year compensation awarded in
January 2020, which will begin to be amortized in 2020.
In connection with awards under its stock-based compensation
plans, the Firm is authorized to issue shares of common stock
held in treasury or newly issued shares.
The Firm generally uses treasury shares, if available, to deliver
shares to employees or employee stock trusts and has an ongoing
repurchase authorization
in
that
connection with awards under its stock-based compensation
plans. Share repurchases by the Firm are subject to regulatory
non-objection.
repurchases
includes
Common Shares Available for Future Awards under Stock-
Based Compensation Plans
in millions
Shares
At
December 31,
2019
123
shares in millions
RSUs at beginning of period
Awarded
Conversions to common stock
Forfeited
RSUs at end of period1
Aggregate intrinsic value of RSUs at end of period
(dollars in millions)
Weighted average award date fair value
RSUs awarded in 2018
RSUs awarded in 2017
2019
Weighted
Average
Award Date
Fair Value
Number of
Shares
74 $
27
(35)
(1)
65 $
$
$
37.59
43.05
28.95
43.66
44.38
3,294
55.40
42.98
1. At December 31, 2019, the weighted average remaining term until delivery for the
outstanding RSUs was approximately 1.2 years.
Unvested RSU Activity
shares in millions
Unvested RSUs at beginning of period
Awarded
Vested
Forfeited
Unvested RSUs at end of period1
2019
Weighted
Average
Award Date
Fair Value
Number of
Shares
41 $
27
(30)
(1)
37 $
40.65
43.05
37.80
43.66
44.58
1. Unvested RSUs represent awards where recipients have yet to satisfy either the
explicit vesting terms or retirement-eligible requirements.
See Note 16 for additional information on the Firm’s Share
Repurchase Program.
Fair Value of RSU Activity
Restricted Stock Units
RSUs are subject to vesting over time, generally one to seven
years from the date of award, contingent upon continued
employment and subject to restrictions on sale, transfer or
assignment until conversion to common stock. All or a portion
of an award may be forfeited if employment is terminated before
the end of the relevant vesting period or cancelled after the
relevant vesting period in certain situations. Recipients of RSUs
may have voting rights, at the Firm’s discretion, and generally
receive dividend equivalents if the awards vest.
$ in millions
2019
2018
2017
Conversions to common stock
$
1,497 $
1,790 $
1,333
Vested
1,292
1,504
1,470
Performance-Based Stock Units
PSUs will vest and convert to shares of common stock only if
the Firm satisfies predetermined performance and market-based
conditions over a three-year performance period. The number
of PSUs that will vest ranges from 0% to 150% of the target
award, based on the extent to which the Firm achieves the
specified performance goals. One-half of the award will be
earned based on the Firm’s average return on equity, excluding
certain adjustments specified in the plan terms (“MS Adjusted
ROE”). The other half of the award will be earned based on the
Firm’s total shareholder return, relative to the total shareholder
return of the S&P 500 Financials Sector Index (“Relative MS
TSR”). PSUs have vesting, restriction, forfeiture and
cancellation provisions that are generally similar to those of
RSUs. At December 31, 2019, approximately 3 million PSUs
were outstanding.
137
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
PSU Fair Value on Award Date
19. Employee Benefit Plans
MS Adjusted ROE
Relative MS TSR
2019
2018
2017
$
43.29 $
56.84 $
42.64
Pension and Other Postretirement Plans
48.28
65.81
48.02
Components of Net Periodic Benefit Expense (Income)
The Relative MS TSR fair values on the award date were
estimated using a Monte Carlo simulation and the following
assumptions.
Monte Carlo Simulation Assumptions
Award Year
2019
2018
2017
Risk-Free
Interest Rate
Expected
Stock Price
Volatility
Correlation
Coefficient
2.6%
2.2%
1.5%
26.5%
26.8%
27.0%
0.89
0.89
0.89
The risk-free interest rate was determined based on the yields
available on U.S. Treasury zero-coupon issues. The expected
stock price volatility was determined using historical volatility.
The correlation coefficient was developed based on historical
price data of the Firm and the S&P 500 Financials Sector Index.
The model uses an expected dividend yield equivalent to
reinvesting dividends.
Deferred Cash-Based Compensation Plans
Deferred cash-based compensation plans generally provide a
return to the plan participants based upon the performance of
each participant’s referenced investments.
Deferred Cash-Based Compensation Expense
$ in millions
2019
2018
2017
Deferred cash-based awards
$
1,233 $
1,174 $
1,039
Return on referenced investments
Total1
645
(48)
499
$
1,878 $
1,126 $
1,538
Includes:
Retirement-eligible awards2
$
195 $
193 $
176
1. Net of forfeitures.
2. Relates to deferred cash-based compensation anticipated to be awarded in January
of the following year that does not contain a future service requirement.
Carried Interest Compensation
$ in millions
Service cost, benefits earned during the
period
Interest cost on projected benefit obligation
Expected return on plan assets
Net amortization of prior service cost (credit)
Net amortization of actuarial loss
Pension Plans
2019
2018
2017
$
16 $
16 $
139
(114)
1
13
134
(112)
(1)
26
16
146
(117)
—
17
62
Net periodic benefit expense
$
55 $
63 $
$ in millions
Other Postretirement Plans
2019
2018
2017
Service cost, benefits earned during the
period
Interest cost on projected benefit obligation
Net amortization of prior service credit
Net periodic benefit expense (income)
$
$
1 $
1 $
2
—
3
(1)
3 $
3 $
1
3
(16)
(12)
Certain U.S. employees of the Firm and its U.S. affiliates who
were hired before July 1, 2007 are covered by the U.S. pension
plan, a non-contributory defined benefit pension plan that is
qualified under Section 401(a) of the Internal Revenue Code
(“U.S. Qualified Plan”). The U.S. Qualified Plan has ceased
future benefit accruals.
Unfunded supplementary plans (“Supplemental Plans”) cover
certain executives. Liabilities for benefits payable under the
Supplemental Plans are accrued by the Firm and are funded
when paid. The Morgan Stanley Supplemental Executive
Retirement and Excess Plan (“SEREP”), a non-contributory
defined benefit plan that is not qualified under Section 401(a)
of the Internal Revenue Code, has ceased future benefit accruals.
Certain of the Firm’s non-U.S. subsidiaries also have defined
benefit pension plans covering their eligible employees.
The Firm’s pension plans generally provide pension benefits
that are based on each employee’s years of credited service and
on compensation levels specified in the plans.
The Firm generally recognizes compensation expense for any
portion of carried interest (both realized and unrealized) that is
allocated to employees.
The Firm has unfunded postretirement benefit plans that provide
health care and life insurance for eligible U.S. retirees and health
care insurance for their dependents.
Carried Interest Compensation Expense
$ in millions
Expense
2019
2018
2017
$
534 $
156 $
197
December 2019 Form 10-K
138
Table of Contents
Notes to Consolidated Financial Statements
Rollforward of Pre-tax AOCI
Benefit Obligation and Funded Status
Pension Plans
2019
2018
2017
Rollforward of the Benefit Obligation and Fair Value of Plan
Assets
$ in millions
Beginning balance
Net gain (loss)
Prior service credit (cost)
Amortization of prior service cost (credit)
Amortization of net loss
Changes recognized in OCI
$
(779) $
(947) $
(112)
—
1
13
(98)
158
(15)
(1)
26
168
Ending balance
$
(877) $
(779) $
$ in millions
Beginning balance
Net gain
Amortization of prior service credit
Changes recognized in OCI
Other Postretirement Plans
2019
2018
2017
$
13 $
1 $
13
—
13
13
(1)
12
Ending balance
$
26 $
13 $
(761)
(205)
2
—
17
(186)
(947)
17
—
(16)
(16)
1
The Firm generally amortizes into net periodic benefit expense
(income) the unrecognized net gains and losses exceeding 10%
of the greater of the projected benefit obligation or the market-
related value of plan assets. The U.S. pension plans amortize
the unrecognized net gains and losses over the average life
expectancy of participants. The remaining plans generally
amortize the unrecognized net gains and losses and prior service
credit over the average remaining service period of active
participants.
Weighted Average Assumptions Used to Determine Net
Periodic Benefit Expense (Income)
Discount rate
Expected long-term rate of return on plan
assets
Rate of future compensation increases
Discount rate
Pension Plans
2019
2018
2017
4.01%
3.46%
4.01%
3.52%
3.34%
3.50%
3.38%
3.52%
3.10%
Other Postretirement Plans
2019
2018
2017
4.07%
3.44%
4.01%
The accounting for pension and other postretirement plans
involves certain assumptions and estimates. The expected long-
term rate of return for the U.S. Qualified Plan was estimated by
computing a weighted average of the underlying long-term
expected returns based on the investment managers’ target
allocations.
Pension Plans
Other Post-
retirement Plans
$ in millions
2019
2018
2019
2018
Rollforward of benefit obligation
Benefit obligation at beginning
of year
Service cost
Interest cost
Actuarial loss (gain)1
Plan amendments
Plan settlements
Benefits paid
Other2
$
3,563 $
3,966 $
71 $
16
139
497
—
(9)
(191)
11
16
134
(340)
15
(11)
(195)
(22)
86
1
3
1
2
(13)
(13)
—
—
(5)
—
—
—
(6)
—
Benefit obligation at end of
year
$
4,026 $
3,563 $
56 $
71
Rollforward of fair value of plan assets
Fair value of plan assets at
beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Plan settlements
Other2
Fair value of plan assets at
end of year
Funded (unfunded) status
$
$
$
3,203 $
3,468 $
— $
499
36
(69)
34
(191)
(195)
(9)
15
(11)
(24)
—
5
(5)
—
—
3,553 $
3,203 $
— $
—
—
6
(6)
—
—
—
(473) $
(360) $
(56) $
(71)
Amounts recognized in the balance sheets
Assets
Liabilities
Net amount recognized
$
$
98 $
151 $
— $
(571)
(511)
(56)
(473) $
(360) $
(56) $
—
(71)
(71)
1. Primarily reflects the impact of year-over-year discount rate fluctuations.
2. Includes foreign currency exchange rate changes.
Accumulated Benefit Obligation
$ in millions
Pension plans
At
December 31,
2019
At
December 31,
2018
$
4,013 $
3,546
Pension Plans with Benefit Obligations in Excess of the Fair
Value of Plan Assets
$ in millions
At
December 31,
2019
At
December 31,
2018
Projected benefit obligation
$
637 $
Accumulated benefit obligation
Fair value of plan assets
624
66
575
559
64
The pension plans included in the table above may differ based
on their funding status as of December 31st of each year.
139
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
Weighted Average Assumptions Used to Determine Benefit
Obligation
Plan Assets
Pension Plans
Other Postretirement Plans
At
December 31,
2019
At
December 31,
2018
At
December 31,
2019
At
December 31,
2018
3.08%
4.01%
3.11%
4.07%
Fair Value of Plan Assets
At December 31, 2019
$ in millions
Level 1
Level 2
Level 3
Total
Assets
Cash and cash equivalents1
$
3 $
— $
— $
3
3.28%
3.34%
N/A
N/A
U.S. government and agency securities:
Discount rate
Rate of future
compensation
increase
The discount rates used to determine the benefit obligation for
the U.S. pension and postretirement plans were selected by the
Firm, in consultation with its independent actuary, using a
pension discount yield curve based on the characteristics of the
plans, each determined independently. The pension discount
yield curve represents spot discount yields based on duration
implicit in a representative broad-based Aa-rated corporate bond
universe of high-quality fixed income investments. For all non-
U.S. pension plans, the Firm set the assumed discount rates
based on the nature of liabilities, local economic environments
and available bond indices.
Assumed Health Care Cost Trend Rates Used to Determine the
U.S. Postretirement Benefit Obligation
At
December 31,
2019
At
December 31,
2018
Health care cost trend rate assumed for next year
Medical
Prescription
Rate to which the cost trend rate is
assumed to decline (ultimate trend rate)
Year that the rate reaches the ultimate trend
rate
5.48%
8.00%
5.66%
7.66%
4.41%
4.50%
U.S. Treasury securities
U.S. agency securities
Total U.S. government
and agency securities
Corporate and other debt—CDO
Other investments
Other receivables1
Total
Assets Measured at NAV
Commingled trust funds:
2,658
—
2,658
—
—
—
—
292
292
9
—
48
—
—
—
—
53
—
2,658
292
2,950
9
53
48
$ 2,661 $
349 $
53 $ 3,063
Money market
Foreign funds:
Fixed income
Liquidity
Targeted cash flow
Total
Liabilities
Derivative contracts
Other payables1
Total liabilities
137
136
30
240
543
(1)
(52)
(53)
$
—
—
(1)
(52)
—
—
$
— $
(53) $
— $
Fair value of plan assets
$ 3,553
At December 31, 2018
2029
2038
$ in millions
Level 1
Level 2
Level 3
Total
Assets
Cash and cash equivalents1
$
3 $
— $
— $
3
U.S. government and agency securities:
U.S. Treasury securities
U.S. agency securities
Total U.S. government
and agency securities
Corporate and other debt—CDO
Derivative contracts
Other investments
Total
Assets Measured at NAV
Commingled trust funds:
Money market
Foreign funds:
Fixed income
Liquidity
Targeted cash flow
Total
Fair value of plan assets
2,197
—
2,197
—
—
—
—
317
317
11
22
—
—
—
—
—
—
48
2,197
317
2,514
11
22
48
$ 2,200 $
350 $
48 $
2,598
252
134
12
207
605
3,203
$
$
1. Cash and cash equivalents, other receivables and other payables are valued at their
carrying value, which approximates fair value.
December 2019 Form 10-K
140
Table of Contents
Notes to Consolidated Financial Statements
Rollforward of Level 3 Plan Assets
$ in millions
Balance at beginning of period
Actual return on plan assets related to assets
held at end of period
Purchases, sales, other settlements and
issuances, net
Balance at end of period
$
$
2019
2018
48 $
3
2
53 $
47
—
1
48
There were no transfers between levels during 2019 and 2018.
The U.S. Qualified Plan’s assets represent 87% of the Firm’s
total pension plan assets. The U.S. Qualified Plan uses a
combination of active and risk-controlled fixed income
investment strategies. The fixed income asset allocation consists
primarily of fixed income securities and related derivative
instruments designed to approximate the expected cash flows
of the plan’s liabilities in order to help reduce plan exposure to
interest rate variation and to better align assets with the
obligation. The longer-duration fixed income allocation is
expected to help protect the plan’s funded status and maintain
the stability of plan contributions over the long run. The
investment portfolio performance is assessed by comparing
actual investment performance with changes in the estimated
present value of the U.S. Qualified Plan’s benefit obligation.
Derivative instruments are permitted in the U.S. Qualified Plan’s
investment portfolio only to the extent that they comply with all
of the plan’s investment policy guidelines and are consistent
with the plan’s risk and return objectives.
As a fundamental operating principle, any restrictions on the
underlying assets apply to a respective derivative product. This
includes percentage allocations and credit quality. Derivatives
are used solely for the purpose of enhancing investment in the
underlying assets and not to circumvent portfolio restrictions.
Plan assets are measured at fair value using valuation techniques
that are consistent with the valuation techniques applied to the
Firm’s major categories of assets and liabilities as described in
Notes 2 and 3. OTC derivative contracts consist of investments
in interest rate swaps and total return swaps. Other investments
consist of pledged insurance annuity contracts held by non-U.S.-
based plans. The pledged insurance annuity contracts are valued
based on the premium reserve of the insurer for a guarantee that
the insurer has given to the employee benefit plan that
approximates fair value. The pledged insurance annuity
contracts are categorized in Level 3 of the fair value hierarchy.
Commingled trust funds are privately offered funds regulated,
supervised and subject to periodic examination by a U.S. federal
or state agency and available to institutional clients. The trust
investment or
must be maintained for
reinvestment of assets contributed to it from U.S. tax-qualified
employee benefit plans maintained by more than one employer
or controlled group of corporations. The sponsor of the
commingled trust funds values the funds based on the fair value
the collective
of the underlying securities. Commingled trust funds are
redeemable at NAV at the measurement date or in the near future.
Some non-U.S.-based plans hold foreign funds that consist of
investments in fixed income funds, target cash flow funds and
liquidity funds. Fixed income funds invest in individual
securities quoted on a recognized stock exchange or traded in a
regulated market. Certain fixed income funds aim to produce
returns consistent with certain Financial Times Stock Exchange
indexes. Target cash flow funds are designed to provide a series
of fixed annual cash flows achieved by investing in government
bonds and derivatives. Liquidity funds place a high priority on
capital preservation, stable value and a high liquidity of assets.
Foreign funds are readily redeemable at NAV.
The Firm generally considers the NAV of commingled trust
funds and foreign funds provided by the fund manager to be the
best estimate of fair value.
Expected Contributions
The Firm’s policy is to fund at least the amount sufficient to
meet minimum funding requirements under applicable
employee benefit and tax laws. At December 31, 2019, the Firm
expected to contribute approximately $50 million to its pension
and postretirement benefit plans in 2020 based upon the plans’
current funded status and expected asset return assumptions for
2020.
Expected Future Benefit Payments
$ in millions
Pension Plans
Other Postretirement
Plans
At December 31, 2019
2020
2021
2022
2023
2024
2025-2029
149
151
153
159
163
911
4
4
5
5
5
18
Morgan Stanley 401(k) Plan
$ in millions
Expense
2019
2018
2017
$
280 $
272 $
258
U.S. employees meeting certain eligibility requirements may
participate in the Morgan Stanley 401(k) Plan. Eligible
employees receive discretionary 401(k) matching cash
contributions as determined annually by the Firm. For 2019,
2018 and 2017, the Firm matched employee contributions up to
4% of eligible pay, up to the IRS limit. Matching contributions
were invested among available funds according to each
participant’s investment direction on file. Eligible employees
with eligible pay less than or equal to $100,000 also received a
fixed contribution under the 401(k) Plan equal to 2% of eligible
pay. Transition contributions relating to acquired entities or
frozen employee benefit plans are allocated to certain eligible
141
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
employees. The Firm match, fixed contribution and transition
contribution are included in the Firm’s 401(k) expense.
Non-U.S. Defined Contribution Pension Plans
Effective Income Tax Rate
Reconciliation of the U.S. Federal Statutory Income Tax Rate to
the Effective Income Tax Rate
$ in millions
Expense
2019
2018
2017
$
121 $
116 $
106
U.S. federal statutory income tax rate
21.0%
21.0%
35.0%
2019
2018
2017
The Firm maintains separate defined contribution pension plans
that cover eligible employees of certain non-U.S. subsidiaries.
Under such plans, benefits are generally determined based on a
fixed rate of base salary with certain vesting requirements.
20. Income Taxes
Provision for (Benefit from) Income Taxes
Components of Provision for (Benefit from) Income Taxes
$ in millions
Current
U.S.:
Federal
State and local
Non-U.S.:
U.K.
Japan
Hong Kong
Other1
Total
Deferred
U.S.:
Federal
State and local
Non-U.S.:
U.K.
Japan
Hong Kong
Other1
Total
Provision for income taxes from continuing
operations
Provision for (benefit from) income taxes
from discontinued operations
2019
2018
2017
$
873 $
686 $
260
207
166
177
82
341
328
268
94
318
476
125
401
56
48
308
$ 1,899 $ 1,901 $ 1,414
$
185 $
330 $ 2,656
46
5
11
—
(82)
56
84
54
(10)
(3)
22
18
(17)
(2)
15
$
165 $
449 $ 2,754
$ 2,064 $ 2,350 $ 4,168
$
— $
(1) $
(7)
1. Other Non-U.S. tax provisions for 2019, 2018 and 2017 primarily include Brazil,
India and Canada.
U.S. state and local income taxes, net of
U.S. federal income tax benefits
Domestic tax credits
Tax exempt income
Non-U.S. earnings
Tax Act enactment
Employee share-based awards
Other
2.2
(1.5)
(0.1)
(0.8)
—
(1.1)
(1.4)
2.0
(0.9)
(0.4)
1.3
—
(1.5)
(0.6)
1.4
(1.6)
(0.1)
(5.0)
11.5
(1.5)
0.4
Effective income tax rate
18.3%
20.9%
40.1%
The Firm’s effective tax rates for 2019 and 2018 include
intermittent net discrete tax benefits of $348 million and $203
million, respectively, primarily associated with remeasurement
of reserves and related interest as a result of new information
pertaining to multi-jurisdiction tax examinations.
The Firm’s effective tax rate from continuing operations for
2017 included an intermittent net discrete tax provision of $968
million, which included an approximate $1.2 billion provision
primarily related to the remeasurement of certain net deferred
tax assets as a result of the Tax Act, partially offset by $233
million of net discrete tax benefits primarily associated with the
remeasurement of reserves and related interest due to new
information regarding the status of multi-year IRS tax
examinations.
The Tax Act, enacted on December 22, 2017, significantly
revised U.S. corporate income tax law by reducing the corporate
income tax rate to 21%, partially or wholly eliminating tax
deductions for certain expenses and implementing a modified
territorial tax system. The modified territorial tax system
included a one-time transition tax on deemed repatriated
earnings of non-U.S. subsidiaries and also imposes a minimum
tax on GILTI and an alternative BEAT on U.S. corporations with
operations outside the U.S.
December 2019 Form 10-K
142
Table of Contents
Notes to Consolidated Financial Statements
At
December 31,
2019
At
December 31,
2018
Deferred Tax Assets and Liabilities
$ in millions
Gross deferred tax assets
Net operating loss and tax credit
carryforwards
Employee compensation and benefit plans
Valuation and liability allowances
Valuation of inventory, investments and
receivables
Total deferred tax assets
Deferred tax assets valuation allowance
$
287 $
2,075
318
368
3,048
156
Deferred tax assets after valuation allowance $
2,892 $
Gross deferred tax liabilities
Fixed assets
Other
Total deferred tax liabilities
Net deferred tax assets
983
411
1,394 $
1,498 $
$
$
264
2,053
318
242
2,877
143
2,734
825
236
1,061
1,673
Deferred income taxes reflect the net tax effects of temporary
differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when such differences are expected
to reverse.
The Firm believes the recognized net deferred tax assets (after
valuation allowance) at December 31, 2019 are more likely than
not to be realized based on expectations as to future taxable
income in the jurisdictions in which it operates.
The earnings of certain foreign subsidiaries are indefinitely
reinvested due to regulatory and other capital requirements in
foreign jurisdictions. As a result of the Tax Act’s one-time
transition tax on the earnings of foreign subsidiaries and an
annual minimum tax on GILTI, as of December 31, 2019 the
unrecognized deferred tax liability attributable to indefinitely
reinvested earnings is immaterial.
Unrecognized Tax Benefits
Rollforward of Unrecognized Tax Benefits
$ in millions
2019
2018
2017
Balance at beginning of period
$
1,080 $
1,594 $
1,851
Interest Expense (Benefit), Net of Federal and State Income Tax
Benefits
$ in millions
2019
2018
2017
Recognized in income statements
$
8 $
(40) $
Accrued at end of period
92
91
(3)
147
Interest and penalties related to unrecognized tax benefits are
recognized as a component of the provision for income taxes.
Penalties related to unrecognized tax benefits for the years
mentioned above were immaterial.
Tax Authority Examinations
The Firm is under continuous examination by the IRS and other
tax authorities in certain countries, such as Japan and the U.K.,
and in states and localities 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.
The Firm believes that the resolution of the above tax
examinations will not have a material effect on the annual
financial statements, although a resolution could have a material
impact in the income statements and on the effective tax rate for
any period in which such resolutions occur.
See Note 13 regarding the Dutch Tax Authority’s challenge, in
the District Court in Amsterdam (matters styled Case number
15/3637 and Case 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 may 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.
Earliest Tax Year Subject to Examination in Major Tax
Jurisdictions
Increase based on tax positions related to
the current period
Increase based on tax positions related to
prior periods
Decrease based on tax positions related to
prior periods
Decreases related to settlements with taxing
authorities
Decreases related to lapse of statute of
limitations
Balance at end of period
Net unrecognized tax benefits1
57
61
83
34
63
170
Jurisdiction
U.S.
(419)
(404)
(312)
New York State and New York City
(17)
(139)
(155)
(7)
(88)
(23)
$
$
755 $
1,080 $
1,594
549 $
746 $
873
Hong Kong
U.K.
Japan
Tax Year
2013
2007
2013
2011
2015
1. Represent ending unrecognized tax benefits adjusted for the impact of the federal
benefit of state issues, competent authority arrangements and foreign tax credit offsets.
If recognized, these net benefits would favorably impact the effective tax rate in future
periods.
143
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
21. Segment, Geographic
Information
and Revenue
Segment Information
The Firm structures its segments primarily based upon the nature
of the financial products and services provided to customers and
its management organization. The Firm provides a wide range
of financial products and services to its customers in each of the
business
Securities, Wealth
Institutional
Management and Investment Management. For a further
discussion of the business segments, see Note 1.
segments:
Revenues and expenses directly associated with each respective
business segment are included in determining its operating
results. Other revenues and expenses that are not directly
attributable to a particular business segment are generally
allocated based on each business segment’s respective net
revenues, non-interest expenses or other relevant measures.
As a result of revenues and expenses from transactions with
other operating segments being treated as transactions with
external parties for purposes of segment disclosures, the Firm
includes an Intersegment Eliminations category to reconcile the
business segment results to the consolidated results.
Selected Financial Information by Business Segment
$ in millions
IS
WM
2019
IM
I/E
Total
Investment banking
$ 5,734 $
509 $
— $
(80) $ 6,163
Trading
Investments
Commissions and fees1
Asset management1
Other
10,318
734
(8)
325
2
1,213
51
—
2,484
1,726
1
(292)
11,095
1,540
3,919
413
632
10,199
2,629
(158)
13,083
345
(46)
(6)
925
Total non-interest revenues
19,906
13,515
3,789
(485)
36,725
Interest income
Interest expense
Net interest
Net revenues
Income from continuing
operations before income
taxes
12,193
11,713
480
5,467
1,245
4,222
20
46
(582)
17,098
(600)
12,404
(26)
18
4,694
$20,386 $17,737 $ 3,763 $ (467) $ 41,419
$ 5,490 $ 4,832 $
985 $
(6) $ 11,301
Provision for income taxes
769
1,104
193
(2)
2,064
Income from continuing
operations
Income (loss) from
discontinued operations,
net of income taxes
Net income
Net income applicable to
noncontrolling interests
Net income applicable to
Morgan Stanley
4,721
3,728
792
(4)
9,237
—
—
4,721
3,728
—
792
122
—
73
—
(4)
—
—
9,237
195
$ 4,599 $ 3,728 $
719 $
(4) $ 9,042
December 2019 Form 10-K
144
$ in millions
IS
WM
2018
IM
I/E
Total
Investment banking
$ 6,088 $
475 $
— $
(81) $ 6,482
Trading
Investments
Commissions and fees1
Asset management1
Other
11,191
182
279
1
2,671
1,804
25
254
—
56
—
11,551
437
(285)
4,190
421
535
10,158
2,468
(149)
12,898
248
(30)
(10)
743
Total non-interest revenues
21,088
12,965
2,717
(469)
36,301
Interest income
Interest expense
Net interest
Net revenues
Income from continuing
operations before income
taxes
9,271
9,777
5,498
1,221
(506)
4,277
57
28
29
(934)
13,892
(940)
10,086
6
3,806
$20,582 $17,242 $ 2,746 $ (463) $ 40,107
$ 6,260 $ 4,521 $
464 $
(8) $ 11,237
Provision for income taxes
1,230
1,049
73
(2)
2,350
Income from continuing
operations
Income (loss) from
discontinued operations,
net of income taxes
Net income
Net income applicable to
noncontrolling interests
Net income applicable to
Morgan Stanley
5,030
3,472
391
(6)
8,887
(6)
—
5,024
3,472
2
393
118
—
17
—
(6)
—
(4)
8,883
135
$ 4,906 $ 3,472 $
376 $
(6) $ 8,748
$ in millions
IS
WM
2017
IM
I/E
Total
Investment banking
$ 5,537 $
533 $
— $
(67) $ 6,003
Trading
Investments
Commissions and fees
Asset management
Other
10,295
368
2,433
359
630
848
3
1,737
9,342
268
(22)
449
—
(5)
11,116
—
820
(109)
4,061
2,196
(100)
11,797
(37)
(13)
848
Total non-interest revenues
19,622
12,731
2,586
(294)
34,645
Interest income
Interest expense
Net interest
Net revenues
Income from continuing
operations before income
taxes
5,377
6,186
4,591
486
(809)
4,105
4
4
—
(975)
(979)
4
8,997
5,697
3,300
$18,813 $16,836 $ 2,586 $ (290) $ 37,945
$ 5,644 $ 4,299 $
456 $
4 $ 10,403
Provision for income taxes
1,993
1,974
201
Income from continuing
operations
Income (loss) from
discontinued operations,
net of income taxes
Net income
Net income applicable to
noncontrolling interests
Net income applicable to
Morgan Stanley
3,651
2,325
255
(19)
—
3,632
2,325
—
255
96
—
9
—
4
—
4
—
4,168
6,235
(19)
6,216
105
$ 3,536 $ 2,325 $
246 $
4 $ 6,111
I/E–Intersegment Eliminations
1. Substantially all of the of revenues for these line items are recognized under the
Revenues from Contracts with Customers accounting update.
Table of Contents
Notes to Consolidated Financial Statements
Detail of Investment Banking Revenues
Certain Other Fee Waivers
$ in millions
2019
2018
2017
Institutional Securities—Advisory
$ 2,116
$ 2,436
$
2,077
Institutional Securities—Underwriting
3,618
3,652
3,460
Firm Investment banking revenues from
contracts with customers1
90%
86%
N/A
1. Represents the approximate amount of Investment banking revenues accounted for
under this accounting update.
Trading Revenues by Product Type
Separately, the Firm’s employees, including its senior officers,
may participate on the same terms and conditions as other
investors in certain funds that the Firm sponsors primarily for
client investment, and the Firm may waive or lower applicable
fees and charges for its employees.
Income from Continuing Operations before Income Tax
Expense (Benefit)
$ in millions
Interest rate
Foreign exchange
Equity security and index1
Commodity and other
Credit
Total
2019
2018
2017
$
2,773 $
2,696 $
2,091
395
5,246
1,438
1,243
914
6,157
1,174
647
6,291
740
610
1,347
$ in millions
U.S.
Non-U.S.1
Total
2019
2018
2017
$
9,464 $
7,804 $
5,686
1,837
3,433
4,717
$ 11,301 $ 11,237 $ 10,403
1. Non-U.S. income is defined as income generated from operations located outside the
U.S.
$ 11,095 $ 11,551 $ 11,116
Net Discrete Tax Provisions (Benefits) by Segment
1. Dividend income is included within equity security and index contracts.
The previous table summarizes gains and losses included in
Trading revenues in the income statements. These activities
include revenues related to derivative and non-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. The
trading revenues presented in the 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.
Investment Management Investments Revenues—Net
Cumulative Unrealized Carried Interest
$ in millions
At
December 31,
2019
At
December 31,
2018
Net cumulative unrealized performance-
based fees at risk of reversing
$
774 $
434
The Firm’s portion of net cumulative unrealized performance-
based fees in the form of carried interest (for which the Firm is
not obligated to pay compensation) are at risk of reversing when
the return in certain funds falls below specified performance
targets. See Note 13 for information regarding general partner
guarantees, which include potential obligations to return
performance fee distributions previously received.
Investment Management Asset Management Revenues—
Reduction of Fees Due to Fee Waivers
$ in millions
Fee waivers
2019
2018
2017
$
43 $
56 $
86
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.
$ in millions
2019
Intermittent net discrete tax provision
(benefit)
Recurring:
IS
WM
IM
Total
$ (317) $
(13) $
(18) $ (348)
Employee share-based awards1
(83)
(37)
(7)
(127)
Total
2018
Intermittent net discrete tax provision
(benefit)
Recurring:
$ (400) $
(50) $
(25) $ (475)
$ (182) $ — $
(21) $ (203)
Employee share-based awards1
(104)
(50)
(11)
(165)
Total
2017
Intermittent:
Tax Act enactment2
Remeasurement of reserves and
related interest
Other
Total intermittent net discrete tax
provision (benefit)
Recurring:
$ (286) $
(50) $
(32) $ (368)
$
705 $
402 $
94 $ 1,201
(168)
(66)
—
9
—
(8)
(168)
(65)
$
471 $
411 $
86 $
968
Employee share-based awards1
(93)
(54)
(8)
(155)
Total
$
378 $
357 $
78 $
813
1. We consider these employee share-based award related provisions (benefits) to be
recurring-type (“Recurring”) discrete tax items, as we anticipate some level of
conversion activity each year.
2. For further discussion on the Tax Act, see Note 20.
Net Revenues by Region
$ in millions
Americas
EMEA
Asia
Total
2019
2018
2017
$ 30,226 $ 29,301 $ 27,817
6,061
5,132
6,092
4,714
5,714
4,414
$ 41,419 $ 40,107 $ 37,945
The Firm operates in both U.S. and non-U.S. markets. The
Firm’s non-U.S. business activities are principally conducted
and managed through EMEA and Asia locations. The net
revenues disclosed in the following table reflect the regional
145
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
view of the Firm’s consolidated net revenues on a managed
basis, based on the following methodology:
22. Parent Company
Parent Company Only—Condensed Income Statements and
Comprehensive Income Statements
$ in millions
Revenues
Dividends from subsidiaries1
Trading
Other
Total non-interest revenues
Interest income
Interest expense
Net interest
Net revenues
Non-interest expenses
Income before income taxes
2019
2018
2017
$
5,529 $
4,973 $
2,567
(54)
80
5,555
5,121
4,661
460
54
(5)
5,022
5,172
4,816
356
(260)
64
2,371
3,783
4,079
(296)
6,015
5,378
2,075
300
225
240
5,715
5,153
1,835
Provision for (benefit from) income taxes
(73)
22
(206)
Net income before undistributed gain
of subsidiaries
Undistributed gain of subsidiaries
Net income
Other comprehensive income (loss), net of
tax:
5,788
3,254
9,042
5,131
3,617
8,748
2,041
4,070
6,111
Foreign currency translation adjustments
(8)
(114)
219
Change in net unrealized gains (losses)
on available-for-sale securities
Pensions, postretirement and other
1,137
(66)
(272)
137
Change in net debt valuation adjustment
(1,559)
1,454
41
(117)
(560)
Comprehensive income
Net income
$
$
8,546 $
9,953 $
5,694
9,042 $
8,748 $
6,111
Preferred stock dividends and other
530
526
523
Earnings applicable to Morgan Stanley
common shareholders
$
8,512 $
8,222 $
5,588
1. In 2019 and 2018, the Parent Company recorded approximately $4 billion and $3
billion, respectively, of dividends from bank subsidiaries.
Institutional Securities: client location for advisory and equity
underwriting, revenue recording location for debt underwriting,
trading desk location for sales and trading.
Wealth Management: representatives operate in the Americas.
Investment Management: client location, except certain closed-
end funds, which are based on asset location.
Revenue Recognized from Prior Services
$ in millions
Non-interest revenues
2019
2018
$
2,705 $
2,821
The previous table includes revenue from contracts with
customers recognized where some or all services were
performed in prior periods and is primarily composed of
investment banking advisory fees and distribution fees.
Receivables from Contracts with Customers
$ in millions
At
December 31,
2019
At
December 31,
2018
Customer and other receivables
$
2,916 $
2,308
Receivables from contracts with customers, which are included
within Customer and other receivables in the balance sheets,
arise when the Firm has both recorded revenues and has the right
per the contract to bill the customer.
Assets by Business Segment
$ in millions
Institutional Securities
Wealth Management
Investment Management
Total1
At
December 31,
2019
At
December 31,
2018
$
$
691,201 $
646,427
197,682
6,546
202,392
4,712
895,429 $
853,531
1. Parent assets have been fully allocated to the business segments.
Total Assets by Region
$ in millions
Americas
EMEA
Asia
Total
At
December 31,
2019
At
December 31,
2018
$
$
622,979 $
185,093
87,357
576,532
200,194
76,805
895,429 $
853,531
December 2019 Form 10-K
146
Table of Contents
Notes to Consolidated Financial Statements
Parent Company Only—Condensed Balance Sheets
Parent Company Only—Condensed Cash Flow Statements
$ in millions, except share data
Assets
Cash and cash equivalents:
Cash and due from banks
Deposits with bank subsidiaries
Trading assets at fair value
Investment securities (includes $19,824 and
$15,500 at fair value and $4,606 and $—
were pledged to various parties)
Securities purchased under agreement to
resell with affiliates
Advances to subsidiaries:
Bank and BHC
Non-bank
Equity investments in subsidiaries:
Bank and BHC
Non-bank
Other assets
Total assets
Liabilities
Trading liabilities at fair value
Securities sold under agreements to
repurchase with affiliates
Payables to and advances from subsidiaries
Other liabilities and accrued expenses
Borrowings (includes $20,461 and $18,599
at fair value)
Total liabilities
Equity
Preferred stock
Common stock, $0.01 par value:
Shares authorized: 3,500,000,000; Shares
issued: 2,038,893,979; Shares outstanding:
1,593,973,680 and 1,699,828,943
Additional paid-in capital
Retained earnings
Employee stock trusts
Accumulated other comprehensive income
(loss)
Common stock held in treasury at cost,
$0.01 par value (444,920,299 and
339,065,036 shares)
Common stock issued to employee stock
trusts
Total shareholders’ equity
Total liabilities and equity
Commitments and contingent liabilities (see Note 13)
At
December 31,
2019
At
December 31,
2018
$ in millions
2019
2018
2017
Net cash provided by (used for) operating
activities
$ 24,175 $ (1,136) $ 3,747
Cash flows from investing activities
Proceeds from (payments for):
$
9 $
8,001
5,747
6
7,476
10,039
Investment securities:
Purchases
Proceeds from sales
37,253
22,588
10,114
25,535
27,667
104,345
36,093
43,667
244
30,954
97,405
42,848
32,418
1,244
273,140 $
270,513
1,130 $
4,631
35,470
2,153
148,207
191,591
276
—
30,861
2,548
156,582
190,267
$
$
8,520
8,520
20
23,935
70,589
2,918
20
23,794
64,175
2,836
Proceeds from paydowns and maturities
Securities purchased under agreements to
resell with affiliates
Securities sold under agreements to
repurchase with affiliates
Advances to and investments in subsidiaries
Net cash provided by (used for) investing
activities
Cash flows from financing activities
Proceeds from:
Issuance of preferred stock, net of issuance
costs
Issuance of Borrowings
Payments for:
Borrowings
Repurchases of common stock and
employee tax withholdings
Cash dividends
(22,408)
(8,155)
(5,263)
4,671
3,157
1,252
3,729
3,620
1,038
15,422
13,057
19,314
4,631
(8,753)
8,753
(9,210)
11,841
(35,686)
(3,737)
12,971
(8,224)
497
—
994
8,337
14,918
36,833
(24,282)
(21,418)
(24,668)
(5,954)
(5,566)
(4,292)
(2,627)
(2,375)
(2,085)
Net change in advances from subsidiaries
4,378
2,122
1,861
Other financing activities
12
—
26
Net cash provided by (used for) financing
activities
Effect of exchange rate changes on cash and
cash equivalents
Net increase (decrease) in cash and cash
equivalents
Cash and cash equivalents, at beginning of
period
Cash and cash equivalents, at end of
period
Cash and cash equivalents:
Cash and due from banks
Deposits with bank subsidiaries
Restricted cash
Cash and cash equivalents, at end of
(19,639)
(12,319)
8,669
(271)
(166)
221
528
(650)
4,413
7,482
8,132
3,719
$ 8,010 $ 7,482 $ 8,132
$
9 $
6 $
11
8,001
7,476
8,120
—
—
1
$ 8,010 $ 7,482 $ 8,132
(2,788)
(2,292)
period
(18,727)
(13,971)
(2,918)
81,549
(2,836)
80,246
$
273,140 $
270,513
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest
Income taxes, net of refunds1
$ 4,677 $ 4,798 $ 3,570
1,186
437
201
1.Represents total payments, net of refunds, made to various tax authorities and includes
taxes paid on behalf of certain subsidiaries that are subsequently settled between the
Parent Company and these subsidiaries. The settlements received from subsidiaries
were $1.6 billion, $1.6 billion and $1.5 billion for 2019, 2018 and 2017, respectively.
On November 25, 2019, the Parent Company issued $500
million of Series L Preferred Stock and on January 15, 2020,
the Parent Company redeemed in whole its outstanding Series
G Preferred Stock. For further information on preferred stock,
see Note 16.
147
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
Parent Company’s Borrowings with Original Maturities
Greater than One Year
Guarantees of Debt Instruments and Warrants Issued by
Subsidiaries
$ in millions
Senior
Subordinated
Total
At
December 31,
2019
At
December 31,
2018
$ in millions
137,138 $
146,492
Aggregate balance
10,570
10,090
$
$
147,708 $
156,582
Guarantees under Subsidiary Lease Obligations
At
December 31,
2019
At
December 31,
2018
$
32,996 $
24,286
Transactions with Subsidiaries
The Parent Company has transactions with its consolidated
subsidiaries determined on an agreed-upon basis and has
guaranteed certain unsecured lines of credit and contractual
obligations on certain of its consolidated subsidiaries.
$ in millions
Aggregate balance1
1. Amounts primarily relate to the U.K.
Finance Subsidiary
At
December 31,
2019
At
December 31,
2018
$
925 $
1,003
The Parent Company fully and unconditionally guarantees the
securities issued by Morgan Stanley Finance LLC, a wholly
owned finance subsidiary.
Resolution and Recovery Planning
As indicated in the Firm’s 2019 resolution plan submitted to the
Federal Reserve and the FDIC, the Parent Company has
amended and restated its support agreement with its material
entities (including its wholly owned, direct subsidiary Morgan
Stanley Holdings LLC (the “Funding IHC”) and certain other
subsidiaries, as defined in the Firm’s 2019 resolution plan.
Under the secured amended and restated support agreement, in
the event of a resolution scenario, the Parent Company would
be obligated to contribute all of its material assets that can be
contributed under the terms of the amended and restated support
agreement (other than shares in subsidiaries of the Parent
Company and certain other assets) (“Contributable Assets”), to
the material entities and/or the Funding IHC. The Funding IHC
would be obligated to provide capital and liquidity, as
applicable, to the material entities.
Guarantees
In the normal course of its business, the Parent Company
guarantees certain of its subsidiaries’ obligations under
derivative and other financial arrangements. The Parent
Company records Trading assets and Trading liabilities, which
include derivative contracts, at fair value in its condensed
balance sheets.
The Parent Company also, in the normal course of its business,
provides standard indemnities to counterparties on behalf of its
subsidiaries for taxes, including U.S. and foreign withholding
taxes, on interest and other payments made on derivatives,
securities and stock lending transactions, and certain annuity
products. These indemnity payments could be required based
on a change in the tax laws or change in interpretation of
applicable tax rulings. Certain contracts contain provisions that
enable the Parent Company to terminate the agreement upon the
occurrence of such events. The maximum potential amount of
future payments that the Parent Company could be required to
make under these indemnifications cannot be estimated. The
Parent Company has not recorded any contingent liability in its
condensed financial statements for these indemnifications and
believes that the occurrence of any events that would trigger
payments under these contracts is remote.
The Parent Company has issued guarantees on behalf of its
subsidiaries to various U.S. and non-U.S. exchanges and
clearinghouses that trade and clear securities and/or futures
contracts. Under these guarantee arrangements, the Parent
Company may be required to pay the financial obligations of its
subsidiaries related to business transacted on or with the
exchanges and clearinghouses in the event of a subsidiary’s
default on its obligations to the exchange or the clearinghouse.
The Parent Company has not recorded any contingent liability
in its condensed financial statements for these arrangements and
believes that any potential requirements to make payments
under these arrangements are remote.
December 2019 Form 10-K
148
Table of Contents
Notes to Consolidated Financial Statements
23. Quarterly Results (Unaudited)
$ in millions, except per share data
First
Second
Third
Fourth1, 2, 3
$ in millions, except per share data
First
Second
Third
Fourth1, 2
Total non-interest revenues
$ 9,272 $ 9,215 $ 8,814 $
9,424
Total non-interest revenues
$10,102 $ 9,704 $ 8,936 $
7,559
2019 Quarter
2018 Quarter
Net interest
Net revenues
1,014
1,029
1,218
1,433
10,286
10,244
10,032
10,857
Net interest
Net revenues
Total non-interest expenses
7,331
7,341
7,322
8,124
Total non-interest expenses
Income from continuing operations
before income taxes
Provision for income taxes
Income from continuing operations
Net income
Net income applicable to
noncontrolling interests
Net income applicable to Morgan
Stanley
2,955
2,903
2,710
487
2,468
2,468
657
2,246
2,246
492
2,218
2,218
2,733
428
2,305
2,305
39
45
45
66
$ 2,429 $ 2,201 $ 2,173 $
2,239
Preferred stock dividends and other
93
170
113
154
975
906
11,077
10,610
7,657
7,501
936
9,872
7,021
3,420
3,109
2,851
714
640
696
989
8,548
6,691
1,857
300
1,557
Income from continuing operations
before income taxes
Provision for income taxes
Income from continuing operations
2,706
2,469
2,155
Income (loss) from discontinued
operations
Net income
Net income applicable to
noncontrolling interests
Net income applicable to Morgan
Stanley
(2)
(2)
(1)
1
2,704
2,467
2,154
1,558
36
30
42
27
$ 2,668 $ 2,437 $ 2,112 $
1,531
Earnings applicable to Morgan
Stanley common shareholders
$ 2,336 $ 2,031 $ 2,060 $
2,085
Preferred stock dividends
93
170
93
170
Earnings (loss) per basic common share4:
Income from continuing operations
$
1.41 $
1.24 $
1.28 $
Earnings per basic common share
Earnings (loss) per diluted common share4:
$
1.41 $
1.24 $
1.28 $
Income from continuing operations
$
1.39 $
1.23 $
1.27 $
Earnings per diluted common share $
1.39 $
1.23 $
1.27 $
1.33
1.33
1.30
1.30
Dividends declared per common
share
$
0.30 $
0.30 $
0.35 $
0.35
Book value per common share
$ 42.83 $ 44.13 $ 45.49 $
45.82
Earnings applicable to Morgan
Stanley common shareholders
$ 2,575 $ 2,267 $ 2,019 $
1,361
Earnings (loss) per basic common share4:
Income from continuing operations
$
1.48 $
1.32 $
1.19 $
0.81
Income (loss) from discontinued
operations
—
—
—
—
Earnings per basic common share
Earnings (loss) per diluted common share4:
$
1.48 $
1.32 $
1.19 $
0.81
Income from continuing operations
$
1.46 $
1.30 $
1.17 $
0.80
Income (loss) from discontinued
operations
Earnings per diluted common share
Dividends declared per common
share
$
$
(0.01)
—
—
—
1.45 $
1.30 $
1.17 $
0.80
0.25 $
0.25 $
0.30 $
0.30
Book value per common share
$ 39.19 $ 40.34 $ 40.67 $
42.20
1. The fourth quarters of 2019 and 2018 included intermittent net discrete tax benefits
of $158 million and $111 million, respectively, primarily associated with remeasurement
of reserves and related interest as a result of new information pertaining to the
resolution of multi-jurisdiction tax examinations.
2. Total non-interest revenues includes impairments of the Investment Management
business segment’s interests in two distinct equity method investments in third-party
asset managers of $41 million in 2019 and $46 million in 2018.
3. The fourth quarter of 2019 included specific severance-related costs of approximately
$172 million, which are included in Compensation and benefits expenses in the Income
statement. These costs were recorded in the business segments approximately as
follows: Institutional Securities $124 million, Wealth Management $37 million and
Investment Management $11 million.
4. The sum of the quarters’ earnings per common share may not equal the annual
amounts due to the averaging effect of the number of shares and share equivalents
throughout the year.
149
December 2019 Form 10-K
Table of Contents
Notes to Consolidated Financial Statements
24. Subsequent Event
On February 20, 2020, the Firm entered into a definitive
agreement under which it will acquire E*TRADE Financial
Corporation (“E*TRADE”) in an all-stock transaction currently
valued at approximately $13 billion, based on the closing price
of the Firm’s common stock and the number of E*TRADE's
fully diluted shares outstanding on February 19, 2020. Under
the terms of the agreement, E*TRADE common stockholders
will receive 1.0432 Morgan Stanley common shares for each
E*TRADE common share. The acquisition is subject to
customary closing conditions, including regulatory approvals
and approval by E*TRADE shareholders, and is expected to
close in the fourth quarter of 2020.
December 2019 Form 10-K
150
Table of Contents
Financial Data Supplement (Unaudited)
Average Balances and Interest Rates and Net Interest Income
Effect of Volume and Rate Changes on Net Interest Income
2019
2018
$ in millions
Average
Daily
Balance
Interest
Average
Rate
Average
Daily
Balance
Interest
Average
Rate
Interest earning assets
Investment
securities1
$ 101,696 $ 2,175
2.1% $ 81,977 $ 1,744
2.1%
Loans1
Securities purchased under agreements to resell and Securities borrowed2:
109,681
121,002
4,249
4,783
4.0
3.9
$ in millions
Interest earning assets
Investment
securities1
Loans1
2019 versus 2018
Increase (Decrease)
Due to Change in:
Rate
Volume
Net Change
$
420 $
439
11 $
95
431
534
Securities purchased under agreements to resell and Securities borrowed2:
U.S.
142,089
3,378
Non-U.S.
76,577
107
Trading assets, net of Trading liabilities3:
U.S.
77,481
2,531
Non-U.S.
14,654
368
Customer receivables and Other4:
U.S.
Non-U.S.
61,501
58,601
2,697
1,059
2.4
0.1
3.3
2.5
4.4
1.8
134,223
2,262
1.7
86,430
(286)
(0.3)
U.S.
Non-U.S.
57,780
2,144
9,014
248
73,695
2,592
54,396
939
3.7
2.8
3.5
1.7
Trading assets, net of Trading liabilities3:
U.S.
Non-U.S.
Customer receivables and Other4:
U.S.
Non-U.S.
133
33
731
155
(429)
73
983
360
(344)
(35)
534
47
1,116
393
387
120
105
120
Total
$ 653,601 $17,098
2.6% $607,196 $13,892
2.3%
Change in interest income
$
1,555 $
1,651 $
3,206
Interest bearing liabilities
Deposits1
Borrowings1, 5
Securities sold under agreements to repurchase and Securities loaned6:
1.0% $169,226 $ 1,255
$ 180,116 $ 1,885
191,692
192,770
5,031
5,052
2.6
U.S.
32,437
1,916
Non-U.S.
31,808
693
Customer payables and Other7:
U.S.
Non-U.S.
118,775
65,196
1,792
1,066
5.9
2.2
1.5
1.6
24,426
1,408
37,319
490
120,228
1,061
70,855
841
0.7%
2.6
5.8
1.3
0.9
1.2
Interest bearing liabilities
Deposits1
Borrowings1, 5
Securities sold under agreements to repurchase and Securities loaned6:
549 $
81 $
(7)
28
$
U.S.
Non-U.S.
Customer payables and Other7:
U.S.
Non-U.S.
462
(72)
(13)
(67)
46
275
744
292
630
21
508
203
731
225
Total
$ 621,102 $12,404
2.0% $613,746 $10,086
1.6%
Change in interest expense
Net interest income and
net interest rate spread $ 4,694
0.6%
$ 3,806
0.7%
Change in net interest income
$
$
419 $
1,899 $
2,318
1,136 $
(248) $
888
151
December 2019 Form 10-K
Table of Contents
Financial Data Supplement (Unaudited)
Average Balances and Interest Rates and Net Interest Income
Effect of Volume and Rate Changes on Net Interest Income
$ in millions
2017
Average
Daily
Balance
Interest
Average
Rate
$ in millions
2018 versus 2017
Increase (Decrease)
Due to Change in:
Rate
Volume
Net Change
Interest earning assets
Investment securities1
Loans1
Securities purchased under agreements to resell and Securities borrowed2:
$ 76,746 $
98,727
1,334
3,298
1.7%
3.3
Interest earning assets
Investment securities1
Loans1
Securities purchased under agreements to resell and Securities borrowed2:
319 $
91 $
585
366
$
410
951
U.S.
Non-U.S.
125,453
95,478
606
(437)
0.5
(0.5)
U.S.
Non-U.S.
Trading assets, net of Trading liabilities3:
Trading assets, net of Trading liabilities3:
U.S.
Non-U.S.
Customer receivables and Other4:
U.S.
Non-U.S.
Total
59,335
4,326
72,440
40,179
1,876
153
1,614
553
3.2
3.5
2.2
1.4
U.S.
Non-U.S.
Customer receivables and Other4:
U.S.
Non-U.S.
42
41
(49)
166
28
196
1,614
110
1,656
151
317
(71)
950
190
268
95
978
386
$ 572,684 $
8,997
1.6%
Change in interest income
$
881 $
4,014 $
4,895
Interest bearing liabilities
Deposits1
Borrowings1, 5
Securities sold under agreements to repurchase and Securities loaned6:
$ 151,442 $
184,453
4,285
187
U.S.
Non-U.S.
Customer payables and Other7:
U.S.
Non-U.S.
Total
30,866
39,396
128,274
65,496
900
337
(213)
201
$ 599,927 $
5,697
Net interest income and net interest rate spread
$
3,300
0.1%
2.3
2.9
0.9
(0.2)
0.3
0.9%
0.7%
Interest bearing liabilities
Deposits1
Borrowings1,5
Securities sold under agreements to repurchase and Securities loaned6:
1,046 $
22 $
578
168
$
U.S.
Non-U.S.
Customer payables and Other7:
U.S.
Non-U.S.
(188)
(18)
13
16
696
171
1,261
624
Change in interest expense
Change in net interest income
$
$
13 $
4,376 $
868 $
(362) $
1,068
746
508
153
1,274
640
4,389
506
1. Amounts include primarily U.S. balances.
2. Includes fees paid on Securities borrowed.
3. Excludes non-interest earning assets and non-interest bearing liabilities, such as
equity securities.
4. Includes Cash and cash equivalents.
5. Includes structured notes, whose interest expense is considered part of its value and
therefore is recorded within Trading revenues.
6. 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.
7. Includes fees received from prime brokerage customers for stock loan transactions
entered into to cover customers’ short positions.
Deposits
$ in
millions
Deposits1:
Savings
Time
Total
Average Daily Deposits
2019
2018
2017
Average
Amount
Average
Rate
Average
Amount
Average
Rate
Average
Amount
Average
Rate
$144,017
0.6% $142,753
0.4% $144,870
36,099
2.8% 26,473
2.4%
6,572
$180,116
1.0% $169,226
0.7% $151,442
0.1%
1.6%
0.1%
1. The Firm’s deposits were primarily held in U.S. offices.
December 2019 Form 10-K
152
Table of Contents
Financial Data Supplement (Unaudited)
Ratios
Net income to average total assets
ROE1
Return on total equity2
Dividend payout ratio3
Total average common equity to average total assets
Total average equity to average total assets
11.7% 11.8% 8.0%
11.1% 11.1% 7.8%
25.0% 23.3% 29.3%
8.2% 8.1% 8.2%
9.2% 9.1% 9.2%
1. ROE represents Earnings applicable to Morgan Stanley common shareholders as a
percentage of average common equity.
2. Return on total equity represents Net income applicable to Morgan Stanley as a
percentage of average total equity.
3. Dividend payout ratio represents dividends declared per common share as a
percentage of earnings per diluted common share.
Securities Sold under Agreements to Repurchase and
Securities Loaned
$ in millions
Period-end balance
Average balance1
2019
2018
2017
$62,706
$61,667
$70,016
64,245
61,745
70,262
Maximum balance at any month-end
78,327
72,161
77,063
Weighted average interest rate during the
period2
Weighted average interest rate on
period-end balance2
4.1%
3.1%
1.8%
4.0%
4.1%
1.5%
1. The Firm calculated its average balances based upon daily amounts.
2. The weighted average interest 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 or period-end balances excluding certain securities-for-securities
transactions.
Cross-Border Outstandings
At December 31, 2019
$ in millions
Banks Governments
Japan
U.K.
Cayman
Islands
France
Canada
Ireland
European
Central Bank
China
Brazil
Luxembourg
Australia
Netherlands
Germany
18,282
6,021
12
4,454
6,794
274
—
1,451
2,765
82
2,265
2,149
1,210
7,146
11,515
—
1,927
1,205
126
11,464
168
2,116
27
2,366
107
838
Non-banking
Financial
Institutions
Other
Total
20,376
11,565 $ 57,369
15,623
10,431
43,590
24,693
5,987
30,692
9,447
2,606
9,161
—
1,320
1,287
7,596
2,481
2,163
2,444
6,363
22,191
4,163
14,768
4,410
13,971
— 11,464
7,907
10,846
4,509
10,677
1,947
2,486
4,788
4,471
9,652
9,598
9,207
8,963
2019
2018
2017
1.0% 1.0% 0.7%
$ in millions
Banks Governments
Non-banking
Financial
Institutions
Other
Total
December 31, 2018
Japan
U.K.
Cayman
Islands
France
Canada
Ireland
European
Central Bank
Brazil
Germany
Luxembourg
$16,130 $
14,974 $
30,301 $ 9,951 $ 71,356
3,978
14
3,750
6,808
664
—
2,464
822
101
7,683
20,168
11,083
42,912
—
1,420
2,153
24
12,008
5,074
1,499
291
28,164
5,342
33,520
17,343
6,584
29,097
2,005
8,466
—
579
4,137
7,139
2,455
13,421
4,191
13,345
— 12,008
2,133
10,250
3,022
1,289
9,480
8,820
$ in millions
Banks Governments
Non-banking
Financial
Institutions
Other
Total
December 31, 2017
Japan
U.K.
France
Cayman
Islands
Ireland
Germany
Canada
Brazil
China
Republic of
Korea
Netherlands
$12,239 $
18,103 $
18,125 $ 10,874 $ 59,341
4,870
3,401
17
391
1,045
4,225
2,761
902
447
313
6,741
900
1
52
1,191
621
3,470
1,713
2,871
982
24,731
13,992
50,334
12,781
8,445
25,527
16,041
4,999
21,058
8,577
6,286
3,072
315
940
1,020
2,446
4,601
13,621
3,765
12,287
3,695
11,613
3,809
10,355
5,852
9,407
4,922
4,377
9,260
8,118
Cross-border outstandings are based upon the FFIEC regulatory
guidelines for reporting cross-border information and represent
the amounts that we may not be able to obtain from a foreign
country due to country-specific events, including unfavorable
economic and political conditions, economic and social
instability, and changes in government policies. Claims include
cash, customer and other receivables, securities purchased under
agreements to resell, securities borrowed and cash trading
instruments, but exclude commitments. Securities purchased
under agreements to resell and securities borrowed are presented
based on the domicile of the counterparty, without reduction for
related securities collateral held. For information on the Firm’s
country risk exposure, see “Quantitative and Qualitative
Disclosures about Risk—Country and Other Risks.”
There can be substantial differences between our cross-border
risk exposure and our country risk exposure. For instance, unlike
the country risk exposure, our cross-border risk exposure does
not include the effect of certain risk mitigants. In addition, the
basis for determining the domicile of the cross-border risk
exposure is different from the basis for determining the country
risk exposure. Cross-border risk exposure is reported based on
the country of jurisdiction for the obligor or guarantor. For
country risk exposure, we consider factors in addition to that of
153
December 2019 Form 10-K
Table of Contents
Financial Data Supplement (Unaudited)
country of jurisdiction, including physical location of operations
or assets, location and source of cash flows or revenues and
location of collateral (if applicable) in order to determine the
basis for country risk exposure. Furthermore, cross-border risk
exposure incorporates CDS only where protection is purchased,
while country risk exposure incorporates CDS where protection
is purchased or sold.
The cross-border outstandings tables set forth cross-border
outstandings for each country, excluding derivative exposure,
in which cross-border outstandings exceed 1% of the Firm’s
consolidated assets or 20% of the Firm’s total capital, whichever
is less, in accordance with the FFIEC guidelines.
$ in millions
At December 31, 2019
Switzerland, Republic of Korea and Taiwan
At December 31, 2018
Netherlands
At December 31, 2017
Australia, European Central Bank, Luxembourg and India
Cross-
Border Exposure1
$
$
$
21,947
7,338
29,257
1. Cross-border exposure, including derivative contracts, that exceeds 0.75% but
does not exceed 1% of the Firm’s consolidated assets.
December 2019 Form 10-K
154
Table of Contents
Glossary of Common Terms and Acronyms
2018 Form 10-K Annual report on Form 10-K for year
2018 Form 10-K Annual report on Form 10-K for year
ended December 31, 2018 filed with the
ended December 31, 2018 filed with the
SEC
SEC
2019 Form 10-K Annual report on Form 10-K for year
2019 Form 10-K Annual report on Form 10-K for year
ended December 31, 2019 filed with the
ended December 31, 2019 filed with the
SEC
SEC
ABS
ABS
AFS
AFS
AML
AML
AOCI
AOCI
Asset-backed securities
Asset-backed securities
Available-for-sale
Available-for-sale
Anti-money laundering
Anti-money laundering
Accumulated other comprehensive income
Accumulated other comprehensive income
(loss)
(loss)
AUM
AUM
Assets under management or supervision
Assets under management or supervision
Balance sheets
Balance sheets
Consolidated balance sheets
Consolidated balance sheets
BEAT
BEAT
BHC
BHC
bps
bps
Cash flow
Cash flow
statements
statements
Base erosion and anti-abuse tax
Base erosion and anti-abuse tax
Bank holding company
Bank holding company
Basis points; one basis point equals
Basis points; one basis point equals
1/100th of 1%
1/100th of 1%
Consolidated cash flow statements
Consolidated cash flow statements
CCAR
CCAR
CCyB
CCyB
CDO
CDO
CDS
CDS
CECL
CECL
CFTC
CFTC
CLN
CLN
CLO
CLO
CMBS
CMBS
CMO
CMO
CVA
CVA
DVA
DVA
Comprehensive Capital Analysis and
Comprehensive Capital Analysis and
Review
Review
Countercyclical capital buffer
Countercyclical capital buffer
Collateralized debt obligation(s),
Collateralized debt obligation(s),
including Collateralized loan obligation
including Collateralized loan obligation
(s)
(s)
Credit default swaps
Credit default swaps
Current expected credit loss
Current expected credit loss
U.S. Commodity Futures Trading
U.S. Commodity Futures Trading
Commission
Commission
Credit-linked note(s)
Credit-linked note(s)
Collateralized loan obligation(s)
Collateralized loan obligation(s)
Commercial mortgage-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligation(s)
Collateralized mortgage obligation(s)
Credit valuation adjustment
Credit valuation adjustment
Debt valuation adjustment
Debt valuation adjustment
ELN
ELN
EMEA
EMEA
EPS
EPS
E.U.
E.U.
FDIC
FDIC
FFELP
FFELP
FFIEC
FFIEC
FHC
FHC
FICC
FICC
FICO
FICO
Equity-linked note(s)
Equity-linked note(s)
Europe, Middle East and Africa
Europe, Middle East and Africa
Earnings per common share
Earnings per common share
European Union
European Union
Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
Federal Family Education Loan Program
Federal Family Education Loan Program
Federal Financial Institutions Examination
Federal Financial Institutions Examination
Council
Council
Financial Holding Company
Financial Holding Company
Fixed Income Clearing Corporation
Fixed Income Clearing Corporation
Fair Isaac Corporation
Fair Isaac Corporation
Financial
Financial
statements
statements
Consolidated financial statements
Consolidated financial statements
FVA
FVA
GILTI
GILTI
GLR
GLR
G-SIB
G-SIB
Funding valuation adjustment
Funding valuation adjustment
Global Intangible Low-Taxed Income
Global Intangible Low-Taxed Income
Global liquidity reserve
Global liquidity reserve
Global systemically important banks
Global systemically important banks
HELOC
HELOC
Home Equity Line of Credit
Home Equity Line of Credit
HQLA
HQLA
HTM
HTM
I/E
I/E
IHC
IHC
IM
IM
Income
Income
statements
statements
IRS
IRS
IS
IS
LCR
LCR
LIBOR
LIBOR
M&A
M&A
High-quality liquid assets
High-quality liquid assets
Held-to-maturity
Held-to-maturity
Intersegment eliminations
Intersegment eliminations
Intermediate holding company
Intermediate holding company
Investment Management
Investment Management
Consolidated income statements
Consolidated income statements
Internal Revenue Service
Internal Revenue Service
Institutional Securities
Institutional Securities
Liquidity coverage ratio, as adopted by the
Liquidity coverage ratio, as adopted by the
U.S. banking agencies
U.S. banking agencies
London Interbank Offered Rate
London Interbank Offered Rate
Merger, acquisition and restructuring
Merger, acquisition and restructuring
transaction
transaction
EBITDA
EBITDA
Earnings before interest, taxes,
Earnings before interest, taxes,
depreciation and amortization
depreciation and amortization
MSBNA
MSBNA
Morgan Stanley Bank, N.A.
Morgan Stanley Bank, N.A.
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December 2019 Form 10-K
Table of Contents
Glossary of Common Terms and Acronyms
MS&Co.
MS&Co.
Morgan Stanley & Co. LLC
Morgan Stanley & Co. LLC
ROE
ROE
Return on average common equity
Return on average common equity
Morgan Stanley & Co. International plc
Morgan Stanley & Co. International plc
ROTCE
ROTCE
Return on average tangible common
Return on average tangible common
equity
equity
ROU
ROU
RSU
RSU
RWA
RWA
SEC
SEC
SLR
SLR
Right-of-use
Right-of-use
Restricted stock unit
Restricted stock unit
Risk-weighted assets
Risk-weighted assets
U.S. Securities and Exchange Commission
U.S. Securities and Exchange Commission
Supplementary leverage ratio
Supplementary leverage ratio
SOFR
SOFR
Secured Overnight Financing Rate
Secured Overnight Financing Rate
S&P
S&P
SPE
SPE
SPOE
SPOE
TDR
TDR
TLAC
TLAC
U.K.
U.K.
UPB
UPB
U.S.
U.S.
Standard & Poor’s
Standard & Poor’s
Special purpose entity
Special purpose entity
Single point of entry
Single point of entry
Troubled debt restructuring
Troubled debt restructuring
Total loss-absorbing capacity
Total loss-absorbing capacity
United Kingdom
United Kingdom
Unpaid principal balance
Unpaid principal balance
United States of America
United States of America
U.S. GAAP
U.S. GAAP
Accounting principles generally accepted
Accounting principles generally accepted
in the United States of America
in the United States of America
VaR
VaR
VIE
VIE
WACC
WACC
WM
WM
Value-at-Risk
Value-at-Risk
Variable interest entity
Variable interest entity
Implied weighted average cost of capital
Implied weighted average cost of capital
Wealth Management
Wealth Management
MSIP
MSIP
MSMS
MSMS
Morgan Stanley MUFG Securities Co.,
Morgan Stanley MUFG Securities Co.,
Ltd.
Ltd.
MSPBNA
MSPBNA
Morgan Stanley Private Bank, National
Morgan Stanley Private Bank, National
Association
Association
MSSB
MSSB
MUFG
MUFG
MUMSS
MUMSS
Morgan Stanley Smith Barney LLC
Morgan Stanley Smith Barney LLC
Mitsubishi UFJ Financial Group, Inc.
Mitsubishi UFJ Financial Group, Inc.
Mitsubishi UFJ Morgan Stanley Securities
Mitsubishi UFJ Morgan Stanley Securities
Co., Ltd.
Co., Ltd.
MWh
MWh
Megawatt hour
Megawatt hour
N/A
N/A
NAV
NAV
N/M
N/M
Not Applicable
Not Applicable
Net asset value
Net asset value
Not Meaningful
Not Meaningful
Non-GAAP
Non-GAAP
Non-generally accepted accounting
Non-generally accepted accounting
principles
principles
NSFR
NSFR
OCC
OCC
OCI
OCI
OIS
OIS
OTC
OTC
OTTI
OTTI
PRA
PRA
PSU
PSU
Net stable funding ratio, as proposed by
Net stable funding ratio, as proposed by
the U.S. banking agencies
the U.S. banking agencies
Office of the Comptroller of the Currency
Office of the Comptroller of the Currency
Other comprehensive income (loss)
Other comprehensive income (loss)
Overnight index swap
Overnight index swap
Over-the-counter
Over-the-counter
Other-than-temporary impairment
Other-than-temporary impairment
Prudential Regulation Authority
Prudential Regulation Authority
Performance-based stock unit
Performance-based stock unit
RMBS
RMBS
Residential mortgage-backed securities
Residential mortgage-backed securities
December 2019 Form 10-K
156
Table of Contents
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
The internal control over financial reporting includes those
policies and procedures that:
None.
Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure
Controls and Procedures
Under the supervision and with the participation of the Firm’s
management, including the Chief Executive Officer and Chief
Financial Officer, the Firm conducted an evaluation of
disclosure controls and procedures, as such term is defined under
Exchange Act Rule 13a-15(e). Based on this evaluation, the
Chief Executive Officer and Chief Financial Officer concluded
that the Firm’s disclosure controls and procedures were effective
as of the end of the period covered by this annual report.
Management’s Report on Internal Control Over Financial
Reporting
The Firm’s management is responsible for establishing and
maintaining adequate internal control over financial reporting.
The Firm’s internal control over financial reporting is designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles in the United States of America (“U.S.
GAAP”).
• Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the Firm;
• Provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in
accordance with U.S. GAAP, and
that receipts and
expenditures are being made only in accordance with
authorizations of the Firm’s management and directors; and
• Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of
Firm assets that could have a material effect on the Firm’s
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Firm’s internal
control over financial reporting as of December 31, 2019. In
making this assessment, management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”)
in Internal Control—Integrated
Framework (2013). Based on management’s assessment and
those criteria, management believes that the Firm maintained
effective internal control over financial reporting as of
December 31, 2019.
The Firm’s independent registered public accounting firm has
audited and issued a report on the Firm’s internal control over
financial reporting, which appears below.
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December 2019 Form 10-K
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Morgan Stanley:
assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal
control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our
opinion.
Definition and Limitations of Internal Control over
Financial Reporting
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and
that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of
Morgan Stanley and subsidiaries (the “Firm”) as of
December 31, 2019, based on criteria established in Internal
Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway
Commission (COSO). In our opinion, the Firm maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2019, based on criteria established
in Internal Control — Integrated Framework (2013) issued by
COSO.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements of the Firm as
of and for the year ended December 31, 2019 and our report
dated February 27, 2020 expressed an unqualified opinion on
those financial statements.
Basis for Opinion
The Firm’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to
express an opinion on the Firm’s internal control over financial
reporting based on our audit. 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 audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all
included obtaining an
material
understanding of internal control over financial reporting,
respects. Our audit
/s/ Deloitte & Touche LLP
New York, New York
February 27, 2020
December 2019 Form 10-K
158
Table of Contents
Changes in Internal Control Over Financial Reporting
Properties
No change in the Firm’s internal control over financial reporting
(as such term is defined in Exchange Act Rule 13a-15(f))
occurred during the quarter ended December 31, 2019 that
materially affected, or is reasonably likely to materially affect,
the Firm’s internal control over financial reporting.
Other Information
On February 26, 2020, the Firm announced that Paul C. Wirth
would step down from his position as Deputy Chief Financial
Officer and Controller of the Firm in May 2020. After that date,
Mr. Wirth will become a Senior Advisor in the Finance Division
reporting to the Chief Financial Officer.
On February 27, 2020, the Firm announced that Raja J. Akram,
age 47, will become Deputy Chief Financial Officer, Chief
Accounting Officer and Controller of the Firm in May 2020.
Beginning in November 2017, Mr. Akram was Controller and
Chief Accounting Officer of Citigroup Inc. Since 2006, Mr.
Akram held a number of roles in Citigroup Inc., including
Deputy Controller, head of the Finance group’s Corporate
Accounting Policy team supporting M&A activities, and Brazil
Country Finance Officer.
For 2020, Mr. Akram will receive a base salary of $600,000 and
a year-end bonus of $4,400,000 that is payable in a combination
of cash and deferred
incentive compensation. Upon
commencement of employment, Mr. Akram will receive
incoming awards in the form of a one-time cash payment, a one-
time deferred cash award, and a one-time restricted stock unit
award with an aggregate value of $5,000,000. Deferred
incentive compensation awards, including deferred cash and
restricted stock units, are subject to the terms and conditions of
the governing award documentation, including vesting and
cancellation conditions. In the event that Mr. Akram’s
employment offer is withdrawn by the Firm, with limited
exceptions, or his employment is terminated by the Firm without
cause, he is entitled to severance in an amount equal to his 2020
base salary and the value of any portion of the 2020 year-end
bonus and incoming awards that have not yet been paid or
awarded.
Unresolved Staff Comments
The Firm, like other well-known seasoned issuers, from time to
time receives written comments from the staff of the SEC
regarding its periodic or current reports under the Exchange Act.
There are no comments that remain unresolved that the Firm
received not less than 180 days before the end of the year to
which this report relates that the Firm believes are material.
We have offices, operations and data centers located around the
world. Our global headquarters and principal executive offices
are located at 1585 Broadway, New York, New York. Our other
principal offices include locations in Manhattan and the greater
New York metropolitan area, London, Hong Kong and Tokyo.
Our current facilities are adequate for our present and future
operations for each of our business segments, although we may
add regional offices, depending upon our future operations.
Legal Proceedings
In addition to the matters described below, in the normal course
of business, the Firm has been named, from time to time, as a
defendant in various legal actions, including arbitrations, class
actions and other litigation, arising in connection with its
activities as a global diversified financial services institution.
Certain of the actual or threatened legal actions include claims
for substantial compensatory and/or punitive damages or claims
for indeterminate amounts of damages. In some cases, the
entities that would otherwise be the primary defendants in such
cases are bankrupt or are in financial distress.
The Firm is also involved, from time to time, in other reviews,
investigations and proceedings (both formal and informal) by
governmental and self-regulatory agencies regarding the Firm’s
business, and involving, among other matters, sales and trading
activities,
sponsored,
financial products or offerings
underwritten or sold by the Firm, and accounting and operational
matters, certain of which may result in adverse judgments,
settlements, fines, penalties, injunctions or other relief.
The Firm contests liability and/or the amount of damages as
appropriate
in each pending matter. Where available
information indicates that it is probable a liability had been
incurred at the date of the financial statements and the Firm can
reasonably estimate the amount of that loss, the Firm accrues
the estimated loss by a charge to income. The Firm’s future legal
expenses may fluctuate from period to period, given the current
environment regarding government investigations and private
litigation affecting global financial services firms, including the
Firm.
In many proceedings and investigations, however, it is
inherently difficult to determine whether any loss is probable or
even possible, or to estimate the amount of any loss. The Firm
cannot predict with certainty if, how or when such proceedings
or investigations will be resolved or what the eventual
settlement, fine, penalty or other relief, if any, may be,
particularly for proceedings and investigations where the factual
record is being developed or contested or where plaintiffs or
government entities seek substantial or indeterminate damages,
restitution, disgorgement or penalties. Numerous issues may
need to be resolved, including through potentially lengthy
discovery and determination of important factual matters,
determination of issues related to class certification and the
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December 2019 Form 10-K
Table of Contents
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. Subject to the
foregoing, the Firm believes, based on current knowledge and
after consultation with counsel, that the outcome of such
proceedings and investigations will not have a material adverse
effect on the financial condition of the Firm, although the
outcome of such proceedings or investigations could be material
to the Firm’s operating results and cash flows for a particular
period depending on, among other things, the level of the Firm’s
revenues or income for such period.
While the Firm has identified below certain proceedings that the
Firm believes to be material, individually or collectively, there
can be no assurance that additional material losses will not be
incurred from claims that have not yet been asserted or are not
yet determined to be material.
Residential Mortgage and Credit Crisis Related Matters
On July 15, 2010, China Development Industrial Bank
(“CDIB”) filed a complaint against the Firm, styled China
Development Industrial Bank v. Morgan Stanley & Co.
Incorporated et al., which is pending in the Supreme Court of
the State of New York, New York County (“Supreme Court of
NY”). The complaint relates to a $275 million CDS referencing
the super senior portion of the STACK 2006-1 CDO. The
complaint asserts claims for common law fraud, fraudulent
inducement and fraudulent concealment and alleges that the
Firm misrepresented the risks of the STACK 2006-1 CDO to
CDIB, and that the Firm knew that the assets backing the CDO
were of poor quality when it entered into the CDS with CDIB.
The complaint seeks compensatory damages related to the
approximately $228 million that CDIB alleges it has already lost
under the CDS, rescission of CDIB’s obligation to pay an
additional $12 million, punitive damages, equitable relief, pre-
and post-judgment interest, fees and costs. On February 28,
2011, the court denied the Firm’s motion to dismiss the
complaint. On December 21, 2018, the court denied the Firm’s
motion for summary judgment and granted in part the Firm’s
motion for sanctions related to the spoliation of evidence. On
January 18, 2019, CDIB filed a motion to clarify and resettle
the portion of the court’s December 21, 2018 order granting
spoliation sanctions. On January 24, 2019, CDIB filed a notice
of appeal from the court’s December 21, 2018 order, and on
January 25, 2019, the Firm filed a notice of appeal from the same
order. On March 7, 2019, the court denied the relief that CDIB
sought in a motion to clarify and resettle the portion of the court’s
December 21, 2018 order granting spoliation sanctions. On
December 5, 2019, the Appellate Division, First Department
(“First Department") heard the parties’ cross-appeals.
On May 17, 2013, plaintiff in IKB International S.A. in
Liquidation, et al. v. Morgan Stanley, et al. filed a complaint
against the Firm and certain affiliates in the Supreme Court of
December 2019 Form 10-K
160
NY. The complaint alleges that defendants made material
misrepresentations and omissions in the sale to plaintiff of
certain mortgage pass-through certificates backed by
securitization trusts containing residential mortgage loans. The
total amount of certificates allegedly sponsored, underwritten
and/or sold by the Firm to plaintiff was approximately $133
million. The complaint alleges causes of action against the Firm
for common law fraud, fraudulent concealment, aiding and
abetting fraud, and negligent misrepresentation, and seeks,
among other things, compensatory and punitive damages. On
October 29, 2014, the court granted in part and denied in part
the Firm’s motion to dismiss. All claims regarding four
certificates were dismissed. After these dismissals, the
remaining amount of certificates allegedly issued by the Firm
or sold to plaintiff by the Firm was approximately $116 million.
On August 11, 2016, the First Department affirmed the trial
court’s order denying in part the Firm’s motion to dismiss the
complaint.
On July 2, 2013, Deutsche Bank, in its capacity as trustee,
became the named plaintiff in Federal Housing Finance Agency,
as Conservator for the Federal Home Loan Mortgage
Corporation, on behalf of the Trustee of the Morgan Stanley
ABS Capital I Inc. Trust, Series 2007-NC1 (MSAC 2007-NC1)
v. Morgan Stanley ABS Capital I Inc., and filed a complaint in
the Supreme Court of NY styled Deutsche Bank National Trust
Company, as Trustee for the Morgan Stanley ABS Capital I Inc.
Trust, Series 2007-NC1 v. Morgan Stanley ABS Capital I, Inc.
On February 3, 2014, the plaintiff filed an amended complaint,
which asserts claims for breach of contract and breach of the
implied covenant of good faith and fair dealing and alleges,
among other things, that the loans in the trust, which had an
original principal balance of approximately $1.25 billion,
breached various representations and warranties. The amended
complaint seeks, among other relief, specific performance of
the loan breach remedy procedures in the transaction documents,
unspecified damages, rescission and interest. On April 12, 2016,
the court granted in part and denied in part the Firm’s motion to
dismiss the amended complaint, dismissing all claims except a
single claim alleging failure to notify, regarding which the
motion was denied without prejudice. On December 9, 2016,
the Firm renewed its motion to dismiss that notification claim.
On January 17, 2017, the First Department affirmed the lower
court’s April 12, 2016 order. On April 13, 2017, the First
Department denied plaintiff’s motion for leave to appeal to the
Court of Appeals. On March 8, 2018, the trial court denied the
Firm’s renewed motion to dismiss the notification claims.
On July 8, 2013, U.S. Bank National Association, in its capacity
as trustee, filed a complaint against the Firm styled U.S. Bank
National Association, solely in its capacity as Trustee of the
Morgan Stanley Mortgage Loan Trust 2007-2AX (MSM
2007-2AX) v. Morgan Stanley Mortgage Capital Holdings LLC,
Successor-by-Merger to Morgan Stanley Mortgage Capital Inc.
and GreenPoint Mortgage Funding, Inc., pending in the
Supreme Court of NY. The complaint asserts claims for breach
Table of Contents
of contract and alleges, among other things, that the loans in the
trust, which had an original principal balance of approximately
$650 million, breached various representations and warranties.
The complaint seeks, among other relief, specific performance
of the loan breach remedy procedures in the transaction
documents, unspecified damages and interest. On November 24,
2014, the court granted in part and denied in part the Firm’s
motion to dismiss the complaint. On August 13, 2018, the Firm
filed a motion to renew its motion to dismiss. On April 4, 2019,
the court denied the Firm’s motion to renew its motion to
dismiss.
On November 6, 2013, Deutsche Bank, in its capacity as trustee,
became the named plaintiff in Federal Housing Finance Agency,
as Conservator for the Federal Home Loan Mortgage
Corporation, on behalf of the Trustee of the Morgan Stanley
ABS Capital I Inc. Trust, Series 2007-NC3 (MSAC 2007-NC3)
v. Morgan Stanley Mortgage Capital Holdings LLC, and filed
a complaint in the Supreme Court of NY styled Deutsche Bank
National Trust Company, solely in its capacity as Trustee for
Morgan Stanley ABS Capital I Inc. Trust, Series 2007-NC3 v.
Morgan Stanley Mortgage Capital Holdings LLC, as Successor-
by-Merger to Morgan Stanley Mortgage Capital Inc. The
complaint asserts claims for breach of contract and breach of
the implied covenant of good faith and fair dealing and alleges,
among other things, that the loans in the trust, which had an
original principal balance of approximately $1.3 billion,
breached various representations and warranties. The complaint
seeks, among other relief, specific performance of the loan
breach remedy procedures in the transaction documents,
unspecified damages, rescission, interest and costs. On April 12,
2016, the court granted the Firm’s motion to dismiss the
complaint, and granted the plaintiff the ability to seek to replead
certain aspects of the complaint. On January 17, 2017, the First
Department affirmed the lower court’s order granting the motion
to dismiss the complaint. On January 9, 2017, plaintiff filed a
motion to amend its complaint. On April 13, 2017, the First
Department denied plaintiff’s motion for leave to appeal to the
Court of Appeals. On March 8, 2018, the trial court granted
plaintiff’s motion to amend its complaint to include failure to
notify claims. On March 19, 2018, the Firm filed an answer to
plaintiff’s amended complaint.
On September 23, 2014, FGIC filed a complaint against the Firm
in the Supreme Court of NY styled Financial Guaranty
Insurance Company v. Morgan Stanley ABS Capital I Inc. et al.
relating to the Morgan Stanley ABS Capital I Inc. Trust 2007-
NC4. The complaint asserts claims for breach of contract and
fraudulent inducement and alleges, among other things, that the
loans in the trust breached various representations and
warranties and defendants made untrue statements and material
omissions to induce FGIC to issue a financial guaranty policy
on certain classes of certificates that had an original balance of
approximately $876 million. The complaint seeks, among other
relief, specific performance of the loan breach remedy
procedures in the transaction documents, compensatory,
consequential and punitive damages, attorneys’ fees and
interest. On January 23, 2017, the court denied the Firm’s motion
to dismiss the complaint. On February 24, 2017, the Firm filed
a notice of appeal of the denial of its motion to dismiss the
complaint and perfected its appeal on November 22, 2017. On
September 13, 2018, the First Department affirmed in part and
reversed in part the lower court’s order denying the Firm’s
motion to dismiss the complaint. On December 20, 2018, the
First Department denied plaintiff’s motion for leave to appeal
to the Court of Appeals or, in the alternative, for reargument.
On January 23, 2015, Deutsche Bank National Trust Company,
in its capacity as trustee, filed a complaint against the Firm styled
Deutsche Bank National Trust Company solely in its capacity
as Trustee of the Morgan Stanley ABS Capital I Inc. Trust 2007-
NC4 v. Morgan Stanley Mortgage Capital Holdings LLC as
Successor-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
October 19, 2018, the court granted the Firm’s motion for leave
to amend its answer and to stay the case pending resolution of
Deutsche Bank National Trust Company’s appeal to the Court
of Appeals in another case styled Deutsche Bank National Trust
Company v. Barclays Bank PLC regarding the applicable statute
of limitations. On January 17, 2019, the First Department
reversed the trial court’s order to the extent that it had granted
in part the Firm’s motion to dismiss the complaint. On June 4,
2019, the First Department granted the Firm’s motion for leave
to appeal its January 17, 2019 decision to the Court of Appeals.
Antitrust Related Matters
The Firm and other financial institutions are responding to a
number of governmental investigations and civil litigation
matters related to allegations of anticompetitive conduct in
various aspects of the financial services industry, including the
matters described below.
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 (“SDNY”)
styled In Re: Interest Rate Swaps Antitrust Litigation. Plaintiffs
allege, inter alia, that the Firm, together with a number of other
financial institution defendants, violated U.S. and New York
state antitrust laws from 2008 through December of 2016 in
connection with their alleged efforts to prevent the development
of electronic exchange-based platforms for interest rates swaps
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December 2019 Form 10-K
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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.
In August of 2017, the Firm was named as a defendant in a
purported antitrust class action in the United States District
Court for the SDNY styled Iowa Public Employees’ Retirement
System et al. v. Bank of America Corporation et al. Plaintiffs
allege, inter alia, that the Firm, together with a number of other
financial institution defendants, violated U.S. antitrust laws and
New York state law in connection with their alleged efforts to
prevent
the development of electronic exchange-based
platforms for securities lending. The class action complaint was
filed on behalf of a purported class of borrowers and lenders
who entered into stock loan transactions with the defendants.
The class action complaint seeks, among other relief,
certification of the class of plaintiffs and treble damages. On
September 27, 2018, the court denied the defendants’ motion to
dismiss the class action complaint.
European Matters
On October 11, 2011, an Italian financial institution, Banco
Popolare Societá Cooperativa (“Banco Popolare”), filed a civil
claim against the Firm in the Milan courts, styled Banco
Popolare Societá Cooperativa v Morgan Stanley & Co.
International plc & others, related to its purchase of €100
million of bonds issued by Parmalat. The claim asserted by
Banco Popolare alleges, among other things, that the Firm was
aware of Parmalat’s impending insolvency and conspired with
others to deceive Banco Popolare into buying bonds by
concealing both Parmalat’s true financial condition and certain
features of the bonds from the market and Banco Popolare.
Banco Popolare seeks damages of €76 million (approximately
$85 million) plus damages for loss of opportunity and moral
damages. The Firm filed its answer on April 20, 2012. On
September 11, 2018, the court dismissed in full the claim against
the Firm. On March 11, 2019, the plaintiff filed an appeal in the
Court of Appeal of Milan. On May 31, 2019, the Firm filed its
response to the plaintiff’s appeal. An appeal hearing is scheduled
to take place on September 16, 2020 in the Court of Appeal of
Milan.
On June 22, 2017, the public prosecutor for the Court of
Accounts for the Republic of Italy filed a claim against the Firm
styled Case No. 2012/00406/MNV, which is pending in the
Regional Prosecutor’s Office at the Judicial Section of the Court
of Auditors for Lazio, Italy. The claim relates to certain
derivative transactions between the Republic of Italy and the
Firm. The transactions were originally entered into between
1999 and 2005, and were restructured (and certain of the
December 2019 Form 10-K
162
transactions were terminated) in December 2011 and January
2012. The claim alleges, inter alia, that the Firm effectively acted
as an agent of the state in connection with these transactions and
asserts claims related to, among other things, whether the
Ministry of Finance was authorized to enter into these
transactions, whether the transactions were appropriate and
whether the Firm’s conduct related to the termination of certain
transactions was proper. The prosecutor is seeking damages
through an administrative process against the Firm for €2.76
billion (approximately $3.1 billion). On March 30, 2018, the
Firm filed its defense to the claim. On June 15, 2018, the Court
issued a decision declining jurisdiction and dismissing the claim
against the Firm. A hearing of the public prosecutor’s appeal
was held on January 10, 2019. On March 7, 2019, the Appellate
Division of the Court of Accounts for the Republic of Italy issued
a decision affirming the decision below declining jurisdiction
and dismissing the claim against the Firm. On April 19, 2019,
the public prosecutor filed an appeal with the Italian Supreme
Court seeking to overturn this decision. On June 14, 2019, the
Firm filed its response to the public prosecutor’s appeal.
In matters styled Case number 15/3637 and Case number
15/4353, the Dutch Tax Authority (“Dutch Authority”) has
challenged in the District Court in Amsterdam the prior set-off
by the Firm of approximately €124 million (approximately $139
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. On April 26, 2018, the District Court in Amsterdam
issued a decision dismissing the Dutch Authority’s claims. On
June 4, 2018, the Dutch Authority filed an appeal before the
Court of Appeal in Amsterdam in matters re-styled Case number
18/00318 and Case number 18/00319. On June 26 and July 2,
2019, a hearing of the Dutch Tax Authority’s appeal was held.
On October 5, 2017, various institutional investors filed a claim
against the Firm and another bank in a matter now styled Case
number B-803-18 (previously BS 99-6998/2017), in the City
Court of Copenhagen, Denmark concerning their roles as
underwriters of the initial public offering (“IPO”) in March 2014
of the Danish company OW Bunker A/S. The claim seeks
damages of DKK 534,270,456 (approximately $80 million) plus
interest in respect of alleged losses arising from investing in
shares in OW Bunker, which entered into bankruptcy in
November 2014. Separately, on November 29, 2017, another
group of institutional investors joined the Firm and another bank
as defendants to pending proceedings in the High Court of
Eastern Denmark against various other parties involved in the
IPO in a matter styled Case number B-2073-16. The claim
brought against the Firm and the other bank has been given its
own Case number B-2564-17. The investors claim damages of
Table of Contents
DKK 767,235,885 (approximately $115 million) plus interest,
from the Firm and the other bank on a joint and several basis
with the Defendants to these proceedings. Both claims are based
on alleged prospectus liability; the second claim also alleges
professional liability of banks acting as financial intermediaries.
On June 8, 2018, the City Court of Copenhagen, Denmark
ordered that the matters now styled Case number B-803-18,
B-2073-16 and Case number B-2564-17 be heard together
before the High Court of Eastern Denmark. On June 29, 2018,
the Firm filed its defense to the matter now styled Case number
B-2564-17. On February 4, 2019, the Firm filed its defense to
the matter now styled Case number B-803-18.
The following matters were terminated during or following
the quarter ended December 31, 2019:
On December 30, 2013, Wilmington Trust Company, in its
capacity as trustee for Morgan Stanley Mortgage Loan Trust
2007-12, filed a complaint against the Firm styled Wilmington
Trust Company v. Morgan Stanley Mortgage Capital Holdings
LLC et al., pending in the Supreme Court of NY. The complaint
asserted claims for breach of contract and alleged, 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 sought, among
other relief, unspecified damages, attorneys’ fees, interest and
costs. On February 28, 2014, defendants filed a motion to
dismiss the complaint, which was granted in part and denied in
part on June 14, 2016. Plaintiff filed a notice of appeal of that
order on August 17, 2016. On July 11, 2017, First Department
affirmed in part and reversed in part an order granting in part
and denying in part the Firm’s motion to dismiss. On August 10,
2017, plaintiff filed a motion for leave to appeal that decision.
On September 26, 2017, the First Department denied plaintiff’s
motion for leave to appeal to the Court of Appeals. On October
31, 2018, the parties entered into an agreement to settle the
litigation. On September 10, 2019, the court entered a final
judgment and order granting final approval of the settlement.
On November 11, 2019, the parties filed a stipulation of
voluntary discontinuance, dismissing the action with prejudice.
On September 19, 2014, FGIC filed a complaint against the Firm
in the Supreme Court of NY, styled Financial Guaranty
Insurance Company v. Morgan Stanley ABS Capital I Inc. et al.
relating to a securitization issued by Basket of Aggregated
Residential NIMS 2007-1 Ltd. The complaint asserted 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 sought,
among other relief, specific performance of the NIMS breach
remedy procedures in the transaction documents, unspecified
damages, reimbursement of certain payments made pursuant to
the transaction documents, attorneys’ fees and interest. On
November 24, 2014, the Firm filed a motion to dismiss the
complaint, which the court denied on January 19, 2017. On
February 24, 2017, the Firm filed a notice of appeal of the denial
of its motion to dismiss the complaint and perfected its appeal
on November 22, 2017. On September 13, 2018, the court
affirmed the lower court’s order denying the Firm’s motion to
dismiss the complaint. On November 13, 2019, the parties
entered into an agreement to settle the litigation. On December
4, 2019,
the parties filed a stipulation of voluntary
discontinuance, dismissing the action with prejudice.
issued by
Beginning on March 25, 2019, the Firm was named as a
defendant in a series of putative class action complaints filed in
the Southern District of NY, the first of which is styled Alaska
Electrical Pension Fund v. BofA Secs., Inc., et al. Each complaint
alleges a conspiracy to fix prices and restrain competition in the
the following
market for unsecured bonds
Government-Sponsored Enterprises: the Federal National
Mortgage Associate; the Federal Home Loan Mortgage
Corporation;
the Federal Farm Credit Banks Funding
Corporation; and the Federal Home Loan Banks. The purported
class period for each suit is from January 1, 2012 to June 1, 2018.
Each complaint raises a claim under Section 1 of the Sherman
Act and seeks, among other things, injunctive relief and treble
compensatory damages. On May 23, 2019, plaintiffs filed a
consolidated amended class action complaint styled In re GSE
Bonds Antitrust Litigation, with a purported class period from
January 1, 2009 to January 1, 2016. On June 13, 2019, the
defendants filed a joint motion to dismiss the consolidated
amended complaint. On August 29, 2019, the court denied the
Firm's motion to dismiss. On December 15, 2019, the Firm and
certain other defendants entered into a stipulation of settlement
to resolve the action as against each of them in its entirety. On
February 3, 2020, the court granted preliminary approval of that
settlement.
Mine Safety Disclosures
Not applicable.
163
December 2019 Form 10-K
Table of Contents
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities
Morgan Stanley’s common stock trades under the symbol “MS”
on the New York Stock Exchange. As of February 14, 2020, the
Firm had 54,039 holders of record; however, the Firm believes
the number of beneficial owners of the Firm’s common stock
exceeds this number.
The table below sets forth the information with respect to
purchases made by or on behalf of the Firm of its common stock
during the fourth quarter of the year ended December 31, 2019.
Issuer Purchases of Equity Securities
Three Months Ended December 31, 2019
$ in millions, except
per share data
October
November
December
Total
Total
Number
of Shares
Purchased1
Average
Price
Paid Per
Share
Total Shares
Purchased as
Part of Share
Repurchase
Program2,3
Dollar Value
of Remaining
Authorized
Repurchase
5,888,009 $
45.59
5,851,110 $
11,221,315 $
48.53
11,212,000 $
13,998,018 $
49.67
13,872,271 $
4,233
3,689
3,000
31,107,342 $
48.48
30,935,381
1. Includes 171,961 shares acquired by the Firm in satisfaction of the tax withholding
the Firm’s stock-based
obligations on stock-based awards granted under
compensation plans during the three months ended December 31, 2019.
2. Share purchases under publicly announced programs are made pursuant to open-
market purchases, Rule 10b5-1 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. On April 18, 2018, the Firm
entered into a sales plan with Mitsubishi UFJ Financial Group, Inc. (“MUFG”). See
Note 16 to the financial statements for further information on the sales plan.
3. 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 non-
objection. On June 27, 2019, the Federal Reserve published
summary results of CCAR and the Firm received a non-
objection to its 2019 Capital Plan. The Firm’s 2019 Capital Plan
includes a share repurchase of up to $6.0 billion of its
outstanding common stock during the period beginning July 1,
2019 through June 30, 2020. For further information, see
“Liquidity and Capital Resources—Capital Plans and Stress
Tests.”
Stock Performance Graph
The following graph compares the cumulative total shareholder
return (rounded to the nearest whole dollar) of the Firm’s
common stock, the S&P 500 Stock Index and the S&P 500
Financials Sector Index for the last five years. The graph
assumes a $100 investment at the closing price on December 31,
2014 and reinvestment of dividends on the respective dividend
payment dates without commissions. This graph does not
forecast future performance of the Firm’s common stock.
December 2019 Form 10-K
164
Cumulative Total Return
December 31, 2014 – December 31, 2019
$200
$150
$100
$50
$0
Dec-2014 Dec-2015 Dec-2016 Dec-2017 Dec-2018 Dec-2019
Morgan Stanley
S&P 500 Stock Index
S&P 500 Financials Sector Index
At December 31,
2014
2015
2016
2017
2018
2019
Morgan Stanley
$100.00 $ 83.25 $113.27 $143.42 $110.77 $146.94
S&P 500 Stock
Index
S&P 500 Financials
Sector Index
100.00
101.37
113.49
138.26
132.19
173.44
100.00
98.44
120.83
146.37
127.28
168.13
Directors, Executive Officers and Corporate
Governance
Information relating to the Firm’s directors and nominees in the
Firm’s definitive proxy statement for its 2020 annual meeting
of shareholders (“Morgan Stanley’s proxy statement”) is
incorporated by reference herein.
Information relating to the Firm’s executive officers is contained
in the “Business” section of this report under “Information about
our Executive Officers.”
Morgan Stanley’s Code of Ethics and Business Conduct applies
to all directors, officers and employees, including its Chief
Executive Officer, Chief Financial Officer and Deputy Chief
Financial Officer. You can find the Code of Ethics and Business
Conduct on the webpage, www.morganstanley.com/about-us-
governance/ethics.html. The Firm 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 U.S.
Securities and Exchange Commission or the New York Stock
Exchange LLC, on the webpage.
Executive Compensation
Information relating
compensation
incorporated by reference herein.
to director and executive officer
is
in Morgan Stanley’s proxy statement
Table of Contents
Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder
Matters
Equity Compensation Plan Information
The following table provides information about outstanding
awards and shares of common stock available for future awards
under all of Morgan Stanley’s equity compensation plans.
Morgan Stanley has not made any grants of common stock
outside of its equity compensation plans.
At December 31, 2019
(a)
(b)
(c)
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights1
Weighted-
average
exercise
price of
outstanding
options,
warrants
and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
70,446,083 $
—
70,446,083 $
—
—
—
122,853,162 2
—
122,853,162
plan category
Equity compensation
plans approved by
security holders
Equity compensation
plans not approved
by security holders
Total
1. Includes outstanding restricted stock unit and performance stock unit awards. The
number of outstanding performance stock unit awards is based on the target number
of units granted to senior executives.
2. Includes the following:
(a) 39,182,870 shares available under the Employee Stock Purchase Plan (“ESPP”).
Pursuant to this plan, which is qualified under Section 423 of the Internal Revenue
Code, eligible employees were permitted to purchase shares of common stock at a
discount to market price through regular payroll deduction. The Compensation,
Management Development and Succession Committee of the Board (“CMDS
Committee”) approved the discontinuation of the ESPP, effective June 1, 2009, such
that no further contributions to the plan will be permitted following such date, until such
time as the CMDS Committee determines to recommence contributions under the
plan.
(b) 67,453,320 shares available under the Equity Incentive Compensation Plan. Awards
may consist of stock options, stock appreciation rights, restricted stock, restricted stock
units to be settled by the delivery of shares of common stock (or the value thereof),
performance-based units, other awards that are valued by reference to or otherwise
based on the fair market value of common stock, and other equity-based or equity-
related awards approved by the CMDS Committee.
(c) 14,869,924 shares available under the Employee Equity Accumulation Plan, which
includes 733,757 shares available for awards of restricted stock and restricted stock
units. Awards may consist of stock options, stock appreciation rights, restricted stock,
restricted stock units to be settled by the delivery of shares of common stock (or the
value thereof), other awards that are valued by reference to or otherwise based on
the fair market value of common stock, and other equity-based or equity-related awards
approved by the CMDS Committee.
(d) 355,243 shares available under the Tax Deferred Equity Participation Plan. Awards
consist of restricted stock units, which are settled by the delivery of shares of common
stock.
(e) 991,805 shares available under the Directors’ Equity Capital Accumulation Plan. This
plan provides for periodic awards of shares of common stock and stock units to non-
employee directors and also allows non-employee directors to defer the cash fees
they earn for services as a director in the form of stock units.
Other information relating to security ownership of certain
beneficial owners and management is set forth under the caption
“Ownership of Our Common Stock” in Morgan Stanley’s proxy
statement and such information is incorporated by reference
herein.
Certain Relationships and Related Transactions
and Director Independence
Information regarding certain relationships and related
transactions
is
incorporated by reference herein.
in Morgan Stanley’s proxy statement
Information regarding director independence in Morgan
Stanley’s proxy statement is incorporated by reference herein.
Principal Accountant Fees and Services
Information regarding principal accountant fees and services in
Morgan Stanley’s proxy statement is incorporated by reference
herein.
Exhibits and Financial Statement Schedules
Documents filed as part of this report
• The financial statements required to be filed in this annual
report on Form 10-K are included in the section titled
“Financial Statements and Supplementary Data.”
Exhibit Index1
Certain of the following exhibits, as indicated parenthetically,
were previously filed as exhibits to registration statements filed
by Morgan Stanley or its predecessor companies under the
Securities Act or to reports or registration statements filed by
Morgan Stanley or its predecessor companies under the
Exchange Act and are hereby incorporated by reference to such
statements or reports. Morgan Stanley’s Exchange Act file
number is 1-11758. The Exchange Act file number of Morgan
Stanley Group Inc., a predecessor company (“MSG”), was
1-9085.
Exhibit
No. Description
3.1* Amended and Restated Certificate of Incorporation
3.2
of Morgan Stanley, as amended to date.
Amended and Restated Bylaws of Morgan Stanley,
as amended to date (Exhibit 3.1 to Morgan Stanley’s
current report on Form 8-K dated October 29, 2015).
4.1* Description of Securities Registered Pursuant to
Section 12 of the Securities Exchange Act of 1934.
4.2
Amended and Restated Senior Indenture dated as of
May 1, 1999 between Morgan Stanley and The Bank
of New York, as trustee (Exhibit 4-e to Morgan
Stanley’s Registration Statement on Form S-3/A
(No. 333-75289)
amended by Fourth
Supplemental Senior Indenture dated as of October
8, 2007 (Exhibit 4.3 to Morgan Stanley’s annual
report on Form 10-K for the fiscal year ended
November 30, 2007).
as
165
December 2019 Form 10-K
Table of Contents
Exhibit
Exhibit
Exhibit
Exhibit
No. Description
No. Description
4.3
4.3
trustee (Exhibit 4-f
trustee (Exhibit 4-f
Senior Indenture dated as of November 1, 2004
Senior Indenture dated as of November 1, 2004
between Morgan Stanley and The Bank of New York,
between Morgan Stanley and The Bank of New York,
as
to Morgan Stanley’s
as
to Morgan Stanley’s
Registration Statement on Form S-3/A (No.
Registration Statement on Form S-3/A (No.
333-117752), as amended by First Supplemental
333-117752), as amended by First Supplemental
Senior Indenture dated as of September 4, 2007
Senior Indenture dated as of September 4, 2007
(Exhibit 4.5 to Morgan Stanley’s annual report on
(Exhibit 4.5 to Morgan Stanley’s annual report on
Form 10-K for the fiscal year ended November 30,
Form 10-K for the fiscal year ended November 30,
2007), Second Supplemental Senior Indenture dated
2007), Second Supplemental Senior Indenture dated
as of January 4, 2008 (Exhibit 4.1 to Morgan
as of January 4, 2008 (Exhibit 4.1 to Morgan
Stanley’s current report on Form 8-K dated
Stanley’s current report on Form 8-K dated
January 4, 2008), Third Supplemental Senior
January 4, 2008), Third Supplemental Senior
Indenture dated as of September 10, 2008 (Exhibit 4
Indenture dated as of September 10, 2008 (Exhibit 4
to Morgan Stanley’s quarterly report on Form 10-Q
to Morgan Stanley’s quarterly report on Form 10-Q
for the quarter ended August 31, 2008), Fourth
for the quarter ended August 31, 2008), Fourth
Supplemental Senior
Indenture dated as of
Indenture dated as of
Supplemental Senior
December 1, 2008 (Exhibit 4.1 to Morgan Stanley’s
December 1, 2008 (Exhibit 4.1 to Morgan Stanley’s
current report on Form 8-K dated December 1,
current report on Form 8-K dated December 1,
2008), Fifth Supplemental Senior Indenture dated as
2008), Fifth Supplemental Senior Indenture dated as
of April 1, 2009 (Exhibit 4 to Morgan Stanley’s
of April 1, 2009 (Exhibit 4 to Morgan Stanley’s
quarterly report on Form 10-Q for the quarter ended
quarterly report on Form 10-Q for the quarter ended
March 31, 2009), Sixth Supplemental Senior
March 31, 2009), Sixth Supplemental Senior
Indenture dated as of September 16, 2011 (Exhibit
Indenture dated as of September 16, 2011 (Exhibit
4.1 to Morgan Stanley’s quarterly report on Form 10-
4.1 to Morgan Stanley’s quarterly report on Form 10-
Q for the quarter ended September 30, 2011),
Q for the quarter ended September 30, 2011),
Seventh Supplemental Senior Indenture dated as of
Seventh Supplemental Senior Indenture dated as of
November 21, 2011 (Exhibit 4.4 to Morgan Stanley’s
November 21, 2011 (Exhibit 4.4 to Morgan Stanley’s
annual report on Form 10-K for the year ended
annual report on Form 10-K for the year ended
December 31, 2011), Eighth Supplemental Senior
December 31, 2011), Eighth Supplemental Senior
Indenture dated as of May 4, 2012 (Exhibit 4.1 to
Indenture dated as of May 4, 2012 (Exhibit 4.1 to
Morgan Stanley’s quarterly report on Form 10-Q for
Morgan Stanley’s quarterly report on Form 10-Q for
June 30, 2012), Ninth
the quarter
June 30, 2012), Ninth
ended
ended
the quarter
Supplemental Senior
Indenture dated as of
Supplemental Senior
Indenture dated as of
March 10, 2014 (Exhibit 4.1 to Morgan Stanley’s
March 10, 2014 (Exhibit 4.1 to Morgan Stanley’s
quarterly report on Form 10-Q for the quarter ended
quarterly report on Form 10-Q for the quarter ended
March 31, 2014) and Tenth Supplemental Senior
March 31, 2014) and Tenth Supplemental Senior
Indenture dated as of January 11, 2017 (Exhibit 4.1
Indenture dated as of January 11, 2017 (Exhibit 4.1
to Morgan Stanley’s current report on Form 8-K
to Morgan Stanley’s current report on Form 8-K
dated January 11, 2017).
dated January 11, 2017).
4.4
4.4
4.5
4.5
4.6
4.6
The Unit Agreement Without Holders’ Obligations,
The Unit Agreement Without Holders’ Obligations,
dated as of August 29, 2008, between Morgan
dated as of August 29, 2008, between Morgan
Stanley and The Bank of New York Mellon, as Unit
Stanley and The Bank of New York Mellon, as Unit
Agent, as Trustee and Paying Agent under the Senior
Agent, as Trustee and Paying Agent under the Senior
Indenture referred to therein and as Warrant Agent
Indenture referred to therein and as Warrant Agent
under the Warrant Agreement referred to therein
under the Warrant Agreement referred to therein
(Exhibit 4.1 to Morgan Stanley’s current report on
(Exhibit 4.1 to Morgan Stanley’s current report on
Form 8-K dated August 29, 2008).
Form 8-K dated August 29, 2008).
Subordinated Indenture dated as of October 1, 2004
Subordinated Indenture dated as of October 1, 2004
between Morgan Stanley and The Bank of New York,
between Morgan Stanley and The Bank of New York,
to Morgan Stanley’s
as
to Morgan Stanley’s
as
Registration
S-3/A
Form
Registration
S-3/A
Form
(No. 333-117752)).
(No. 333-117752)).
trustee (Exhibit 4-g
trustee (Exhibit 4-g
Statement
Statement
on
on
Indenture dated as of
Junior Subordinated
Indenture dated as of
Junior Subordinated
October 12, 2006 between Morgan Stanley and The
October 12, 2006 between Morgan Stanley and The
Bank of New York, as trustee (Exhibit 4.1 to Morgan
Bank of New York, as trustee (Exhibit 4.1 to Morgan
Stanley’s current report on Form 8-K dated
Stanley’s current report on Form 8-K dated
October 12, 2006).
October 12, 2006).
December 2019 Form 10-K
166
No. Description
No. Description
4.7
4.7
Deposit Agreement dated as of July 6, 2006 among
Deposit Agreement dated as of July 6, 2006 among
Morgan Stanley, JPMorgan Chase Bank, N.A. and
Morgan Stanley, JPMorgan Chase Bank, N.A. and
the holders from time to time of the depositary
the holders from time to time of the depositary
receipts described therein (Exhibit 4.3 to Morgan
receipts described therein (Exhibit 4.3 to Morgan
Stanley’s quarterly report on Form 10-Q for the
Stanley’s quarterly report on Form 10-Q for the
quarter ended May 31, 2006).
quarter ended May 31, 2006).
4.8
4.8
4.9
4.9
4.10
4.10
Form of Deposit Agreement among Morgan Stanley,
Form of Deposit Agreement among Morgan Stanley,
JPMorgan Chase Bank, N.A. and the holders from
JPMorgan Chase Bank, N.A. and the holders from
time to time of the depositary receipts representing
time to time of the depositary receipts representing
interests in the Series A Preferred Stock described
interests in the Series A Preferred Stock described
therein (Exhibit 2.4 to Morgan Stanley’s Registration
therein (Exhibit 2.4 to Morgan Stanley’s Registration
Statement on Form 8-A dated July 5, 2006).
Statement on Form 8-A dated July 5, 2006).
for Depositary Shares,
for Depositary Shares,
Depositary Receipt
Depositary Receipt
representing Floating Rate Non-Cumulative
representing Floating Rate Non-Cumulative
Preferred Stock, Series A (included in Exhibit 4.8
Preferred Stock, Series A (included in Exhibit 4.8
hereto).
hereto).
Form of Deposit Agreement among Morgan Stanley,
Form of Deposit Agreement among Morgan Stanley,
The Bank of New York Mellon and the holders from
The Bank of New York Mellon and the holders from
time to time of the depositary receipts representing
time to time of the depositary receipts representing
interests in the Series E Preferred Stock described
interests in the Series E Preferred Stock described
therein (Exhibit 2.6 to Morgan Stanley’s Registration
therein (Exhibit 2.6 to Morgan Stanley’s Registration
Statement on Form 8-A dated September 27, 2013).
Statement on Form 8-A dated September 27, 2013).
4.11 Depositary Receipt
4.11 Depositary Receipt
for Depositary Shares,
for Depositary Shares,
representing
Fixed-to-Floating Rate Non-
Fixed-to-Floating Rate Non-
representing
Cumulative Preferred Stock, Series E (included in
Cumulative Preferred Stock, Series E (included in
Exhibit 4.10 hereto).
Exhibit 4.10 hereto).
4.12
4.12
Form of Deposit Agreement among Morgan Stanley,
Form of Deposit Agreement among Morgan Stanley,
The Bank of New York Mellon and the holders from
The Bank of New York Mellon and the holders from
time to time of the depositary receipts representing
time to time of the depositary receipts representing
interests in the Series F Preferred stock described
interests in the Series F Preferred stock described
therein (Exhibit 2.4 to Morgan Stanley’s Registration
therein (Exhibit 2.4 to Morgan Stanley’s Registration
Statement on Form 8-A dated December 9, 2013).
Statement on Form 8-A dated December 9, 2013).
4.13 Depositary Receipt
4.13 Depositary Receipt
for Depositary Shares,
for Depositary Shares,
representing
Fixed-to-Floating Rate Non-
Fixed-to-Floating Rate Non-
representing
Cumulative Preferred Stock, Series F (included in
Cumulative Preferred Stock, Series F (included in
Exhibit 4.12 hereto).
Exhibit 4.12 hereto).
4.14
4.14
Form of Deposit Agreement among Morgan Stanley,
Form of Deposit Agreement among Morgan Stanley,
The Bank of New York Mellon and the holders from
The Bank of New York Mellon and the holders from
time to time of the depositary receipts representing
time to time of the depositary receipts representing
interests in the Series H Preferred stock described
interests in the Series H Preferred stock described
therein (Exhibit 4.6 to Morgan Stanley’s current
therein (Exhibit 4.6 to Morgan Stanley’s current
report on Form 8-K dated April 29, 2014).
report on Form 8-K dated April 29, 2014).
4.15 Depositary Receipt
4.15 Depositary Receipt
for Depositary Shares,
for Depositary Shares,
representing
Fixed-to-Floating Rate Non-
Fixed-to-Floating Rate Non-
representing
Cumulative Preferred Stock, Series H (included in
Cumulative Preferred Stock, Series H (included in
Exhibit 4.14 hereto).
Exhibit 4.14 hereto).
4.16
4.16
Form of Deposit Agreement among Morgan Stanley,
Form of Deposit Agreement among Morgan Stanley,
The Bank of New York Mellon and the holders from
The Bank of New York Mellon and the holders from
time to time of the depositary receipts representing
time to time of the depositary receipts representing
interests in the Series I Preferred stock described
interests in the Series I Preferred stock described
therein (Exhibit 2.4 to Morgan Stanley’s Registration
therein (Exhibit 2.4 to Morgan Stanley’s Registration
Statement on Form 8-A dated September 17, 2014).
Statement on Form 8-A dated September 17, 2014).
4.17 Depositary Receipt
4.17 Depositary Receipt
for Depositary Shares,
for Depositary Shares,
Fixed-to-Floating Rate Non-
Fixed-to-Floating Rate Non-
representing
representing
Cumulative Preferred Stock, Series I (included in
Cumulative Preferred Stock, Series I (included in
Exhibit 4.16 hereto).
Exhibit 4.16 hereto).
Table of Contents
Exhibit
Exhibit
Exhibit
Exhibit
No. Description
No. Description
4.18
4.18
Form of Deposit Agreement among Morgan Stanley,
Form of Deposit Agreement among Morgan Stanley,
The Bank of New York Mellon and the holders from
The Bank of New York Mellon and the holders from
time to time of the depositary receipts representing
time to time of the depositary receipts representing
interests in the Series J Preferred Stock described
interests in the Series J Preferred Stock described
therein (Exhibit 4.3 to Morgan Stanley’s current
therein (Exhibit 4.3 to Morgan Stanley’s current
report on Form 8-K dated March 18, 2015).
report on Form 8-K dated March 18, 2015).
4.20
4.20
4.19 Depositary Receipt
4.19 Depositary Receipt
for Depositary Shares,
for Depositary Shares,
representing
Fixed-to-Floating Rate Non-
representing
Fixed-to-Floating Rate Non-
Cumulative Preferred Stock, Series J (included in
Cumulative Preferred Stock, Series J (included in
Exhibit 4.18 hereto).
Exhibit 4.18 hereto).
Form of Deposit Agreement among Morgan Stanley,
Form of Deposit Agreement among Morgan Stanley,
The Bank of New York Mellon and the holders from
The Bank of New York Mellon and the holders from
time to time of the depositary receipts representing
time to time of the depositary receipts representing
interests in the Series K Preferred Stock described
interests in the Series K Preferred Stock described
therein (Exhibit 2.4 to Morgan Stanley’s current
therein (Exhibit 2.4 to Morgan Stanley’s current
report on Form 8-A dated January 30, 2017).
report on Form 8-A dated January 30, 2017).
for Depositary Shares,
4.21 Depositary Receipt
for Depositary Shares,
4.21 Depositary Receipt
Fixed-to-Floating Rate Non-
representing
Fixed-to-Floating Rate Non-
representing
Cumulative Preferred Stock, Series K (included in
Cumulative Preferred Stock, Series K (included in
Exhibit 4.20 hereto).
Exhibit 4.20 hereto).
4.22
4.22
Form of Deposit Agreement among Morgan Stanley,
Form of Deposit Agreement among Morgan Stanley,
The Bank of New York Mellon and the holders from
The Bank of New York Mellon and the holders from
time to time of the depositary receipts representing
time to time of the depositary receipts representing
interests in the Series L Preferred Stock described
interests in the Series L Preferred Stock described
therein (Exhibit 2.4 to Morgan Stanley’s Registration
therein (Exhibit 2.4 to Morgan Stanley’s Registration
Statement on Form 8-A dated November 22, 2019).
Statement on Form 8-A dated November 22, 2019).
4.23 Depositary Receipt
4.23 Depositary Receipt
for Depositary Shares,
for Depositary Shares,
representing 4.875% Non-Cumulative Preferred
representing 4.875% Non-Cumulative Preferred
Stock, Series L (included in Exhibit 4.22 hereto).
Stock, Series L (included in Exhibit 4.22 hereto).
10.1 Amended and Restated Trust Agreement dated as of
10.1 Amended and Restated Trust Agreement dated as of
January 1, 2018 by and between Morgan Stanley and
January 1, 2018 by and between Morgan Stanley and
State Street Bank and Trust Company (Exhibit 10.1
State Street Bank and Trust Company (Exhibit 10.1
to Morgan Stanley’s quarterly report on Form 10-Q
to Morgan Stanley’s quarterly report on Form 10-Q
for the quarter ended March 31, 2018).
for the quarter ended March 31, 2018).
10.2 Amended and Restated Investor Agreement dated as
10.2 Amended and Restated Investor Agreement dated as
of June 30, 2011 by and between Morgan Stanley and
of June 30, 2011 by and between Morgan Stanley and
Mitsubishi UFJ Financial Group, Inc. (Exhibit 10.1
Mitsubishi UFJ Financial Group, Inc. (Exhibit 10.1
to Morgan Stanley’s current report on Form 8-K
to Morgan Stanley’s current report on Form 8-K
dated June 30, 2011), as amended by Third
dated June 30, 2011), as amended by Third
Amendment, dated October 3, 2013 (Exhibit 10.1 to
Amendment, dated October 3, 2013 (Exhibit 10.1 to
Morgan Stanley’s quarterly report on Form 10-Q for
Morgan Stanley’s quarterly report on Form 10-Q for
the quarter ended September 30, 2013) and Fourth
the quarter ended September 30, 2013) and Fourth
Amendment, dated April 6, 2016 (Exhibit 10.1 to
Amendment, dated April 6, 2016 (Exhibit 10.1 to
Morgan Stanley’s quarterly report on Form 10-Q for
Morgan Stanley’s quarterly report on Form 10-Q for
the quarter ended March 31, 2016).
the quarter ended March 31, 2016).
No. Description
No. Description
10.3† Morgan Stanley 401(k) Plan, amended and restated
10.3† Morgan Stanley 401(k) Plan, amended and restated
as of January 1, 2013 (Exhibit 10.6 to Morgan
as of January 1, 2013 (Exhibit 10.6 to Morgan
Stanley annual report on Form 10-K for the year
Stanley annual report on Form 10-K for the year
ended December 31, 2012), as amended by
ended December 31, 2012), as amended by
Amendment (Exhibit 10.5 to Morgan Stanley’s
Amendment (Exhibit 10.5 to Morgan Stanley’s
annual report on Form 10-K for the year ended
annual report on Form 10-K for the year ended
December 31, 2013), Amendment (Exhibit 10.6 to
December 31, 2013), Amendment (Exhibit 10.6 to
Morgan Stanley’s annual report on Form 10-K for
Morgan Stanley’s annual report on Form 10-K for
the year ended December 31, 2013), Amendment
the year ended December 31, 2013), Amendment
(Exhibit 10.5 to Morgan Stanley’s annual report on
(Exhibit 10.5 to Morgan Stanley’s annual report on
Form 10-K for the year ended December 31, 2014),
Form 10-K for the year ended December 31, 2014),
Amendment (Exhibit 10.5 to Morgan Stanley’s
Amendment (Exhibit 10.5 to Morgan Stanley’s
annual report on Form 10-K for the year ended
annual report on Form 10-K for the year ended
December 31, 2015), Amendment (Exhibit 10.4 to
December 31, 2015), Amendment (Exhibit 10.4 to
Morgan Stanley’s annual report on Form 10-K for
Morgan Stanley’s annual report on Form 10-K for
the year ended December 31, 2016), Amendment
the year ended December 31, 2016), Amendment
(Exhibit 10.4 to Morgan Stanley’s annual report on
(Exhibit 10.4 to Morgan Stanley’s annual report on
Form 10-K for the year ended December 31, 2017),
Form 10-K for the year ended December 31, 2017),
Amendment (Exhibit 10.5 to Morgan Stanley’s
Amendment (Exhibit 10.5 to Morgan Stanley’s
annual report on Form 10-K for the year ended
annual report on Form 10-K for the year ended
December 31, 2017) and Amendment (Exhibit 10.4
December 31, 2017) and Amendment (Exhibit 10.4
to Morgan Stanley’s annual report on Form 10-K for
to Morgan Stanley’s annual report on Form 10-K for
the year ended December 31, 2018).
the year ended December 31, 2018).
10.4†* Amendment to Morgan Stanley 401(k) Plan, dated
10.4†* Amendment to Morgan Stanley 401(k) Plan, dated
as of December 12, 2019.
as of December 12, 2019.
10.5† Tax Deferred Equity Participation Plan as amended
10.5† Tax Deferred Equity Participation Plan as amended
and restated as of November 26, 2007 (Exhibit 10.9
and restated as of November 26, 2007 (Exhibit 10.9
to Morgan Stanley’s annual report on Form 10-K for
to Morgan Stanley’s annual report on Form 10-K for
the fiscal year ended November 30, 2007).
the fiscal year ended November 30, 2007).
10.6† Directors’ Equity Capital Accumulation Plan as
10.6† Directors’ Equity Capital Accumulation Plan as
amended and restated as of November 1, 2018
amended and restated as of November 1, 2018
(Exhibit 10.6 to Morgan Stanley’s annual report on
(Exhibit 10.6 to Morgan Stanley’s annual report on
Form 10-K for the fiscal year ended December 31,
Form 10-K for the fiscal year ended December 31,
2018).
2018).
10.7† Employees’ Equity Accumulation Plan as amended
10.7† Employees’ Equity Accumulation Plan as amended
and restated as of November 26, 2007 (Exhibit 10.12
and restated as of November 26, 2007 (Exhibit 10.12
to Morgan Stanley’s annual report on Form 10-K for
to Morgan Stanley’s annual report on Form 10-K for
the fiscal year ended November 30, 2007).
the fiscal year ended November 30, 2007).
10.8† Employee Stock Purchase Plan as amended and
10.8† Employee Stock Purchase Plan as amended and
restated as of February 1, 2009 (Exhibit 10.20 to
restated as of February 1, 2009 (Exhibit 10.20 to
Morgan Stanley’s annual report on Form 10-K for
Morgan Stanley’s annual report on Form 10-K for
the fiscal year ended November 30, 2008).
the fiscal year ended November 30, 2008).
10.9† Morgan Stanley Supplemental Executive Retirement
10.9† Morgan Stanley Supplemental Executive Retirement
and Excess Plan, amended and restated effective
and Excess Plan, amended and restated effective
December 31, 2008 (Exhibit 10.2
to Morgan
December 31, 2008 (Exhibit 10.2
to Morgan
Stanley’s quarterly report on Form 10-Q for the
Stanley’s quarterly report on Form 10-Q for the
quarter ended March 31, 2009) as amended by
quarter ended March 31, 2009) as amended by
Amendment (Exhibit 10.5 to Morgan Stanley’s
Amendment (Exhibit 10.5 to Morgan Stanley’s
quarterly report on Form 10-Q for the quarter ended
quarterly report on Form 10-Q for the quarter ended
June 30, 2009), Amendment (Exhibit 10.19 to
June 30, 2009), Amendment (Exhibit 10.19 to
Morgan Stanley’s annual report on Form 10-K for
Morgan Stanley’s annual report on Form 10-K for
the year ended December 31, 2010), Amendment
the year ended December 31, 2010), Amendment
(Exhibit 10.3 to Morgan Stanley’s quarterly report
(Exhibit 10.3 to Morgan Stanley’s quarterly report
on Form 10-Q for the quarter ended June 30, 2011)
on Form 10-Q for the quarter ended June 30, 2011)
and Amendment (Exhibit 10.1 to Morgan Stanley’s
and Amendment (Exhibit 10.1 to Morgan Stanley’s
quarterly report on Form 10-Q for the quarter ended
quarterly report on Form 10-Q for the quarter ended
September 30, 2014).
September 30, 2014).
167
December 2019 Form 10-K
Table of Contents
Exhibit
Exhibit
No. Description
No. Description
10.10† 1995 Equity Incentive Compensation Plan (Annex A
10.10† 1995 Equity Incentive Compensation Plan (Annex A
to MSG’s proxy statement for its 1996 Annual
to MSG’s proxy statement for its 1996 Annual
Meeting of Stockholders) as amended by
Meeting of Stockholders) as amended by
Amendment (Exhibit 10.39 to Morgan Stanley’s
Amendment (Exhibit 10.39 to Morgan Stanley’s
annual report on Form 10-K for the fiscal year ended
annual report on Form 10-K for the fiscal year ended
November 30, 2000), Amendment (Exhibit 10.5 to
November 30, 2000), Amendment (Exhibit 10.5 to
Morgan Stanley’s quarterly report on Form 10-Q for
Morgan Stanley’s quarterly report on Form 10-Q for
the quarter ended August 31, 2005), Amendment
the quarter ended August 31, 2005), Amendment
(Exhibit 10.3 to Morgan Stanley’s quarterly report
(Exhibit 10.3 to Morgan Stanley’s quarterly report
on Form 10-Q for the quarter ended February 28,
on Form 10-Q for the quarter ended February 28,
2006), Amendment (Exhibit 10.24 to Morgan
2006), Amendment (Exhibit 10.24 to Morgan
Stanley’s annual report on Form 10-K for the fiscal
Stanley’s annual report on Form 10-K for the fiscal
year ended November 30, 2006) and Amendment
year ended November 30, 2006) and Amendment
(Exhibit 10.22 to Morgan Stanley’s annual report on
(Exhibit 10.22 to Morgan Stanley’s annual report on
Form 10-K for the fiscal year ended November 30,
Form 10-K for the fiscal year ended November 30,
2007).
2007).
10.11† Form of Deferred Compensation Agreement under
10.11† Form of Deferred Compensation Agreement under
the Pre-Tax Incentive Program 2 (Exhibit 10.12 to
the Pre-Tax Incentive Program 2 (Exhibit 10.12 to
MSG’s annual report for the fiscal year ended
MSG’s annual report for the fiscal year ended
November 30, 1996).
November 30, 1996).
10.12† Key Employee Private Equity Recognition Plan
10.12† Key Employee Private Equity Recognition Plan
(Exhibit 10.43 to Morgan Stanley’s annual report on
(Exhibit 10.43 to Morgan Stanley’s annual report on
Form 10-K for the fiscal year ended November 30,
Form 10-K for the fiscal year ended November 30,
2000).
2000).
10.13† Morgan Stanley UK Share Ownership Plan (Exhibit
10.13† Morgan Stanley UK Share Ownership Plan (Exhibit
4.1 to Morgan Stanley’s Registration Statement on
4.1 to Morgan Stanley’s Registration Statement on
Form S-8 (No. 333-146954)).
Form S-8 (No. 333-146954)).
10.14† Supplementary Deed of Participation for the Morgan
10.14† Supplementary Deed of Participation for the Morgan
Stanley UK Share Ownership Plan, dated as of
Stanley UK Share Ownership Plan, dated as of
November 5, 2009 (Exhibit 10.36 to Morgan
November 5, 2009 (Exhibit 10.36 to Morgan
Stanley’s annual report on Form 10-K for the year
Stanley’s annual report on Form 10-K for the year
ended December 31, 2009).
ended December 31, 2009).
10.15† Aircraft Time Sharing Agreement, dated as of
10.15† Aircraft Time Sharing Agreement, dated as of
January 1, 2010, by and between Corporate Services
January 1, 2010, by and between Corporate Services
Support Corp. and James P. Gorman (Exhibit 10.1 to
Support Corp. and James P. Gorman (Exhibit 10.1 to
Morgan Stanley’s quarterly report on Form 10-Q for
Morgan Stanley’s quarterly report on Form 10-Q for
the quarter ended March 31, 2010).
the quarter ended March 31, 2010).
10.16† Agreement between Morgan Stanley and James P.
10.16† Agreement between Morgan Stanley and James P.
Gorman, dated August 16, 2005, and amendment
Gorman, dated August 16, 2005, and amendment
dated December 17, 2008 (Exhibit 10.2 to Morgan
dated December 17, 2008 (Exhibit 10.2 to Morgan
Stanley’s quarterly report on Form 10-Q for the
Stanley’s quarterly report on Form 10-Q for the
quarter ended March 31, 2010), as amended by
quarter ended March 31, 2010), as amended by
Amendment (Exhibit 10.25 to Morgan Stanley’s
Amendment (Exhibit 10.25 to Morgan Stanley’s
annual report on Form 10-K for the year ended
annual report on Form 10-K for the year ended
December 31, 2013).
December 31, 2013).
10.17† Form of Restrictive Covenant Agreement (Exhibit
10.17† Form of Restrictive Covenant Agreement (Exhibit
10 to Morgan Stanley’s current report on Form 8-K
10 to Morgan Stanley’s current report on Form 8-K
dated November 22, 2005).
dated November 22, 2005).
10.18† Equity Incentive Compensation Plan, as amended
10.18† Equity Incentive Compensation Plan, as amended
and restated as of March 30, 2017 (Exhibit 10.1 to
and restated as of March 30, 2017 (Exhibit 10.1 to
Morgan Stanley’s current report on Form 8-K dated
Morgan Stanley’s current report on Form 8-K dated
May 22, 2017).
May 22, 2017).
10.19† Morgan Stanley 2006 Notional Leveraged Co-
10.19† Morgan Stanley 2006 Notional Leveraged Co-
Investment Plan, as amended and restated as of
Investment Plan, as amended and restated as of
November 28, 2008 (Exhibit 10.47 to Morgan
November 28, 2008 (Exhibit 10.47 to Morgan
Stanley’s annual report on Form 10-K for the fiscal
Stanley’s annual report on Form 10-K for the fiscal
year ended November 30, 2008).
year ended November 30, 2008).
December 2019 Form 10-K
168
Exhibit
Exhibit
No. Description
No. Description
10.20† Form of Award Certificate under the 2006 Notional
10.20† Form of Award Certificate under the 2006 Notional
Leveraged Co-Investment Plan (Exhibit 10.7 to
Leveraged Co-Investment Plan (Exhibit 10.7 to
Morgan Stanley’s quarterly report on Form 10-Q for
Morgan Stanley’s quarterly report on Form 10-Q for
the quarter ended February 29, 2008).
the quarter ended February 29, 2008).
10.21† Morgan Stanley 2007 Notional Leveraged Co-
10.21† Morgan Stanley 2007 Notional Leveraged Co-
Investment Plan, amended as of June 4, 2009
Investment Plan, amended as of June 4, 2009
(Exhibit 10.6 to Morgan Stanley’s quarterly report
(Exhibit 10.6 to Morgan Stanley’s quarterly report
on Form 10-Q for the quarter ended June 30, 2009).
on Form 10-Q for the quarter ended June 30, 2009).
10.22† Form of Award Certificate under the 2007 Notional
10.22† Form of Award Certificate under the 2007 Notional
Leveraged Co-Investment Plan
for Certain
for Certain
Leveraged Co-Investment Plan
Management Committee Members (Exhibit 10.8 to
Management Committee Members (Exhibit 10.8 to
Morgan Stanley’s quarterly report on Form 10-Q for
Morgan Stanley’s quarterly report on Form 10-Q for
the quarter ended February 29, 2008).
the quarter ended February 29, 2008).
10.23† Morgan Stanley Compensation Incentive Plan
10.23† Morgan Stanley Compensation Incentive Plan
(Exhibit 10.54 to Morgan Stanley’s annual report on
(Exhibit 10.54 to Morgan Stanley’s annual report on
Form 10-K for the fiscal year ended November 30,
Form 10-K for the fiscal year ended November 30,
2008).
2008).
10.24† Morgan Stanley Schedule of Non-Employee
10.24† Morgan Stanley Schedule of Non-Employee
Directors Annual Compensation, effective as of
Directors Annual Compensation, effective as of
November 1, 2018 (Exhibit 10.24 to Morgan
November 1, 2018 (Exhibit 10.24 to Morgan
Stanley’s annual report on Form 10-K for the fiscal
Stanley’s annual report on Form 10-K for the fiscal
year ended December 31, 2018).
year ended December 31, 2018).
10.25† Morgan Stanley UK Limited Alternative Retirement
10.25† Morgan Stanley UK Limited Alternative Retirement
Plan, dated as of October 8, 2009 (Exhibit 10.2 to
Plan, dated as of October 8, 2009 (Exhibit 10.2 to
Morgan Stanley’s quarterly report on Form 10-Q for
Morgan Stanley’s quarterly report on Form 10-Q for
the quarter ended March 31, 2013).
the quarter ended March 31, 2013).
10.26† Agreement between Morgan Stanley and Colm
10.26† Agreement between Morgan Stanley and Colm
Kelleher, dated January 5, 2015 (Exhibit 10.1 to
Kelleher, dated January 5, 2015 (Exhibit 10.1 to
Morgan Stanley’s quarterly report on Form 10-Q for
Morgan Stanley’s quarterly report on Form 10-Q for
the quarter ended March 31, 2015).
the quarter ended March 31, 2015).
10.27† Description of Operating Committee Medical
10.27† Description of Operating Committee Medical
Coverage (Exhibit 10.2
to Morgan Stanley’s
to Morgan Stanley’s
Coverage (Exhibit 10.2
quarterly report on Form 10-Q for the quarter ended
quarterly report on Form 10-Q for the quarter ended
March 31, 2015).
March 31, 2015).
10.28† Form of Award Certificate for Discretionary
10.28† Form of Award Certificate for Discretionary
Retention Awards of Stock Units. (Exhibit 10.33 to
Retention Awards of Stock Units. (Exhibit 10.33 to
Morgan Stanley’s annual report on Form 10-K for
Morgan Stanley’s annual report on Form 10-K for
the year ended December 31, 2017).
the year ended December 31, 2017).
10.29† Form of Award Certificate for Discretionary
10.29† Form of Award Certificate for Discretionary
the Morgan Stanley
Retention Awards under
Retention Awards under
the Morgan Stanley
Compensation Incentive Plan. (Exhibit 10.34 to
Compensation Incentive Plan. (Exhibit 10.34 to
Morgan Stanley’s annual report on Form 10-K for
Morgan Stanley’s annual report on Form 10-K for
the year ended December 31, 2017).
the year ended December 31, 2017).
10.30† Form of Award Certificate for Long-Term Incentive
10.30† Form of Award Certificate for Long-Term Incentive
Program Awards (Exhibit 10.30 to Morgan Stanley’s
Program Awards (Exhibit 10.30 to Morgan Stanley’s
annual report on Form 10-K for the fiscal year ended
annual report on Form 10-K for the fiscal year ended
December 31, 2018).
December 31, 2018).
10.31† Memorandum
10.31† Memorandum
to Colm Kelleher Regarding
to Colm Kelleher Regarding
Relocation to New York, dated February 25, 2016
Relocation to New York, dated February 25, 2016
(Exhibit 10.2 to Morgan Stanley’s quarterly report
(Exhibit 10.2 to Morgan Stanley’s quarterly report
on Form 10-Q for the quarter ended March 31, 2016).
on Form 10-Q for the quarter ended March 31, 2016).
Subsidiaries of Morgan Stanley.
Subsidiaries of Morgan Stanley.
21*
21*
23.1* Consent of Deloitte & Touche LLP.
23.1* Consent of Deloitte & Touche LLP.
24
24
Powers of Attorney (included on signature page).
Powers of Attorney (included on signature page).
31.1* Rule 13a-14(a) Certification of Chief Executive
31.1* Rule 13a-14(a) Certification of Chief Executive
Officer.
Officer.
Table of Contents
Exhibit
No. Description
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
104
Interactive Data Files pursuant to Rule 405 of
Regulation S-T formatted in Inline eXtensible
Business Reporting Language (“Inline XBRL”).
Cover Page Interactive Data File (formatted in Inline
XBRL and contained in Exhibit 101).
1. For purposes of this Exhibit Index, references to “The Bank of New York” mean in
some instances the entity successor to JPMorgan Chase Bank, N.A. or J.P. Morgan
Trust Company, National Association; references to “JPMorgan Chase Bank, N.A.”
mean the entity formerly known as The Chase Manhattan Bank, in some instances
as the successor to Chemical Bank; references to “J.P. Morgan Trust Company, N.A.”
mean the entity formerly known as Bank One Trust Company, N.A., as successor to
The First National Bank of Chicago.
*
Filed herewith.
** Furnished herewith.
† Management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Form
10-K pursuant to Item 15(b).
Note: Other instruments defining the rights of holders of long-
term debt securities of Morgan Stanley and its subsidiaries are
omitted pursuant to Section (b)(4)(iii) of Item 601 of Regulation
S-K. Morgan Stanley hereby agrees to furnish copies of these
instruments to the U.S. Securities and Exchange Commission
upon request.
Form 10-K Summary
None.
169
December 2019 Form 10-K
Table of Contents
Signatures
Signature
Signature
Title
Title
Pursuant to the requirements of Section 13 or 15(d) 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, on February 27, 2020.
MORGAN STANLEY
(REGISTRANT)
By:
/s/ JAMES P. GORMAN
/s/ THOMAS H. GLOCER
/s/ THOMAS H. GLOCER
Director
Director
(Thomas H. Glocer)
(Thomas H. Glocer)
/s/ ROBERT H. HERZ
/s/ ROBERT H. HERZ
(Robert H. Herz)
(Robert H. Herz)
Director
Director
(James P. Gorman)
Chairman of the Board and Chief Executive Officer
/s/ NOBUYUKI HIRANO
/s/ NOBUYUKI HIRANO
Director
Director
(Nobuyuki Hirano)
(Nobuyuki Hirano)
POWER OF ATTORNEY
/s/ STEPHEN J. LUCZO
/s/ STEPHEN J. LUCZO
Director
Director
We, the undersigned, hereby severally constitute Jonathan
Pruzan, Eric F. Grossman and Martin M. Cohen, and each of
them singly, our true and lawful attorneys with full power to
them and each of them to sign for us, and in our names in the
capacities indicated below, any and all amendments to the annual
report on Form 10-K filed with the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as
they may be signed by our said attorneys to any and all
amendments to said annual report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated on the
27th day of February, 2020.
(Stephen J. Luczo)
(Stephen J. Luczo)
/s/ JAMI MISCIK
/s/ JAMI MISCIK
(Jami Miscik)
(Jami Miscik)
Director
Director
/s/ DENNIS M. NALLY
/s/ DENNIS M. NALLY
Director
Director
(Dennis M. Nally)
(Dennis M. Nally)
/s/ TAKESHI
/s/ TAKESHI
OGASAWARA
OGASAWARA
(Takeshi Ogasawara)
(Takeshi Ogasawara)
Director
Director
/s/ HUTHAM S. OLAYAN
/s/ HUTHAM S. OLAYAN
Director
Director
Signature
Signature
Title
Title
(Hutham S. Olayan)
(Hutham S. Olayan)
/s/ JAMES P. GORMAN
/s/ JAMES P. GORMAN
Chairman of the Board and
Chairman of the Board and
Chief Executive Officer
Chief Executive Officer
/s/ MARY L. SCHAPIRO
/s/ MARY L. SCHAPIRO
Director
Director
(James P. Gorman)
(James P. Gorman)
(Principal Executive Officer)
(Principal Executive Officer)
(Mary L. Schapiro)
(Mary L. Schapiro)
/s/ JONATHAN PRUZAN
/s/ JONATHAN PRUZAN
Executive Vice President and
Executive Vice President and
Chief Financial Officer
Chief Financial Officer
(Jonathan Pruzan)
(Jonathan Pruzan)
(Principal Financial Officer)
(Principal Financial Officer)
/s/ PAUL C. WIRTH
/s/ PAUL C. WIRTH
Deputy Chief Financial Officer
Deputy Chief Financial Officer
(Paul C. Wirth)
(Paul C. Wirth)
(Principal Accounting Officer)
(Principal Accounting Officer)
/s/ PERRY M. TRAQUINA
/s/ PERRY M. TRAQUINA
(Perry M. Traquina)
(Perry M. Traquina)
/s/ RAYFORD WILKINS,
/s/ RAYFORD WILKINS,
JR.
JR.
(Rayford Wilkins, Jr.)
(Rayford Wilkins, Jr.)
Director
Director
Director
Director
/s/ ELIZABETH CORLEY
/s/ ELIZABETH CORLEY
Director
Director
(Elizabeth Corley)
(Elizabeth Corley)
/s/ ALISTAIR DARLING
/s/ ALISTAIR DARLING
Director
Director
(Alistair Darling)
(Alistair Darling)
December 2019 Form 10-K
S-1