The Quarterly
MS 2014 10-K

Morgan Stanley (MS) SEC Quarterly Report (10-Q) for Q2 2015

MS Q3 2015 10-Q
MS 2014 10-K MS Q3 2015 10-Q
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

OR

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

EXCHANGE ACT OF 1934

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)

36-3145972

(I.R.S. Employer Identification No.)

(212) 761-4000

(Registrant's telephone number,
including area code)

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

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

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

Large Accelerated Filer  x

Accelerated Filer   ¨

Non-Accelerated Filer  ¨

Smaller reporting company  ¨

(Do not check if a smaller reporting company)

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

As of July 31, 2015, there were 1,953,385,490 shares of the Registrant's Common Stock, par value $0.01 per share, outstanding.

Table of Contents

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended June 30, 2015

Table of Contents Page

Part I-Financial Information

Item 1.

Financial Statements (unaudited) 1

Condensed Consolidated Statements of Income-Three and Six Months Ended June 30, 2015 and 2014

1

Condensed Consolidated Statements of Comprehensive Income-Three and Six Months Ended June 30, 2015 and 2014

2

Condensed Consolidated Statements of Financial Condition-June 30, 2015 and December 31, 2014

3

Condensed Consolidated Statements of Changes in Total Equity-Six Months Ended June  30, 2015 and 2014

4

Condensed Consolidated Statements of Cash Flows-Six Months Ended June 30, 2015 and 2014

5

Notes to Condensed Consolidated Financial Statements (unaudited)

6

1. Introduction and Basis of Presentation

6

2. Significant Accounting Policies

7

3. Fair Value Disclosures

8

4. Investment Securities

32

5. Collateralized Transactions

37

6. Variable Interest Entities and Securitization Activities

42

7. Loans and Allowance for Loan Losses

49

8. Deposits

54

9. Long-Term Borrowings and Other Secured Financings

55

10. Derivative Instruments and Hedging Activities

55

11. Commitments, Guarantees and Contingencies

66

12. Regulatory Requirements

71

13. Total Equity

74

14. Earnings per Common Share

78

15. Interest Income and Interest Expense

79

16. Employee Benefit Plans

80

17. Income Taxes

80

18. Segment and Geographic Information

81

19. Equity Method Investments

84

20. Subsequent Events

84

Report of Independent Registered Public Accounting Firm

86

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations 87

Introduction

87

Executive Summary

88

Business Segments

97

Supplemental Financial Information and Disclosures

115

Accounting Development Updates

117

Critical Accounting Policies

118

Liquidity and Capital Resources

119

Item 3.

Quantitative and Qualitative Disclosures about Market Risk 141

Item 4.

Controls and Procedures 157

Financial Data Supplement (unaudited)

158

Part II-Other Information

Item 1.

Legal Proceedings 164

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds 166

Item 6.

Exhibits 166

i
Table of Contents

AVAILABLE INFORMATION

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

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

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

Amended and Restated Certificate of Incorporation;

Amended and Restated Bylaws;

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

Corporate Governance Policies;

Policy Regarding Communication with the Board of Directors;

Policy Regarding Director Candidates Recommended by Shareholders;

Policy Regarding Corporate Political Activities;

Policy Regarding Shareholder Rights Plan;

Code of Ethics and Business Conduct;

Code of Conduct; and

Integrity Hotline information.

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

ii
Table of Contents

Part I-Financial Information.

Item 1. Financial Statements.

MORGAN STANLEY

Condensed Consolidated Statements of Income

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

(unaudited)

Three Months Ended
June 30,
Six Months Ended
June 30,
2015 2014 2015 2014

Revenues:

Investment banking

$ 1,614 $ 1,633 $ 2,971 $ 2,941

Trading

2,973 2,516 6,623 5,478

Investments

261 227 527 586

Commissions and fees

1,158 1,138 2,344 2,354

Asset management, distribution and administration fees

2,742 2,621 5,423 5,170

Other

297 206 468 500

Total non-interest revenues

9,045 8,341 18,356 17,029

Interest income

1,386 1,250 2,870 2,593

Interest expense

688 983 1,576 2,018

Net interest

698 267 1,294 575

Net revenues

9,743 8,608 19,650 17,604

Non-interest expenses:

Compensation and benefits

4,405 4,200 8,929 8,506

Occupancy and equipment

351 358 693 719

Brokerage, clearing and exchange fees

487 458 950 901

Information processing and communications

438 411 853 835

Marketing and business development

179 165 329 312

Professional services

598 531 1,084 984

Other

558 553 1,230 1,045

Total non-interest expenses

7,016 6,676 14,068 13,302

Income from continuing operations before income taxes

2,727 1,932 5,582 4,302

Provision for income taxes

894 15 1,281 800

Income from continuing operations

1,833 1,917 4,301 3,502

Discontinued operations:

Income (loss) from discontinued operations before income taxes

(2 (1 (10 (3

Provision for (benefit from) income taxes

-   (1 (3 (2

Income (loss) from discontinued operations

(2 -   (7 (1

Net income

$ 1,831 $ 1,917 $ 4,294 $ 3,501

Net income applicable to nonredeemable noncontrolling interests

24 18 93 97

Net income applicable to Morgan Stanley

$ 1,807 $ 1,899 $ 4,201 $ 3,404

Preferred stock dividends and other

142 79 222 135

Earnings applicable to Morgan Stanley common shareholders

$ 1,665 $ 1,820 $ 3,979 $ 3,269

Earnings per basic common share:

Income from continuing operations

$ 0.87 $ 0.94 $ 2.07 $ 1.70

Income (loss) from discontinued operations

-   -   -   -  

Earnings per basic common share

$ 0.87 $ 0.94 $ 2.07 $ 1.70

Earnings per diluted common share:

Income from continuing operations

$ 0.85 $ 0.92 $ 2.03 $ 1.66

Income (loss) from discontinued operations

-   -   -   -  

Earnings per diluted common share

$ 0.85 $ 0.92 $ 2.03 $ 1.66

Dividends declared per common share

$ 0.15 $ 0.10 $ 0.25 $ 0.15

Average common shares outstanding:

Basic

1,919,087,127 1,928,250,328 1,921,604,663 1,926,260,244

Diluted

1,960,355,702 1,969,698,239 1,961,676,071 1,969,675,518

See Notes to Condensed Consolidated Financial Statements.

1
Table of Contents

MORGAN STANLEY

Condensed Consolidated Statements of Comprehensive Income

(dollars in millions)

(unaudited)

Three Months Ended
June 30,
Six Months Ended
June 30,
    2015         2014         2015         2014    

Net income

$ 1,831 $ 1,917 $ 4,294 $ 3,501

Other comprehensive income (loss), net of tax:

Foreign currency translation adjustments(1)

$ 34 $ 86 $ (188 $ 152

Amortization of cash flow hedges(2)

-   1 1 2

Change in net unrealized gains (losses) on available for sale securities(3)

(228 162 (28 236

Pension, postretirement and other related adjustments(4)

(3 4 (2 6

Total other comprehensive income (loss)

$ (197 $ 253 $ (217 $ 396

Comprehensive income

$ 1,634 $ 2,170 $ 4,077 $ 3,897

Net income applicable to nonredeemable noncontrolling interests

24 18 93 97

Other comprehensive income (loss) applicable to nonredeemable noncontrolling interests

(16 18 (18 36

Comprehensive income applicable to Morgan Stanley

$ 1,626 $ 2,134 $ 4,002 $ 3,764

(1) Amounts include provision for (benefit from) income taxes of $(54) million and $(56) million for the quarters ended June 30, 2015 and 2014, respectively, and $120 million and $(112) million for the six months ended June 30, 2015 and 2014, respectively.
(2) Amounts include provision for income taxes of $1 million for the quarter ended June 30, 2015 and $1 million and $1 million for the six months ended June 30, 2015 and 2014, respectively.
(3) Amounts include provision for (benefit from) income taxes of $(137) million and $112 million for the quarters ended June 30, 2015 and 2014, respectively, and $(16) million and $162 million for the six months ended June 30, 2015 and 2014, respectively.
(4) Amounts include provision for (benefit from) income taxes of $(1) million and $1 million for the quarters ended June 30, 2015 and 2014, respectively, and $(1) million and $2 million for the six months ended June 30, 2015 and 2014, respectively.

See Notes to Condensed Consolidated Financial Statements.

2
Table of Contents

MORGAN STANLEY

Condensed Consolidated Statements of Financial Condition

(dollars in millions, except share data)

(unaudited)

June 30,
2015
December 31,
2014

Assets

Cash and due from banks ($10 and $45 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)

$ 19,145 $ 21,381

Interest bearing deposits with banks

27,214 25,603

Cash deposited with clearing organizations or segregated under federal and other regulations or requirements ($165 and $149 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)

33,652 40,607

Trading assets, at fair value ($127,737 and $127,342 were pledged to various parties at June 30, 2015 and December 31, 2014, respectively) ($625 and $966 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)

250,279 256,801

Investment securities (includes $63,709 and $69,216 at fair value at June 30, 2015 and December 31, 2014, respectively)

66,132 69,316

Securities received as collateral, at fair value

15,492 21,316

Securities purchased under agreements to resell (includes $810 and $1,113 at fair value at June 30, 2015 and December 31, 2014, respectively)

106,760 83,288

Securities borrowed

143,969 136,708

Customer and other receivables

57,115 48,961

Loans:

Held for investment (net of allowances of $169 and $149 at June 30, 2015 and December 31, 2014, respectively)

66,424 57,119

Held for sale

9,469 9,458

Other investments ($387 and $467 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)

4,172 4,355

Premises, equipment and software costs (net of accumulated depreciation of $6,660 and $6,219 at June 30, 2015 and December 31, 2014, respectively) ($187 and $191 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)

6,182 6,108

Goodwill

6,594 6,588

Intangible assets (net of accumulated amortization of $1,969 and $1,824 at June 30, 2015 and December 31, 2014, respectively) (includes $6 at fair value at June 30, 2015 and December 31, 2014, respectively)

3,151 3,159

Other assets ($50 and $59 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to the Company)

10,005 10,742

Total assets

$ 825,755 $ 801,510

Liabilities

Deposits

$ 139,203 $ 133,544

Short-term borrowings (includes $2,825 and $1,765 at fair value at June 30, 2015 and December 31, 2014, respectively)

3,122 2,261

Trading liabilities, at fair value (includes $0 and $1 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally non-recourse to the Company)

125,152 107,381

Obligation to return securities received as collateral, at fair value

23,250 25,685

Securities sold under agreements to repurchase (includes $594 and $612 at fair value at June 30, 2015 and December 31, 2014, respectively)

65,619 69,949

Securities loaned

23,151 25,219

Other secured financings (includes $4,074 and $4,504 at fair value at June 30, 2015 and December 31, 2014, respectively) ($299 and $348 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally non-recourse to the Company)

11,688 12,085

Customer and other payables

181,494 181,069

Other liabilities and accrued expenses ($3 and $72 at June 30, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally non-recourse to the Company)

18,920 19,441

Long-term borrowings (includes $32,994 and $31,774 at fair value at June 30, 2015 and December 31, 2014, respectively)

158,089 152,772

Total liabilities

749,688 729,406

Commitments and contingent liabilities (see Note 11)

Equity

Morgan Stanley shareholders' equity:

Preferred stock (see Note 13)

7,520 6,020

Common stock, $0.01 par value:

Shares authorized: 3,500,000,000 at June 30, 2015 and December 31, 2014;

Shares issued: 2,038,893,979 at June 30, 2015 and December 31, 2014;

Shares outstanding: 1,955,655,320 and 1,950,980,142 at June 30, 2015 and December 31, 2014, respectively

20 20

Additional paid-in capital

23,655 24,249

Retained earnings

48,106 44,625

Employee stock trusts

2,441 2,127

Accumulated other comprehensive loss

(1,447 (1,248

Common stock held in treasury, at cost, $0.01 par value:

Shares outstanding: 83,238,659 and 87,913,837 at June 30, 2015 and December 31, 2014, respectively

(2,816 (2,766

Common stock issued to employee stock trusts

(2,441 (2,127

Total Morgan Stanley shareholders' equity

75,038 70,900

Nonredeemable noncontrolling interests

1,029 1,204

Total equity

76,067 72,104

Total liabilities and equity

$ 825,755 $ 801,510

See Notes to Condensed Consolidated Financial Statements.

3
Table of Contents

MORGAN STANLEY

Condensed Consolidated Statements of Changes in Total Equity

Six Months Ended June 30, 2015 and 2014

(dollars in millions)

(unaudited)

Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Employee
Stock
Trusts
Accumulated
Other
Comprehensive
Income (Loss)
Common
Stock
Held in
Treasury
at Cost
Common
Stock
Issued to
Employee
Stock
Trusts
Non-
redeemable
Non-
controlling
Interests
Total
Equity

BALANCE AT

DECEMBER 31, 2014

$ 6,020 $ 20 $ 24,249 $ 44,625 $ 2,127 $ (1,248 $ (2,766 $ (2,127 $ 1,204 $ 72,104

Net income applicable to Morgan Stanley

-   -   -   4,201 -   -   -   -   -   4,201

Net income applicable to nonredeemable noncontrolling interests

-   -   -   -   -   -   -   -   93 93

Dividends

-   -   -   (720 -   -   -   -   -   (720

Shares issued under employee plans and related tax effects

-   -   (577 -   314 -   1,423 (314 -   846

Repurchases of common stock and employee tax withholdings

-   -   -   -   -   -   (1,473 -   -   (1,473

Net change in Accumulated other comprehensive income

-   -   -   -   -   (199 -   -   (18 (217

Issuance of preferred stock

1,500 -   (7 -   -   -   -   -   -   1,493

Deconsolidation of certain legal entities associated with a real estate fund

-   -   -   -   -   -   -   -   (191 (191

Other net decreases

-   -   (10 -   -   -   -   -   (59 (69

BALANCE AT JUNE 30, 2015

$ 7,520 $ 20 $ 23,655 $ 48,106 $ 2,441 $ (1,447 $ (2,816 $ (2,441 $ 1,029 $ 76,067

BALANCE AT

DECEMBER 31, 2013

$ 3,220 $ 20 $ 24,570 $ 42,172 $ 1,718 $ (1,093 $ (2,968 $ (1,718 $ 3,109 $ 69,030

Net income applicable to Morgan Stanley

-   -   -   3,404 -   -   -   -   -   3,404

Net income applicable to nonredeemable noncontrolling interests

-   -   -   -   -   -   -   -   97 97

Dividends

-   -   -   (431 -   -   -   -   -   (431

Shares issued under employee plans and related tax effects

-   -   (950 -   429 -   1,627 (429 -   677

Repurchases of common stock and employee tax withholdings

-   -   -   -   -   -   (964 -   -   (964

Net change in Accumulated other comprehensive income

-   -   -   -   -   360 -   -   36 396

Issuance of preferred stock

1,800 -   (12 -   -   -   -   -   -   1,788

Deconsolidation of certain legal entities associated with a real estate fund

-   -   -   -   -   -   -   -   (1,606 (1,606

Other net decreases

-   -   -   -   -   -   -   -   (190 (190

BALANCE AT JUNE 30, 2014

$ 5,020 $ 20 $ 23,608 $ 45,145 $ 2,147 $ (733 $ (2,305 $ (2,147 $ 1,446 $ 72,201

See Notes to Condensed Consolidated Financial Statements.

4
Table of Contents

MORGAN STANLEY

Condensed Consolidated Statements of Cash Flows

(dollars in millions)

(unaudited)

Six Months Ended
June 30,
2015 2014

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$ 4,294 $ 3,501

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

Income from equity method investments

(83 (76

Compensation payable in common stock and options

611 629

Depreciation and amortization

654 612

Net gain on sale of available for sale securities

(55 (16

Impairment charges

83 77

Provision for credit losses on lending activities

38 15

Other operating activities

37 (131

Changes in assets and liabilities:

Cash deposited with clearing organizations or segregated under federal and other regulations or requirements

6,955 (5,510

Trading assets, net of Trading liabilities

25,115 26,647

Securities borrowed

(7,261 (17,759

Securities loaned

(2,068 (1,991

Customer and other receivables and other assets

(7,556 2,904

Customer and other payables and other liabilities

(1,482 21,972

Securities purchased under agreements to resell

(23,472 9,174

Securities sold under agreements to repurchase

(4,263 (34,221

Net cash provided by (used for) operating activities

(8,453 5,827

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from (payments for):

Premises, equipment and software, net

(620 (413

Business dispositions, net of cash disposed

-   167

Loans:

Purchases, net of proceeds from sales

(221 (679

Originations, net of repayments

(8,861 (11,119

Investment securities:

Purchases

(26,832 (19,329

Proceeds from sales

26,501 5,499

Proceeds from paydowns and maturities

2,796 2,153

Other investing activities

(97 (388

Net cash used for investing activities

(7,334 (24,109

CASH FLOWS FROM FINANCING ACTIVITIES

Net proceeds from (payments for):

Short-term borrowings

861 (359

Nonredeemable noncontrolling interests

(60 (189

Other secured financings

(280 194

Deposits

5,659 5,316

Proceeds from:

Excess tax benefits associated with stock-based awards

176 85

Derivatives financing activities

312 360

Issuance of preferred stock, net of issuance costs

1,493 1,788

Issuance of long-term borrowings

22,909 14,825

Payments for:

Long-term borrowings

(12,963 (21,342

Derivatives financing activities

(257 (170

Repurchases of common stock and employee tax withholdings

(1,473 (964

Cash dividends

(673 (387

Net cash provided by (used for) financing activities

15,704 (843

Effect of exchange rate changes on cash and cash equivalents

(542 127

Net decrease in cash and cash equivalents

(625 (18,998

Cash and cash equivalents, at beginning of period

46,984 59,883

Cash and cash equivalents, at end of period

$ 46,359 $ 40,885

Cash and cash equivalents include:

Cash and due from banks

$ 19,145 $ 18,863

Interest bearing deposits with banks

27,214 22,022

Cash and cash equivalents, at end of period

$ 46,359 $ 40,885

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash payments for interest were $1,027 million and $1,162 million for the six months ended June 30, 2015 and 2014, respectively.

Cash payments for income taxes were $342 million and $374 million for the six months ended June 30, 2015 and 2014, respectively.

See Notes to Condensed Consolidated Financial Statements.

5
Table of Contents

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Introduction and Basis of Presentation.

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

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

Global Oil Merchanting Business.     As a result of entering into a definitive agreement to sell the global oil merchanting unit of the commodities division to Castleton Commodities International LLC, on May 11, 2015, the Company recognized an impairment charge of $59 million in Other revenues during the quarter and six months ended June 30, 2015, to reduce the carrying amount of the unit to its estimated fair value less costs to sell. The transaction does not meet the criteria for discontinued operations and is not expected to have a material impact on the Company's financial results. The Company expects to close the transaction during the second half of 2015 (see Note 3).

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

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

The condensed consolidated financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements and should be read in conjunction with the Company's consolidated financial statements and notes thereto included in the 2014 Form 10-K. The condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of operations for interim periods are not necessarily indicative of results for the entire year.

Consolidation.     The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and other entities in which the Company has a controlling financial interest, including certain variable interest entities ("VIE") (see Note 6). For consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The net income attributable to noncontrolling interests for such subsidiaries is presented as Net income (loss) applicable to

6
Table of Contents

MORGAN STANLEY

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

nonredeemable noncontrolling interests in the Company's condensed consolidated statements of income. The portion of shareholders' equity of such subsidiaries that is attributable to noncontrolling interests for such subsidiaries is presented as Nonredeemable noncontrolling interests, a component of total equity, in the Company's condensed consolidated statements of financial condition.

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

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

2. Significant Accounting Policies.

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

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

Accounting Standards Adopted.

Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.     In June 2014, the Financial Accounting Standards Board (the "FASB") issued an accounting update requiring repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. This accounting update also requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement. This guidance became effective for the Company beginning January 1, 2015. In addition, new disclosures are required for sales of financial assets where the Company retains substantially all the exposure throughout the term and for the collateral pledged and remaining maturity of repurchase and securities lending agreements, which were effective January 1, 2015, and April 1, 2015, respectively. The adoption of this guidance did not have a material impact on the Company's condensed consolidated financial statements. For further information on the adoption of this guidance, see Notes 5 and 6.

Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).     In May 2015, the FASB issued an accounting update that removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured at net asset value ("NAV") per share, or its equivalent using the practical expedient. The Company adopted this guidance retrospectively during the second quarter of 2015, as early adoption is permitted. For further information on the adoption of this guidance, see Note 3.

Condensed Consolidated Statements of Cash Flows.

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

7
Table of Contents

MORGAN STANLEY

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

3. Fair Value Disclosures.

Fair Value Measurements.

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis at June 30, 2015.

Quoted
Prices in
Active

Markets
for
Identical
Assets

(Level 1)
Significant
Observable
Inputs

(Level 2)
Significant
Unobservable
Inputs

(Level 3)
Counterparty
and Cash
Collateral
Netting
Balance at
June 30,
2015
(dollars in millions)

Assets at Fair Value

Trading assets:

U.S. government and agency securities:

U.S. Treasury securities

$ 16,664 $ -   $ -   $ -   $ 16,664

U.S. agency securities

1,331 16,793 3 -   18,127

Total U.S. government and agency securities

17,995 16,793 3 -   34,791

Other sovereign government obligations

17,317 9,023 12 -   26,352

Corporate and other debt:

State and municipal securities

-   1,987 7 -   1,994

Residential mortgage-backed securities

-   2,118 378 -   2,496

Commercial mortgage-backed securities

-   1,319 84 -   1,403

Asset-backed securities

-   839 19 -   858

Corporate bonds

-   14,321 479 -   14,800

Collateralized debt and loan obligations

-   362 660 -   1,022

Loans and lending commitments

-   6,595 5,512 -   12,107

Other debt

-   2,168 564 -   2,732

Total corporate and other debt

-   29,709 7,703 -   37,412

Corporate equities(1)

109,680 1,045 486 -   111,211

Derivative and other contracts:

Interest rate contracts

827 352,457 2,211 -   355,495

Credit contracts

-   24,053 886 -   24,939

Foreign exchange contracts

60 63,005 492 -   63,557

Equity contracts

633 47,745 1,121 -   49,499

Commodity contracts

3,380 11,427 3,145 -   17,952

Other

-   145 -   -   145

Netting(2)

(4,515 (416,622 (4,211 (53,700 (479,048

Total derivative and other contracts

385 82,210 3,644 (53,700 32,539

Investments:

Investments measured at NAV(3)

4,534

Principal investments

57 25 581 -   663

Other

193 222 300 -   715

Total investments

250 247 881 -   5,912

Physical commodities

-   2,062 -   -   2,062

Total trading assets

145,627 141,089 12,729 (53,700 250,279

AFS securities

28,478 35,231 -   -   63,709

Securities received as collateral

15,480 9 3 -   15,492

Securities purchased under agreements to resell

-   810 -   -   810

Intangible assets(4)

-   -   6 -   6

Total assets measured at fair value

$ 189,585 $ 177,139 $ 12,738 $ (53,700 $ 330,296

8
Table of Contents

MORGAN STANLEY

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

Quoted
Prices in
Active

Markets
for
Identical
Assets

(Level 1)
Significant
Observable
Inputs

(Level 2)
Significant
Unobservable
Inputs

(Level 3)
Counterparty
and Cash
Collateral
Netting
Balance at
June 30,
2015
(dollars in millions)

Liabilities at Fair Value

Short-term borrowings

$ -   $ 2,825 $ -   $ -   $ 2,825

Trading liabilities:

U.S. government and agency securities:

U.S. Treasury securities

15,679 -   -   -   15,679

U.S. agency securities

1,111 179 -   -   1,290

Total U.S. government and agency securities

16,790 179 -   -   16,969

Other sovereign government obligations

18,040 2,353 -   -   20,393

Corporate and other debt:

State and municipal securities

-   2 -   -   2

Corporate bonds

-   5,906 15 -   5,921

Unfunded lending commitments

-   6 -   -   6

Other debt

-   4 4 -   8

Total corporate and other debt

-   5,918 19 -   5,937

Corporate equities(1)

42,192 1,577 112 -   43,881

Derivative and other contracts:

Interest rate contracts

766 330,343 2,447 -   333,556

Credit contracts

-   23,178 1,875 -   25,053

Foreign exchange contracts

12 66,247 46 -   66,305

Equity contracts

490 54,568 3,223 -   58,281

Commodity contracts

3,811 11,448 1,940 -   17,199

Other

-   169 -   -   169

Netting(2)

(4,515 (416,622 (4,211 (37,243 (462,591

Total derivative and other contracts

564 69,331 5,320 (37,243 37,972

Total trading liabilities

77,586 79,358 5,451 (37,243 125,152

Obligation to return securities received as collateral

23,237 10 3 -   23,250

Securities sold under agreements to repurchase

-   440 154 -   594

Other secured financings

-   3,906 168 -   4,074

Long-term borrowings

-   30,773 2,221 -   32,994

Total liabilities measured at fair value

$ 100,823 $ 117,312 $ 7,997 $ (37,243 $ 188,889

AFS-available for sale

(1) The Company holds or sells short for trading purposes equity securities issued by entities in diverse industries and of varying size.
(2) For positions with the same counterparty that cross over the levels of the fair value hierarchy, both counterparty netting and cash collateral netting are included in the column titled "Counterparty and Cash Collateral Netting." For contracts with the same counterparty, counterparty netting among positions classified within the same level is included within that level. For further information on derivative instruments and hedging activities, see Note 10.
(3) Certain investments that are measured at fair value using the NAV per share, or its equivalent, are not classified in the fair value hierarchy. For additional disclosure about such investments, see "Fair Value of Investments that are Measured at Net Asset Value" herein.
(4) Amount represents mortgage servicing rights ("MSRs") accounted for at fair value.

9
Table of Contents

MORGAN STANLEY

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2014

Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
Significant
Observable
Inputs

(Level 2)
Significant
Unobservable
Inputs

(Level 3)
Counterparty
and Cash
Collateral
Netting
Balance at
December 31,
2014
(dollars in millions)

Assets at Fair Value

Trading assets:

U.S. government and agency securities:

U.S. Treasury securities

$ 16,961 $ -   $ -   $ -   $ 16,961

U.S. agency securities

850 18,193 -   -   19,043

Total U.S. government and agency securities

17,811 18,193 -   -   36,004

Other sovereign government obligations

15,149 7,888 41 -   23,078

Corporate and other debt:

State and municipal securities

-   2,049 -   -   2,049

Residential mortgage-backed securities

-   1,991 175 -   2,166

Commercial mortgage-backed securities

-   1,484 96 -   1,580

Asset-backed securities

-   583 76 -   659

Corporate bonds

-   15,800 386 -   16,186

Collateralized debt and loan obligations

-   741 1,152 -   1,893

Loans and lending commitments

-   6,088 5,874 -   11,962

Other debt

-   2,167 285 -   2,452

Total corporate and other debt

-   30,903 8,044 -   38,947

Corporate equities(1)

112,490 1,357 272 -   114,119

Derivative and other contracts:

Interest rate contracts

663 495,026 2,484 -   498,173

Credit contracts

-   30,813 1,369 -   32,182

Foreign exchange contracts

83 72,769 249 -   73,101

Equity contracts(2)

571 45,967 1,586 -   48,124

Commodity contracts

4,105 18,042 2,268 -   24,415

Other

-   376 -   -   376

Netting(3)

(4,910 (564,127 (4,220 (66,720 (639,977

Total derivative and other contracts

512 98,866 3,736 (66,720 36,394

Investments:

Investments measured at NAV(4)

5,009

Principal investments

58 3 835 -   896

Other

225 198 323 -   746

Total investments

283 201 1,158 -   6,651

Physical commodities

-   1,608 -   -   1,608

Total trading assets

146,245 159,016 13,251 (66,720 256,801

AFS securities

37,200 32,016 -   -   69,216

Securities received as collateral

21,265 51 -   -   21,316

Securities purchased under agreements to resell

-   1,113 -   -   1,113

Intangible assets(5)

-   -   6 -   6

Total assets measured at fair value

$ 204,710 $ 192,196 $ 13,257 $ (66,720 $ 348,452

10
Table of Contents

MORGAN STANLEY

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

Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
Significant
Observable
Inputs

(Level 2)
Significant
Unobservable
Inputs

(Level 3)
Counterparty
and Cash
Collateral
Netting
Balance at
December 31,
2014
(dollars in millions)

Liabilities at Fair Value

Short-term borrowings

$ -   1,765 $ -   $ -   $ 1,765

Trading liabilities:

U.S. government and agency securities:

U.S. Treasury securities

14,199 -   -   -   14,199

U.S. agency securities

1,274 85 -   -   1,359

Total U.S. government and agency securities

15,473 85 -   -   15,558

Other sovereign government obligations

11,653 2,109 -   -   13,762

Corporate and other debt:

State and municipal securities

-   1 -   -   1

Corporate bonds

-   5,943 78 -   6,021

Unfunded lending commitments

-   10 5 -   15

Other debt

-   63 38 -   101

Total corporate and other debt

-   6,017 121 -   6,138

Corporate equities(1)

31,340 326 45 -   31,711

Derivative and other contracts:

Interest rate contracts

602 469,319 2,657 -   472,578

Credit contracts

-   29,997 2,112 -   32,109

Foreign exchange contracts

21 72,233 98 -   72,352

Equity contracts(2)

416 51,405 3,751 -   55,572

Commodity contracts

4,817 15,584 1,122 -   21,523

Other

-   172 -   -   172

Netting(3)

(4,910 (564,127 (4,220 (40,837 (614,094

Total derivative and other contracts

946 74,583 5,520 (40,837 40,212

Total trading liabilities

59,412 83,120 5,686 (40,837 107,381

Obligation to return securities received as collateral

25,629 56 -   -   25,685

Securities sold under agreements to repurchase

-   459 153 -   612

Other secured financings

-   4,355 149 -   4,504

Long-term borrowings

-   29,840 1,934 -   31,774

Total liabilities measured at fair value

$ 85,041 $ 119,595 $ 7,922 $ (40,837 $ 171,721

(1) The Company holds or sells short for trading purposes equity securities issued by entities in diverse industries and of varying size.
(2) Level 3 asset derivative equity contracts increased by $57 million with a corresponding decrease in the balance of Level 2 asset derivative equity contracts, and the balance of Level 3 liability derivative equity contracts increased by $842 million with a corresponding decrease in the balance of Level 2 liability derivative equity contracts to correct the fair value level assigned to these contracts at December 31, 2014. The total amount of asset and liability derivative equity contracts remained unchanged.
(3) For positions with the same counterparty that cross over the levels of the fair value hierarchy, both counterparty netting and cash collateral netting are included in the column titled "Counterparty and Cash Collateral Netting." For contracts with the same counterparty, counterparty netting among positions classified within the same level is included within that level. For further information on derivative instruments and hedging activities, see Note 10.
(4) Certain investments that are measured at fair value using the NAV per share, or its equivalent, are not classified in the fair value hierarchy. For additional disclosure about such investments, see "Fair Value of Investments that are Measured at Net Asset Value" herein.
(5) Amount represents MSRs accounted for at fair value.

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

The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters and six months ended June 30, 2015 and 2014, respectively. Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. As a result, the realized and unrealized gains (losses) for

11
Table of Contents

MORGAN STANLEY

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

assets and liabilities within the Level 3 category presented in the tables below do not reflect the related realized and unrealized gains (losses) on hedging instruments that have been classified by the Company within the Level 1 and/or Level 2 categories.

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

12
Table of Contents

MORGAN STANLEY

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

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

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Quarter Ended June 30, 2015

Beginning
Balance at
March 31,
2015
Total
Realized
and
Unrealized
Gains
(Losses)(1)
Purchases Sales Issuances Settlements Net
Transfers
Ending
Balance at
June 30,
2015
Unrealized
Gains

(Losses) for
Level 3

Assets/
Liabilities
Outstanding

at June 30,
2015(2)
(dollars in millions)

Assets at Fair Value

Trading assets:

U.S. agency securities

$ -   $ -   $ -   $ (3 $ -   $ -   $ 6 $ 3 $ -  

Other sovereign government obligations

11 -   5 (1 -   -   (3 12 -  

Corporate and other debt:

State and municipal securities

-   1 4 (9 -   -   11 7 1

Residential mortgage-backed securities

296 2 138 (32 -   -   (26 378 2

Commercial mortgage-backed securities

180 (4 5 (9 -   -   (88 84 (5

Asset-backed securities

67 5 11 (64 -   -   -   19 1

Corporate bonds

424 (4 228 (150 -   (2 (17 479 (16

Collateralized debt and loan obligations

822 68 300 (439 -   (78 (13 660 (10

Loans and lending commitments

4,789 31 1,615 (351 -   (491 (81 5,512 26

Other debt

486 (1 130 (51 -   -   -   564 (1

Total corporate and other debt

7,064 98 2,431 (1,105 -   (571 (214 7,703 (2

Corporate equities

230 38 266 (92 -   -   44 486 26

Net derivative and other contracts(3):

Interest rate contracts

(496 95 4 -   (13 14 160 (236 135

Credit contracts

(984 (24 4 -   (24 23 16 (989 (29

Foreign exchange contracts

297 57 -   -   (1 43 50 446 82

Equity contracts

(2,472 (23 39 -   (54 206 202 (2,102 (161

Commodity contracts

1,345 4 2 -   (112 (34 -   1,205 (27

Total net derivative and other contracts

(2,310 109 49 -   (204 252 428 (1,676 -  

Investments:

Principal investments

829 (21 5 (12 -   (205 (15 581 (21

Other

391 (4 -   -   -   -   (87 300 -  

Securities received as collateral

33 -   -   (30 -   -   -   3 -  

Intangible assets

5 1 -   -   -   -   -   6 1

Liabilities at Fair Value

Trading liabilities:

Corporate and other debt:

Corporate bonds

$ 23 $ -   $ (21 $ 15 $ -   $ -   $ (2 $ 15 $ -  

Other debt

23 -   -   10 -   (29 -   4 -  

Total corporate and other debt

46 -   (21 25 -   (29 (2 19 -  

Corporate equities

50 240 (49 2 -   -   349 112 240

Obligation to return securities received as collateral

33 -   (30 -   -   -   -   3 -  

Securities sold under agreements to repurchase

154 -   -   -   -   -   -   154 -  

Other secured financings

133 2 -   -   37 -   -   168 2

Long-term borrowings

1,738 51 -   -   549 (88 73 2,221 51

(1) Total realized and unrealized gains (losses) are primarily included in Trading revenues in the condensed consolidated statements of income except for $(25) million related to Trading assets-Investments, which is included in Investments revenues.
(2) Amounts represent unrealized gains (losses) for the quarter ended June 30, 2015 related to assets and liabilities still outstanding at June 30, 2015.
(3) Net derivative and other contracts represent Trading assets-Derivative and other contracts net of Trading liabilities-Derivative and other contracts. For further information on derivative instruments and hedging activities, see Note 10.

13
Table of Contents

MORGAN STANLEY

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

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months Ended June 30, 2015

Beginning
Balance at
December 31,
2014
Total
Realized and
Unrealized
Gains
(Losses)(1)
Purchases Sales Issuances Settlements Net
Transfers
Ending
Balance at
June 30,
2015
Unrealized
Gains
(Losses) for
Level 3
Assets/
Liabilities
Outstanding
at June 30,
2015(2)
(dollars in millions)

Assets at Fair Value

Trading assets:

U.S. agency securities

$ -   $ -   $ 3 $ -   $ -   $ -   $ -   $ 3 $ -  

Other sovereign government obligations

41 1 6 (32 -   -   (4 12 1

Corporate and other debt:

State and municipal securities

-   1 4 -   -   -   2 7 1

Residential mortgage-backed securities

175 21 163 (51 -   -   70 378 12

Commercial mortgage-backed securities

96 (6 16 (22 -   -   -   84 (9

Asset-backed securities

76 (4 11 (29 -   -   (35 19 2

Corporate bonds

386 10 213 (126 -   (1 (3 479 9

Collateralized debt and loan obligations

1,152 145 404 (682 -   (331 (28 660 (6

Loans and lending commitments

5,874 35 2,082 (209 -   (2,078 (192 5,512 30

Other debt

285 (8 12 -   -   (1 276 564 6

Total corporate and other debt

8,044 194 2,905 (1,119 -   (2,411 90 7,703 45

Corporate equities

272 64 260 (147 -   -   37 486 49

Net derivative and other contracts(3):

Interest rate contracts

(173 188 9 -   (20 124 (364 (236 197

Credit contracts

(743 (276 17 -   (54 31 36 (989 (284

Foreign exchange contracts

151 121 -   -   (1 144 31 446 120

Equity contracts(4)

(2,165 (73 69 -   (225 156 136 (2,102 (160

Commodity contracts

1,146 299 3 -   (112 (72 (59 1,205 234

Total net derivative and other contracts

(1,784 259 98 -   (412 383 (220 (1,676 107

Investments:

Principal investments

835 (4 15 (46 -   (205 (14 581 (26

Other

323 (16 2 (6 -   -   (3 300 (12

Securities received as collateral

-   -   3 -   -   -   -   3 -  

Intangible assets

6 1 -   -   -   (1 -   6 1

14
Table of Contents

MORGAN STANLEY

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

Beginning
Balance at
December 31,
2014
Total
Realized and
Unrealized
Gains
(Losses)(1)
Purchases Sales Issuances Settlements Net
Transfers
Ending
Balance at
June 30,
2015
Unrealized
Gains
(Losses) for
Level 3
Assets/
Liabilities
Outstanding
at June 30,
2015(2)
(dollars in millions)

Liabilities at Fair Value

Trading liabilities:

Corporate and other debt:

Corporate bonds

$ 78 $ (2 $ (12 $ 14 $ -   $ -   $ (67 $ 15 $ (2

Unfunded lending commitments

5 5 -   -   -   -   -   -   5

Other debt

38 -   -   6 -   (39 (1 4 -  

Total corporate and other debt

121 3 (12 20 -   (39 (68 19 3

Corporate equities

45 19 (75 25 -   -   136 112 20

Obligation to return securities received as collateral

-   -   -   3 -   -   -   3 -  

Securities sold under agreements to repurchase

153 (1 -   -   -   -   -   154 (1

Other secured financings

149 (6 -   -   37 (24 -   168 2

Long-term borrowings

1,934 65 -   -   612 (300 40 2,221 59

(1) Total realized and unrealized gains (losses) are primarily included in Trading revenues in the Company's condensed consolidated statements of income except for $(20) million related to Trading assets-Investments, which is included in Investments revenues.
(2) Amounts represent unrealized gains (losses) for the quarter ended June 30, 2015 related to assets and liabilities still outstanding at June 30, 2015.
(3) Net derivative and other contracts represent Trading assets-Derivative and other contracts net of Trading liabilities-Derivative and other contracts. For further information on derivative instruments and hedging activities, see Note 10.
(4) Net liability Level 3 derivative equity contracts increased by $785 million to correct the fair value level assigned to these contracts at December 31, 2014. The total amount of derivative equity contracts remained unchanged at December 31, 2014.

15
Table of Contents

MORGAN STANLEY

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

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Quarter Ended June 30, 2014

Beginning
Balance at
March 31,
2014
Total
Realized and
Unrealized
Gains
(Losses)(1)
Purchases Sales Issuances Settlements Net
Transfers
Ending
Balance at
June 30,
2014
Unrealized
Gains
(Losses) for
Level 3
Assets/
Liabilities
Outstanding
at June 30,
2014(2)
(dollars in millions)

Assets at Fair Value

Trading assets:

Other sovereign government obligations

$ 8 $ -   $ 7 $ (2 $ -   $ -   $ 1 $ 14 $ -  

Corporate and other debt:

State and municipal securities

-   -   4 -   -   -   -   4 -  

Residential mortgage-backed securities

51 10 1 (7 -   -   -   55 8

Commercial mortgage-backed securities

80 5 14 (52 -   -   -   47 (1

Asset-backed securities

146 -   28 (115 -   -   6 65 -  

Corporate bonds

538 64 100 (223 -   -   31 510 42

Collateralized debt obligations

1,293 79 497 (534 -   (27 24 1,332 32

Loans and lending commitments

4,988 146 1,505 (423 -   (304 (83 5,829 188

Other debt

31 2 8 (17 -   (2 -   22 2

Total corporate and other debt

7,127 306 2,157 (1,371 -   (333 (22 7,864 271

Corporate equities

263 16 68 (29 -   -   (75 243 11

Net derivative and other contracts(3):

Interest rate contracts

(121 (64 1 -   -   77 (2 (109 (25

Credit contracts

(231 (362 8 -   (8 (157 40 (710 (357

Foreign exchange contracts

52 21 3 (1 -   30 4 109 21

Equity contracts

(1,099 3 29 (1 (32 (102 105 (1,097 (25

Commodity contracts

1,074 (43 108 -   -   (7 -   1,132 (55

Other

(1 (1 -   -   -   (1 -   (3 (1

Total net derivative and other contracts

(326 (446 149 (2 (40 (160 147 (678 (442

Investments:

Principal investments

2,193 (14 16 (72 -   (1,234 (6 883 65

Other

521 2 2 (10 -   -   (135 380 9

Securities received as collateral

3 -   -   -   -   (3 -   -   -  

Intangible assets

7 (1 -   -   -   -   -   6 (1

Liabilities at Fair Value

Trading liabilities:

Corporate and other debt:

Corporate bonds

$ 3 $ (1 $ (4 $ 13 $ -   $ -   $ 1 $ 14 $ -  

Unfunded lending commitments

6 (5 -   1 -   -   -   12 (5

Other debt

68 11 -   5 -   (20 -   42 2

Total corporate and other debt

77 5 (4 19 -   (20 1 68 (3

Corporate equities

10 (1 (21 17 -   -   (1 6 -  

Obligation to return securities received as collateral

3 -   -   -   -   -   (3 -   -  

Securities sold under agreements to repurchase

154 (1 -   -   -   -   -   155 (1

Other secured financings

275 (5 -   -   17 (178 16 135 (4

Long-term borrowings

1,878 (50 -   -   160 (89 (220 1,779 (50

(1) Total realized and unrealized gains (losses) are primarily included in Trading revenues in the condensed consolidated statements of income except for $(12) million related to Trading assets-Investments, which is included in Investments revenues.
(2) Amounts represent unrealized gains (losses) for the quarter ended June 30, 2014 related to assets and liabilities still outstanding at June 30, 2014.
(3) Net derivative and other contracts represent Trading assets-Derivative and other contracts net of Trading liabilities-Derivative and other contracts. For further information on derivative instruments and hedging activities, see Note 10.

16
Table of Contents

MORGAN STANLEY

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

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months Ended June 30, 2014

Beginning
Balance at
December 31,
2013
Total
Realized and
Unrealized
Gains
(Losses)(1)
Purchases Sales Issuances Settlements Net
Transfers
Ending
Balance at
June 30,
2014
Unrealized
Gains

(Losses)  for
Level 3
Assets/
Liabilities
Outstanding
at June 30,
2014(2)
(dollars in millions)

Assets at Fair Value

Trading assets:

Other sovereign government obligations

$ 27 $ -   $ 8 $ (21 $ -   $ -   $ -   $ 14 $ -  

Corporate and other debt:

State and municipal securities

-   -   4 -   -   -   -   4 -  

Residential mortgage-backed securities

47 13 1 (5 -   -   (1 55 9

Commercial mortgage-backed securities

108 13 23 (97 -   -   -   47 (1

Asset-backed securities

103 (4 30 (88 -   -   24 65 -  

Corporate bonds

522 96 169 (304 -   -   27 510 68

Collateralized debt and loan obligations

1,468 134 658 (886 -   (72 30 1,332 52

Loans and lending commitments

5,129 (137 1,770 (343 -   (634 44 5,829 (117

Other debt

27 2 8 (18 -   -   3 22 1

Total corporate and other debt

7,404 117 2,663 (1,741 -   (706 127 7,864 12

Corporate equities

190 18 79 (38 -   -   (6 243 14

Net derivative and other contracts(3):

Interest rate contracts

113 (141 1 -   -   (46 (36 (109 (130

Credit contracts

(147 (576 45 -   (62 47 (17 (710 (582

Foreign exchange contracts

68 14 4 (1 -   38 (14 109 15

Equity contracts

(831 (15 175 (2 (218 (280 74 (1,097 (58

Commodity contracts

880 121 164 -   -   (33 -   1,132 98

Other

(4 (3 -   -   -   4 -   (3 (3

Total net derivative and other contracts

79 (600 389 (3 (280 (270 7 (678 (660

Investments:

Principal investments

2,160 47 16 (84 -   (1,234 (22 883 128

Other

538 (10 13 (21 -   -   (140 380 (3

Intangible assets

8 (1 -   -   -   (1 -   6 (1

17
Table of Contents

MORGAN STANLEY

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

Beginning
Balance at
December 31,
2013
Total
Realized and
Unrealized
Gains
(Losses)(1)
Purchases Sales Issuances Settlements Net
Transfers
Ending
Balance at
June 30,
2014
Unrealized
Gains

(Losses)  for
Level 3
Assets/
Liabilities
Outstanding
at June 30,
2014(2)
(dollars in millions)

Liabilities at Fair Value

Short-term borrowings

$ 1 $ -   $ -   $ -   $ -   $ (1 $ -   $ -   $ -  

Trading liabilities:

Corporate and other debt:

Corporate bonds

22 1 (50 47 -   -   (4 14 -  

Unfunded lending commitments

2 (9 -   1 -   -   -   12 (9

Other debt

48 10 -   -   -   3 1 42 1

Total corporate and other debt

72 2 (50 48 -   3 (3 68 (8

Corporate equities

8 (1 (22 15 -   -   4 6 (1

Securities sold under agreements to repurchase

154 (1 -   -   -   -   -   155 (1

Other secured financings

278 (9 -   -   18 (186 16 135 (5

Long-term borrowings

1,887 (80 -   -   359 (233 (314 1,779 (81

(1) Total realized and unrealized gains (losses) are primarily included in Trading revenues in the Company's condensed consolidated statements of income except for $37 million related to Trading assets-Investments, which is included in Investments revenues.
(2) Amounts represent unrealized gains (losses) for the quarter ended June 30, 2014 related to assets and liabilities still outstanding at June 30, 2014.
(3) Net derivative and other contracts represent Trading assets-Derivative and other contracts, net of Trading liabilities-Derivative and other contracts. For further information on derivative instruments and hedging activities, see Note 10.

18
Table of Contents

MORGAN STANLEY

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

Quantitative Information about and Sensitivity of Significant Unobservable Inputs Used in Recurring Level 3 Fair Value Measurements at June 30, 2015 and December 31, 2014.

The disclosures below provide information on the valuation techniques, significant unobservable inputs, and their ranges and averages for each major category of assets and liabilities measured at fair value on a recurring basis with a significant Level 3 balance. The level of aggregation and breadth of products cause the range of inputs to be wide and not evenly distributed across the inventory. Further, the range of unobservable inputs may differ across firms in the financial services industry because of diversity in the types of products included in each firm's inventory. The following disclosures also include qualitative information on the sensitivity of the fair value measurements to changes in the significant unobservable inputs.

Balance at
June 30, 2015

Valuations Technique(s) /

Significant Unobservable Input(s) /

Sensitivity of the Fair Value to Changes

in the Unobservable Inputs

Range(1) Averages(2)
(dollars in millions)

Assets

Trading assets:

Corporate and other debt:

Residential mortgage-backed securities

$ 378 Comparable pricing:

Comparable bond price / (A)

0 to 82 points 41 points

Commercial mortgage-backed securities

84 Comparable pricing:

Comparable bond price / (A)

0 to 10 points 1 points

Corporate bonds

479 Comparable pricing:

Comparable bond price / (A)

3 to 125 points 61 points

Collateralized debt and loan obligations

660 Comparable pricing(3):

Comparable bond price / (A)

55 to 104 points 82 points
Correlation model:

Credit correlation / (B)

42% to 61% 53%

Loans and lending commitments

5,512 Corporate loan model:

Credit spread / (C)

127 to 706 basis points 464 basis points
Margin loan model:

Credit spread / (C)(D)

82 to 513 basis points 157 basis points

Volatility skew / (C)(D)

18% to 57% 25%

Discount rate / (C)(D)

2% to 3% 3%
Option model:

Volatility skew / (C)

0% 0%
Comparable pricing(3):

Comparable loan price / (A)

39 to 104 points 89 points

Other debt

564 Comparable pricing:

Comparable loan price / (A)

3 to 81 points 64 points
Comparable pricing:

Comparable bond price / (A)

11 points 11 points
Option model:

At the money volatility / (A)

15% to 54% 16%
Margin loan model(3):

Discount rate / (C)

0% to 5% 2%

Corporate equities

486 Net asset value:

Discount to net asset value / (C)

0% to 71% 36%
Comparable pricing:

Comparable price / (A)

7% to 91% 79%
Comparable pricing(3):

Comparable equity price / (A)

100% 100%
Market approach:

EBITDA multiple / (A)(D)

8 to 10 times 9 times

Price / Book ratio / (A)(D)

0 times 0 times

19
Table of Contents

MORGAN STANLEY

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

Balance at
June 30, 2015

Valuations Technique(s) /

Significant Unobservable Input(s) /

Sensitivity of the Fair Value to Changes

in the Unobservable Inputs

Range(1) Averages(2)
(dollars in millions)

Net derivative and other contracts(4):

Interest rate contracts

(236) Option model:

Interest rate volatility concentration liquidity multiple / (C)(D)

0 to 3 times 2 times

Interest rate-Foreign exchange correlation / (A)(D)

28% to 62%  44% /  43%(5)

Interest rate volatility skew / (A)(D)

32% to 106%  49% /  52%(5)

Interest rate quanto correlation / (A)(D)

-14% to 35%    2% /   -8%(5)

Interest rate curve correlation / (C)(D)

12% to 95%  60% /  73%(5)

Inflation volatility / (A)(D)

61%  61% /  61%(5)

Interest rate-Inflation correlation / (A)(D)

-40% to -39% -39% / -39%(5)

Credit contracts

(989 Comparable pricing:

Cash synthetic basis / (C)(D)

5 to 12 points 9 points

Comparable bond price / (C)(D)

0 to 65 points 20 points
Correlation model(3):

Credit correlation / (B)

41% to 99% 63%

Foreign exchange contracts(6)

446 Option model:

Interest rate-Foreign exchange correlation / (A)(D)

28% to 62% 44% / 43%(5)

Interest rate volatility skew / (A)(D)

32% to 106% 49% / 52%(5)

Interest rate curve / (A)(D)

0% to 1%   0% /   0%(5)

Equity contracts(6)

(2,102 Option model:

At the money volatility / (A)(D)

6% to 54% 31%

Volatility skew / (A)(D)

-3% to 0% -1%

Equity-Equity correlation / (C)(D)

40% to 99% 69%

Equity-Foreign exchange correlation / (C)(D)

-50% to 10% -24%

Equity-Interest rate correlation / (C)(D)

-22% to 71% 19% / 4%(5)

Commodity contracts

1,205 Option model:

Forward power price / (C)(D)


$6 to $101 per
Megawatt hour


$35 per
Megawatt hour

Commodity volatility / (A)(D)

10% to 75% 18%

Cross commodity correlation / (C)(D)

33% to 100% 93%

Investments:

Principal investments

581 Discounted cash flow:

Implied weighted average cost of capital / (C)(D)

12% 12%

Exit multiple / (A)(D)

10 times 10 times

Capitalization rate / (C)(D)

5 to 10 % 6%

Equity discount rate / (C)(D)

18% to 35% 21%
Market approach(3):

EBITDA multiple / (A)(D)

8 to 15 times 11 times

Price / Earnings ratio / (A)(D)

30 times 30 times

Forward capacity price / (A)(D)

$5 to $7 $7
Comparable pricing:

Comparable equity price / (A)

100% 100%

Other

300 Discounted cash flow:

Implied weighted average cost of capital / (C)(D)

10% 10%

Exit multiple / (A)(D)

11 times 11 times
Market approach:

EBITDA multiple / (A)(D)

8 to 13 times 10 times
Comparable pricing(3):

Comparable equity price / (A)

100% 100%

20
Table of Contents

MORGAN STANLEY

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

Balance at
June 30, 2015

Valuations Technique(s) /

Significant Unobservable Input(s) /

Sensitivity of the Fair Value to Changes

in the Unobservable Inputs

Range(1) Averages(2)
(dollars in millions)

Liabilities

Trading liabilities:

Corporate equities

$ 112 Comparable pricing:

Comparable equity price / (A)

55% 55%

Securities sold under agreements to repurchase

154 Discounted cash flow:

Funding spread / (A)

75 to 98 basis points 89 basis points

Other secured financings

168 Comparable pricing:

Comparable bond price / (A)

100 points 100 points
Comparable pricing:

Comparable bond price / (C)

0 to 15 points 8 points

Discounted cash flow:

Discount rate / (C)

16% 16%

Discounted cash flow(3):

Funding spread / (A)

88 to 109 basis points 98 basis points

Long-term borrowings

2,221 Option model(3):

At the money volatility / (C)(D)

20% to 35% 29%

Volatility skew / (C)(D)

-1% to 0% -1%

Equity - Equity correlation / (A)(D)

40% to 90% 66%

Equity - Foreign exchange correlation / (C)(D)

-70% to 35% -34%

Option model:

Equity alpha / (A)

33% to 85% 73%

Correlation model:

Credit correlation / (B)

44% to 60% 45%

Balance at
December 31, 2014

Valuation Technique(s) /
Significant Unobservable Input(s) /
Sensitivity of the Fair  Value to Changes
in the Unobservable Inputs

Range(1) Averages(2)
(dollars in millions)

Assets

Trading assets:

Corporate and other debt:

Residential mortgage-backed securities

$ 175 Comparable pricing:

Comparable bond price / (A)

3 to 90 points 15 points

Commercial mortgage-backed securities

96 Comparable pricing:

Comparable bond price / (A)

0 to 7 points 1 points

Asset-backed securities

76 Comparable pricing:

Comparable bond price / (A)

0 to 62 points 23 points

Corporate bonds

386 Comparable pricing:

Comparable bond price / (A)

1 to 160 points 90 points

Collateralized debt and loan obligations

1,152 Comparable pricing(3):

Comparable bond price / (A)

20 to 100 points 66 points
Correlation model:

Credit correlation / (B)

47% to 65% 56%

Loans and lending commitments

5,874 Corporate loan model:

Credit spread / (C)

36 to 753 basis points 373 basis points
Margin loan model:

Credit spread / (C)(D)

150 to 451 basis points 216 basis points

Volatility skew / (C)(D)

3% to 37% 21%

Discount rate / (C)(D)

2% to 3% 3%
Option model:

Volatility skew / (C)

-1% -1%
Comparable pricing(3):

Comparable loan price / (A)

15 to 105 points 89 points

Other debt

285 Comparable pricing(3):

Comparable loan price / (A)

0 to 75 points 39 points
Comparable pricing:

Comparable bond price / (A)

15 points 15 points
Option model:

At the money volatility / (A)

15% to 54% 15%

21
Table of Contents

MORGAN STANLEY

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

Balance at
December 31, 2014

Valuation Technique(s) /
Significant Unobservable Input(s) /
Sensitivity of the Fair  Value to Changes
in the Unobservable Inputs

Range(1) Averages(2)
(dollars in millions)

Corporate equities

272 Net asset value:

Discount to net asset value / (C)

0% to 71% 36%
Comparable pricing:

Comparable price / (A)

83% to 96% 85%
Comparable pricing(3):

Comparable equity price / (A)

100% 100%
Market approach:

EBITDA multiple / (A)(D)

6 to 9 times 8 times

Price / Book ratio / (A)(D)

0 times 0 times

Net derivative and other contracts(4):

Interest rate contracts

(173 Option model:

Interest rate volatility concentration liquidity multiple / (C)(D)

0 to 3 times 2 times

Interest rate-Foreign exchange correlation / (A)(D)

28% to 62% 44% / 42%(5)

Interest rate volatility skew / (A)(D)

38% to 104% 86% / 60%(5)

Interest rate quanto correlation / (A)(D)

-9% to 35% 6% / -6%(5)

Interest rate curve correlation / (A)(D)

44% to 87% 73% / 80%(5)

Inflation volatility / (A)(D)

69% to 71% 70% / 71%(5)

Interest rate-Inflation correlation / (A)(D)

-44% to -40% -42% / -43%(5)

Credit contracts

(743 Comparable pricing:

Cash synthetic basis / (C)(D)

5 to 13 points 9 points

Comparable bond price / (C)(D)

0 to 55 points 18 points
Correlation model(3):

Credit correlation / (B)

42% to 95% 63%

Foreign exchange contracts(6)

151 Option model:

Interest rate quanto correlation / (A)(D)

-9% to 35% 6% / -6%(5)

Interest rate-Credit spread correlation / (A)(D)

-54% to -2% -17% / -11%(5)

Interest rate curve correlation / (A)(D)

44% to 87% 73% / 80%(5)

Interest rate-Foreign exchange correlation / (A)(D)

28% to 62% 44% / 42%(5)

Interest rate curve / (A)(D)

0% to 2% 1% / 1%(5)

Equity contracts(6)(7)

(2,165 Option model:

At the money volatility / (A)(D)

14% to 51% 29%

Volatility skew / (A)(D)

-2% to 0% -1%

Equity - Equity correlation / (C)(D)

40% to 99% 72%

Equity - Foreign exchange correlation / (C)(D)

-50% to 10% -16%

Equity - Interest rate correlation / (C)(D)

-18% to 81% 26% / 11%(5)

Commodity contracts

1,146 Option model:

Forward power price / (C)(D)

$
5 to $106 per
Megawatt hour

$
38 per
Megawatt hour

Commodity volatility / (A)(D)

11% to 90% 19%

Cross commodity correlation / (C)(D)

33% to 100% 93%

Investments:

Principal investments

835 Discounted cash flow:

Implied weighted average cost of capital / (C)(D)

11% 11%

Exit multiple / (A)(D)

10 times 10 times
Discounted cash flow:

Equity discount rate / (C)

25% 25%
Market approach(3):

EBITDA multiple / (A)(D)

4 to 14 times 10 times

Price / Earnings ratio / (A)(D)

23 times 23 times

Forward capacity price / (A)(D)

$5 to $7 $7
Comparable pricing:

Comparable equity price / (A)

64% to 100% 95%

22
Table of Contents

MORGAN STANLEY

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

Balance at
December 31, 2014

Valuation Technique(s) /
Significant Unobservable Input(s) /
Sensitivity of the Fair  Value to Changes
in the Unobservable Inputs

Range(1) Averages(2)
(dollars in millions)

Other

323 Discounted cash flow:

Implied weighted average cost of capital / (C)(D)

10% to 13% 11%

Exit multiple / (A)(D)

6 to 9 times 9 times
Market approach:

EBITDA multiple / (A)(D)

9 to 13 times 10 times
Comparable pricing(3):

Comparable equity price / (A)

100% 100%

Liabilities

Trading liabilities:

Corporate and other debt:

Corporate bonds

$ 78 Option model:

Volatility skew / (C)(D)

-1% -1%

At the money volatility / (C)(D)

10% 10%

Securities sold under agreements to repurchase

153 Discounted cash flow:

Funding spread / (A)

75 to 91 basis points 86 basis points

Other secured financings

149 Comparable pricing:

Comparable bond price / (A)

99 to 101 points 100 points
Discounted cash flow(3):

Funding spread / (A)

82 to 98 basis points 95 basis points

Long-term borrowings

1,934 Option model(3):

At the money volatility / (C)(D)

18% to 32% 27%

Volatility skew / (A)(D)

-1% to 0% 0%

Equity - Equity correlation / (A)(D)

40% to 90% 68%

Equity - Foreign exchange correlation / (C)(D)

-73% to 30% -32%
Option model:

Equity alpha / (A)

0% to 94% 67%
Correlation model:

Credit correlation / (B)

48% to 65% 51%

EBITDA-Earnings before interest, taxes, depreciation and amortization
(1) The ranges of significant unobservable inputs are represented in points, percentages, basis points, times or megawatt hours. Points are a percentage of par; for example, 82 points would be 82% of par. A basis point equals 1/100th of 1%; for example, 706 basis points would equal 7.06%.
(2) Amounts represent weighted averages except where simple averages and the median of the inputs are provided (see footnote 5 below). Weighted averages are calculated by weighting each input by the fair value of the respective financial instruments except for collateralized debt and loan obligations, principal investments, other debt, corporate bonds, long-term borrowings and derivative instruments where some or all inputs are weighted by risk.
(3) This is the predominant valuation technique for this major asset or liability class.
(4) Credit Valuation Adjustment ("CVA") and Funding Valuation Adjustments ("FVA") are included in the balance, but excluded from the Valuation Technique(s) and Significant Unobservable Input(s) in the table above. CVA is a Level 3 input when the underlying counterparty credit curve is unobservable. FVA is a Level 3 input in its entirety given the lack of observability of funding spreads in the principal market.
(5) The data structure of the significant unobservable inputs used in valuing interest rate contracts, foreign exchange contracts and certain equity contracts may be in a multi-dimensional form, such as a curve or surface, with risk distributed across the structure. Therefore, a simple average and median, together with the range of data inputs, may be more appropriate measurements than a single point weighted average.
(6) Includes derivative contracts with multiple risks ( i.e., hybrid products).
(7) Net liability Level 3 derivative equity contracts increased by $785 million to correct the fair value level assigned to these contracts at December 31, 2014. This correction did not result in a change to the Valuation Technique(s), Significant Unobservable Inputs, Ranges or Averages.

Sensitivity of the fair value to changes in the unobservable inputs:

(A) Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher (lower) fair value measurement.

23
Table of Contents

MORGAN STANLEY

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

(B) Significant changes in credit correlation may result in a significantly higher or lower fair value measurement. Increasing (decreasing) correlation drives a redistribution of risk within the capital structure such that junior tranches become less (more) risky and senior tranches become more (less) risky.
(C) Significant increase (decrease) in the unobservable input in isolation would result in a significantly lower (higher) fair value measurement.
(D) There are no predictable relationships between the significant unobservable inputs.

For a description of the Company's significant unobservable inputs included in the June 30, 2015 and December 31, 2014 tables above for all major categories of assets and liabilities, see Note 4 to the consolidated financial statements in the 2014 Form 10-K.

During the quarter and six months ended June 30, 2015, there were no significant updates made to the Company's significant unobservable inputs.

Fair Value of Investments that are Measured at Net Asset Value.

The Company's Investments measured at fair value were $5,912 million and $6,651 million at June 30, 2015 and December 31, 2014, respectively. For a description of the Company's investments in private equity funds, real estate funds and hedge funds measured at fair value based on NAV, see Note 4 to the consolidated financial statements in the 2014 Form 10-K. The following tables present information solely about the Company's investments in private equity funds, real estate funds and hedge funds measured at fair value using the NAV per share, or its equivalent, at June 30, 2015 and December 31, 2014:

At June 30, 2015 At December 31, 2014
Fair Value Unfunded
Commitment
Fair Value Unfunded
Commitment
(dollars in millions)

Private equity funds

$ 2,155 $ 618 $ 2,569 $ 613

Real estate funds

1,683 111 1,753 112

Hedge funds(1):

Long-short equity hedge funds

448 -   433 -  

Fixed income/credit-related hedge funds

75 -   76 -  

Event-driven hedge funds

39 -   39 -  

Multi-strategy hedge funds

134 4 139 3

Total

$ 4,534 $ 733 $ 5,009 $ 728

(1) Fixed income/credit-related hedge funds, event-driven hedge funds and multi-strategy hedge funds are redeemable at least on a three-month period basis, primarily with a notice period of 90 days or less. At June 30, 2015, approximately 30% of the fair value amount of long-short equity hedge funds was redeemable at least quarterly, 48% is redeemable every six months and 22% of these funds have a redemption frequency of greater than six months. At December 31, 2014, approximately 36% of the fair value amount of long-short equity hedge funds was redeemable at least quarterly, 47% is redeemable every six months and 17% of these funds have a redemption frequency of greater than six months. The notice period for long-short equity hedge funds at June 30, 2015 and December 31, 2014 was primarily greater than six months.

24
Table of Contents

MORGAN STANLEY

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

Private Equity Funds and Real Estate Funds.     Investments in these funds generally are not redeemable due to the closed-ended nature of these funds. Instead, distributions from each fund will be received as the underlying investments of the funds are disposed and monetized. The following table presents information about the fair value of the funds estimated to be liquidated over time:

At June 30, 2015
Fair Value of the Funds Estimated to be Liquidated

Fund Type

Less than 5 years 5-10 years Over 10 years Total
(dollars in millions)

Private equity funds

$ 158 $ 1,200 $ 797 $ 2,155

Real estate funds

191 901 591 1,683

Hedge Funds .    Investments in hedge funds may be subject to initial period lock-up restrictions or gates. A hedge fund lock-up provision is a provision that provides that, during a certain initial period, an investor may not make a withdrawal from the fund. The purpose of a gate is to restrict the level of redemptions that an investor in a particular hedge fund can demand on any redemption date. The following table presents information about lock-up restrictions and gates by hedge fund type:

At June 30, 2015
Hedge Fund Restrictions

Hedge Fund Type

Fair Value Lock-up
Restrictions
Gate
Restrictions
(dollars in millions)

Long-short equity(1)(2)

$ 448 1 12

Fixed income/credit-related(1)

75 13 N/A

Event-driven(3)

39 N/A N/A

Multi-strategy(1)(2)

134 35 25

N/A-Not Applicable.

(1) The remaining restriction period subject to lock-up restrictions was primarily over three years at June 30, 2015.
(2) The restriction period for these investments subject to an exit restriction was indefinite at June 30, 2015.
(3) There were no restrictions on redemption at June 30, 2015.

25
Table of Contents

MORGAN STANLEY

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

Fair Value Option.

The Company 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. The following table presents net gains (losses) due to changes in fair value for items measured at fair value pursuant to the fair value option election for the quarters and six months ended June 30, 2015 and 2014, respectively:

Trading
Revenues
Interest
Income
(Expense)
Gains
(Losses)
Included in
Net
Revenues
(dollars in millions)

Three Months Ended June 30, 2015

Securities purchased under agreements to resell

$ (2 $ 5 $ 3

Short-term borrowings(1)

(2 -   (2

Securities sold under agreements to repurchase

6 (2 4

Long-term borrowings(1)

152 (138 14

Six Months Ended June 30, 2015

Securities purchased under agreements to resell

$ (3 $ 5 $ 2

Short-term borrowings(1)

(42 -   (42

Securities sold under agreements to repurchase

4 (3 1

Long-term borrowings(1)

1,089 (270 819

Three Months Ended June 30, 2014

Securities purchased under agreements to resell

$ (1 $ 2 $ 1

Short-term borrowings(2)

(14 -   (14

Securities sold under agreements to repurchase

(5 (1 (6

Long-term borrowings(2)

(678 (174 (852

Six Months Ended June 30, 2014

Securities purchased under agreements to resell

$ (2 $ 4 $ 2

Short-term borrowings(2)

(37 -   (37

Securities sold under agreements to repurchase

(5 (2 (7

Long-term borrowings(2)

(948 (346 (1,294

(1) Of the total gains (losses) recorded in Trading revenues for short-term and long-term borrowings for the quarter and six months ended June 30, 2015, $182 million and $307 million, respectively, are attributable to changes in the credit quality of the Company and other credit factors, and the respective remainder is attributable to changes in foreign currency rates or interest rates or movements in the reference price or index for structured notes before the impact of related hedges.
(2) Of the total gains (losses) recorded in Trading revenues for short-term and long-term borrowings for the quarter and six months ended June 30, 2014, $87 million and $213 million, respectively, are attributable to changes in the credit quality of the Company and other credit factors, and the respective remainder is attributable to changes in foreign currency rates or interest rates or movements in the reference price or index for structured notes before the impact of related hedges.

In addition to the amounts in the above table, as discussed in Note 2 to the consolidated financial statements in the 2014 Form 10-K, all of the instruments within Trading assets or Trading liabilities are measured at fair value, either through the election of the fair value option or as required by other accounting guidance. The amounts in the above table are included within Net revenues and do not reflect gains or losses on related hedging instruments, if any.

26
Table of Contents

MORGAN STANLEY

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

The Company hedges the economics of market risk for short-term and long-term borrowings ( i.e ., risks other than that related to the credit quality of the Company) as part of its overall trading strategy and manages the market risks embedded within the issuance by the related business unit as part of the business unit's portfolio. The gains and losses on related economic hedges are recorded in Trading revenues and largely offset the gains and losses on short-term and long-term borrowings attributable to market risk.

At June 30, 2015 and December 31, 2014, a breakdown of the short-term and long-term borrowings measured at fair value on a recurring basis by business unit responsible for risk-managing each borrowing is shown in the table below:

Short-Term and  Long-Term
Borrowings

Business Unit

At
June 30,
2015
At
December 31,
2014
(dollars in millions)

Equity

$ 18,684 $ 17,253

Interest rates

14,002 13,545

Credit and foreign exchange

2,547 2,105

Commodities

586 636

Total

$ 35,819 $ 33,539

The following tables present information on the Company's short-term and long-term borrowings (primarily structured notes), loans and unfunded lending commitments for which the fair value option was elected:

Gains (Losses) due to Changes in Instrument-Specific Credit Risk.

Three Months Ended
June 30,
Six Months Ended
June 30,
    2015         2014         2015         2014    
(dollars in millions)

Short-term and long-term borrowings(1)

$ 182 $ 87 $ 307 $ 213

Loans and other debt(2)

(6 126 71 128

Unfunded lending commitments(3)

(1 13 8 27

(1) The change in the fair value of short-term and long-term borrowings (primarily structured notes) includes an adjustment to reflect the change in credit quality of the Company based upon observations of the Company's secondary bond market spreads and changes in other credit factors.
(2) Loans and other debt instrument-specific credit gains (losses) were determined by excluding the non-credit components of gains and losses, such as those due to changes in interest rates.
(3) Gains (losses) on unfunded lending commitments were generally determined based on the differential between estimated expected client yields and contractual yields at each respective period-end.

Net Difference between Contractual Principal Amount and Fair Value.

Contractual Principal
Amount Exceeds Fair
Value
At
June 30,
2015
At
December 31,
2014
(dollars in millions)

Short-term and long-term borrowings(1)

$ (229 $ (670

Loans and other debt(2)

14,597 14,990

Loans 90 or more days past due and/or on nonaccrual status(2)(3)

12,559 12,916

27
Table of Contents

MORGAN STANLEY

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

(1) Short-term and long-term borrowings do not include structured notes where the repayment of the initial principal amount fluctuates based on changes in the reference price or index.
(2) The majority of the difference between principal and fair value amounts for loans and other debt emanates from the Company's distressed debt trading business, which purchases distressed debt at amounts well below par.
(3) The aggregate fair value of loans that were in nonaccrual status, which includes all loans 90 or more days past due, was $1,562 million and $1,367 million at June 30, 2015 and December 31, 2014, respectively. The aggregate fair value of loans that were 90 or more days past due was $836 million and $643 million at June 30, 2015 and December 31, 2014, respectively.

The tables above exclude non-recourse debt from consolidated VIEs, liabilities related to failed sales of financial assets, pledged commodities and other liabilities that have specified assets attributable to them.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis .

Certain assets and liabilities were measured at fair value on a non-recurring basis and are not included in the tables above. These assets and liabilities may include loans, other investments, premises, equipment and software costs, intangible assets and unfunded lending commitments.

The following tables present, by caption on the Company's condensed consolidated statements of financial condition, the fair value hierarchy for those assets measured at fair value on a non-recurring basis for which the Company recognized a non-recurring fair value adjustment for the quarters and six months ended June 30, 2015 and 2014.

Three Months and Six Months Ended June 30, 2015.

Fair Value Measurements Using: Total
Gains (Losses)
for the
Three Months
Ended
June 30,
2015(2)
Total
Gains (Losses)
for the

Six Months
Ended
June 30,
2015(2)
Carrying
Value at
June 30,
2015(1)
Quoted in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(dollars in millions)

Assets:

Loans(3)

$ 3,244 $ -   $ 2,458 $ 786 $ 47 $ 8

Other investments(4)

-   -   -   -   -   (2

Premises, equipment and software costs(5)

-   -   -   -   (2 (22

Total assets

$ 3,244 $ -   $ 2,458 $ 786 $ 45 $ (16

Liabilities:

Other liabilities and accrued expenses(3)

$ (283 $ -   $ (244 $ (39 (45 $ (48

Total liabilities

$ (283 $ -   $ (244 $ (39 (45 $ (48

28
Table of Contents

MORGAN STANLEY

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

Three Months and Six Months Ended June 30, 2014.

Carrying
Value at
June 30,
2014(1)
Fair Value Measurements Using: Total
Gains (Losses)
for the

Three Months
Ended
June 30,
2014(2)
Total
Gains (Losses)
for the

Six Months
Ended
June 30,
2014(2)
Quoted in
Active
Markets
for
Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(dollars in millions)

Loans(3)

$ 2,390 $ -   $ 1,999 $ 391 $ (21 $ (7

Other investments(4)

47 -   -   47 (3 (25

Premises, equipment and software costs(5)

-   -   -   -   (41 (41

Intangible assets(4)

-   -   -   -   -   (2

Other assets(5)

-   -   -   -   -   (9

Total

$ 2,437 $ -   $ 1,999 $ 438 $ (65 $ (84

(1) Carrying values relate only to those assets that had fair value adjustments during the quarter ended June 30, 2015 and 2014. These amounts do not include assets that had fair value adjustments during the six months ended June 30, 2015 and 2014, unless the assets also had a fair value adjustment during the quarter ended June 30, 2015 and 2014.
(2) Changes in the fair value of Loans and losses related to Other investments are recorded within Other revenues in the Company's condensed consolidated statements of income. Losses related to Premises, equipment and software costs, Intangible assets and Other assets are recorded within Other expenses if not held for sale and within Other revenues if held for sale. Losses related to Other liabilities and accrued expenses are recorded within Other revenues related to a non-recurring fair value adjustment for certain unfunded lending commitments designated as held for sale.
(3) Non-recurring changes in the fair value of loans and unfunded lending commitments held for investment or held for sale were calculated using recently executed transactions; market price quotations; valuation models that incorporate market observable inputs where possible, such as comparable loan or debt prices and credit default swap spread levels adjusted for any basis difference between cash and derivative instruments; or default recovery analysis where such transactions and quotations are unobservable.
(4) Losses related to Other investments and Intangible assets were determined primarily using discounted cash flow models and methodologies that incorporate multiples of certain comparable companies.
(5) Losses related to Premises, equipment and software costs and Other assets were determined primarily using a default recovery analysis.

In addition to the table above, as a result of entering into an agreement to sell the global oil merchanting unit of the commodities division, the Company recognized an impairment charge of $59 million in Other revenues in the Company's condensed consolidated statements of income in the quarter and six months ended June 30, 2015, to reduce the carrying amount of the unit to its estimated fair value less costs to sell.

There were no significant liabilities measured at fair value on a non-recurring basis during the quarter and six months ended June 30, 2014.

Financial Instruments Not Measured at Fair Value.

The tables below present the carrying value, fair value and fair value hierarchy category of certain financial instruments that are not measured at fair value in the Company's condensed consolidated statements of financial condition. The tables below 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 our deposit customers.

For a further discussion of the Company's financial instruments not measured at fair value, see Note 4 to the consolidated financial statements in 2014 Form 10-K.

29
Table of Contents

MORGAN STANLEY

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

Financial Instruments Not Measured at Fair Value at June 30, 2015 and December 31, 2014

At June 30, 2015

At June 30, 2015 Fair Value Measurements Using:
Carrying
Value
Fair Value Quoted
Prices in
Active
Markets
for
Identical
Assets

(Level 1)
Significant
Observable
Inputs

(Level 2)
Significant
Unobservable
Inputs

(Level 3)
(dollars in millions)

Financial Assets:

Cash and due from banks

$ 19,145 $ 19,145 $ 19,145 $ -   $ -  

Interest bearing deposits with banks

27,214 27,214 27,214 -   -  

Cash deposited with clearing organizations or segregated under federal and other regulations or requirements

33,652 33,652 33,652 -   -  

Investment securities-HTM securities

2,423 2,397 703 1,694 -  

Securities purchased under agreements to resell

105,950 105,937 -   105,605 332

Securities borrowed

143,969 143,960 -   143,956 4

Customer and other receivables(1)

52,940 52,814 -   48,068 4,746

Loans(2)

75,893 76,654 -   19,628 57,026

Financial Liabilities:

Deposits

$ 139,203 $ 139,226 $ -   $ 139,226 $ -  

Short-term borrowings

297 297 -   297 -  

Securities sold under agreements to repurchase

65,025 65,078 -   62,974 2,104

Securities loaned

23,151 23,182 -   23,013 169

Other secured financings

7,614 7,638 -   5,833 1,805

Customer and other payables(1)

178,125 178,125 -   178,125 -  

Long-term borrowings

125,095 128,385 -   128,087 298

30
Table of Contents

MORGAN STANLEY

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

At December 31, 2014

At December 31, 2014 Fair Value Measurements Using:
Carrying
Value
Fair Value Quoted
Prices in
Active
Markets
for
Identical
Assets

(Level 1)
Significant
Observable
Inputs

(Level 2)
Significant
Unobservable
Inputs

(Level 3)
(dollars in millions)

Financial Assets:

Cash and due from banks

$ 21,381 $ 21,381 $ 21,381 $ -   $ -  

Interest bearing deposits with banks

25,603 25,603 25,603 -   -  

Cash deposited with clearing organizations or segregated under federal and other regulations or requirements

40,607 40,607 40,607 -   -  

Investment securities-HTM securities

100 100 100 -   -  

Securities purchased under agreements to resell

82,175 82,165 -   81,981 184

Securities borrowed

136,708 136,708 -   136,696 12

Customer and other receivables(1)

45,116 45,028 -   39,945 5,083

Loans(2)

66,577 67,800 -   18,212 49,588

Financial Liabilities:

Deposits

$ 133,544 $ 133,572 $ -   $ 133,572 $ -  

Short-term borrowings

496 496 -   496 -  

Securities sold under agreements to repurchase

69,337 69,433 -   63,921 5,512

Securities loaned

25,219 25,244 -   24,740 504

Other secured financings

7,581 7,881 -   5,465 2,416

Customer and other payables(1)

178,373 178,373 -   178,373 -  

Long-term borrowings

120,998 124,961 -   124,150 811

HTM-held to maturity

(1) Accrued interest, fees, and dividend receivables and payables where carrying value approximates fair value have been excluded.
(2) Amounts include all loans measured at fair value on a non-recurring basis.

The fair value of the Company's unfunded lending commitments, primarily related to corporate lending in the Company's Institutional Securities business segment, that are not carried at fair value at June 30, 2015 was $1,245 million, of which $1,031 million and $214 million would have been categorized in Level 2 and Level 3 of the fair value hierarchy, respectively. The carrying value of these commitments, if fully funded, would have been $94.1 billion.

The fair value of the Company's unfunded lending commitments, primarily related to corporate lending in the Company's Institutional Securities business segment, that are not carried at fair value at December 31, 2014 was $1,178 million, of which $928 million and $250 million would have been categorized in Level 2 and Level 3 of the fair value hierarchy, respectively. The carrying value of these commitments, if fully funded, would have been $86.8 billion.

31
Table of Contents

MORGAN STANLEY

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

4. Investment Securities.

The following tables present information about the Company's AFS securities, which are carried at fair value, and HTM securities, which are carried at amortized cost. The net unrealized gains or losses on AFS securities are reported on an after-tax basis as a component of Accumulated other comprehensive income (loss) ("AOCI").

At June 30, 2015
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Other-than-
Temporary
Impairment
Fair
Value
(dollars in millions)

AFS debt securities:

U.S. government and agency securities:

U.S. Treasury securities

$ 26,093 $ 71 $ 62 $ -   $ 26,102

U.S. agency securities(1)

22,040 72 160 -   21,952

Total U.S. government and agency securities

48,133 143 222 -   48,054

Corporate and other debt:

Commercial mortgage-backed securities:

Agency

2,102 2 61 -   2,043

Non-agency

2,163 12 10 -   2,165

Auto loan asset-backed securities

2,707 1 2 -   2,706

Corporate bonds

3,798 9 18 -   3,789

Collateralized loan obligations

962 -   12 -   950

FFELP student loan asset-backed securities(2)

3,994 13 16 -   3,991

Total corporate and other debt

15,726 37 119 -   15,644

Total AFS debt securities

63,859 180 341 -   63,698

AFS equity securities

15 -   4 -   11

Total AFS securities

63,874 180 345 -   63,709

HTM securities:

U.S. government securities:

U.S. Treasury securities

702 1 -   -   703

U.S. agency securities(1)

1,721 -   27 -   1,694

Total HTM securities

2,423 1 27 -   2,397

Total Investment securities

$ 66,297 $ 181 $ 372 $ -   $ 66,106

32
Table of Contents

MORGAN STANLEY

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

At December 31, 2014
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Other-than-
Temporary
Impairment
Fair
Value
(dollars in millions)

AFS debt securities:

U.S. government and agency securities:

U.S. Treasury securities

$ 35,855 $ 42 $ 67 $ -   $ 35,830

U.S. agency securities(1)

18,030 77 72 -   18,035

Total U.S. government and agency securities

53,885 119 139 -   53,865

Corporate and other debt:

Commercial mortgage-backed securities:

Agency

2,288 1 76 -   2,213

Non-agency

1,820 11 6 -   1,825

Auto loan asset-backed securities

2,433 -   5 -   2,428

Corporate bonds

3,640 10 22 -   3,628

Collateralized loan obligations

1,087 -   20 -   1,067

FFELP student loan asset-backed securities(2)

4,169 18 8 -   4,179

Total corporate and other debt

15,437 40 137 -   15,340

Total AFS debt securities

69,322 159 276 -   69,205

AFS equity securities

15 -   4 -   11

Total AFS securities

69,337 159 280 -   69,216

HTM securities:

U.S. government securities:

U.S. Treasury securities

100 -   -   -   100

Total HTM securities

100 -   -   -   100

Total Investment securities

$ 69,437 $ 159 $ 280 $ -   $ 69,316

(1) U.S. agency securities are composed of three main categories consisting of agency-issued debt, agency mortgage pass-through pool securities and collateralized mortgage obligations.
(2) FFELP-Federal Family Education Loan Program. Amounts are backed by a guarantee from the U.S. Department of Education of at least 95% of the principal balance and interest on such loans.

33
Table of Contents

MORGAN STANLEY

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

The tables below present the fair value of Investment securities that are in an unrealized loss position:

Less than 12 Months 12 Months or Longer Total

At June 30, 2015

Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
(dollars in millions)

AFS debt securities:

U.S. government and agency securities:

U.S. Treasury securities

$ 10,668 $ 62 $ -   $ -   $ 10,668 $ 62

U.S. agency securities

9,517 110 1,989 50 11,506 160

Total U.S. government and agency securities

20,185 172 1,989 50 22,174 222

Corporate and other debt:

Commercial mortgage-backed securities:

Agency

42 -   1,437 61 1,479 61

Non-agency

867 9 253 1 1,120 10

Auto loan asset-backed securities

1,237 2 162 -   1,399 2

Corporate bonds

1,624 12 481 6 2,105 18

Collateralized loan obligations

-   -   951 12 951 12

FFELP student loan asset-backed securities

2,290 12 468 4 2,758 16

Total corporate and other debt

6,060 35 3,752 84 9,812 119

Total AFS debt securities

26,245 207 5,741 134 31,986 341

AFS equity securities

11 4 -   -   11 4

Total AFS securities

26,256 211 5,741 134 31,997 345

HTM securities:

U.S. government and agency securities:

U.S. agency securities

1,694 27 -   -   1,694 27

Total HTM securities

1,694 27 -   -   1,694 27

Total Investment securities

$ 27,950 $ 238 $ 5,741 $ 134 $ 33,691 $ 372

Less than 12 Months 12 Months or Longer Total

At December 31, 2014

Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
(dollars in millions)

AFS debt securities:

U.S. government and agency securities:

U.S. Treasury securities

$ 11,410 $ 14 $ 5,924 $ 53 $ 17,334 $ 67

U.S. agency securities

2,739 6 4,133 66 6,872 72

Total U.S. government and agency securities

14,149 20 10,057 119 24,206 139

Corporate and other debt:

Commercial mortgage-backed securities:

Agency

42 -   1,822 76 1,864 76

Non-agency

706 3 346 3 1,052 6

Auto loan asset-backed securities

2,034 5 -   -   2,034 5

Corporate bonds

905 6 1,299 16 2,204 22

Collateralized loan obligations

-   -   1,067 20 1,067 20

FFELP student loan asset-backed securities

1,523 6 393 2 1,916 8

Total corporate and other debt

5,210 20 4,927 117 10,137 137

Total AFS debt securities

19,359 40 14,984 236 34,343 276

AFS equity securities

11 4 -   -   11 4

Total Investment securities

$ 19,370 $ 44 $ 14,984 $ 236 $ 34,354 $ 280

34
Table of Contents

MORGAN STANLEY

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

As discussed in Note 2 to the Company's consolidated financial statements in the 2014 Form 10-K, AFS and HTM securities with a current fair value less than their amortized cost are analyzed as part of the Company's ongoing assessment of temporary versus other-than-temporarily impaired at the individual security level. The net unrealized losses on AFS debt securities reported in the table above are primarily due to higher interest rates since those securities were purchased. The risk of credit loss on securities in an unrealized loss position is considered minimal because all of the Company's agency securities as well as the Company's asset-backed securities, commercial mortgage-backed securities ("CMBS") and collateralized loan obligations ("CLOs") are highly rated and because the Company's corporate bonds are all investment grade. The Company does not intend to sell and is not likely to be required to sell its AFS debt securities prior to recovery of its amortized cost basis. The Company does not expect to experience a credit loss on its AFS debt securities or HTM securities based on consideration of the relevant information (as discussed in Note 2 to the Company's consolidated financial statements in the 2014 Form 10-K), including for U.S. government and agency securities, the existence of an explicit and implicit guarantee provided by the U.S. government. The Company believes that its AFS debt securities in an unrealized loss position were not other-than-temporarily impaired at June 30, 2015 and December 31, 2014.

For AFS equity securities in an unrealized loss position, the Company does not intend to sell these securities or expect to be required to sell these securities prior to the recovery of the cost basis and the Company believes that these securities were not other-than-temporarily impaired at June 30, 2015 and December 31, 2014.

35
Table of Contents

MORGAN STANLEY

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

The following table presents the amortized cost, fair value and annualized average yield of Investment securities by contractual maturity dates at June 30, 2015:

At June 30, 2015

Amortized
Cost
Fair
Value
Annualized
Average
Yield
(dollars in millions)

AFS debt securities:

U.S. government and agency securities:

U.S. Treasury securities:

After 1 year through 5 years

$ 24,714 $ 24,736 1.1

After 5 years through 10 years

1,379 1,366 1.6

Total

26,093 26,102

U.S. agency securities:

After 1 year through 5 years

2,108 2,113 0.7

After 5 years through 10 years

1,967 1,968 1.5

After 10 years

17,965 17,871 1.8

Total

22,040 21,952

Total U.S. government and agency securities

48,133 48,054 1.4

Corporate and other debt:

Commercial mortgage-backed securities:

Agency:

Due within 1 year

19 20 0.5

After 1 year through 5 years

720 721 0.9

After 5 years through 10 years

222 220 1.5

After 10 years

1,141 1,082 1.5

Total

2,102 2,043

Non-agency:

After 10 years

2,163 2,165 1.8

Total

2,163 2,165

Auto loan asset-backed securities:

Due within 1 year

21 21 0.8

After 1 year through 5 years

2,381 2,381 1.0

After 5 years through 10 years

305 304 1.4

Total

2,707 2,706

Corporate bonds:

Due within 1 year

301 302 0.9

After 1 year through 5 years

2,777 2,772 1.5

After 5 years through 10 years

720 715 2.6

Total

3,798 3,789

Collateralized loan obligations:

After 5 years through 10 years

962 950 1.4

Total

962 950

FFELP student loan asset-backed securities:

After 1 year through 5 years

109 109 0.7

After 5 years through 10 years

779 779 0.9

After 10 years

3,106 3,103 0.9

Total

3,994 3,991

Total corporate and other debt

15,726 15,644 1.3

Total AFS debt securities

63,859 63,698 1.4

36
Table of Contents

MORGAN STANLEY

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

At June 30, 2015

Amortized
Cost
Fair Value Annualized
Average Yield
(dollars in millions)

AFS equity securities

$ 15 $ 11 -  

Total AFS securities

63,874 63,709 1.4 %

HTM securities:

U.S. government securities:

U.S. Treasury securities:

After 1 year through 5 years

702 703 1.1

Total

702 703

U.S. agency securities:

After 10 years

1,721 1,694 2.5

Total

1,721 1,694

Total HTM securities

2,423 2,397 2.1

Total Investment securities

$ 66,297 $ 66,106 1.4

See Note 6 for additional information on securities issued by VIEs, including U.S. agency mortgage-backed securities, non-agency CMBS, auto loan asset-backed securities, CLO and FFELP student loan asset-backed securities.

The following table presents information pertaining to gross realized gains and losses on sales of AFS securities within the Company's Investment securities portfolio during the quarters and six months ended June 30, 2015 and 2014:

Three Months Ended
June 30,
Six Months Ended
June 30,
2015 2014 2015 2014
(dollars in millions)

Gross realized gains

$ 40 $ 10 $ 69 $ 17

Gross realized losses

$ 10 $ -   $ 14 $ 1

Gross realized gains and losses are recognized in Other revenues in the Company's condensed consolidated statements of income.

5. Collateralized Transactions.

The Company enters into reverse repurchase agreements, repurchase agreements, 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 the Company's inventory positions.

The Company manages credit exposure arising from such transactions by, in appropriate circumstances, entering into master netting agreements and collateral agreements with counterparties that provide the Company, in the event of a counterparty default (such as bankruptcy or a counterparty's failure to pay or perform), with the right to net a counterparty's rights and obligations under such agreement and liquidate and set off collateral held by the Company against the net amount owed by the counterparty.

37
Table of Contents

MORGAN STANLEY

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

The Company's policy is generally to take possession of securities purchased under agreements to resell and securities borrowed, and to receive securities and cash posted as collateral (with rights of rehypothecation). In certain cases, the Company may agree for such collateral to be posted to a third-party custodian under a tri-party arrangement that enables the Company to take control of such collateral in the event of a counterparty default. The Company 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. The risk related to a decline in the market value of collateral (pledged or received) is managed by setting appropriate market-based haircuts. Increases in collateral margin calls on secured financing due to market value declines may be mitigated by increases in collateral margin calls on reverse repurchase agreements and securities borrowed transactions with similar quality collateral. Additionally, the Company may replace lower quality collateral pledged with higher quality collateral through collateral substitution rights in the underlying agreements.

The Company actively manages its secured financing in a manner that reduces the potential refinancing risk of secured financing for less liquid assets. The Company considers the quality of collateral when negotiating collateral eligibility with counterparties, as defined by the Company's fundability criteria. The Company 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.

Offsetting of Certain Collateralized Transactions.

The following tables present information about the offsetting of these instruments and related collateral amounts. For information related to offsetting of derivatives, see Note 10.

At June 30, 2015
Gross
Amounts(1)
Amounts Offset
in the
Condensed
Consolidated
Statements of
Financial
Condition
Net Amounts
Presented

in the
Condensed
Consolidated
Statements of
Financial
Condition
Financial
Instruments Not
Offset in the
Condensed
Consolidated
Statements of
Financial
Condition(2)
Net Exposure
(dollars in millions)

Assets

Securities purchased under agreements to resell

$ 169,644 $ (62,884 $ 106,760 $ (100,650 $ 6,110

Securities borrowed

152,717 (8,748 143,969 (135,853 8,116

Liabilities

Securities sold under agreements to repurchase

$ 128,503 $ (62,884 $ 65,619 $ (52,383 $ 13,236

Securities loaned

31,899 (8,748 23,151 (22,438 713

38
Table of Contents

MORGAN STANLEY

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

At December 31, 2014
Gross
Amounts(3)
Amounts Offset
in the
Condensed
Consolidated
Statements of
Financial
Condition
Net Amounts
Presented

in the
Condensed
Consolidated
Statements of
Financial
Condition
Financial
Instruments Not
Offset in the
Condensed
Consolidated
Statements of
Financial
Condition(2)
Net Exposure
(dollars in millions)

Assets

Securities purchased under agreements to resell

$ 148,234 $ (64,946 $ 83,288 $ (79,343 $ 3,945

Securities borrowed

145,556 (8,848 136,708 (128,282 8,426

Liabilities

Securities sold under agreements to repurchase

$ 134,895 $ (64,946 $ 69,949 $ (56,454 $ 13,495

Securities loaned

34,067 (8,848 25,219 (24,252 967

(1) Amounts include $4.7 billion of Securities purchased under agreements to resell, $4.2 billion of Securities borrowed, $14.2 billion of Securities sold under agreements to repurchase and $0.5 billion of Securities loaned, which are either not subject to master netting agreements or are subject to such agreements but the Company has not determined the agreements to be legally enforceable.
(2) Amounts relate to master netting agreements, which have been determined by the Company to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance.
(3) Amounts include $3.9 billion of Securities purchased under agreements to resell, $4.2 billion of Securities borrowed, $15.6 billion of Securities sold under agreements to repurchase and $0.7 billion of Securities loaned, which are either not subject to master netting agreements or are subject to such agreements but the Company has not determined the agreements to be legally enforceable.

39
Table of Contents

MORGAN STANLEY

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

Secured Financing Transactions-Maturities and Collateral Pledged.

The following tables present gross obligations for repurchase agreements, securities loaned transactions and obligations to return securities received as collateral by remaining contractual maturity and class of collateral pledged.

At June 30, 2015
Remaining Contractual Maturity
Overnight
and Open
Less than
30 days
30-90
days
Over
90 days
Total
(dollars in millions)

Securities sold under agreements to repurchase(1)

$ 44,067 $ 26,060 $ 13,693 $ 44,683 $ 128,503

Securities loaned(1)

16,061 2,021 1,989 11,828 31,899

Gross amount of secured financing included in the above offsetting disclosure

$ 60,128 $ 28,081 $ 15,682 $ 56,511 $ 160,402

Obligation to return securities received as collateral

23,250 -   -   -   23,250

Total

$ 83,378 $ 28,081 $ 15,682 $ 56,511 $ 183,652

Secured Financing by the Class of Collateral Pledged

At June 30, 2015
(dollars in millions)

Securities sold under agreements to repurchase(1)

U.S. government and agency securities

$ 62,574

State and municipal securities

2,245

Other sovereign government obligations

34,051

Asset-backed securities

593

Corporate and other debt

6,940

Corporate equities

21,379

Other

721

Total securities sold under agreements to repurchase

$ 128,503

Securities loaned(1)

Other sovereign government obligations

$ 8,798

Corporate and other debt

188

Corporate equities

22,853

Other

60

Total securities loaned

$ 31,899

Gross amount of secured financing included in the above offsetting disclosure

$ 160,402

Obligation to return securities received as collateral

Other sovereign government obligations

$ 10

Corporate equities

22,944

Other

296

Total obligation to return securities received as collateral

$ 23,250

Total

$ 183,652

(1) Amounts presented on a gross basis, prior to netting as shown on the Company's condensed consolidated statements of financial condition.

Trading Assets Pledged.

The Company pledges its trading assets to collateralize repurchase agreements and other secured financings. Pledged financial instruments that can be sold or repledged by the secured party are identified as Trading assets (pledged to various parties) in the Company's condensed consolidated statements of financial condition. At June 30, 2015 and December 31, 2014, the carrying value of Trading assets by the Company that have been loaned or pledged to counterparties where those counterparties do not have the right to sell or repledge the collateral were $45.5 billion and $31.3 billion, respectively.

40
Table of Contents

MORGAN STANLEY

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

Collateral Received.

The Company receives collateral in the form of securities in connection with reverse repurchase agreements, securities borrowed and derivative transactions, customer margin loans and securities-based lending. In many cases, the Company is permitted to sell or repledge these securities held as collateral and use the securities to secure repurchase agreements, to enter into securities lending and derivative transactions or for delivery to counterparties to cover short positions. The Company additionally receives securities as collateral in connection with certain securities-for-securities transactions in which the Company is the lender. In instances where the Company is permitted to sell or repledge these securities, the Company reports the fair value of the collateral received and the related obligation to return the collateral in its condensed consolidated statements of financial condition. At June 30, 2015 and December 31, 2014, the total fair value of financial instruments received as collateral where the Company is permitted to sell or repledge the securities was $605 billion and $546 billion, respectively, and the fair value of the portion that had been sold or repledged was $461 billion and $403 billion, respectively.

Other.

The Company also engages in margin lending to clients that allows the client to borrow against the value of qualifying securities and is included within Customer and other receivables in the Company's condensed consolidated statements of financial condition. For a further discussion of the Company's margin lending activities, see Note 6 to the consolidated financial statements in the 2014 Form 10-K. At June 30, 2015 and December 31, 2014, there were approximately $30.8 billion and $29.0 billion, respectively, of customer margin loans outstanding.

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 Company is deemed to be the primary beneficiary, and certain equity-linked notes and other secured borrowings. These liabilities are generally payable from the cash flows of the related assets accounted for as Trading assets (see Notes 6 and 9).

At June 30, 2015 and December 31, 2014, cash and securities deposited with clearing organizations or segregated under federal and other regulations or requirements were as follows:

At
June  30,
2015
At
December  31,
2014
(dollars in millions)

Cash deposited with clearing organizations or segregated under federal and other regulations or requirements(1)

$ 33,652 $ 40,607

Securities(2)

16,646 14,630

Total

$ 50,298 $ 55,237

(1) During the second quarter of 2015, the Company made amendments to certain arrangements by which it acts in the capacity of a clearing member to clear derivatives on behalf of customers. These amendments resulted in approximately $3.8 billion related to cash initial margin received from customers and remitted to clearing organizations or third-party custodian banks no longer qualifying for recognition in the Company's condensed consolidated statements of financial condition.
(2) Securities deposited with clearing organizations or segregated under federal and other regulations or requirements are sourced from Securities purchased under agreements to resell and Trading assets in the Company's condensed consolidated statements of financial condition.

41
Table of Contents

MORGAN STANLEY

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

6. Variable Interest Entities and Securitization Activities.

The Company is involved with various special purpose entities ("SPE") in the normal course of business. In most cases, these entities are deemed to be VIEs. The Company's transactions with VIEs primarily include securitizations, municipal tender option bond trusts, credit protection purchased through CLNs, other structured financings, collateralized loan and debt obligations, equity-linked notes, managed real estate partnerships and asset management investment funds. The Company's continuing involvement in VIEs that it does not consolidate can include ownership of retained interests in Company-sponsored transactions, interests purchased in the secondary market (both for Company-sponsored transactions and transactions sponsored by third parties), derivatives with securitization SPEs (primarily interest rate derivatives in commercial mortgage and residential mortgage securitizations and credit derivatives in which the Company has purchased protection in synthetic CDOs).

For a further discussion on the Company's VIEs, the determination and structure of VIEs and securitization activities, see Note 7 to the Company's consolidated financial statements in the 2014 Form 10-K.

Consolidated VIEs.

Except for consolidated VIEs included in other structured financings and managed real estate partnerships in the tables below, the Company accounts for the assets held by the entities primarily in Trading assets and the liabilities of the entities as Other secured financings in its condensed consolidated statements of financial condition. For consolidated VIEs included in other structured financings, the Company accounts for the assets held by the entities primarily in Premises, equipment and software costs, and Other assets in its condensed consolidated statements of financial condition. For consolidated VIEs included in managed real estate partnerships, the Company accounts for the assets held by the entities primarily in Trading assets in its condensed consolidated statements of financial condition. Except for consolidated VIEs included in other structured financings, the assets and liabilities are measured at fair value, with changes in fair value reflected in earnings.

The assets owned by many consolidated VIEs cannot be removed unilaterally by the Company and are not generally available to the Company. The related liabilities issued by many consolidated VIEs are non-recourse to the Company. In certain other consolidated VIEs, the Company either has the unilateral right to remove assets or provide additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.

The following table presents information at June 30, 2015 and December 31, 2014 about VIEs that the Company consolidates. Consolidated VIE assets and liabilities are presented after intercompany eliminations and include assets financed on a non-recourse basis:

At June 30, 2015 At December 31, 2014
VIE assets VIE liabilities VIE assets VIE liabilities
(dollars in millions)

Mortgage- and asset-backed securitizations

$ 478 $ 290 $ 563 $ 337

Managed real estate partnerships(1)

57 -   288 4

Other structured financings

846 12 928 80

Other

1,417 -   1,199 -  

(1) During the second quarter of 2015, the Company deconsolidated approximately $191 million in net assets previously attributable to nonredeemable noncontrolling interests that were related to a real estate fund sponsored by the Company.

42
Table of Contents

MORGAN STANLEY

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

In general, the Company's exposure to loss in consolidated VIEs is limited to losses that would be absorbed on the VIE's assets recognized in its financial statements, net of losses absorbed by third-party holders of the VIE's liabilities. At June 30, 2015 and December 31, 2014, managed real estate partnerships reflected nonredeemable noncontrolling interests in the Company's condensed consolidated financial statements of $57 million and $240 million, respectively. The Company also had additional maximum exposure to losses of approximately $68 million and $105 million at June 30, 2015 and December 31, 2014, respectively, primarily related to certain derivatives, commitments, guarantees and other forms of involvement.

Non-Consolidated VIEs.

The following tables present information about certain non-consolidated VIEs in which the Company had variable interests at June 30, 2015 and December 31, 2014. The tables include all VIEs in which the Company has determined that its maximum exposure to loss is greater than specific thresholds or meets certain other criteria. Most of the VIEs included in the tables below are sponsored by unrelated parties; the Company's involvement generally is the result of the Company's secondary market-making activities and securities held in its Investment securities portfolio (see Note 4):

At June 30, 2015
Mortgage-and
Asset-Backed
Securitizations
Collateralized
Debt
Obligations
Municipal
Tender
Option
Bonds
Other
Structured
Financings
Other
(dollars in millions)

VIE assets that the Company does not consolidate (unpaid principal balance)(1)

$ 164,184 $ 19,654 $ 4,374 $ 1,866 $ 19,654

Maximum exposure to loss:

Debt and equity interests(2)

$ 16,122 $ 1,974 $ 12 $ 1,084 $ 3,671

Derivative and other contracts

10 2 2,638 -   68

Commitments, guarantees and other

768 1,808 -   609 467

Total maximum exposure to loss

$ 16,900 $ 3,784 $ 2,650 $ 1,693 $ 4,206

Carrying value of exposure to loss-Assets:

Debt and equity interests(2)

$ 16,122 $ 1,974 $ 12 $ 657 $ 3,671

Derivative and other contracts

10 2 5 -   13

Total carrying value of exposure to loss-Assets

$ 16,132 $ 1,976 $ 17 $ 657 $ 3,684

Carrying value of exposure to loss-Liabilities:

Derivative and other contracts

$ -   $ -   $ -   $ -   $ 5

Commitments, guarantees and other

-   -   -   5 -  

Total carrying value of exposure to loss-Liabilities

$ -   $ -   $ -   $ 5 $ 5

43
Table of Contents

MORGAN STANLEY

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

At December 31, 2014
Mortgage-and
Asset-Backed
Securitizations
Collateralized
Debt
Obligations
Municipal
Tender
Option
Bonds
Other
Structured
Financings
Other
(dollars in millions)

VIE assets that the Company does not consolidate (unpaid principal balance)(3)

$ 174,548 $ 26,567 $ 3,449 $ 2,040 $ 19,237

Maximum exposure to loss:

Debt and equity interests(4)

$ 15,028 $ 3,062 $ 13 $ 1,158 $ 3,884

Derivative and other contracts

15 2 2,212 -   164

Commitments, guarantees and other

1,054 432 -   617 429

Total maximum exposure to loss

$ 16,097 $ 3,496 $ 2,225 $ 1,775 $ 4,477

Carrying value of exposure to loss-Assets:

Debt and equity interests(4)

$ 15,028 $ 3,062 $ 13 $ 741 $ 3,884

Derivative and other contracts

15 2 4 -   74

Total carrying value of exposure to loss-Assets

$ 15,043 $ 3,064 $ 17 $ 741 $ 3,958

Carrying value of exposure to loss-Liabilities:

Derivative and other contracts

$ -   $ -   $ -   $ -   $ 57

Commitments, guarantees and other

-   -   -   5 -  

Total carrying value of exposure to loss-Liabilities

$ -   $ -   $ -   $ 5 $ 57

(1) Mortgage- and asset-backed securitizations include VIE assets as follows: $28.4 billion of residential mortgages; $64.3 billion of commercial mortgages; $14.3 billion of U.S. agency collateralized mortgage obligations; and $57.2 billion of other consumer or commercial loans.
(2) Mortgage- and asset-backed securitizations include VIE debt and equity interests as follows: $2.0 billion of residential mortgages; $3.0 billion of commercial mortgages; $3.6 billion of U.S. agency collateralized mortgage obligations; and $7.5 billion of other consumer or commercial loans.
(3) Mortgage- and asset-backed securitizations include VIE assets as follows: $30.8 billion of residential mortgages; $71.9 billion of commercial mortgages; $20.6 billion of U.S. agency collateralized mortgage obligations; and $51.2 billion of other consumer or commercial loans.
(4) Mortgage- and asset-backed securitizations include VIE debt and equity interests as follows: $1.9 billion of residential mortgages; $2.4 billion of commercial mortgages; $4.0 billion of U.S. agency collateralized mortgage obligations; and $6.8 billion of other consumer or commercial loans.

The Company's maximum exposure to loss often differs from the carrying value of the variable interests held by the Company. The maximum exposure to loss is dependent on the nature of the Company's variable interest in the VIEs and is limited to the notional amounts of certain liquidity facilities, other credit support, total return swaps, written put options, and the fair value of certain other derivatives and investments the Company has made in the VIEs. Liabilities issued by VIEs generally are non-recourse to the Company. Where notional amounts are utilized in quantifying maximum exposure related to derivatives, such amounts do not reflect fair value write-downs already recorded by the Company.

The Company's maximum exposure to loss does not include the offsetting benefit of any financial instruments that the Company may utilize to hedge these risks associated with the Company's variable interests. In addition, the Company's maximum exposure to loss is not reduced by the amount of collateral held as part of a transaction with the VIE or any party to the VIE directly against a specific exposure to loss.

44
Table of Contents

MORGAN STANLEY

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

Securitization transactions generally involve VIEs. Primarily as a result of its secondary market-making activities, the Company owned additional securities issued by securitization SPEs for which the maximum exposure to loss is less than specific thresholds. These additional securities totaled $13.4 billion and $14.0 billion at June 30, 2015, and December 31, 2014, respectively. These securities were either retained in connection with transfers of assets by the Company, acquired in connection with secondary market-making activities or held in the Company's AFS securities within its Investment securities portfolio (see Note 4). At June 30, 2015, and December 31, 2014, these securities consisted of securities backed by residential mortgage loans, commercial mortgage loans or other consumer loans, such as credit card receivables, automobile loans and student loans, and CDOs or CLOs. The Company's primary risk exposure is to the securities issued by the SPE owned by the Company, with the risk highest on the most subordinate class of beneficial interests. These securities generally are included in Trading assets-Corporate and other debt or AFS securities within the Company's Investment securities portfolio and are measured at fair value (see Note 3). The Company does not provide additional support in these transactions through contractual facilities, such as liquidity facilities, guarantees or similar derivatives. The Company's maximum exposure to loss generally equals the fair value of the securities owned.

Transfers of Assets with Continuing Involvement.

The following tables present information at June 30, 2015, and December 31, 2014, respectively, regarding transactions with SPEs in which the Company, acting as principal, transferred financial assets with continuing involvement and received sales treatment:

At June 30, 2015
Residential
Mortgage
Loans
Commercial
Mortgage
Loans
U.S. Agency
Collateralized
Mortgage
Obligations
Credit-
Linked
Notes  and

Other(1)
(dollars in millions)

SPE assets (unpaid principal balance)(2)

$ 25,110 $ 59,078 $ 16,756 $ 18,874

Retained interests (fair value):

Investment grade

$ 1 $ 160 $ 948 $ -  

Non-investment grade

170 80 -   1,193

Total retained interests (fair value)

$ 171 $ 240 $ 948 $ 1,193

Interests purchased in the secondary market (fair value):

Investment grade

$ 1 $ 174 $ 41 $ 40

Non-investment grade

81 65 -   42

Total interests purchased in the secondary market (fair value)

$ 82 $ 239 $ 41 $ 82

Derivative assets (fair value)

$ -   $ 430 $ -   $ 102

Derivative liabilities (fair value)

-   -   -   531

(1) Amounts include CLO transactions managed by unrelated third parties.
(2) Amounts include assets transferred by unrelated transferors.

45
Table of Contents

MORGAN STANLEY

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

At June 30, 2015
Level 1 Level 2 Level 3 Total
(dollars in millions)

Retained interests (fair value):

Investment grade

$ -   $ 1,104 $ 5 $ 1,109

Non-investment grade

-   24 1,419 1,443

Total retained interests (fair value)

$ -   $ 1,128 $ 1,424 $ 2,552

Interests purchased in the secondary market (fair value):

Investment grade

$ -   $ 254 $ 2 $ 256

Non-investment grade

-   147 41 188

Total interests purchased in the secondary market (fair value)

$ -   $ 401 $ 43 $ 444

Derivative assets (fair value)

$ -   $ 483 $ 49 $ 532

Derivative liabilities (fair value)

-   211 320 531

At December 31, 2014
Residential
Mortgage
Loans
Commercial
Mortgage
Loans
U.S. Agency
Collateralized
Mortgage
Obligations
Credit-
Linked
Notes  and

Other(1)
(dollars in millions)

SPE assets (unpaid principal balance)(2)

$ 26,549 $ 58,660 $ 20,826 $ 24,011

Retained interests (fair value):

Investment grade

$ 10 $ 117 $ 1,019 $ 57

Non-investment grade

98 120 -   1,264

Total retained interests (fair value)

$ 108 $ 237 $ 1,019 $ 1,321

Interests purchased in the secondary market (fair value):

Investment grade

$ 32 $ 129 $ 61 $ 423

Non-investment grade

32 72 -   59

Total interests purchased in the secondary market (fair value)

$ 64 $ 201 $ 61 $ 482

Derivative assets (fair value)

$ -   $ 495 $ -   $ 138

Derivative liabilities (fair value)

-   -   -   86

(1) Amounts include CLO transactions managed by unrelated third parties.
(2) Amounts include assets transferred by unrelated transferors.

46
Table of Contents

MORGAN STANLEY

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

At December 31, 2014
Level 1 Level 2 Level 3 Total
(dollars in millions)

Retained interests (fair value):

Investment grade

$ -   $ 1,166 $ 37 $ 1,203

Non-investment grade

-   123 1,359 1,482

Total retained interests (fair value)

$ -   $ 1,289 $ 1,396 $ 2,685

Interests purchased in the secondary market (fair value):

Investment grade

$ -   $ 644 $ 1 $ 645

Non-investment grade

-   129 34 163

Total interests purchased in the secondary market (fair value)

$ -   $ 773 $ 35 $ 808

Derivative assets (fair value)

$ -   $ 559 $ 74 $ 633

Derivative liabilities (fair value)

-   82 4 86

Transferred assets are carried at fair value prior to securitization, and any changes in fair value are recognized in the Company's condensed consolidated statements of income. The Company may act as underwriter of the beneficial interests issued by these securitization vehicles. Investment banking underwriting net revenues are recognized in connection with these transactions. The Company may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are included in the Company's condensed consolidated statements of financial condition at fair value. Any changes in the fair value of such retained interests are recognized in the Company's condensed consolidated statements of income.

Net gains on sale of assets in securitization transactions at the time of the sale were not material in the quarters and six months ended June 30, 2015 and 2014.

During the quarters and six months ended June 30, 2015 and 2014, the Company received proceeds from new securitization transactions and proceeds from cash flows from retained interests in securitization transactions as follows:

For the Three Months
Ended June 30,
For the Six Months
Ended June 30,
    2015         2014         2015         2014    
(dollars in millions)

Proceeds received from new securitization transactions

$ 6,273 $ 3,634 $ 11,164 $ 9,647

Proceeds from cash flows from retained interests in securitization transactions

658 870 1,606 1,472

The Company has provided, or otherwise agreed to be responsible for, representations and warranties regarding certain assets transferred in securitization transactions sponsored by the Company (see Note 11).

47
Table of Contents

MORGAN STANLEY

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

In connection with its underwriting of CLO transactions for unaffiliated sponsors, the Company received proceeds from sale of corporate loans sold to those SPEs as follows:

For the Three Months
Ended June 30,
For the Six Months
Ended June 30,
    2015         2014         2015         2014    
(dollars in millions)

Proceeds from sale of corporate loans sold to those SPEs

$ 621 $ 697 $ 966 $ 1,125

Net gains on sale of corporate loans to CLO transactions at the time of sale were not material for the quarters and six months ended June 30, 2015 and 2014.

The Company also enters into transactions in which it sells equity securities and contemporaneously enters into bilateral OTC equity derivatives with the purchasers of the securities, through which derivatives it retains the exposure to the securities. For transactions where the derivatives were outstanding at June 30, 2015, the carrying value of assets derecognized at the time of sale and the gross cash proceeds were $12.8 billion. In addition, the fair value at June 30, 2015 of the assets sold was $12.5 billion while the fair value of derivative assets and derivative liabilities recognized in the Company's condensed consolidated statement of financial condition at June 30, 2015 was $5.2 million and $325 million, respectively (see Note 10).

Failed Sales.

In order to be treated as a sale of assets for accounting purposes, a transaction must meet all of the criteria stipulated in the accounting guidance for the transfer of financial assets. A transfer that fails to meet these criteria, is treated as a failed sale. In such cases, the Company continues to recognize the assets in Trading assets, and the Company recognizes the associated liabilities in Other secured financings in its condensed consolidated statements of financial condition (see Note 9).

The assets transferred to unconsolidated VIEs in transactions accounted for as failed sales cannot be removed unilaterally by the Company and are not generally available to the Company. The related liabilities are also non-recourse to the Company. In certain other failed sale transactions, the Company has the right to remove assets or provide additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.

The following table presents information about the carrying value (equal to fair value) of assets and liabilities resulting from transfers of financial assets treated by the Company as secured financings:

At June 30, 2015 At December 31, 2014
Carrying Value of Carrying Value of
Assets Liabilities Assets Liabilities
(dollars in millions)

Failed sales

$ 351 $ 351 $ 352 $ 344

48
Table of Contents

MORGAN STANLEY

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

7. Loans and Allowance for Loan Losses.

Loans.

The Company's loans held for investment are recorded at amortized cost, and its loans held for sale are recorded at lower of cost or fair value in the Company's condensed consolidated statements of financial condition.

The Company's outstanding loans at June 30, 2015 and December 31, 2014 included the following:

At June 30, 2015 At December 31, 2014

Loans by Product Type

Loans Held
for
Investment
Loans Held
for Sale
Total
Loans(1)(2)
Loans Held
for
Investment
Loans Held
for Sale
Total
Loans(1)(3)
(dollars in millions)

Corporate loans

$ 22,500 $ 8,490 $ 30,990 $ 19,659 $ 8,200 $ 27,859

Consumer loans

19,464 -   19,464 16,576 -   16,576

Residential real estate loans

18,241 167 18,408 15,735 114 15,849

Wholesale real estate loans

6,388 812 7,200 5,298 1,144 6,442

Total loans, gross of allowance for loan losses

66,593 9,469 76,062 57,268 9,458 66,726

Allowance for loan losses

(169 -   (169 (149 -   (149

Total loans, net of allowance for loan losses

$ 66,424 $ 9,469 $ 75,893 $ 57,119 $ 9,458 $ 66,577

(1) Amounts include loans that are made to non-U.S. borrowers of $7,773 million and $7,017 million at June 30, 2015 and December 31, 2014, respectively.
(2) At June 30, 2015, loans at fixed interest rates and floating or adjustable interest rates were $7,314 million and $68,579 million, respectively.
(3) At December 31, 2014, loans at fixed interest rates and floating or adjustable interest rates were $6,663 million and $59,914 million, respectively.

The above table does not include Loans and lending commitments held at fair value of $12,107 million and $11,962 million that were recorded as Trading assets in the Company's condensed consolidated statement of financial condition at June 30, 2015 and December 31, 2014, respectively. At June 30, 2015, Loans and lending commitments held at fair value consisted of $6,991 million of corporate loans, $1,939 million of residential real estate loans and $3,177 million of wholesale real estate loans. At December 31, 2014, Loans and lending commitments held at fair value consisted of $7,093 million of corporate loans, $1,682 million of residential real estate loans and $3,187 million of wholesale real estate loans. See Note 3 for further information regarding Loans and lending commitments held at fair value.

Credit Quality.

For a discussion about the Company's evaluation of credit transactions and monitoring, see Note 8 to the Company's consolidated financial statements in the 2014 Form 10-K.

The Company utilizes the following credit quality indicators which are consistent with U.S. banking regulators' definitions of criticized exposures, 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.

49
Table of Contents

MORGAN STANLEY

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

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 Company 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. When a loan is impaired the impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or as a practical expedient the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent. For further information, see Note 2 to the Company's consolidated financial statements in the 2014 Form 10-K.

The following tables present credit quality indicators for the Company's loans held for investment, gross of allowance for loan losses, by product type, at June 30, 2015 and December 31, 2014.

At June 30, 2015

Loans by Credit Quality Indicators

Corporate Consumer Residential
Real  Estate
Wholesale
Real  Estate
Total
(dollars in millions)

Pass

$ 21,032 $ 19,464 $ 18,194 $ 6,388 $ 65,078

Special mention

763 -   -   -   763

Substandard

684 -   47 -   731

Doubtful

21 -   -   -   21

Total loans

$ 22,500 $ 19,464 $ 18,241 $ 6,388 $ 66,593

At December 31, 2014

Loans by Credit Quality Indicators

Corporate Consumer Residential
Real  Estate
Wholesale
Real  Estate
Total
(dollars in millions)

Pass

$ 17,847 $ 16,576 $ 15,688 $ 5,298 $ 55,409

Special mention

1,683 -   -   -   1,683

Substandard

127 -   47 -   174

Doubtful

2 -   -   -   2

Total loans

$ 19,659 $ 16,576 $ 15,735 $ 5,298 $ 57,268

50
Table of Contents

MORGAN STANLEY

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

Allowance for Loan Losses and Impaired Loans.

For factors considered by the Company in determining the allowance for loan losses and impairments, see Notes 2 and 8 to the Company's consolidated financial statements in the 2014 Form 10-K.

The tables below provide details on impaired loans, past due loans and allowances for the Company's held for investment loans:

At June 30, 2015 At December 31, 2014

Loans by Product Type

Corporate Residential
Real  Estate
Total Corporate Residential
Real  Estate
Total
(dollars in millions)

Impaired loans with allowance

$ 19 $  -   $ 19 $  -   $  -   $  -  

Impaired loans without allowance(1)

2 27 29 2 17 19

Impaired loans unpaid principal balance

21 27 48 2 17 19

Past due 90 days loans and on nonaccrual

2 34 36 2 25 27

At June 30, 2015 At December 31, 2014

Loans by Region

Americas EMEA Asia-Pacific Total Americas EMEA Asia-Pacific Total
(dollars in millions)

Impaired loans

$ 29 $ 19 $  -   $ 48 $ 19 $  -    $ -   $ 19

Past due 90 days loans and on nonaccrual

36 -   -   36 27 -   -   27

Allowance for loan losses

132 32 5 169 121 20 8 149

EMEA-Europe, Middle East and Africa.

(1) At June 30, 2015 and December 31, 2014, no allowance was outstanding for these loans as the fair value of the collateral held exceeded or equaled the carrying value.

51
Table of Contents

MORGAN STANLEY

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

The table below summarizes information about the allowance for loan losses, loans by impairment methodology, the allowance for lending-related commitments and lending-related commitments by impairment methodology.

Corporate Consumer Residential
Real  Estate
Wholesale
Real Estate
Total
(dollars in millions)

Allowance for loan losses:

Balance at December 31, 2014

$ 118 $ 2 $ 8 $ 21 $ 149

Gross charge-offs

-   -   (1 -   (1

Gross recoveries

1 -   -   -   1

</