Morgan Stanley (MS) SEC Quarterly Report (10-Q) for Q3 2015

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The Company.

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

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

Basis of Financial Information.

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

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

Consolidation.

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

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

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MORGAN STANLEY

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

Income Statement Presentation.

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

Statements of Cash Flows Presentation.

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

Global Oil Merchanting Business.

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

TransMontaigne.

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

CanTerm.

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

2.	Significant Accounting Policies.

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

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MORGAN STANLEY

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

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

Accounting Standards Adopted.

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

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

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

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

Goodwill.

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

3.	Fair Values.

Fair Value Measurements.

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

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MORGAN STANLEY

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

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

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

At September 30, 2015.

		Quoted Prices  in Active Markets for Identical Assets (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Counterparty and Cash Collateral Netting				Balance at September 30, 2015
		(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. government and agency securities:
U.S. Treasury securities		$	18,359			$	-			$	-			$	-			$	18,359
U.S. agency securities			1,328				18,690				-				-				20,018
Total U.S. government and agency securities			19,687				18,690				-				-				38,377
Other sovereign government obligations			19,597				7,493				11				-				27,101
Corporate and other debt:
State and municipal securities			-				1,954				33				-				1,987
Residential mortgage-backed securities			-				1,746				404				-				2,150
Commercial mortgage-backed securities			-				1,868				79				-				1,947
Asset-backed securities			-				771				31				-				802
Corporate bonds			-				13,207				226				-				13,433
Collateralized debt and loan obligations			-				187				545				-				732
Loans and lending commitments			-				6,170				5,164				-				11,334
Other debt			-				1,714				530				-				2,244
Total corporate and other debt			-				27,617				7,012				-				34,629
Corporate equities(1)			96,023				491				575				-				97,089
Derivative and other contracts:
Interest rate contracts			860				368,503				2,160				-				371,523
Credit contracts			-				23,844				937				-				24,781
Foreign exchange contracts			102				70,801				347				-				71,250
Equity contracts			876				49,833				951				-				51,660
Commodity contracts			3,392				14,646				3,203				-				21,241
Other			-				364				-				-				364
Netting(2)			(4,652	)			(437,820	)			(3,981	)			(61,072	)			(507,525	)
Total derivative and other contracts			578				90,171				3,617				(61,072	)			33,294
Investments:
Investments measured at NAV(3)																			4,278
Principal investments			23				97				541				-				661
Other			149				204				312				-				665
Total investments			172				301				853				-				5,604
Physical commodities			-				1,717				-				-				1,717
Total trading assets			136,057				146,480				12,068				(61,072	)			237,811
AFS securities			27,765				33,394				-				-				61,159
Securities received as collateral			9,455				-				1				-				9,456
Securities purchased under agreements to resell			-				809				-				-				809
Intangible assets(4)			-				-				5				-				5
Total assets measured at fair value		$	173,277			$	180,683			$	12,074			$	(61,072	)		$	309,240

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MORGAN STANLEY

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

		Quoted Prices  in Active Markets for Identical Assets (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Counterparty and Cash Collateral Netting				Balance at September 30, 2015
		(dollars in millions)
Liabilities at Fair Value
Short-term borrowings		$	-			$	1,699			$	69			$	-			$	1,768
Trading liabilities:
U.S. government and agency securities:
U.S. Treasury securities			14,524				-				-				-				14,524
U.S. agency securities			1,026				135				-				-				1,161
Total U.S. government and agency securities			15,550				135				-				-				15,685
Other sovereign government obligations			13,611				2,379				-				-				15,990
Corporate and other debt:
State and municipal securities			-				3				-				-				3
Corporate bonds			-				6,783				19				-				6,802
Lending commitments			-				2				-				-				2
Other debt			-				7				4				-				11
Total corporate and other debt			-				6,795				23				-				6,818
Corporate equities(1)			50,017				1,145				97				-				51,259
Derivative and other contracts:
Interest rate contracts			780				346,806				2,071				-				349,657
Credit contracts			-				22,900				1,742				-				24,642
Foreign exchange contracts			60				72,593				281				-				72,934
Equity contracts			691				53,728				2,992				-				57,411
Commodity contracts			3,845				13,551				1,771				-				19,167
Other			-				51				-				-				51
Netting(2)			(4,652	)			(437,820	)			(3,981	)			(41,636	)			(488,089	)
Total derivative and other contracts			724				71,809				4,876				(41,636	)			35,773
Total trading liabilities			79,902				82,263				4,996				(41,636	)			125,525
Obligation to return securities received as collateral			20,327				-				1				-				20,328
Securities sold under agreements to repurchase			-				443				154				-				597
Other secured financings			-				3,109				341				-				3,450
Long-term borrowings			-				28,925				2,462				-				31,387
Total liabilities measured at fair value		$	100,229			$	116,439			$	8,023			$	(41,636	)		$	183,055

AFS-available for sale

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

(2)

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

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

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

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MORGAN STANLEY

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

At December 31, 2014.

		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Counterparty and Cash Collateral Netting				Balance at December 31, 2014
		(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. government and agency securities:
U.S. Treasury securities		$	16,961			$	-			$	-			$	-			$	16,961
U.S. agency securities			850				18,193				-				-				19,043
Total U.S. government and agency securities			17,811				18,193				-				-				36,004
Other sovereign government obligations			15,149				7,888				41				-				23,078
Corporate and other debt:
State and municipal securities			-				2,049				-				-				2,049
Residential mortgage-backed securities			-				1,991				175				-				2,166
Commercial mortgage-backed securities			-				1,484				96				-				1,580
Asset-backed securities			-				583				76				-				659
Corporate bonds			-				15,800				386				-				16,186
Collateralized debt and loan obligations			-				741				1,152				-				1,893
Loans and lending commitments			-				6,088				5,874				-				11,962
Other debt			-				2,167				285				-				2,452
Total corporate and other debt			-				30,903				8,044				-				38,947
Corporate equities(1)			112,490				1,357				272				-				114,119
Derivative and other contracts:
Interest rate contracts			663				495,026				2,484				-				498,173
Credit contracts			-				30,813				1,369				-				32,182
Foreign exchange contracts			83				72,769				249				-				73,101
Equity contracts(2)			571				45,967				1,586				-				48,124
Commodity contracts			4,105				18,042				2,268				-				24,415
Other			-				376				-				-				376
Netting(3)			(4,910	)			(564,127	)			(4,220	)			(66,720	)			(639,977	)
Total derivative and other contracts			512				98,866				3,736				(66,720	)			36,394
Investments:
Investments measured at NAV(4)																			5,009
Principal investments			58				3				835				-				896
Other			225				198				323				-				746
Total investments			283				201				1,158				-				6,651
Physical commodities			-				1,608				-				-				1,608
Total trading assets			146,245				159,016				13,251				(66,720	)			256,801
AFS securities			37,200				32,016				-				-				69,216
Securities received as collateral			21,265				51				-				-				21,316
Securities purchased under agreements to resell			-				1,113				-				-				1,113
Intangible assets(5)			-				-				6				-				6
Total assets measured at fair value		$	204,710			$	192,196			$	13,257			$	(66,720	)		$	348,452

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MORGAN STANLEY

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

		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Counterparty and Cash Collateral Netting				Balance at December 31, 2014
		(dollars in millions)
Liabilities at Fair Value
Short-term borrowings		$	-			$	1,765			$	-			$	-			$	1,765
Trading liabilities:
U.S. government and agency securities:
U.S. Treasury securities			14,199				-				-				-				14,199
U.S. agency securities			1,274				85				-				-				1,359
Total U.S. government and agency securities			15,473				85				-				-				15,558
Other sovereign government obligations			11,653				2,109				-				-				13,762
Corporate and other debt:
State and municipal securities			-				1				-				-				1
Corporate bonds			-				5,943				78				-				6,021
Lending commitments			-				10				5				-				15
Other debt			-				63				38				-				101
Total corporate and other debt			-				6,017				121				-				6,138
Corporate equities(1)			31,340				326				45				-				31,711
Derivative and other contracts:
Interest rate contracts			602				469,319				2,657				-				472,578
Credit contracts			-				29,997				2,112				-				32,109
Foreign exchange contracts			21				72,233				98				-				72,352
Equity contracts(2)			416				51,405				3,751				-				55,572
Commodity contracts			4,817				15,584				1,122				-				21,523
Other			-				172				-				-				172
Netting(3)			(4,910	)			(564,127	)			(4,220	)			(40,837	)			(614,094	)
Total derivative and other contracts			946				74,583				5,520				(40,837	)			40,212
Total trading liabilities			59,412				83,120				5,686				(40,837	)			107,381
Obligation to return securities received as collateral			25,629				56				-				-				25,685
Securities sold under agreements to repurchase			-				459				153				-				612
Other secured financings			-				4,355				149				-				4,504
Long-term borrowings			-				29,840				1,934				-				31,774
Total liabilities measured at fair value		$	85,041			$	119,595			$	7,922			$	(40,837	)		$	171,721

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

(2)

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

(3)

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

(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.

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MORGAN STANLEY

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

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

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

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

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

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MORGAN STANLEY

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

Three Months Ended September 30, 2015.

		Beginning Balance at June 30, 2015				Total Realized and Unrealized Gains (Losses)(1)				Purchases(2)				Sales				Issuances				Settlements				Net Transfers				Ending Balance at September 30, 2015				Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at September 30, 2015(3)
		(dollars in millions)
Assets at Fair Value
Trading assets:
U.S. agency securities		$	3			$	-			$	-			$	-			$	-			$	-			$	(3	)		$	-			$	-
Other sovereign government obligations			12				-				5				(4	)			-				-				(2	)			11				-
Corporate and other debt:
State and municipal securities			7				5				12				(5	)			-				-				14				33				5
Residential mortgage-backed securities			378				3				59				(55	)			-				-				19				404				4
Commercial mortgage-backed securities			84				(12	)			17				(6	)			-				-				(4	)			79				(12	)
Asset-backed securities			19				-				13				(7	)			-				-				6				31				-
Corporate bonds			479				(25	)			78				(228	)			-				(50	)			(28	)			226				(6	)
Collateralized debt and loan obligations			660				(7	)			80				(188	)			-				-				-				545				(11	)
Loans and lending commitments			5,512				(78	)			939				(156	)			-				(1,229	)			176				5,164				(53	)
Other debt			564				(22	)			9				(4	)			-				(1	)			(16	)			530				(23	)
Total corporate and other debt			7,703				(136	)			1,207				(649	)			-				(1,280	)			167				7,012				(96	)
Corporate equities			486				10				150				(80	)			-				-				9				575				4
Net derivative and other contracts(4):
Interest rate contracts			(236	)			(137	)			12				-				(7	)			74				383				89				(66	)
Credit contracts			(989	)			210				-				-				(74	)			86				(38	)			(805	)			219
Foreign exchange contracts			446				42				3				-				-				(327	)			(98	)			66				45
Equity contracts			(2,102	)			309				16				-				(50	)			(187	)			(27	)			(2,041	)			296
Commodity contracts			1,205				238				-				-				-				(11	)			-				1,432				179
Total net derivative and other contracts			(1,676	)			662				31				-				(131	)			(365	)			220				(1,259	)			673
Investments:
Principal investments			581				26				8				(50	)			-				-				(24	)			541				26
Other			300				11				1				-				-				-				-				312				11
Securities received as collateral			3				-				-				(2	)			-				-				-				1				-
Intangible assets			6				(1	)			-				-				-				-				-				5				(1	)
Liabilities at Fair Value
Short-term borrowings		$	-			$	(2	)		$	-			$	-			$	4			$	-			$	63			$	69			$	(2	)
Trading liabilities:
Corporate and other debt:
Corporate bonds			15				9				(10	)			23				-				-				-				19				7
Other debt			4				-				-				-				-				-				-				4				-
Total corporate and other debt			19				9				(10	)			23				-				-				-				23				7
Corporate equities			112				72				(50	)			99				-				-				8				97				73
Obligation to return securities received as collateral			3				-				(2	)			-				-				-				-				1				-
Securities sold under agreements to repurchase			154				-				-				-				-				-				-				154				-
Other secured financings			168				2				-				-				187				(12	)			-				341				2
Long-term borrowings			2,221				61				-				-				237				(81	)			146				2,462				64

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

(2)	Loan originations are included in purchases.

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

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

		14

Table of Contents

MORGAN STANLEY

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

Nine Months Ended September 30, 2015.

		Beginning Balance at December 31, 2014				Total Realized and Unrealized Gains (Losses)(1)				Purchases(2)				Sales				Issuances				Settlements				Net Transfers				Ending Balance at September 30, 2015				Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at September 30, 2015(3)
		(dollars in millions)
Assets at Fair Value
Trading assets:
Other sovereign government obligations		$	41			$	(1	)		$	7			$	(31	)		$	-			$	-			$	(5	)		$	11			$	-
Corporate and other debt:
State and municipal securities			-				5				14				(1	)			-				-				15				33				5
Residential mortgage-backed securities			175				28				172				(57	)			-				-				86				404				19
Commercial mortgage-backed securities			96				(17	)			23				(23	)			-				-				-				79				(19	)
Asset-backed securities			76				(1	)			22				(31	)			-				-				(35	)			31				4
Corporate bonds			386				(19	)			155				(218	)			-				(53	)			(25	)			226				(16	)
Collateralized debt and loan obligations			1,152				141				320				(709	)			-				(331	)			(28	)			545				(7	)
Loans and lending commitments			5,874				(34	)			1,860				(95	)			-				(2,461	)			20				5,164				(62	)
Other debt			285				(13	)			30				(14	)			-				(25	)			267				530				-
Total corporate and other debt			8,044				90				2,596				(1,148	)			-				(2,870	)			300				7,012				(76	)
Corporate equities			272				57				437				(199	)			-				-				8				575				67
Net derivative and other contracts(4):
Interest rate contracts			(173	)			(37	)			16				-				(22	)			277				28				89				20
Credit contracts			(743	)			(69	)			6				-				(94	)			86				9				(805	)			(89	)
Foreign exchange contracts			151				133				4				-				(1	)			(197	)			(24	)			66				133
Equity contracts(5)			(2,165	)			(76	)			115				-				(279	)			252				112				(2,041	)			(237	)
Commodity contracts			1,146				345				2				-				(112	)			111				(60	)			1,432				420
Total net derivative and other contracts			(1,784	)			296				143				-				(508	)			529				65				(1,259	)			247
Investments:
Principal investments			835				22				20				(109	)			-				(187	)			(40	)			541				-
Other			323				(5	)			2				(6	)			-				-				(2	)			312				-
Securities received as collateral			-				-				1				-				-				-				-				1				-
Intangible assets			6				-				-				-				-				(1	)			-				5				-
Liabilities at Fair Value
Short-term borrowings		$	-			$	(2	)		$	-			$	-			$	60			$	-			$	7			$	69			$	(2	)
Trading liabilities:
Corporate and other debt:
Corporate bonds			78				6				(25	)			37				-				-				(65	)			19				6
Lending commitments			5				5				-				-				-				-				-				-				5
Other debt			38				-				(1	)			7				-				(39	)			(1	)			4				-
Total corporate and other debt			121				11				(26	)			44				-				(39	)			(66	)			23				11
Corporate equities			45				90				(88	)			128				-				-				102				97				90
Obligation to return securities received as collateral			-				-				-				1				-				-				-				1				-
Securities sold under agreements to repurchase			153				(1	)			-				-				-				-				-				154				-
Other secured financings			149				(5	)			-				-				223				(36	)			-				341				4
Long-term borrowings			1,934				159				-				-				853				(213	)			47				2,462				157

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

(2)	Loan originations are included in purchases.

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

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

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

		15

Table of Contents

MORGAN STANLEY

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

Three Months Ended September 30, 2014.

		Beginning Balance at June 30, 2014				Total Realized and Unrealized Gains (Losses)(1)				Purchases(2)				Sales				Issuances				Settlements				Net Transfers				Ending Balance at September 30, 2014				Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at September 30, 2014(3)
		(dollars in millions)
Assets at Fair Value
Trading assets:
Other sovereign government obligations		$	14			$	(1	)		$	-			$	(1	)		$	-			$	-			$	1			$	13			$	(1	)
Corporate and other debt:
State and municipal securities			4				-				-				-				-				-				(4	)			-				-
Residential mortgage-backed securities			55				11				33				(7	)			-				(11	)			-				81				11
Commercial mortgage-backed securities			47				(1	)			1				(3	)			-				-				13				57				(2	)
Asset-backed securities			65				5				27				(8	)			-				-				22				111				5
Corporate bonds			510				36				99				(148	)			-				-				9				506				38
Collateralized debt obligations			1,332				8				299				(362	)			-				(6	)			-				1,271				6
Loans and lending commitments			5,829				(20	)			2,138				(676	)			-				(721	)			957				7,507				(24	)
Other debt			22				-				135				(3	)			-				-				1				155				-
Total corporate and other debt			7,864				39				2,732				(1,207	)			-				(738	)			998				9,688				34
Corporate equities			243				(2	)			30				(41	)			-				-				11				241				7
Net derivative and other contracts(4):
Interest rate contracts			(109	)			(15	)			7				-				(3	)			(17	)			150				13				(22	)
Credit contracts			(710	)			209				7				-				(64	)			(108	)			(16	)			(682	)			140
Foreign exchange contracts			109				(27	)			6				(3	)			-				70				(1	)			154				(25	)
Equity contracts			(1,097	)			(6	)			56				-				(59	)			(105	)			23				(1,188	)			(9	)
Commodity contracts			1,132				73				36				-				-				(62	)			(12	)			1,167				12
Other			(3	)			(1	)			-				-				-				4				-				-				-
Total net derivative and other contracts			(678	)			233				112				(3	)			(126	)			(218	)			144				(536	)			96
Investments:
Principal investments			883				(1	)			22				(23	)			-				-				32				913				(1	)
Other			380				(3	)			14				-				-				-				2				393				(3	)
Intangible assets			6				-				-				-				-				-				-				6				-
Liabilities at Fair Value
Trading liabilities:
Other sovereign government obligations		$	-			$	-			$	-			$	-			$	-			$	-			$	2			$	2			$	-
Corporate and other debt:
Corporate bonds			14				1				(8	)			46				-				-				(3	)			48				1
Lending commitments			12				12				-				-				-				-				-				-				-
Other debt			42				5				-				-				-				(2	)			-				35				5
Total corporate and other debt			68				18				(8	)			46				-				(2	)			(3	)			83				6
Corporate equities			6				(5	)			(12	)			2				-				-				2				3				(4	)
Securities sold under agreements to repurchase			155				2				-				-				-				-				-				153				2
Other secured financings			135				-				-				-				4				(3	)			26				162				-
Long-term borrowings			1,779				72				-				-				136				(108	)			186				1,921				72

(1)	Total realized and unrealized gains (losses) are primarily included in Trading revenues in the condensed consolidated statements of income except for $(4) million related to Trading assets-Investments, which is included in Investments revenues.

(2)	Loan originations are included in purchases.

(3)	Amounts represent unrealized gains (losses) for the quarter ended September 30, 2014 related to assets and liabilities still outstanding at September 30, 2014.

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

		16

Table of Contents

MORGAN STANLEY

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

Nine Months Ended September 30, 2014.

		Beginning Balance at December 31, 2013				Total Realized and Unrealized Gains (Losses)(1)				Purchases(2)				Sales				Issuances				Settlements				Net Transfers				Ending Balance at September 30, 2014				Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at September 30, 2014(3)
		(dollars in millions)
Assets at Fair Value
Trading assets:
Other sovereign government obligations		$	27			$	(1	)		$	7			$	(21	)		$	-			$	-			$	1			$	13			$	(1	)
Corporate and other debt:
Residential mortgage-backed securities			47				34				30				(9	)			-				(20	)			(1	)			81				29
Commercial mortgage-backed securities			108				11				22				(97	)			-				-				13				57				(3	)
Asset-backed securities			103				(3	)			58				(93	)			-				-				46				111				(3	)
Corporate bonds			522				107				185				(302	)			-				-				(6	)			506				84
Collateralized debt and loan obligations			1,468				137				716				(940	)			-				(109	)			(1	)			1,271				45
Loans and lending commitments			5,129				(202	)			3,962				(327	)			-				(1,299	)			244				7,507				(181	)
Other debt			27				4				128				(6	)			-				(2	)			4				155				3
Total corporate and other debt			7,404				88				5,101				(1,774	)			-				(1,430	)			299				9,688				(26	)
Corporate equities			190				17				83				(47	)			-				-				(2	)			241				10
Net derivative and other contracts(4):
Interest rate contracts			113				(4	)			8				-				(3	)			(61	)			(40	)			13				4
Credit contracts			(147	)			(434	)			52				-				(118	)			10				(45	)			(682	)			(475	)
Foreign exchange contracts			68				(6	)			6				(1	)			-				106				(19	)			154				(2	)
Equity contracts			(831	)			(19	)			223				(1	)			(273	)			(370	)			83				(1,188	)			(66	)
Commodity contracts			880				177				200				-				-				(90	)			-				1,167				99
Other			(4	)			(1	)			-				-				-				5				-				-				-
Total net derivative and other contracts			79				(287	)			489				(2	)			(394	)			(400	)			(21	)			(536	)			(440	)
Investments:
Principal investments			2,160				49				36				(124	)			-				(1,234	)			26				913				129
Other			538				(13	)			17				(11	)			-				-				(138	)			393				(6	)
Intangible assets			8				-				-				-				-				(2	)			-				6				(1	)
Liabilities at Fair Value
Short-term borrowings		$	1			$	-			$	-			$	-			$	-			$	(1	)		$	-			$	-			$	-
Trading liabilities:
Other sovereign government obligations			-				-				-				-				-				-				2				2				-
Corporate and other debt:
Corporate bonds			22				2				(46	)			85				-				-				(11	)			48				3
Lending commitments			2				2				-				-				-				-				-				-				-
Other debt			48				15				-				-				-				1				1				35				5
Total corporate and other debt			72				19				(46	)			85				-				1				(10	)			83				8
Corporate equities			8				(6	)			(16	)			2				-				-				3				3				(6	)
Securities sold under agreements to repurchase			154				1				-				-				-				-				-				153				1
Other secured financings			278				(9	)			-				-				21				(188	)			42				162				(6	)
Long-term borrowings			1,887				17				-				-				372				(289	)			(32	)			1,921				15

(1)	Total realized and unrealized gains (losses) are primarily included in Trading revenues in the Company's condensed consolidated statements of income except for $36 million related to Trading assets-Investments, which is included in Investments revenues.

(2)	Loan originations are included in purchases.

(3)	Amounts represent unrealized gains (losses) for the nine months ended September 30, 2014 related to assets and liabilities still outstanding at September 30, 2014.

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

		17

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.

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.

At September 30, 2015

Balance at September 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 at Fair Value

Trading assets:

Corporate and other debt:

Residential mortgage-backed securities

$

404

Comparable pricing:

Comparable bond price / (A)

0 to 80 points

36 points

Commercial mortgage-backed securities

79

Comparable pricing:

Comparable bond price / (A)

0 to 9 points

2 points

Corporate bonds

226

Comparable pricing:

Comparable bond price / (A)

4 to 119 points

83 points

Collateralized debt and loan obligations

545

Comparable pricing(3):

Comparable bond price / (A)

45 to 103 points

77 points

Correlation model:

Credit correlation / (B)

35% to 60%

49%

Loans and lending commitments

5,164

Corporate loan model:

Credit spread / (C)

72 to 831 basis points

544 basis points

Margin loan model:

Credit spread / (C)(D)

80 to 548 basis points

165 basis points

Volatility skew / (C)(D)

14% to 70%

36%

Discount rate / (C)(D)

2% to 6%

4%

Option model:

Volatility skew / (C)

-1%

-1%

Comparable pricing(3):

Comparable loan price / (A)

40 to 103 points

89 points

Discounted cash flow:

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

6% to 8%

7%

Capitalization rate / (C)(D)

4% to 10%

4%

Other debt

530

Comparable pricing:

Comparable loan price / (A)

3 to 84 points

65 points

Comparable pricing:

Comparable bond price / (A)

11 points

11 points

Option model:

At the money volatility / (A)

16% to 53%

16%

Margin loan model(3):

Discount rate / (C)

1% to 2%

1%

Corporate equities

575

Comparable pricing:

Comparable price / (A)

59% to 91%

78%

Comparable pricing(3):

Comparable equity price / (A)

100%

100%

		18

Table of Contents

MORGAN STANLEY

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

Balance at September 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)

Market approach:

EBITDA multiple / (A)(D)

9 times

9 times

Price / Book ratio / (A)(D)

0 times

0 times

Net derivative and other contracts(4):

Interest rate contracts

89

Option model:

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

0 to 3 times

2 times

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

26% to 62%

44% / 43%(5)

Interest rate volatility skew / (A)(D)

32% to 91%

44% / 43%(5)

Interest rate quanto correlation / (A)(D)

-8% to 37%

2% / -8%(5)

Interest rate curve correlation / (C)(D)

24% to 93%

69% / 75%(5)

Inflation volatility / (A)(D)

60%

60% / 60%(5)

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

-43% to -41%

-43% /-43%(5)

Credit contracts

(805

)

Comparable pricing:

Cash synthetic basis / (C)(D)

5 to 12 points

9 points

Comparable bond price / (C)(D)

0 to 75 points

25 points

Correlation model(3):

Credit correlation / (B)

34% to 99%

58%

Foreign exchange contracts(6)

66

Option model:

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

26% to 62%

44% / 43%(5)

Interest rate volatility skew / (A)(D)

32% to 91%

44% / 43%(5)

Interest rate curve / (A)(D)

0% to 1%

0% / 0%(5)

Interest rate quanto correlation / (A)(D)

-8% to 37%

2% / -8%(5)

Equity contracts(6)

(2,041

)

Option model:

At the money volatility / (A)(D)

16% to 62%

31%

Volatility skew / (A)(D)

-3% to 0%

-1%

Equity - Equity correlation / (C)(D)

40% to 99%

72%

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

-50% to 10%

-16%

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

-31% to 50%

14% / 7%(5)

Commodity contracts

1,432

Option model:

Forward power price / (C)(D)

$4 to $91 per

$33 per

Megawatt hour

Megawatt hour

Commodity volatility / (A)(D)

10% to 59%

18%

Cross commodity correlation / (C)(D)

43% to 100%

93%

Investments:

Principal investments

541

Discounted cash flow:

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

14%

14%

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)

9 to 19 times

11 times

Forward capacity price / (A)(D)

$5 to $9

$7

Comparable pricing:

Comparable equity price / (A)

75% to 100%

84%

Other

312

Discounted cash flow:

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

10%

10%

Exit multiple / (A)(D)

10 times

10 times

Market approach:

EBITDA multiple / (A)

8 to 14 times

10 times

		19

Table of Contents

MORGAN STANLEY

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

Balance at September 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)

Comparable pricing(3):

Comparable equity price / (A)

100%

100%

Liabilities at Fair Value

Short-term borrowings

$

69

Comparable pricing:

Comparable equity price / (A)

20%

20%

Corporate equities

97

Comparable pricing: Comparable equity price / (A)

0% to 100%

80%

Securities sold under agreements to repurchase

154

Discounted cash flow:

Funding spread / (A)

96 to 123 basis points

113 basis points

Other secured financings

341

Comparable pricing:

Comparable bond price / (A)

100 points

100 points

Discounted cash flow(3):

Discount rate / (C)

4% to 17%

5%

Discounted cash flow:

Funding spread / (A)

108 to 130 basis points

119 basis points

Long-term borrowings

2,462

Option model(3):

At the money volatility / (C)(D)

22% to 40%

29%

Volatility skew / (A)(D)

-2% to 0%

-1%

Equity - Equity correlation / (A)(D)

40% to 97%

78%

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

-70% to 35%

-42%

Option model:

Equity alpha / (A)

25% to 80%

63%

Correlation model:

Credit correlation / (B)

40% to 60%

44%

Comparable pricing:

Comparable equity price / (A)

100%

100%

At December 31, 2014.

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 at Fair Value

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 point

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%

		20

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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)

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%

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

$38 per

Megawatt hour

Megawatt hour

Commodity volatility / (A)(D)

11% to 90%

19%

Cross commodity correlation / (C)(D)

33% to 100%

93%

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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)

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%

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 at Fair Value

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, 80 points would be 80% of par. A basis point equals 1/100th of 1%; for example, 831 basis points would equal 8.31%.

(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.

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MORGAN STANLEY

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

(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.

(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 September 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 nine months ended September 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.

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 September 30, 2015 and December 31, 2014:

		At September 30, 2015								At December 31, 2014
		Fair Value				Commitment				Fair Value				Commitment
		(dollars in millions)
Private equity funds		$	1,962			$	597			$	2,569			$	613
Real estate funds			1,664				135				1,753				112
Hedge funds(1):
Long-short equity hedge funds			447				-				433				-
Fixed income/credit-related hedge funds			73				-				76				-
Event-driven hedge funds			3				-				39				-
Multi-strategy hedge funds			129				4				139				3
Total		$	4,278			$	736			$	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 September 30, 2015, approximately 32% of the fair value amount of long-short equity hedge funds was redeemable at least quarterly, 48% is redeemable every six months and 20% 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 September 30, 2015 and December 31, 2014 was primarily greater than six months.

		23

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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 September 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		$	139			$	1,151			$	672			$	1,962
Real estate funds			235				882				547				1,664

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 September 30, 2015
		Hedge Fund Restrictions
Hedge Fund Type		Fair Value				Lock-up Restrictions				Gate Restrictions
		(dollars in millions)
Long-short equity(1)(2)		$	447				1	%			12	%
Fixed income/credit-related(1)			73				13	%			N/A
Event-driven(1)			3				3	%			N/A
Multi-strategy(1)(2)			129				37	%			28	%

N/A-Not Applicable.

(1)	The remaining restriction period subject to lock-up restrictions was primarily over three years at September 30, 2015.

(2)	The restriction period for these investments subject to an exit restriction was indefinite at September 30, 2015.

		24

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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 nine months ended September 30, 2015 and 2014, respectively:

						Interest				Gains (Losses)
		Trading				Income				Included in
		Revenues				(Expense)				Net Revenues
		(dollars in millions)
Three Months Ended September 30, 2015
Securities purchased under agreements to resell		$	(1	)		$	2			$	1
Short-term borrowings(1)			(85	)			-				(85	)
Securities sold under agreements to repurchase			-				(2	)			(2	)
Long-term borrowings(1)			1,137				(129	)			1,008
Nine Months Ended September 30, 2015
Securities purchased under agreements to resell		$	(4	)		$	7			$	3
Short-term borrowings(1)			(127	)			-				(127	)
Securities sold under agreements to repurchase			4				(5	)			(1	)
Long-term borrowings(1)			2,226				(399	)			1,827
Three Months Ended September 30, 2014
Securities purchased under agreements to resell		$	(2	)		$	2			$	-
Short-term borrowings(2)			5				2				7
Securities sold under agreements to repurchase			3				(2	)			1
Long-term borrowings(2)			1,579				(174	)			1,405
Nine Months Ended September 30, 2014
Securities purchased under agreements to resell		$	(4	)		$	6			$	2
Short-term borrowings(2)			(32	)			2				(30	)
Securities sold under agreements to repurchase			(2	)			(4	)			(6	)
Long-term borrowings(2)			631				(520	)			111

(1)

Of the total gains (losses) recorded in Trading revenues for short-term and long-term borrowings for the quarter and nine months ended September 30, 2015, $435 million and $742 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 nine months ended September 30, 2014, $215 million and $428 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.

		25

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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 September 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 September 30, 2015				At December 31, 2014
		(dollars in millions)
Equity		$	17,054			$	17,253
Interest rates			13,614				13,545
Credit and foreign exchange			1,947				2,105
Commodities			540				636
Total		$	33,155			$	33,539

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

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
		(dollars in millions)
Short-term and long-term borrowings(1)		$	435			$	215			$	742			$	428
Loans and other debt(2)			(32	)			25				39				153
Lending commitments(3)			5				2				13				29

(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 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 September 30, 2015				At December 31, 2014
		(dollars in millions)
Loans and other debt(1)		$	14,186			$	14,990
Loans 90 or more days past due and/or on nonaccrual status(1)(2)			11,798				12,916
Short-term and long-term borrowings(3)			694				(670	)

		26

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MORGAN STANLEY

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

(1)	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.

(2)

The aggregate fair value of loans that were in nonaccrual status, which includes all loans 90 or more days past due, was $2,070 million and $1,367 million at September 30, 2015 and December 31, 2014, respectively. The aggregate fair value of loans that were 90 or more days past due was $916 million and $643 million at September 30, 2015 and December 31, 2014, respectively.

(3)	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.

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 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 nine months ended September 30, 2015 and 2014.

Three Months and Nine Months Ended September 30, 2015.

						Fair Value Measurements Using:
		Carrying Value at September 30, 2015(1)				Quoted in  Active Markets for Identical Assets (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total Gains (Losses) for the Three Months Ended September 30, 2015(2)				Total Gains (Losses) for the Nine Months Ended September 30, 2015(2)
		(dollars in millions)
Assets:
Loans(3)		$	5,089			$	-			$	3,060			$	2,029			$	12			$	(201	)
Other investments(4)			-				-				-				-				-				(2	)
Premises, equipment and software costs(5)			-				-				-				-				(2	)			(24	)
Total assets		$	5,089			$	-			$	3,060			$	2,029			$	10			$	(227	)
Liabilities:
Other liabilities and accrued expenses(3)		$	(427	)		$	-			$	(365	)		$	(62	)		$	(144	)		$	(171	)
Total liabilities		$	(427	)		$	-			$	(365	)		$	(62	)		$	(144	)		$	(171	)

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MORGAN STANLEY

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

Three Months and Nine Months Ended September 30, 2014.

						Fair Value Measurements Using:
		Carrying Value at September 30, 2014(1)				Quoted in  Active Markets for Identical Assets (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total Gains (Losses) for the Three Months Ended September 30, 2014(2)				Total Gains (Losses) for the Nine Months Ended September 30, 2014(2)
		(dollars in millions)
Assets:
Loans(3)		$	2,672			$	-			$	1,996			$	676			$	(45	)		$	(55	)
Other investments(4)			38				-				-				38				(2	)			(27	)
Premises, equipment and software costs(5)			-				-				-				-				(27	)			(43	)
Intangible assets(4)			20				-				-				20				(4	)			(6	)
Other assets(5)			-				-				-				-				-				(9	)
Total assets		$	2,730			$	-			$	1,996			$	734			$	(78	)		$	(140	)

(1)	Carrying values relate only to those assets that had fair value adjustments during the quarters ended September 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 and represent non-recurring fair value adjustments for certain lending commitments designated as held for sale.

(3)

Non-recurring changes in the fair value of loans and 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 $10 million and $69 million in Other revenues in the Company's condensed consolidated statements of income in the quarter and nine months ended September 30, 2015, respectively, to reduce the carrying amount of the unit to its estimated fair value less costs to sell.

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

		28

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MORGAN STANLEY

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

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.

At September 30, 2015.

		At September 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		$	19,244			$	19,244			$	19,244			$	-			$	-
Interest bearing deposits with banks			34,274				34,274				34,274				-				-
Cash deposited with clearing organizations or segregated under federal and other regulations or requirements			35,552				35,552				35,552				-				-
Investment securities-HTM securities			3,530				3,528				1,007				2,521				-
Securities purchased under agreements to resell			126,397				126,397				-				125,731				666
Securities borrowed			148,245				148,232				-				148,148				84
Customer and other receivables(1)			46,134				46,028				-				41,230				4,798
Loans(2)			78,209				79,026				-				17,317				61,709
Financial Liabilities:
Deposits		$	147,226			$	147,248			$	-			$	147,248			$	-
Short-term borrowings			214				214				-				214				-
Securities sold under agreements to repurchase			57,973				58,036				-				55,598				2,438
Securities loaned			20,644				20,657				-				20,488				169
Other secured financings			6,721				6,720				-				5,441				1,279
Customer and other payables(1)			190,434				190,434				-				190,434				-
Long-term borrowings			128,956				130,826				-				130,747				79

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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 lending commitments, primarily related to corporate lending in the Company's Institutional Securities business segment, that are not carried at fair value at September 30, 2015 was $1,807 million, of which $1,544 million and $263 million would have been categorized in Level 2 and Level 3 of the fair value hierarchy, respectively. The notional amount of these commitments was $109.8 billion.

The fair value of the Company's 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 notional amount of these commitments was $86.8 billion.

4.	Derivative Instruments and Hedging Activities.

The Company trades and makes markets globally in listed futures, over-the-counter ("OTC") swaps, forwards, options and other derivatives referencing, among other things, interest rates, currencies, investment grade and non-investment grade corporate credits, loans, bonds, U.S. and other sovereign securities, emerging market bonds and loans, credit indices, asset-backed security indices, property indices, mortgage-related and other asset-backed securities, and real estate loan products. The Company uses these instruments for trading, foreign currency exposure management, and asset and liability management.

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

The Company manages its trading positions by employing a variety of risk mitigation strategies. These strategies include diversification of risk exposures and hedging. Hedging activities consist of the purchase or sale of positions in related securities and financial instruments, including a variety of derivative products ( e.g. , futures, forwards, swaps and options). The Company manages the market risk associated with its trading activities on a Company-wide basis, on a worldwide trading division level and on an individual product basis.

Offsetting of Derivative Instruments.

In connection with its derivative activities, the Company generally enters into master netting agreements and collateral agreements with its counterparties. For a further discussion of these agreements, see Note 12 to the consolidated financial statements in the 2014 Form 10-K. The following tables present information about the offsetting of derivative instruments and related collateral amounts. See information related to offsetting of certain collateralized transactions in Note 6.

		At September 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				Amounts Not Offset in the Condensed Consolidated Statements of Financial Condition(2)								Net Exposure
					Financial Instruments Collateral				Other Cash Collateral
		(dollars in millions)
Derivative assets
Bilateral OTC		$	379,609			$	(351,265	)		$	28,344			$	(9,967	)		$	(8	)		$	18,369
Cleared OTC(3)			129,262				(127,987	)			1,275				-				-				1,275
Exchange traded			31,948				(28,273	)			3,675				-				-				3,675
Total derivative assets		$	540,819			$	(507,525	)		$	33,294			$	(9,967	)		$	(8	)		$	23,319
Derivative liabilities
Bilateral OTC		$	361,467			$	(332,549	)		$	28,918			$	(6,967	)		$	-			$	21,951
Cleared OTC(3)			128,153				(127,267	)			886				-				(2	)			884
Exchange traded			34,242				(28,273	)			5,969				(735	)			-				5,234
Total derivative liabilities		$	523,862			$	(488,089	)		$	35,773			$	(7,702	)		$	(2	)		$	28,069

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

		At December 31, 2014
		Gross Amounts(4)				Amounts Offset in the Condensed Consolidated Statements of Financial Condition				Net Amounts Presented in the Condensed Consolidated Statements of Financial Condition				Amounts Not Offset in the Condensed Consolidated Statements of Financial Condition(2)								Net Exposure
					Financial Instruments Collateral				Other Cash Collateral
		(dollars in millions)
Derivative assets
Bilateral OTC		$	427,079			$	(396,582	)		$	30,497			$	(9,844	)		$	(19	)		$	20,634
Cleared OTC(3)			217,169				(215,576	)			1,593				-				-				1,593
Exchange traded			32,123				(27,819	)			4,304				-				-				4,304
Total derivative assets		$	676,371			$	(639,977	)		$	36,394			$	(9,844	)		$	(19	)		$	26,531
Derivative liabilities
Bilateral OTC		$	410,003			$	(375,095	)		$	34,908			$	(11,192	)		$	(179	)		$	23,537
Cleared OTC(3)			211,695				(211,180	)			515				-				(6	)			509
Exchange traded			32,608				(27,819	)			4,789				(726	)			-				4,063
Total derivative liabilities		$	654,306			$	(614,094	)		$	40,212			$	(11,918	)		$	(185	)		$	28,109

(1)

Amounts include $6.2 billion of derivative assets and $6.9 billion of derivative liabilities, which are either not subject to master netting agreements or collateral agreements or are subject to such agreements but the Company has not determined the agreements to be legally enforceable. See also "Fair Value and Notional of Derivative Instruments" herein, for additional disclosure about gross fair values and notionals for derivative instruments by risk type.

(2)	Amounts relate to master netting agreements and collateral 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 OTC derivatives that are centrally cleared in accordance with certain regulatory requirements.

(4)

Amounts include $6.5 billion of derivative assets and $6.9 billion of derivative liabilities, which are either not subject to master netting agreements or collateral agreements or are subject to such agreements but the Company has not determined the agreements to be legally enforceable. See also "Fair Value and Notional of Derivative Instruments" herein, for additional disclosure about gross fair values and notionals for derivative instruments by risk type.

The Company incurs credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instruments arises from the failure of a counterparty to perform according to the terms of the contract. The Company's exposure to credit risk at any point in time is represented by the fair value of the derivative contracts reported as assets. The fair value of a derivative represents the amount at which the derivative could be exchanged in an orderly transaction between market participants and is further described in Note 2 to the consolidated financial statements in the 2014 Form 10-K and Note 3.

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

OTC Derivative Products-Trading Assets.

The tables below present a summary by counterparty credit rating and remaining contract maturity of the fair value of OTC derivatives in a gain position at September 30, 2015 and December 31, 2014. Fair value is presented in the final column, net of collateral received (principally cash and U.S. government and agency securities):

		At September 30, 2015(1)
		Years to Maturity																Cross-Maturity and Cash Collateral Netting(3)				Net  Exposure Post-cash Collateral				Net Exposure Post-collateral
Credit Rating(2)		Less than 1				1-3				3-5				Over 5
		(dollars in millions)
AAA		$	260			$	289			$	895			$	4,174			$	(4,514	)		$	1,104			$	924
AA			2,599				2,493				1,848				11,978				(13,432	)			5,486				2,887
A			10,807				9,428				5,885				22,520				(38,543	)			10,097				6,606
BBB			4,202				4,711				2,414				12,306				(15,682	)			7,951				5,654
Non-investment grade			4,502				3,339				1,521				3,755				(8,144	)			4,973				3,573
Total		$	22,370			$	20,260			$	12,563			$	54,733			$	(80,315	)		$	29,611			$	19,644

		At December 31, 2014(1)
		Years to Maturity																Cross-Maturity and Cash Collateral Netting(3)				Net Exposure Post-cash Collateral				Net Exposure Post-collateral
Credit Rating(2)		Less than 1				1-3				3-5				Over 5
		(dollars in millions)
AAA		$	499			$	246			$	1,313			$	4,281			$	(5,009	)		$	1,330			$	1,035
AA			2,679				2,811				2,704				14,137				(15,415	)			6,916				4,719
A			11,733				10,833				7,585				23,968				(43,644	)			10,475				6,520
BBB			5,119				3,753				2,592				13,132				(15,844	)			8,752				6,035
Non-investment grade			3,196				3,089				1,541				2,499				(5,727	)			4,598				3,918
Total		$	23,226			$	20,732			$	15,735			$	58,017			$	(85,639	)		$	32,071			$	22,227

(1)	Fair values shown represent the Company's net exposure to counterparties related to the Company's OTC derivative products. Amounts include centrally cleared OTC derivatives. The tables do not include exchange-traded derivatives and the effect of any related hedges utilized by the Company.

(2)	Obligor credit ratings are determined by the Company's Credit Risk Management Department.

(3)

Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity categories. Receivable and payable balances with the same counterparty in the same maturity category are netted within such maturity category, where appropriate. Cash collateral received is netted on a counterparty basis, provided legal right of offset exists.

For a discussion of hedge accounting, fair value hedges-interest rate risk and net investment hedges, see Note 12 to the consolidated financial statements in the 2014 Form 10-K.

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

Fair Value and Notional of Derivative Instruments.

The following tables summarize the fair value of derivative instruments designated as accounting hedges and the fair value of derivative instruments not designated as accounting hedges by type of derivative contract and the platform on which these instruments are traded or cleared on a gross basis. Fair values of derivative contracts in an asset position are included in Trading assets, and fair values of derivative contracts in a liability position are reflected in Trading liabilities in the Company's condensed consolidated statements of financial condition (see Note 3):

		Derivative Assets at September 30, 2015
		Fair Value																Notional
		Bilateral OTC				Cleared OTC(1)				Exchange Traded				Total				Bilateral OTC				Cleared OTC(1)				Exchange Traded				Total
		(dollars in millions)
Derivatives designated as accounting hedges:
Interest rate contracts		$	3,565			$	1,828			$	-			$	5,393			$	38,389			$	43,193			$	-			$	81,582
Foreign exchange contracts			210				5				-				215				6,533				438				-				6,971
Total derivatives designated as accounting hedges			3,775				1,833				-				5,608				44,922				43,631				-				88,553
Derivatives not designated as accounting hedges(2):
Interest rate contracts			242,212				123,482				436				366,130				4,570,771				6,416,792				1,231,155				12,218,718
Credit contracts			21,246				3,535				-				24,781				684,536				171,985				-				856,521
Foreign exchange contracts			70,521				412				102				71,035				1,964,784				13,908				42,417				2,021,109
Equity contracts			25,261				-				26,399				51,660				356,509				-				294,745				651,254
Commodity contracts			16,230				-				5,011				21,241				87,566				-				103,188				190,754
Other			364				-				-				364				7,568				-				-				7,568
Total derivatives not designated as accounting hedges			375,834				127,429				31,948				535,211				7,671,734				6,602,685				1,671,505				15,945,924
Total derivatives		$	379,609			$	129,262			$	31,948			$	540,819			$	7,716,656			$	6,646,316			$	1,671,505			$	16,034,477
Cash collateral netting			(54,391	)			(2,480	)			-				(56,871	)			-				-				-				-
Counterparty netting			(296,874	)			(125,507	)			(28,273	)			(450,654	)			-				-				-				-
Total derivative assets		$	28,344			$	1,275			$	3,675			$	33,294			$	7,716,656			$	6,646,316			$	1,671,505			$	16,034,477

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

		Derivative Liabilities at September 30, 2015
		Fair Value																Notional
		Bilateral OTC				Cleared OTC(1)				Exchange Traded				Total				Bilateral OTC				Cleared OTC(1)				Exchange Traded				Total
		(dollars in millions)
Derivatives designated as accounting hedges:
Interest rate contracts		$	61			$	98			$	-			$	159			$	2,000			$	4,519			$	-			$	6,519
Foreign exchange contracts			37				2				-				39				4,155				153				-				4,308
Total derivatives designated as accounting hedges			98				100				-				198				6,155				4,672				-				10,827
Derivatives not designated as accounting hedges(2):
Interest rate contracts			224,805				124,372				321				349,498				4,259,745				6,013,571				1,189,701				11,463,017
Credit contracts			21,224				3,418				-				24,642				617,011				165,496				-				782,507
Foreign exchange contracts			72,572				263				60				72,895				1,968,292				12,137				9,274				1,989,703
Equity contracts			28,858				-				28,553				57,411				351,276				-				293,615				644,891
Commodity contracts			13,859				-				5,308				19,167				79,641				-				89,147				168,788
Other			51				-				-				51				4,170				-				-				4,170
Total derivatives not designated as accounting hedges			361,369				128,053				34,242				523,664				7,280,135				6,191,204				1,581,737				15,053,076
Total derivatives		$	361,467			$	128,153			$	34,242			$	523,862			$	7,286,290			$	6,195,876			$	1,581,737			$	15,063,903
Cash collateral netting			(35,675	)			(1,760	)			-				(37,435	)			-				-				-				-
Counterparty netting			(296,874	)			(125,507	)			(28,273	)			(450,654	)			-				-				-				-
Total derivative liabilities		$	28,918			$	886			$	5,969			$	35,773			$	7,286,290			$	6,195,876			$	1,581,737			$	15,063,903

		Derivative Assets at December 31, 2014
		Fair Value																Notional
		Bilateral OTC				Cleared OTC(1)				Exchange Traded				Total				Bilateral OTC				Cleared OTC(1)				Exchange Traded				Total
		(dollars in millions)
Derivatives designated as accounting hedges:
Interest rate contracts		$	3,947			$	1,053			$	-			$	5,000			$	44,324			$	27,692			$	-			$	72,016
Foreign exchange contracts			498				6				-				504				9,362				261				-				9,623
Total derivatives designated as accounting hedges			4,445				1,059				-				5,504				53,686				27,953				-				81,639
Derivatives not designated as accounting hedges(3):
Interest rate contracts			281,214				211,552				407				493,173				4,854,953				9,187,454				1,467,056				15,509,463
Credit contracts			27,776				4,406				-				32,182				806,441				167,390				-				973,831
Foreign exchange contracts			72,362				152				83				72,597				1,955,343				11,538				9,663				1,976,544
Equity contracts			23,208				-				24,916				48,124				299,363				-				271,164				570,527
Commodity contracts			17,698				-				6,717				24,415				115,792				-				156,440				272,232
Other			376				-				-				376				5,179				-				-				5,179
Total derivatives not designated as accounting hedges			422,634				216,110				32,123				670,867				8,037,071				9,366,382				1,904,323				19,307,776
Total derivatives		$	427,079			$	217,169			$	32,123			$	676,371			$	8,090,757			$	9,394,335			$	1,904,323			$	19,389,415
Cash collateral netting			(58,541	)			(4,654	)			-				(63,195	)			-				-				-				-
Counterparty netting			(338,041	)			(210,922	)			(27,819	)			(576,782	)			-				-				-				-
Total derivative assets		$	30,497			$	1,593			$	4,304			$	36,394			$	8,090,757			$	9,394,335			$	1,904,323			$	19,389,415

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

		Derivative Liabilities at December 31, 2014
		Fair Value																Notional
		Bilateral OTC				Cleared OTC(1)				Exchange Traded				Total				Bilateral OTC				Cleared OTC(1)				Exchange Traded				Total
		(dollars in millions)
Derivatives designated as accounting hedges:
Interest rate contracts		$	125			$	99			$	-			$	224			$	2,024			$	7,588			$	-			$	9,612
Foreign exchange contracts			5				1				-				6				1,491				121				-				1,612
Total derivatives designated as accounting hedges			130				100				-				230				3,515				7,709				-				11,224
Derivatives not designated as accounting hedges(3):
Interest rate contracts			264,579				207,482				293				472,354				4,615,886				9,138,417				1,714,021				15,468,324
Credit contracts			28,165				3,944				-				32,109				714,181				154,054				-				868,235
Foreign exchange contracts			72,156				169				21				72,346				1,947,178				11,477				1,761				1,960,416
Equity contracts			30,061				-				25,511				55,572				339,884				-				302,205				642,089
Commodity contracts			14,740				-				6,783				21,523				93,019				-				132,136				225,155
Other			172				-				-				172				5,478				-				-				5,478
Total derivatives not designated as accounting hedges			409,873				211,595				32,608				654,076				7,715,626				9,303,948				2,150,123				19,169,697
Total derivatives		$	410,003			$	211,695			$	32,608			$	654,306			$	7,719,141			$	9,311,657			$	2,150,123			$	19,180,921
Cash collateral netting			(37,054	)			(258	)			-				(37,312	)			-				-				-				-
Counterparty netting			(338,041	)			(210,922	)			(27,819	)			(576,782	)			-				-				-				-
Total derivative liabilities		$	34,908			$	515			$	4,789			$	40,212			$	7,719,141			$	9,311,657			$	2,150,123			$	19,180,921

(1)	Amounts include OTC derivatives that are centrally cleared in accordance with certain regulatory requirements.

(2)

Notional amounts include gross notionals related to open long and short futures contracts of $886 billion and $950 billion, respectively. The unsettled fair value on these futures contracts (excluded from the table above) of $432 million and $9 million is included in Customer and other receivables and Customer and other payables, respectively, in the Company's condensed consolidated statements of financial condition.

(3)

Notional amounts include gross notionals related to open long and short futures contracts of $685 billion and $1,122 billion, respectively. The unsettled fair value on these futures contracts (excluded from the table above) of $472 million and $21 million is included in Customer and other receivables and Customer and other payables, respectively, in the Company's condensed consolidated statements of financial condition.

At September 30, 2015, cash collateral payables of $3 million and at December 31, 2014, cash collateral receivables and payables of $21 million and $30 million, respectively, were not offset against certain contracts that did not meet the definition of a derivative. The Company had no cash collateral receivable at September 30, 2015 that was not offset against certain contracts that did not meet the definition of a derivative.

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

Derivatives Designated as Fair Value Hedges.

The following table presents gains (losses) reported on interest rate derivative instruments designated and qualifying as accounting hedges and the related hedged item as well as the hedge ineffectiveness included in Interest expense in the Company's condensed consolidated statements of income:

		Gains (Losses) Recognized in Interest Expense
		Three Months Ended September 30,								Nine Months Ended September 30,
Product Type		2015				2014				2015				2014
		(dollars in millions)
Derivatives		$	1,531			$	(384	)		$	390			$	547
Borrowings			(1,334	)			757				386				429
Total		$	197			$	373			$	776			$	976

Derivatives Designated as Net Investment Hedges.

The following table presents gains (losses) reported on derivative instruments designated and qualifying as accounting hedges:

		Gains (Losses) Recognized in OCI (effective portion)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
Product Type		2015				2014				2015				2014
		(dollars in millions)
Foreign exchange contracts(1)		$	210			$	438			$	391			$	262
Total		$	210			$	438			$	391			$	262

(1)

Losses of $37 million and $117 million related to the forward points on the hedging instruments were excluded from hedge effectiveness testing and recognized in interest income during the quarter and nine months ended September 30, 2015, respectively. Losses of $46 million and $143 million related to the forward points on the hedging instruments were excluded from hedge effectiveness testing and recognized in interest income during the quarter and nine months ended September 30, 2014, respectively.

Derivatives Not Designated as Accounting Hedges.

The following table summarizes gains (losses) on derivative instruments not designated as accounting hedges:

		Gains (Losses) Recognized in Income(1)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
Product Type		2015				2014				2015				2014
		(dollars in millions)
Interest rate contracts		$	103			$	(37	)		$	579			$	(1,847	)
Credit contracts			99				407				(110	)			258
Foreign exchange contracts			3,570				191				(1,224	)			1,795
Equity contracts			3,678				114				1,658				(2,212	)
Commodity contracts			787				60				1,435				531
Other contracts			35				22				(30	)			133
Total derivative instruments		$	8,272			$	757			$	2,308			$	(1,342	)

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(1)

Gains (losses) on derivative contracts not designated as hedges are primarily included in Trading revenues in the Company's condensed consolidated statements of income. Gains (losses) associated with certain derivative contracts that have physically settled are excluded from the table above. Gains (losses) on these contracts are reflected with the associated cash instruments, which are also included in Trading revenues in the Company's condensed consolidated statements of income.

The Company also has certain embedded derivatives that have been bifurcated from the related structured borrowings. Such derivatives are classified in Long-term borrowings and had a net fair value of $19 million and $10 million at September 30, 2015 and December 31, 2014, respectively, and a notional value of $2,069 million at both September 30, 2015 and December 31, 2014. The Company recognized a loss of $6 million and a gain of $10 million related to changes in the fair value of its bifurcated embedded derivatives for the quarter and nine months ended September 30, 2015, respectively. The Company recognized a gain of $5 million and a loss of $23 million related to changes in the fair value of its bifurcated embedded derivatives for the quarter and nine months ended September 30, 2014, respectively.

Credit Risk-Related Contingencies.

In connection with certain OTC trading agreements, the Company may be required to provide additional collateral or immediately settle any outstanding liability balances with certain counterparties in the event of a credit rating downgrade of the Company. The following table presents the aggregate fair value of certain derivative contracts that contain credit risk-related contingent features that are in a net liability position for which the Company has posted collateral in the normal course of business.

		At September 30, 2015
		(dollars in millions)
Net derivative liabilities		$	26,700
Collateral posted			22,247

The additional collateral or termination payments which may be called in the event of a future credit rating downgrade vary by contract and can be based on ratings by either or both of Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Services ("S&P"). At September 30, 2015, for such OTC trading agreements, the future potential collateral amounts and termination payments that could be called or required by counterparties or exchange and clearing organizations in the event of one-notch or two-notch downgrade scenarios based on the relevant contractual downgrade triggers were as follows:

		At September 30, 2015
		(dollars in millions)
Incremental collateral or termination payments upon potential future ratings downgrade(1):
One-notch downgrade		$	1,111
Two-notch downgrade			1,251

(1)

Amounts include $1,879 million related to bilateral arrangements between the Company and other parties where upon the downgrade of one party, the downgraded party must deliver collateral to the other party. These bilateral downgrade arrangements are a risk management tool used extensively by the Company as credit exposures are reduced if counterparties are downgraded.

Credit Derivatives and Other Credit Contracts.

The Company enters into credit derivatives, principally through credit default swaps, under which it receives or provides protection against the risk of default on a set of debt obligations issued by a specified reference entity or entities. A majority of the Company's counterparties are banks, broker-dealers, insurance and other financial institutions, and monoline insurers.

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

The tables below summarize the notional and fair value of protection sold and protection purchased through credit default swaps:

		At September 30, 2015
		Maximum Potential Payout/Notional
		Protection Sold								Protection Purchased
		Notional				Fair Value (Asset)/Liability				Notional				Fair Value (Asset)/Liability
		(dollars in millions)
Single name credit default swaps		$	458,768			$	1,241			$	439,328			$	(593	)
Index and basket credit default swaps			264,416				(148	)			231,528				(68	)
Tranched index and basket credit default swaps			74,353				(1,394	)			170,635				823
Total		$	797,537			$	(301	)		$	841,491			$	162

		At December 31, 2014
		Maximum Potential Payout/Notional
		Protection Sold								Protection Purchased
		Notional				Fair Value (Asset)/Liability				Notional				Fair Value (Asset)/Liability
		(dollars in millions)
Single name credit default swaps		$	535,415			$	(2,479	)		$	509,872			$	1,641
Index and basket credit default swaps			276,465				(1,777	)			229,789				1,563
Tranched index and basket credit default swaps			96,182				(2,355	)			194,343				3,334
Total		$	908,062			$	(6,611	)		$	934,004			$	6,538

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

The tables below summarize the credit ratings of the reference obligation and maturities of protection sold through credit default swaps and other credit contracts:

		At September 30, 2015
		Maximum Potential Payout/Notional																				Fair Value (Asset)/ Liability(1)(2)
		Years to Maturity
Credit Ratings of the Reference Obligation		Less than 1				1-3				3-5				Over 5				Total
		(dollars in millions)
Single name credit default swaps:
AAA		$	4,247			$	13,475			$	5,252			$	1,587			$	24,561			$	(253	)
AA			9,247				18,450				10,605				2,689				40,991				(433	)
A			18,861				36,875				11,145				1,825				68,706				(803	)
BBB			43,071				92,864				41,808				11,883				189,626				(325	)
Non-investment grade			35,030				66,058				28,914				4,882				134,884				3,055
Total			110,456				227,722				97,724				22,866				458,768				1,241
Index and basket credit default swaps:
AAA			14,890				41,296				1,663				-				57,849				(1,006	)
A			4,700				4,668				6,271				12				15,651				(197	)
BBB			9,904				27,045				49,952				34,893				121,794				(818	)
Non-investment grade			24,331				82,978				16,048				20,118				143,475				479
Total			53,825				155,987				73,934				55,023				338,769				(1,542	)
Total credit default swaps sold		$	164,281			$	383,709			$	171,658			$	77,889			$	797,537			$	(301	)
Other credit contracts(3)		$	1			$	806			$	340			$	49			$	1,196			$	(1,042	)
Total credit derivatives and other credit contracts		$	164,282			$	384,515			$	171,998			$	77,938			$	798,733			$	(1,343	)

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

		At December 31, 2014
		Maximum Potential Payout/Notional																				Fair Value (Asset)/ Liability(1)(2)
		Years to Maturity
Credit Ratings of the Reference Obligation		Less than 1				1-3				3-5				Over 5				Total
		(dollars in millions)
Single name credit default swaps:
AAA		$	2,385			$	9,400			$	6,147			$	692			$	18,624			$	(113	)
AA			9,080				23,701				14,769				3,318				50,868				(688	)
A			22,861				52,291				22,083				2,944				100,179				(1,962	)
BBB			48,547				114,384				60,629				13,536				237,096				(1,489	)
Non-investment grade			29,857				66,066				29,011				3,714				128,648				1,773
Total			112,730				265,842				132,639				24,204				535,415				(2,479	)
Index and basket credit default swaps:
AAA			17,625				31,124				7,265				1,883				57,897				(985	)
AA			704				6,512				716				2,864				10,796				(270	)
A			1,283				6,841				10,154				30				18,308				(465	)
BBB			30,265				40,575				60,141				7,730				138,711				(2,904	)
Non-investment grade			25,750				88,105				22,971				10,109				146,935				492
Total			75,627				173,157				101,247				22,616				372,647				(4,132	)
Total credit default swaps sold		$	188,357			$	438,999			$	233,886			$	46,820			$	908,062			$	(6,611	)
Other credit contracts(3)		$	51			$	539			$	1			$	620			$	1,211			$	(500	)
Total credit derivatives and other credit contracts		$	188,408			$	439,538			$	233,887			$	47,440			$	909,273			$	(7,111	)

(1)	Fair value amounts are shown on a gross basis prior to cash collateral or counterparty netting.

(2)	Fair value amounts of certain credit default swaps where the Company sold protection have an asset carrying value because credit spreads of the underlying reference entity or entities tightened during the term of the contracts.

(3)	Other credit contracts include credit-linked notes ("CLNs"), collateralized debt obligations ("CDOs") and credit default swaps that are considered hybrid instruments. Fair value amounts shown represent the fair value of the hybrid instruments.

Single Name Credit Default Swaps.

A credit default swap protects the buyer against the loss of principal on a bond or loan in case of a default by the issuer. The protection buyer pays a periodic premium (generally quarterly) over the life of the contract and is protected for the period. The Company in turn will have to perform under a credit default swap if a credit event as defined under the contract occurs. Typical credit events include bankruptcy, dissolution or insolvency of the referenced entity, failure to pay and restructuring of the obligations of the referenced entity. In order to provide an indication of the current payment status or performance risk of the credit default swaps, a breakdown by credit ratings is provided. Agency ratings, if available, are used for this purpose; otherwise the Company's internal ratings are used.

Index and Basket Credit Default Swaps.

Index and basket credit default swaps are products where credit protection is provided on a portfolio of single name credit default swaps. Generally, in the event of a default on one of the underlying names, the Company will have to pay a pro rata portion of the total notional amount of the credit default swap.

The Company also enters into tranched index and basket credit default swaps where credit protection is provided on a particular portion of the portfolio loss distribution. The most junior tranches cover initial defaults, and once losses exceed the notional of the tranche, they are passed on to the next most senior tranche in the capital structure.

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

In order to provide an indication of the current payment status or performance risk of the credit default swaps, a breakdown by the Company's internal credit ratings is provided. Effective January 1, 2015, the Company utilized its internal credit ratings as compared with December 31, 2014 where external agency ratings, if available, were utilized. The change in the rating methodology did not have a significant impact on investment grade versus non-investment grade classifications or the fair values of tranched and non-tranched index and basket products in the above table.

Credit Protection Sold through CLNs and CDOs.

The Company has invested in CLNs and CDOs, which are hybrid instruments containing embedded derivatives, in which credit protection has been sold to the issuer of the note. If there is a credit event of a reference entity underlying the instrument, the principal balance of the note may not be repaid in full to the Company.

Purchased Credit Protection with Identical Underlying Reference Obligations.

For single name credit default swaps and non-tranched index and basket credit default swaps, the Company has purchased protection with a notional amount of approximately $668 billion and $731 billion at September 30, 2015 and December 31, 2014, respectively, compared with a notional amount of approximately $721 billion and $805 billion at September 30, 2015 and December 31, 2014, respectively, of credit protection sold with identical underlying reference obligations. In order to identify purchased protection with the same underlying reference obligations, the notional amount for individual reference obligations within non-tranched indices and baskets was determined on a pro rata basis and matched off against single name and non-tranched index and basket credit default swaps where credit protection was sold with identical underlying reference obligations.

The purchase of credit protection does not represent the sole manner in which the Company risk manages its exposure to credit derivatives. The Company manages its exposure to these derivative contracts through a variety of risk mitigation strategies, which include managing the credit and correlation risk across single name, non-tranched indices and baskets, tranched indices and baskets, and cash positions. Aggregate market risk limits have been established for credit derivatives, and market risk measures are routinely monitored against these limits. The Company may also recover amounts on the underlying reference obligation delivered to the Company under credit default swaps where credit protection was sold.

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5.	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 September 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		$	24,718			$	119			$	3			$	-			$	24,834
U.S. agency securities(1)			21,000				90				68				-				21,022
Total U.S. government and agency securities			45,718				209				71				-				45,856
Corporate and other debt:
Commercial mortgage-backed securities:
Agency			1,996				4				44				-				1,956
Non-agency			2,174				16				12				-				2,178
Auto loan asset-backed securities			2,679				3				1				-				2,681
Corporate bonds			3,866				14				17				-				3,863
Collateralized loan obligations			912				-				13				-				899
FFELP student loan asset-backed securities(2)			3,807				-				93				-				3,714
Total corporate and other debt			15,434				37				180				-				15,291
Total AFS debt securities			61,152				246				251				-				61,147
AFS equity securities			15				-				3				-				12
Total AFS securities			61,167				246				254				-				61,159
HTM securities:
U.S. government securities:
U.S. Treasury securities			1,002				5				-				-				1,007
U.S. agency securities(1)			2,528				1				8				-				2,521
Total HTM securities			3,530				6				8				-				3,528
Total Investment securities		$	64,697			$	252			$	262			$	-			$	64,687

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