MS Q3 2017 10-Q

Morgan Stanley (MS) SEC Annual Report (10-K) for 2017

MS Q1 2018 10-Q
MS Q3 2017 10-Q MS Q1 2018 10-Q
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the year ended December 31, 2017

Commission File Number 1-11758

(Exact name of Registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

1585 Broadway

New York, NY 10036

(Address of principal executive offices, including zip code)

36-3145972

(I.R.S. Employer Identification No.)

(212) 761-4000

(Registrant's telephone number,

including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of exchange
on which registered

Common Stock, $0.01 par value

New York Stock Exchange

Depositary Shares, each representing 1/1,000th interest in a share of Floating Rate Non-Cumulative Preferred Stock, Series A, $0.01 par value

New York Stock Exchange

Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series E, $0.01 par value

New York Stock Exchange

Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series F, $0.01 par value

New York Stock Exchange

Depositary Shares, each representing 1/1,000th interest in a share of 6.625% Non-Cumulative Preferred Stock, Series G, $0.01 par value

New York Stock Exchange

Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series I, $0.01 par value

New York Stock Exchange

Depositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series K, $0.01 par value

New York Stock Exchange

Global Medium-Term Notes, Series A, Fixed Rate Step-Up Senior Notes due 2026 of Morgan Stanley Finance LLC (and Registrant's guarantee with respect thereto)

New York Stock Exchange

Market Vectors ETNs due March 31, 2020 (two issuances); Market Vectors ETNs due April 30, 2020 (two issuances)

NYSE Arca, Inc.

Morgan Stanley Cushing ® MLP High Income Index ETNs due March 21, 2031

NYSE Arca, Inc.

Indicate by check mark if Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES  ☒  NO  ☐

Indicate by check mark if Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  YES  ☐  NO  ☒

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

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

Large Accelerated Filer  ☒

Accelerated Filer  ☐

Non-Accelerated Filer  ☐

Smaller reporting company  ☐

(Do not check if a smaller reporting company)

Emerging growth company  ☐

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

Indicate by check mark whether Registrant is a shell company (as defined in Exchange Act Rule 12b-2).  YES  ☐  NO  ☒

As of June 30, 2017, the aggregate market value of the common stock of Registrant held by non-affiliates of Registrant was approximately $77,833,014,763. This calculation does not reflect a determination that persons are affiliates for any other purposes.

As of January 31, 2018, there were 1,791,846,388 shares of Registrant's common stock, $0.01 par value, outstanding.

Documents Incorporated by Reference: Portions of Registrant's definitive proxy statement for its 2018 annual meeting of shareholders are incorporated by reference in Part III of this Form 10-K.

Table of Contents

ANNUAL REPORT ON FORM 10-K

for the year ended December 31, 2017

Table of Contents Part Item Page

Business

I 1 1

Overview

1

Business Segments

1

Competition

1

Supervision and Regulation

2

Executive Officers of Morgan Stanley

10

Risk Factors

1A 11

Unresolved Staff Comments

1B 22

Properties

2 22

Legal Proceedings

3 23

Mine Safety Disclosures

4 28

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

II 5 29

Selected Financial Data

6 31

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

7 32

Introduction

32

Executive Summary

33

Business Segments

38

Supplemental Financial Information and Disclosures

52

Accounting Development Updates

53

Critical Accounting Policies

54

Liquidity and Capital Resources

57

Quantitative and Qualitative Disclosures about Market Risk

7A 71

Financial Statements and Supplementary Data

8 91

Report of Independent Registered Public Accounting Firm

91

Consolidated Income Statements

92

Consolidated Comprehensive Income Statements

93

Consolidated Balance Sheets

94

Consolidated Statements of Changes in Total Equity

95

Consolidated Cash Flow Statements

96

Notes to Consolidated Financial Statements

97

1. Introduction and Basis of Presentation

97

2. Significant Accounting Policies

98

3. Fair Values

109

4. Derivative Instruments and Hedging Activities

124

5. Investment Securities

129

6. Collateralized Transactions

133

7. Loans and Allowance for Credit Losses

136

8. Equity Method Investments

139

9. Goodwill and Intangible Assets

139

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10. Deposits

140

11. Borrowings and Other Secured Financings

140

12. Commitments, Guarantees and Contingencies

142

13. Variable Interest Entities and Securitization Activities

148

14. Regulatory Requirements

153

15. Total Equity

156

16. Earnings per Common Share

159

17. Interest Income and Interest Expense

159

18. Deferred Compensation Plans

159

19. Employee Benefit Plans

161

20. Income Taxes

166

21. Segment and Geographic Information

169

22. Parent Company

171

23. Quarterly Results (Unaudited)

174

24. Subsequent Events

175

Financial Data Supplement (Unaudited)

176

Glossary of Common Acronyms

180

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

9 182

Controls and Procedures

9A 182

Other Information

9B 184

Directors, Executive Officers and Corporate Governance

III 10 184

Executive Compensation

11 184

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

12 184

Certain Relationships and Related Transactions and Director Independence

13 185

Principal Accountant Fees and Services

14 185

Exhibits and Financial Statement Schedules

IV 15 185

Form 10-K Summary

16 185

Exhibit Index

E-1

Signatures

S-1

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Forward-Looking Statements

We have included in or incorporated by reference into this report, and from time to time may make in our public filings, press releases or other public statements, certain statements, including (without limitation) those under "Legal Proceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures about Market Risk" that may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, our management may make forward-looking statements to analysts, investors, representatives of the media and others. These forward-looking statements are not historical facts and represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and beyond our control.

The nature of our business makes predicting the future trends of our revenues, expenses, and net income difficult. The risks and uncertainties involved in our businesses could affect the matters referred to in such statements, and it is possible that our actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements include (without limitation):

the effect of market conditions, particularly in the global equity, fixed income, currency, credit and commodities markets, including corporate and mortgage (commercial and residential) lending and commercial real estate markets and energy markets;

the level of individual investor participation in the global markets as well as the level of client assets;

the flow of investment capital into or from Assets under management or supervision;

the level and volatility of equity, fixed income and commodity prices, interest rates, currency values and other market indices;

the availability and cost of both credit and capital as well as the credit ratings assigned to our unsecured short-term and long-term debt;

technological changes instituted by us, our competitors or counterparties and technological risks, business continuity and related operational risks;

risk associated with cybersecurity threats, including data protection and cybersecurity risk management;

our ability to manage effectively our capital and liquidity, including approval of our capital plans by our banking regulators;

the impact of current, pending and future legislation (including with respect to the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act")) or changes thereto, regulation (including capital, leverage, funding, liquidity and recovery and resolution requirements and our ability to address such requirements), policies (including fiscal and monetary policies established by central banks and financial regulators, and changes to global trade policies), and other legal and regulatory actions in the U.S. and worldwide;

changes in tax laws and regulations globally, including the interpretation and application of the U.S. Tax Cuts and Jobs Act ("Tax Act");

the effectiveness of our risk management policies;

our ability to effectively respond to an economic downturn, or other market disruptions;

the actions and initiatives of current and potential competitors as well as governments, central banks, regulators and self-regulatory organizations;

our ability to provide innovative products and services and execute our strategic objectives;

the effect of economic and political conditions and geopolitical events, including the U.K. anticipated withdrawal from the E.U.;

sovereign risk;

the performance and results of our acquisitions, divestitures, joint ventures, strategic alliances or other strategic arrangements;

investor, consumer and business sentiment and confidence in the financial markets;

our reputation and the general perception of the financial services industry;

inflation, natural disasters, pandemics and acts of war or terrorism; and

other risks and uncertainties detailed under "Business-Competition" and "Business-Supervision and Regulation," "Risk Factors" and elsewhere throughout this report.

Accordingly, you are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements to reflect the impact of circumstances or events that arise after the dates they are made, whether as a result of new information, future events or otherwise except as required by applicable law. You should, however, consult further disclosures we may make in future filings of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and any amendments thereto or in future press releases or other public statements.

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Available Information

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

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

You can access information about our corporate governance at www.morganstanley.com/about-us-governance. Our Corporate Governance webpage includes:

Amended and Restated Certificate of Incorporation;

Amended and Restated Bylaws;

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

Corporate Governance Policies;

Policy Regarding Corporate Political Activities;

Policy Regarding Shareholder Rights Plan;

Equity Ownership Commitment;

Code of Ethics and Business Conduct;

Code of Conduct;

Integrity Hotline Information; and

Environmental and Social Policies.

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

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Business

Overview

We are a global financial services firm that, through our subsidiaries and affiliates, advises, and originates, trades, manages and distributes capital for, governments, institutions and individuals. We were originally incorporated under the laws of the State of Delaware in 1981, and our predecessor companies date back to 1924. We are an FHC regulated by the Board of Governors of the Federal Reserve System ("Federal Reserve") under the Bank Holding Company Act of 1956, as amended ("BHC Act"). We conduct our business from our headquarters in and around New York City, our regional offices and branches throughout the U.S. and our principal offices in London, Tokyo, Hong Kong and other world financial centers. As of December 31, 2017, we had 57,633 employees worldwide. Unless the context otherwise requires, the terms "Morgan Stanley," the "Firm," "us," "we," and "our" mean Morgan Stanley (the "Parent Company") together with its consolidated subsidiaries. We define the following as part of our consolidated financial statements ("financial statements"): consolidated income statements ("income statements"), consolidated balance sheets ("balance sheets"), and consolidated cash flow statements ("cash flow statements"). See the "Glossary of Common Acronyms" for definitions of certain acronyms used throughout the 2017 Form 10-K.

Financial information concerning us, our business segments and geographic regions for each of the 12 months ended December 31, 2017, December 31, 2016 and December 31, 2015 is included in the financial statements and the notes thereto in "Financial Statements and Supplementary Data."

Business Segments

We are a global financial services firm that maintains significant market positions in each of our business segments-Institutional Securities, Wealth Management and Investment Management. Through our subsidiaries and affiliates, we provide a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Additional information related to our business segments, respective clients, and products and services provided is included under "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Competition

All aspects of our businesses are highly competitive, and we expect them to remain so. We compete in the U.S. and globally for clients, market share and human talent. Operating within the financial services industry on a global basis

presents, among other things, technological, risk management, regulatory and other infrastructure challenges that require effective resource allocation in order for us to remain competitive. Our competitive position depends on our reputation and the quality and consistency of our long-term investment performance. Our ability to sustain or improve our competitive position also depends substantially on our ability to continue to attract and retain highly qualified employees while managing compensation and other costs. We compete with commercial banks, brokerage firms, insurance companies, exchanges, electronic trading and clearing platforms, financial data repositories, sponsors of mutual funds, hedge funds and private equity funds, energy companies, financial technology firms and other companies offering financial or ancillary services in the U.S., globally and through the internet. In addition, restrictive laws and regulations applicable to certain U.S. financial services institutions, such as Morgan Stanley, which may prohibit us from engaging in certain transactions and impose more stringent capital and liquidity requirements, can put us at a competitive disadvantage to competitors in certain businesses not subject to these same requirements. See also "Supervision and Regulation" below and "Risk Factors."

Institutional Securities and Wealth Management

Our competitive position for our Institutional Securities and Wealth Management business segments depends on innovation, execution capability and relative pricing. We compete directly in the U.S. and globally with other securities and financial services firms and broker-dealers and with others on a regional or product basis. Additionally, there is increased competition driven by established firms as well as the emergence of new firms and business models (including innovative uses of technology) competing for the same clients and assets or offering similar products and services.

Our ability to access capital at competitive rates (which is generally impacted by our credit ratings), to commit and to deploy capital efficiently, particularly in our capital-intensive underwriting and sales, trading, financing and market-making activities, also affects our competitive position. Corporate clients may request that we provide loans or lending commitments in connection with certain investment banking activities and such requests are expected to continue.

It is possible that competition may become even more intense as we continue to compete with financial institutions that may be larger, or better capitalized, or may have a stronger local presence and longer operating history in certain geographies or products. Many of these firms have the ability to offer a wide range of products and services that may enhance their competitive position and could result in pricing pressure on our businesses. In addition, our business is subject to extensive regulation in the U.S. and abroad, while certain of our

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competitors may be subject to less stringent legal and regulatory regimes than us, thereby putting us at a competitive disadvantage.

We continue to experience intense price competition in some of our businesses. In particular, the ability to execute securities trades electronically on exchanges and through other automated trading markets has increased the pressure on trading commissions and comparable fees. The trend toward direct access to automated, electronic markets will likely increase as additional trading moves to more automated platforms. It is also possible that we will experience competitive pressures in these and other areas in the future as some of our competitors seek to obtain market share by reducing prices (in the form of commissions or pricing).

Investment Management

Our ability to compete successfully in the asset management industry is affected by several factors, including our reputation, investment objectives, quality of investment professionals, performance of investment strategies or product offerings relative to peers and appropriate benchmark indices, advertising and sales promotion efforts, fee levels, the effectiveness of and access to distribution channels and investment pipelines, and the types and quality of products offered. Our investment products, including alternative investment products, may compete with investments offered by other investment managers with passive investment products or who may be subject to less stringent legal and regulatory regimes than us.

Supervision and Regulation

As a major financial services firm, we are subject to extensive regulation by U.S. federal and state regulatory agencies and securities exchanges and by regulators and exchanges in each of the major markets where we conduct our business. Legislative and regulatory responses to the 2007-2008 financial crisis, both in the U.S. and worldwide, have resulted in major changes to the way we are regulated and conduct our business. These laws and regulations include the Dodd-Frank Act; risk-based capital, leverage and liquidity standards adopted or being developed by the Basel Committee on Banking Supervision ("Basel Committee"), including Basel III, and the national implementation of those standards; capital planning and stress testing requirements; and new resolution regimes in the U.S. and other jurisdictions. Some areas of regulation are still subject to final rulemaking or transition periods.

We continue to monitor the changing political, tax and regulatory environment; it is likely that there will be further changes in the way major financial institutions are regulated in both the U.S. and other markets in which we operate,

although it remains difficult to predict the exact impact these changes will have on our business, financial condition, results of operations and cash flows for a particular future period and we expect to remain subject to extensive supervision and regulation.

Financial Holding Company

Consolidated Supervision.     We have operated as a BHC and FHC under the BHC Act since September 2008. As a BHC, we are subject to comprehensive consolidated supervision, regulation and examination by the Federal Reserve. Under existing regulation, the Federal Reserve has heightened authority to examine, prescribe regulations and take action with respect to all of our subsidiaries. In particular, we are, or will become, subject to (among other things): significantly revised and expanded regulation and supervision; more intensive scrutiny of our businesses and plans for expansion of those businesses; activities limitations; a systemic risk regime that imposes heightened capital and liquidity requirements; restrictions on activities and investments imposed by a section of the BHC Act added by the Dodd-Frank Act referred to as the "Volcker Rule"; and comprehensive derivatives regulation. In addition, the Consumer Financial Protection Bureau has primary rulemaking, enforcement and examination authority over us and our subsidiaries with respect to federal consumer protection laws, to the extent applicable.

Scope of Permitted Activities.     The BHC Act limits the activities of BHCs and FHCs and grants the Federal Reserve authority to limit our ability to conduct activities. We must obtain the Federal Reserve's approval before engaging in certain banking and other financial activities both in the U.S. and internationally.

The BHC Act grandfathers "activities related to the trading, sale or investment in commodities and underlying physical properties," provided that we were engaged in "any of such activities as of September 30, 1997 in the U.S." and provided that certain other conditions that are within our reasonable control are satisfied. We currently engage in our commodities activities pursuant to the BHC Act grandfather exemption as well as other authorities under the BHC Act.

Activities Restrictions under the Volcker Rule.     The Volcker Rule prohibits "banking entities," including us and our affiliates, from engaging in certain "proprietary trading" activities, as defined in the Volcker Rule, subject to exemptions for underwriting, market-making-related activities, risk-mitigating hedging and certain other activities. The Volcker Rule also prohibits certain investments and relationships by banking entities with "covered funds," with a number of exemptions and exclusions. Banking entities were required to bring all of their activities and investments into conformance with the Volcker Rule by July 21, 2015, subject to certain

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extensions. In June 2017, the Federal Reserve approved our application for a five-year extension of the transition period to conform investments in certain legacy covered funds that are also illiquid funds. The approval covers essentially all of our non-conforming investments in, and relationships with, legacy covered funds subject to the Volcker Rule. The Volcker Rule also requires that deductions be made from a BHC's Tier 1 capital for permissible investments in covered funds. In addition, the Volcker Rule requires banking entities to have comprehensive compliance programs reasonably designed to ensure and monitor compliance with the Volcker Rule.

Capital Standards.     The Federal Reserve establishes capital requirements, including well-capitalized standards, for large BHCs and evaluates our compliance with such requirements. The OCC establishes similar capital requirements and standards for Morgan Stanley Bank, N.A. ("MSBNA") and Morgan Stanley Private Bank, National Association ("MSPBNA") (collectively, our "U.S. Bank Subsidiaries").

Regulatory Capital Framework.     The regulatory capital requirements for us and our U.S. Bank Subsidiaries are largely based on the Basel III capital standards established by the Basel Committee and also implement certain provisions of the Dodd-Frank Act. We are subject to various risk-based capital requirements with various transition provisions, measured against our Common Equity Tier 1 capital, Tier 1 capital and Total capital bases, leverage-based capital requirements, including the SLR, and additional capital buffers above generally applicable minimum standards for BHCs.

In December 2017, the Basel Committee released its agreement on a comprehensive set of revisions to its Basel III Framework. The revised requirements are expected to take effect starting January 2022, subject to U.S. banking agencies issuing implementation proposals. The impact on us of any revisions to the Basel Committee's capital standards is uncertain and depends on future rulemakings by the U.S. banking agencies.

Regulated Subsidiaries.     In addition, many of our regulated subsidiaries are, or are expected to be in the future, subject to regulatory capital requirements, including regulated subsidiaries registered as "swap dealers" with the CFTC or "security-based swap dealers" with the SEC (collectively, "Swaps Entities") or registered as broker-dealers or futures commission merchants. Specific regulatory capital requirements vary by regulated subsidiary, and in many cases these standards are not yet established or are subject to ongoing rulemakings that could substantially modify requirements.

For more information about the specific capital requirements applicable to us and our U.S. Bank Subsidiaries, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Regulatory Requirements."

Capital Planning, Stress Tests and Capital Distributions.     Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements for large BHCs, including Morgan Stanley. The Dodd-Frank Act also requires each of our U.S. Bank Subsidiaries to conduct an annual stress test. For more information about the capital planning and stress test requirements, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Regulatory Requirements."

In addition to capital planning requirements, the OCC, the Federal Reserve and the FDIC have the authority to prohibit or to limit the payment of dividends by the banking organizations they supervise, including us and our U.S. Bank Subsidiaries, if, in the banking regulator's opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization. All of these policies and other requirements could affect our ability to pay dividends and/or repurchase stock, or require us to provide capital assistance to our U.S. Bank Subsidiaries under circumstances which we would not otherwise decide to do so.

Liquidity Standards.     In addition to capital regulations, the U.S. banking agencies and the Basel Committee have adopted, or are in the process of considering, liquidity standards. We and our U.S. Bank Subsidiaries are subject to the U.S. banking agencies' LCR requirements, which generally follow Basel Committee standards. Similarly, we and our U.S. Bank Subsidiaries will become subject to NSFR requirements, if adopted by the U.S. banking agencies, and the proposed NSFR requirements generally follow Basel Committee standards.

In addition to the LCR and NSFR, we and many of our regulated subsidiaries, including those registered as Swaps Entities with the CFTC or SEC, are, or are expected to be in the future, subject to other liquidity standards, including liquidity stress-testing and associated liquidity reserve requirements.

For more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Regulatory Liquidity Framework."

Systemic Risk Regime.     The Dodd-Frank Act established a systemic risk regime to which BHCs with $50 billion or more in consolidated assets, such as Morgan Stanley, are subject. Under rules issued by the Federal Reserve to implement

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certain requirements of the Dodd-Frank Act's enhanced prudential standards, such BHCs must conduct internal liquidity stress tests, maintain unencumbered highly liquid assets to meet projected net cash outflows for 30 days over the range of liquidity stress scenarios used in internal stress tests, and comply with various liquidity risk management requirements. Institutions also must comply with a range of risk management and corporate governance requirements.

In March 2016, the Federal Reserve re-proposed rules that would establish single-counterparty credit limits for large banking organizations ("covered companies"), with more stringent limits for the largest covered companies. U.S. G-SIBs, including the Firm, would be subject to a limit of 15% of Tier 1 capital for credit exposures to any "major counterparty" (defined as other U.S. G-SIBs, foreign G-SIBs and nonbank systemically important financial institutions supervised by the Federal Reserve) and to a limit of 25% of Tier 1 capital for credit exposures to any other unaffiliated counterparty.

In addition, the Federal Reserve has proposed rules that would create a new early remediation framework to address financial distress or material management weaknesses. The Federal Reserve also has the ability to establish additional prudential standards, including those regarding contingent capital, enhanced public disclosures and limits on short-term debt, including off-balance sheet exposures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Regulatory Requirements-Total Loss-Absorbing Capacity and Long-Term Debt Requirement."

Under the systemic risk regime, if the Federal Reserve or the Financial Stability Oversight Council determines that a BHC with $50 billion or more in consolidated assets poses a "grave threat" to U.S. financial stability, the institution may be, among other things, restricted in its ability to merge or offer financial products and/or required to terminate activities and dispose of assets.

See also "Capital Standards" and "Liquidity Standards" herein and "Resolution and Recovery Planning" below.

Resolution and Recovery Planning.     Pursuant to the Dodd-Frank Act, we are required to periodically submit to the Federal Reserve and the FDIC a resolution plan that describes our strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of our material financial distress or failure. Our preferred resolution strategy, which is set out in our 2017 resolution plan, is an SPOE strategy. An SPOE strategy generally contemplates the provision of additional capital and liquidity by the Parent Company to certain of its subsidiaries so that such subsidiaries have the resources necessary to implement the resolution strategy after the Parent Company has filed for bankruptcy.

Further, we are required to submit an annual recovery plan to the Federal Reserve that outlines the steps that management could take over time to generate or conserve financial resources in times of prolonged financial stress.

Certain of our domestic and foreign subsidiaries are also subject to resolution and recovery planning requirements in the jurisdictions in which they operate. For example, MSBNA must submit to the FDIC an annual resolution plan that describes MSBNA's strategy for a rapid and orderly resolution in the event of material financial distress or failure of MSBNA. In September 2016, the OCC issued final guidelines that establish enforceable standards for recovery planning by national banks and certain other institutions with total consolidated assets of $50 billion or more, calculated on a rolling four-quarter average basis, including MSBNA and MSPBNA. The guidelines were effective on January 1, 2017, and applied to MSBNA as of January 1, 2018. MSPBNA must be in compliance by October 1, 2018.

In addition, certain financial companies, including BHCs such as the Firm and certain of its covered subsidiaries, can be subjected to a resolution proceeding under the orderly liquidation authority in Title II of the Dodd-Frank Act with the FDIC being appointed as receiver, provided that certain procedures are met, including certain extraordinary financial distress and systemic risk determinations by the U.S. Treasury Secretary in consultation with the U.S. President. The orderly liquidation authority rulemaking is proceeding in stages, with some regulations now finalized and others not yet proposed. If we were subject to the orderly liquidation authority, the FDIC would have considerable powers, including: the power to remove directors and officers responsible for our failure and to appoint new directors and officers; the power to assign our assets and liabilities to a third party or bridge financial company without the need for creditor consent or prior court review; the ability to differentiate among our creditors, including by treating certain creditors within the same class better than others, subject to a minimum recovery right on the part of disfavored creditors to receive at least what they would have received in bankruptcy liquidation; and broad powers to administer the claims process to determine distributions from the assets of the receivership. The FDIC has been developing an SPOE strategy that could be used to implement the orderly liquidation authority.

Regulators have taken and proposed various actions to facilitate an SPOE strategy under the U.S. Bankruptcy Code, the orderly liquidation authority or other resolution regimes.

In September 2017, the Federal Reserve issued a final rule that would impose contractual requirements on certain QFCs ("covered QFCs") to which U.S. G-SIBs, including us, and their subsidiaries are parties. The OCC issued a final rule in

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November 2017 that imposes substantively identical requirements on national banks that are subsidiaries of U.S. G-SIBs, including our U.S. Bank Subsidiaries, as well as certain other institutions (together with the entities covered by the Federal Reserve final rule, the "covered entities"). Under the Federal Reserve's and OCC's final rules, covered QFCs must generally expressly provide that transfer restrictions and default rights against covered entities are limited to the same extent as they would be under the Federal Deposit Insurance Act and Title II of the Dodd-Frank Act and their implementing regulations. In addition, covered QFCs may not, among other things, permit the exercise of any cross-default right against covered entities based on an affiliate's entry into insolvency, resolution or similar proceedings, subject to certain creditor protections. There is a phased-in compliance schedule based on counterparty type, with the first compliance date of January 1, 2019.

For more information about our resolution plan-related submissions and associated regulatory actions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Regulatory Requirements-Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Regulatory Developments-Resolution and Recovery Planning."

Cyber and Information Security Risk Management. As a general matter, the financial services industry faces increased global regulatory focus regarding cyber and information security risk management practices. Many aspects of our businesses are subject to cybersecurity legal and regulatory requirements enacted by U.S. federal and state governments and other non-U.S. jurisdictions in Europe and Asia. These laws are aimed at codifying basic cybersecurity protections and mandating data breach notification requirements.

Certain of our businesses are also subject to privacy and data protection information security legal requirements concerning the use and protection of certain customer information. For example, the General Data Protection Regulation (GDPR) is scheduled to become effective in the E.U. on May 25, 2018 as a replacement for the E.U. Data Protection Directive. The GDPR imposes mandatory breach notification obligations, including significant fines for noncompliance, enhanced governance and accountability requirements and has extraterritorial impact. In addition, other jurisdictions have adopted or are proposing GDPR or similar standards, such as Australia, Singapore, Japan, Columbia, Argentina, India, Turkey, Hong Kong and Switzerland.

U.S. Bank Subsidiaries

U.S. Bank Subsidiaries.     MSBNA, primarily a wholesale commercial bank, offers commercial lending and certain retail securities-based lending services in addition to deposit products, and also conducts certain foreign exchange activities.

MSPBNA offers certain mortgage and other secured lending products, including retail securities-based lending products, primarily for customers of our affiliate retail broker-dealer, Morgan Stanley Smith Barney LLC ("MSSB LLC"). MSPBNA also offers certain deposit products and prime brokerage custody services.

Both MSBNA and MSPBNA are FDIC-insured national banks subject to supervision, regulation and examination by the OCC. They are both subject to the OCC's risk governance guidelines, which establish heightened standards for a large national bank's risk governance framework and the oversight of that framework by the bank's board of directors.

Prompt Corrective Action.     The Federal Deposit Insurance Corporation Improvement Act of 1991 provides a framework for regulation of depository institutions and their affiliates, including parent holding companies, by their federal banking regulators. Among other things, it requires the relevant federal banking regulator to take prompt corrective action with respect to a depository institution if that institution does not meet certain capital adequacy standards. These regulations generally apply only to insured banks and thrifts such as MSBNA or MSPBNA and not to their parent holding companies. The Federal Reserve is, however, separately authorized to take appropriate action at the holding company level, subject to certain limitations. Under the systemic risk regime, as described above, we also would become subject to an early remediation protocol in the event of financial distress. In addition, BHCs, such as Morgan Stanley, are required to serve as a source of strength to their U.S. bank subsidiaries and commit resources to support these subsidiaries in the event such subsidiaries are in financial distress.

Transactions with Affiliates.     Our U.S. Bank Subsidiaries are subject to Sections 23A and 23B of the Federal Reserve Act, which impose restrictions on "covered transactions" with any affiliates. Covered transactions include any extension of credit to, purchase of assets from, and certain other transactions by insured banks with an affiliate. These restrictions limit the total amount of credit exposure that our U.S. Bank Subsidiaries may have to any one affiliate and to all affiliates. Sections 23A and 23B also set collateral requirements and require all such transactions to be made on market terms. Derivatives, securities borrowing and securities lending transactions between our U.S. Bank Subsidiaries and their affiliates are subject to these restrictions. The Federal Reserve has

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indicated that it will propose a rulemaking to implement changes to these restrictions made by the Dodd-Frank Act.

In addition, the Volcker Rule generally prohibits covered transactions between (i) us or any of our affiliates and (ii) covered funds for which we or any of our affiliates serve as the investment manager, investment adviser, commodity trading advisor or sponsor, or other covered funds organized and offered by us or any of our affiliates pursuant to specific exemptions in the Volcker Rule. See also "Financial Holding Company-Activities Restriction under the Volcker Rule" above.

FDIC Regulation.     An FDIC-insured depository institution is generally liable for any loss incurred or expected to be incurred by the FDIC in connection with the failure of an insured depository institution under common control by the same BHC. As commonly controlled FDIC-insured depository institutions, each of MSBNA and MSPBNA could be responsible for any loss to the FDIC from the failure of the other. In addition, both institutions are exposed to changes in the cost of FDIC insurance. Under the Dodd-Frank Act, some of the restoration of the FDIC's reserve fund must be paid for exclusively by large depository institutions, including MSBNA.

Institutional Securities and Wealth Management

Broker-Dealer and Investment Adviser Regulation.     Our primary U.S. broker-dealer subsidiaries, Morgan Stanley & Co. LLC ("MS&Co.") and MSSB LLC, are registered broker-dealers with the SEC and in all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands, and are members of various self-regulatory organizations, including FINRA, and various securities exchanges and clearing organizations. Broker-dealers are subject to laws and regulations covering all aspects of the securities business, including sales and trading practices, securities offerings, publication of research reports, use of customers' funds and securities, capital structure, risk management controls in connection with market access, recordkeeping and retention, and the conduct of their directors, officers, representatives and other associated persons. Broker-dealers are also regulated by securities administrators in those states where they do business. Violations of the laws and regulations governing a broker-dealer's actions could result in censures, fines, the issuance of cease-and-desist orders, revocation of licenses or registrations, the suspension or expulsion from the securities industry of such broker-dealer or its officers or employees, or other similar consequences by both federal and state securities administrators. Our broker-dealer subsidiaries are also members of the Securities Investor Protection Corporation, which provides certain protections for customers of broker-dealers against losses in the event of the insolvency of a broker-dealer.

MSSB LLC is also a registered investment adviser with the SEC. MSSB LLC's relationship with its investment advisory clients is subject to the fiduciary and other obligations imposed on investment advisers under the Investment Advisers Act of 1940, and the rules and regulations promulgated thereunder as well as various state securities laws. These laws and regulations generally grant the SEC and other supervisory bodies broad administrative powers to address non-compliance, including the power to restrict or limit MSSB LLC from carrying on its investment advisory and other asset management activities. Other sanctions that may be imposed include the suspension of individual employees, limitations on engaging in certain activities for specified periods of time or for specified types of clients, the revocation of registrations, other censures and significant fines.

The Firm is subject to various regulations that affect broker-dealer sales practices and customer relationships. For example, under the Dodd-Frank Act, the SEC is authorized to impose a fiduciary duty rule applicable to broker-dealers when providing personalized investment advice about securities to retail customers, although the SEC has not yet acted on this authority.

As a separate matter, the U.S. DOL's conflict of interest rule under ERISA went into effect on June 9, 2017. The rule, which broadens the circumstances under which a firm and/or financial adviser is considered a fiduciary when providing certain recommendations to retirement investors and requires that such recommendations be in the best interests of clients, is subject to phased-in compliance. As of June 9, 2017, we and our financial advisers are considered ERISA fiduciaries under the rule when providing investment advice for a fee to retirement investors. Full compliance with the rule's related exemptions is currently scheduled to be required by July 1, 2019. In addition, the U.S. DOL is undertaking an examination of the rule that may result in changes to the rule or its related exemptions or a change in the full compliance date. Given the breadth and scale of our platform and continued investment in technology and infrastructure, we believe that we will be able to provide compliant solutions to meet our clients' investment needs. However, these developments may impact the manner in which affected businesses are conducted, decrease profitability and increase potential litigation or enforcement risk.

Margin lending by broker-dealers is regulated by the Federal Reserve's restrictions on lending in connection with customer and proprietary purchases and short sales of securities, as well as securities borrowing and lending activities. Broker-dealers are also subject to maintenance and other margin requirements imposed under FINRA and other self-regulatory organization rules. In many cases, our broker-dealer subsidiaries' margin policies are more stringent than these rules.

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As registered U.S. broker-dealers, certain of our subsidiaries are subject to the SEC's net capital rule and the net capital requirements of various exchanges, other regulatory authorities and self-regulatory organizations. These rules are generally designed to measure the broker-dealer subsidiary's general financial integrity and/or liquidity and require that at least a minimum amount of net and/or liquid assets be maintained by the subsidiary. See also "Financial Holding Company-Consolidated Supervision" and "Financial Holding Company-Liquidity Standards" above. Rules of FINRA and other self-regulatory organizations also impose limitations and requirements on the transfer of member organizations' assets.

Research.     Research-related regulations have been implemented in many jurisdictions, including in the U.S., where FINRA has adopted rules that cover research relating to both equity and debt securities. In addition, European regulators have introduced new requirements in MiFID II relating to the unbundling of research services and execution services, which may affect the way we conduct our activities. Both U.S. and non-U.S. regulators continue to focus on research conflicts of interest and may impose additional regulations.

Regulation of Futures Activities and Certain Commodities Activities.     MS&Co., as a futures commission merchant, and MSSB LLC, as an introducing broker, are subject to net capital requirements of, and certain of their activities are regulated by, the CFTC, the NFA, CME Group, and various commodity futures exchanges. MS&Co. and MSSB LLC and certain of their affiliates are registered members of the NFA in various capacities. Rules and regulations of the CFTC, NFA and commodity futures exchanges address obligations related to, among other things, customer protections, the segregation of customer funds and the holding of secured amounts, the use by futures commission merchants of customer funds, recordkeeping and reporting obligations of futures commission merchants and introducing brokers, risk disclosure, risk management and discretionary trading.

Our commodities activities are subject to extensive and evolving energy, commodities, environmental, health and safety, and other governmental laws and regulations in the U.S. and abroad. Intensified scrutiny of certain energy markets by U.S. federal, state and local authorities in the U.S. and abroad and by the public has resulted in increased regulatory and legal enforcement and remedial proceedings involving companies conducting the activities in which we are engaged.

Derivatives Regulation.     Under the U.S. regulatory regime for "swaps" and "security-based swaps" (collectively, "Swaps") implemented pursuant to the Dodd-Frank Act, we

are subject to regulations including, among others, public and regulatory reporting, central clearing and mandatory trading on regulated exchanges or execution facilities for certain types of Swaps. The CFTC has completed the majority of its regulations in this area, most of which are in effect. The SEC has also finalized many of its Swaps regulations, although a significant number are not yet in effect. The Dodd-Frank Act also requires the registration of "swap dealers" with the CFTC and "security-based swap dealers" with the SEC. Certain of our subsidiaries have registered with the CFTC as swap dealers and will in the future be required to register with the SEC as security-based swap dealers. Such Swaps Entities are or will be subject to a comprehensive regulatory regime with new obligations for the Swaps activities for which they are registered, including capital requirements, margin requirements for uncleared Swaps and comprehensive business conduct rules. Each of the CFTC and the SEC have proposed rules to impose capital standards on Swaps Entities subject to its respective jurisdiction, which include our subsidiaries, but these rules have not yet been finalized.

The specific parameters of some of these requirements for Swaps have been and continue to be developed through the CFTC, SEC and bank regulator rulemakings. In 2015, the federal banking regulators and the CFTC separately issued final rules establishing uncleared swap margin requirements for Swaps Entities subject to their respective regulation, including MSBNA, Morgan Stanley Capital Services LLC and Morgan Stanley & Co. International plc ("MSIP"), respectively. The variation margin requirements under these rules were effective as of March 1, 2017. The rules phase-in initial margin requirements from September 1, 2016 through September 1, 2020, depending on the level of OTC derivatives activity of the swap dealer and the relevant counterparty. Margin rules with the same or similar compliance dates have been adopted or are in the process of being finalized by regulators outside the U.S., and certain of our subsidiaries may be subject to such rules.

Although important areas within the global derivatives regulatory framework have been finalized in recent years, additional changes are expected. As the framework evolves, we expect to continue to face increased costs and regulatory oversight. Complying with registration and other regulatory requirements has required, and is expected to require in the future, systems and other changes. Compliance with Swaps-related regulatory capital requirements may also require us to devote more capital to our Swaps business.

Our Institutional Securities and Wealth Management business activities are also regulated in jurisdictions outside the U.S. See "Non-U.S. Regulation" herein.

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Investment Management

Many of the subsidiaries engaged in our asset management activities are registered as investment advisers with the SEC. Many aspects of our asset management activities are also subject to federal and state laws and regulations primarily intended to benefit the investor or client. These laws and regulations generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict us from carrying on our asset management activities in the event that we fail to comply with such laws and regulations. Sanctions that may be imposed for such failure include the suspension of individual employees, limitations on our engaging in various asset management activities for specified periods of time or specified types of clients, the revocation of registrations, other censures and significant fines. In order to facilitate our asset management business, a U.S. broker-dealer subsidiary of ours, Morgan Stanley Distribution, Inc., acts as distributor to the Morgan Stanley mutual funds and as placement agent to certain private investment funds managed by our Investment Management business segment.

Our asset management activities are subject to certain additional laws and regulations, including, but not limited to, additional reporting and recordkeeping requirements (including with respect to clients that are private funds) and restrictions on sponsoring or investing in, or maintaining certain other relationships with, "covered funds," as defined in the Volcker Rule, subject to certain limited exemptions. Many of these requirements have increased the expenses associated with our asset management activities and/or reduced the investment returns we are able to generate for us and our asset management clients. See also "Financial Holding Company-Activities Restrictions under the Volcker Rule."

In addition, certain of our affiliates are registered as commodity trading advisors and/or commodity pool operators, or are operating under certain exemptions from such registration pursuant to CFTC rules and other guidance, and have certain responsibilities with respect to each pool they advise. Violations of the rules of the CFTC, the NFA or the commodity exchanges could result in remedial actions, including fines, registration restrictions or terminations, trading prohibitions or revocations of commodity exchange memberships. See also "Institutional Securities and Wealth Management-Broker-Dealer and Investment Adviser Regulation," "Institutional Securities and Wealth Management-Regulation of Futures Activities and Certain Commodities Activities," and "Institutional Securities and Wealth Management-Derivatives Regulation" above and "Non-U.S. Regulation," below for a discussion of other regulations that impact our Investment Management business

activities, including, among other things, the Department of Labor's conflict of interest rule and MiFID II.

Our Investment Management business activities are also regulated outside the U.S. For example, the FCA is the primary regulator of our business in the U.K.; the Financial Services Agency regulates our business in Japan; the Securities and Futures Commission of Hong Kong regulates our business in Hong Kong; and the Monetary Authority of Singapore regulates our business in Singapore. See also "Non-U.S. Regulation" herein.

Non-U.S. Regulation

All of our businesses are regulated extensively by non-U.S. regulators, including governments, securities exchanges, commodity exchanges, self-regulatory organizations, central banks and regulatory bodies, especially in those jurisdictions in which we maintain an office. Certain regulators have prudential, conduct and other authority over us or our subsidiaries, as well as powers to limit or restrict us from engaging in certain businesses or to conduct administrative proceedings that can result in censure, fines, the issuance of cease-and-desist orders, or the suspension or expulsion of a regulated entity or its affiliates.

Some of our subsidiaries are regulated as broker-dealers and other regulated entity types under the laws of the jurisdictions in which they operate. Subsidiaries engaged in banking and trust activities outside the U.S. are regulated by various government agencies in the particular jurisdiction where they are chartered, incorporated and/or conduct their business activity. For instance, the PRA, the FCA and several securities and futures exchanges in the U.K., including the London Stock Exchange and ICE Futures Europe, regulate our activities in the U.K.; the Bundesanstalt für Finanzdienstleistungsaufsicht (the Federal Financial Supervisory Authority) and the Deutsche Börse AG regulate our activities in the Federal Republic of Germany; the Financial Services Agency, the Bank of Japan, the Japanese Securities Dealers Association and several Japanese securities and futures exchanges regulate our activities in Japan; the Securities and Futures Commission of Hong Kong, the Hong Kong Monetary Authority and the Hong Kong Exchanges and Clearing Limited regulate our operations in Hong Kong; and the Monetary Authority of Singapore and the Singapore Exchange Limited regulate our business in Singapore.

Our largest non-U.S. entity, MSIP, is subject to extensive regulation and supervision by the PRA, which has broad legal authority to establish prudential and other standards applicable to MSIP that seek to ensure its safety and soundness and to minimize adverse effects on the stability of the U.K.

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financial system. MSIP is also regulated and supervised by the FCA with respect to business conduct matters.

Non-U.S. policymakers and regulators, including the European Commission and European Supervisory Authorities (among others, the European Banking Authority and the European Securities and Markets Authority), continue to propose and adopt numerous reforms, including those that may further impact the structure of banks, and to formulate regulatory standards and measures that will be of relevance and importance to our European operations.

In November 2016, the European Commission published a package of proposals including various risk reduction measures. These include proposed amendments to the Capital Requirements Directive and Regulation providing updates to risk-based capital, liquidity, leverage and other prudential standards on a consolidated basis, consistent with final Basel standards. In addition, the proposals would require certain large, non-E.U. financial groups with two or more institutions established in the E.U. to establish a single E.U. IHC. The proposals would require E.U. banks and broker-dealers to be held below the E.U. IHC; until more specific regulations are proposed, it remains unclear which other E.U. entities would need to be held beneath the E.U. IHC. The E.U. IHC would be subject to direct supervision and authorization by the European Central Bank or the relevant national E.U. regulator. Further amendments were also proposed to the E.U. bank recovery and resolution regime under the E.U. Bank Recovery and Resolution Directive ("BRRD"). The proposals will now be considered by the European Parliament and the Council of the E.U. The final form of the proposals, as well as the date of their adoption, is not yet certain.

The amendments to the BRRD build on previous proposals by regulators in the U.K., E.U. and other major jurisdictions to finalize recovery and resolution planning frameworks and related regulatory requirements that will apply to certain of our subsidiaries that operate in those jurisdictions. For instance, the BRRD established a recovery and resolution framework for E.U. credit institutions and investment firms, including MSIP. In addition, certain jurisdictions, including the U.K. and other E.U. jurisdictions, have implemented, or are in the process of implementing, changes to resolution regimes to provide resolution authorities with the ability to recapitalize a failing entity organized in such jurisdictions by writing down certain unsecured liabilities or converting certain unsecured liabilities into equity.

Regulators in the U.K., E.U. and other major jurisdictions have also finalized other regulatory standards applicable to certain of our subsidiaries that operate in those jurisdictions. For instance, the European Market Infrastructure Regulation introduced new requirements regarding the central clearing and reporting of derivatives, as well as margin requirements

for uncleared derivatives. MiFID II, which took effect on January 3, 2018, introduced comprehensive and new trading and market infrastructure reforms in the E.U., including new trading venues, enhancements to pre- and post-trading transparency, and additional investor protection requirements, among others. Although the full impact of these changes remains unclear, we have had to make extensive changes to our operations, including systems and controls in order to comply with MiFID II.

Financial Crimes Program

Our Financial Crimes program is coordinated on an enterprise-wide basis and supports our financial crime prevention efforts across all regions and business units with responsibility for governance, oversight and execution of our AML, economic sanctions ("Sanctions") and anti-corruption programs.

In the U.S., the Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001, imposes significant obligations on financial institutions to detect and deter money laundering and terrorist financing activity, including requiring banks, BHCs and their subsidiaries, broker-dealers, futures commission merchants, introducing brokers and mutual funds to implement AML programs, verify the identity of customers that maintain accounts, and monitor and report suspicious activity to appropriate law enforcement or regulatory authorities. Outside the U.S., applicable laws, rules and regulations similarly require designated types of financial institutions to implement AML programs.

We have implemented policies, procedures and internal controls that are designed to comply with all applicable AML laws and regulations. Regarding Sanctions, we have implemented policies, procedures and internal controls that are designed to comply with the regulations and economic sanctions programs administered by the U.S. Treasury's OFAC, which target foreign countries, entities and individuals based on external threats to U.S. foreign policy, national security or economic interests, and to comply, as applicable, with similar sanctions programs imposed by foreign governments or global or regional multilateral organizations such as the United Nations Security Council and the E.U. Council.

We are also subject to applicable anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, in the jurisdictions in which we operate. Anti-corruption laws generally prohibit offering, promising, giving or authorizing others to give anything of value, either directly or indirectly, to a government official or private party in order to influence official action or otherwise gain an unfair business advantage, such as to obtain or retain business. We have implemented policies, procedures and internal controls that are designed to comply with such laws, rules and regulations.

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Protection of Client Information

Many aspects of our businesses are subject to legal requirements concerning the use and protection of certain customer information, including those adopted pursuant to the Gramm-Leach-Bliley Act and the Fair and Accurate Credit Transactions Act of 2003 in the U.S., the E.U. Data Protection Directive and various laws in Asia, including the Japanese Personal Information (Protection) Law, the Hong Kong Personal Data (Protection) Ordinance and the Australian Privacy Act. We have adopted measures designed to comply with these and related applicable requirements in all relevant jurisdictions.

Executive Officers of Morgan Stanley

The executive officers of Morgan Stanley and their age and titles as of February 27, 2018 are set forth below. Business experience for the past five years is provided in accordance with SEC rules.

Jeffrey S. Brodsky (53) .    Executive Vice President and Chief Human Resources Officer of Morgan Stanley (since January 2016). Vice President and Global Head of Human Resources (January 2011 to December 2015). Co-Head of Human Resources (January 2010 to December 2011). Head of Morgan Stanley Smith Barney Human Resources (June 2009 to January 2010).

James P. Gorman (59) .    Chairman of the Board of Directors and Chief Executive Officer of Morgan Stanley (since January 2012). President and Chief Executive Officer (January 2010 to December 2011) and member of the Board of Directors (since January 2010). Co-President (December 2007 to December 2009) and Co-Head of Strategic Planning (October 2007 to December 2009). President and Chief Operating Officer of Wealth Management (February 2006 to April 2008).

Eric F. Grossman (51) .    Executive Vice President and Chief Legal Officer of Morgan Stanley (since January 2012). Global Head of Legal (September 2010 to January 2012).

Global Head of Litigation (January 2006 to September 2010) and General Counsel of the Americas (May 2009 to September 2010). General Counsel of Wealth Management (November 2008 to September 2010). Partner at the law firm of Davis Polk & Wardwell LLP (June 2001 to December 2005).

Keishi Hotsuki (55) .    Executive Vice President (since May 2014) and Chief Risk Officer of Morgan Stanley (since May 2011). Interim Chief Risk Officer (January 2011 to May 2011) and Head of Market Risk Department (March 2008 to April 2014). Director of Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (since May 2010). Global Head of Market Risk Management at Merrill Lynch (June 2005 to September 2007).

Colm Kelleher (60) .    President of Morgan Stanley (since January 2016). Executive Vice President (October 2007 to January 2016). President of Institutional Securities (January 2013 to January 2016). Head of International (January 2011 to January 2016). Co-President of Institutional Securities (January 2010 to December 2012). Chief Financial Officer and Co-Head of Strategic Planning (October 2007 to December 2009). Head of Global Capital Markets (February 2006 to October 2007). Co-Head of Fixed Income Europe (May 2004 to February 2006).

Jonathan M. Pruzan (49) .    Executive Vice President and Chief Financial Officer of Morgan Stanley (since May 2015). Co-Head of Global Financial Institutions Group (January 2010 to April 2015). Co-Head of North American Financial Institutions Group M&A (September 2007 to December 2009). Head of the U.S. Bank Group (April 2005 to August 2007).

Daniel A. Simkowitz (52) .    Head of Investment Management of Morgan Stanley (since October 2015). Co-Head of Global Capital Markets (March 2013 to September 2015). Chairman of Global Capital Markets (November 2009 to March 2013). Managing Director in Global Capital Markets (December 2000 to November 2009).

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Risk Factors

For a discussion of the risks and uncertainties that may affect our future results and strategic objectives, see "Forward-Looking Statements" immediately preceding "Business" and "Return on Equity and Tangible Common Equity Targets" and "Effects of Inflation and Changes in Interest and Foreign Exchange Rates" under "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Market Risk

Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio owned by us. For more information on how we monitor and manage market risk, see "Quantitative and Qualitative Disclosures about Market Risk-Risk Management-Market Risk."

Our results of operations may be materially affected by market fluctuations and by global and economic conditions and other factors, including changes in asset values.

Our results of operations have been in the past and may, in the future, be materially affected by market fluctuations due to global financial markets, economic conditions, changes to the global trade policies and other factors, including the level and volatility of equity, fixed income and commodity prices, the level and term structure of interest rates and currency values, and the level of other market indices.

The results of our Institutional Securities business segment, particularly results relating to our involvement in primary and secondary markets for all types of financial products, are subject to substantial market fluctuations due to a variety of factors that we cannot control or predict with great certainty. These fluctuations impact results by causing variations in new business flows and in the fair value of securities and other financial products. Fluctuations also occur due to the level of global market activity, which, among other things, affects the size, number and timing of investment banking client assignments and transactions and the realization of returns from our principal investments.

During periods of unfavorable market or economic conditions, the level of individual investor participation in the global markets, as well as the level of client assets, may also decrease, which would negatively impact the results of our Wealth Management business segment.

In addition, fluctuations in global market activity could impact the flow of investment capital into or from AUM and the way customers allocate capital among money market, equity, fixed income or other investment alternatives, which

could negatively impact our Investment Management business segment.

The value of our financial instruments may be materially affected by market fluctuations. Market volatility, illiquid market conditions and disruptions in the credit markets may make it extremely difficult to value certain of our financial instruments, particularly during periods of market displacement. Subsequent valuations in future periods, in light of factors then prevailing, may result in significant changes in the values of these instruments and may adversely impact historical or prospective performance-based fees (also known as incentive fees, which include carried interest) in respect of certain business. In addition, at the time of any sales and settlements of these financial instruments, the price we ultimately realize will depend on the demand and liquidity in the market at that time and may be materially lower than their current fair value. Any of these factors could cause a decline in the value of our financial instruments, which may have an adverse effect on our results of operations in future periods.

In addition, financial markets are susceptible to severe events evidenced by rapid depreciation in asset values accompanied by a reduction in asset liquidity. Under these extreme conditions, hedging and other risk management strategies may not be as effective at mitigating trading losses as they would be under more normal market conditions. Moreover, under these conditions, market participants are particularly exposed to trading strategies employed by many market participants simultaneously and on a large scale. Our risk management and monitoring processes seek to quantify and mitigate risk to more extreme market moves. However, severe market events have historically been difficult to predict and we could realize significant losses if extreme market events were to occur.

Holding large and concentrated positions may expose us to losses.

Concentration of risk may reduce revenues or result in losses in our market-making, investing, block trading, underwriting and lending businesses in the event of unfavorable market movements, or when market conditions are more favorable for our competitors. We commit substantial amounts of capital to these businesses, which often results in our taking large positions in the securities of, or making large loans to, a particular issuer or issuers in a particular industry, country or region. For further information regarding our country risk exposure, see also "Quantitative and Qualitative Disclosures about Market Risk-Risk Management-Credit Risk-Country Risk Exposure."

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Credit Risk

Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial obligations to us. For more information on how we monitor and manage credit risk, see "Quantitative and Qualitative Disclosures about Market Risk-Risk Management-Credit Risk."

We are exposed to the risk that third parties that are indebted to us will not perform their obligations.

We incur significant credit risk exposure through our Institutional Securities business segment. This risk may arise from a variety of business activities, including, but not limited to, extending credit to clients through various lending commitments; entering into swap or other derivative contracts under which counterparties have obligations to make payments to us; providing short- or long-term funding that is secured by physical or financial collateral whose value may at times be insufficient to fully cover the loan repayment amount; posting margin and/or collateral and other commitments to clearing houses, clearing agencies, exchanges, banks, securities firms and other financial counterparties; and investing and trading in securities and loan pools, whereby the value of these assets may fluctuate based on realized or expected defaults on the underlying obligations or loans.

We also incur credit risk in our Wealth Management business segment lending to mainly individual investors, including, but not limited to, margin- and securities-based loans collateralized by securities, residential mortgage loans and HELOC.

While we believe current valuations and reserves adequately address our perceived levels of risk, adverse economic conditions may negatively impact our clients and our credit exposures. In addition, as a clearing member of several central counterparties, we finance our customer positions and could be held responsible for the defaults or misconduct of our customers. Although we regularly review our credit exposures, default risk may arise from events or circumstances that are difficult to detect or foresee.

A default by a large financial institution could adversely affect financial markets.

The commercial soundness of many financial institutions may be closely interrelated as a result of credit, trading, clearing or other relationships among the institutions. Increased centralization of trading activities through particular clearing houses, central agents or exchanges as required by provisions of the Dodd-Frank Act may increase our concentration of risk with respect to these entities. As a result, concerns about, or a default or threatened default by,

one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This is sometimes referred to as "systemic risk" and may adversely affect financial intermediaries, such as clearing houses, clearing agencies, exchanges, banks and securities firms, with which we interact on a daily basis and, therefore, could adversely affect us. See also "Systemic Risk Regime" under "Business-Supervision and Regulation-Financial Holding Company."

Operational Risk

Operational risk refers to the risk of loss, or of damage to our reputation, resulting from inadequate or failed processes or systems, from human factors or from external events ( e.g. , fraud, theft, legal and compliance risks, cyber attacks or damage to physical assets). We may incur operational risk across the full scope of our business activities, including revenue-generating activities ( e.g. , sales and trading) and support and control groups ( e.g. , information technology and trade processing). Legal, regulatory and compliance risk is included in the scope of operational risk and is discussed below under "Legal, Regulatory and Compliance Risk." For more information on how we monitor and manage operational risk, see "Quantitative and Qualitative Disclosures about Market Risk-Risk Management-Operational Risk."

We are subject to operational risks, including a failure, breach or other disruption of our operational or security systems, which could adversely affect our businesses or reputation.

Our businesses are highly dependent on our ability to process and report, on a daily basis, a large number of transactions across numerous and diverse markets in many currencies. We may introduce new products or services or change processes or reporting, including in connection with new regulatory requirements, resulting in new operational risk that we may not fully appreciate or identify.

The trend toward direct access to automated, electronic markets and the move to more automated trading platforms has resulted in using increasingly complex technology that relies on the continued effectiveness of the programming code and integrity of the data to process the trades. We rely on the ability of our employees, consultants, our internal systems and systems at technology centers maintained by unaffiliated third parties to operate our different businesses and process a high volume of transactions. Additionally, we are subject to complex and evolving laws and regulations governing privacy and data protection, which may differ and potentially conflict, in various jurisdictions.

As a major participant in the global capital markets, we face the risk of incorrect valuation or risk management of our trading positions due to flaws in data, models, electronic trading systems or processes or due to fraud.

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We also face the risk of operational failure or termination of any of the clearing agents, exchanges, clearing houses or other financial intermediaries we use to facilitate our lending, securities and derivatives transactions. In the event of a breakdown or improper operation of our or a direct or indirect third party's systems or processes or improper or unauthorized action by third parties, including consultants and subcontractors or our employees, we could suffer financial loss, an impairment to our liquidity position, a disruption of our businesses, regulatory sanctions or damage to our reputation. In addition, the interconnectivity of multiple financial institutions with central agents, exchanges and clearing houses, and the increased importance of these entities, increases the risk that an operational failure at one institution or entity may cause an industry-wide operational failure that could materially impact our ability to conduct business. Furthermore, the concentration of financial institution company and personal information held by a handful of third parties increases the risk that a breach at a key third party may cause an industry-wide data breach that could significantly increase the cost and risk of conducting business.

Despite the business contingency and security response plans we have in place, there can be no assurance that such plans will fully mitigate all potential risks to us. Our ability to conduct business may be adversely affected by a disruption in the infrastructure that supports our business and the communities where we are located, which are concentrated in the New York metropolitan area, London, Hong Kong and Tokyo, as well as Mumbai, Budapest, Glasgow and Baltimore. This may include a disruption involving physical site access, cyber or information security incidents, terrorist activities, disease pandemics, catastrophic events, natural disasters, extreme weather events, electrical outage, environmental hazard, computer servers, communications or other services we use, our employees or third parties with whom we conduct business.

Although we employ backup systems for our data, those backup systems may be unavailable following a disruption, the affected data may not have been backed up or may not be recoverable from the backup, or the backup data may be costly to recover, which could adversely affect our business.

A cyber attack, information or security breach or a technology failure could adversely affect our ability to conduct our business, manage our exposure to risk or result in disclosure or misuse of confidential or proprietary information and otherwise adversely impact our results of operations, liquidity and financial condition, as well as cause reputational harm.

We maintain a significant amount of personal information on our customers, employees and certain counterparties that we

are required to protect under various state, federal and international data protection and privacy laws. These laws may be in conflict with one another, or courts and regulators may interpret them in ways that we had not anticipated or that adversely affect our business.

Cybersecurity and information risks for financial institutions have significantly increased in recent years in part because of the proliferation of new technologies, the use of the internet and mobile telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists and other external extremist parties, including foreign state actors, in some circumstances as a means to promote political ends. In addition to the growing sophistication of certain parties, the commoditization of cyber tools which are able to be weaponized by less sophisticated actors has led to an increase in the exploitation of technological vulnerabilities. Any of these parties may also attempt to fraudulently induce employees, customers, clients, vendors or other third parties or users of our systems to disclose sensitive information in order to gain access to our data or that of our employees or clients. Cybersecurity and information security risks may also derive from human error, fraud or malice on the part of our employees or third parties, including third party providers, or may result from accidental technological failure. In addition, third parties with whom we do business, their service providers, as well as other third parties with whom our customers do business, may also be sources of cybersecurity risks, particularly where activities of customers are beyond our security and control systems. There is no guarantee that the measures we take will provide absolute security or recoverability given the techniques used in cyber attacks are complex and frequently change, and may not be able to be anticipated.

Like other financial services firms, the Firm and its third party providers continue to be the subject of unauthorized access attacks, mishandling or misuse of information, computer viruses or malware, cyber attacks designed to obtain confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage, denial of service attacks, data breaches and other events. There can be no assurance that such unauthorized access, mishandling or misuse of information or cyber incidents will not occur in the future, and they could occur more frequently and on a more significant scale.

A cyber attack, information or security breach or a technology failure of ours or of a third party could jeopardize our or our clients', employees', partners', vendors' or counterparties' personal, confidential, proprietary or other information processed and stored in, and transmitted through, our and our third parties' computer systems. Furthermore, such events

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could cause interruptions or malfunctions in our, our clients', employees', partners', vendors', counterparties' or third parties' operations, as well as the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information of ours, our employees, our customers or of other third parties. Any of these events could result in reputational damage with our clients and the market, client dissatisfaction, additional costs to us to maintain and update our operational and security systems and infrastructure, regulatory investigations, litigation or enforcement, or regulatory fines or penalties, any of which could adversely affect our business, financial condition or results of operations.

Given our global footprint and the high volume of transactions we process, the large number of clients, partners, vendors and counterparties with which we do business, and the increasing sophistication of cyber attacks, a cyber attack, information or security breach could occur and persist for an extended period of time without detection. We expect that any investigation of a cyber attack would be inherently unpredictable and that it would take time before the completion of any investigation and before there is availability of full and reliable information. During such time we would not necessarily know the extent of the harm or how best to remediate it, and certain errors or actions could be repeated or compounded before they are discovered and remediated, all or any of which would further increase the costs and consequences of a cyber attack.

While many of our agreements with partners and third party vendors include indemnification provisions, we may not be able to recover sufficiently, or at all, under such provisions to adequately offset any losses. In addition, although we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber and information security risks, such insurance coverage may be insufficient to cover all losses.

The cost of managing cyber and information security risks and attacks along with complying with new and increasingly expansive regulatory requirements could adversely affect our business.

Liquidity Risk

Liquidity risk refers to the risk that we will be unable to finance our operations due to a loss of access to the capital markets or difficulty in liquidating our assets. Liquidity risk also encompasses our ability (or perceived ability) to meet our financial obligations without experiencing significant business disruption or reputational damage that may threaten our viability as a going concern. Liquidity risk also encompasses the associated funding risks triggered by the market or idiosyncratic stress events that may negatively affect our liquidity and may impact our ability to raise new funding. For

more information on how we monitor and manage liquidity risk, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" and "Quantitative and Qualitative Disclosures about Market Risk-Risk Management-Liquidity Risk."

Liquidity is essential to our businesses and we rely on external sources to finance a significant portion of our operations.

Liquidity is essential to our businesses. Our liquidity could be negatively affected by our inability to raise funding in the long-term or short-term debt capital markets or our inability to access the secured lending markets. Factors that we cannot control, such as disruption of the financial markets or negative views about the financial services industry generally, including concerns regarding fiscal matters in the U.S. and other geographic areas, could impair our ability to raise funding.

In addition, our ability to raise funding could be impaired if investors or lenders develop a negative perception of our long-term or short-term financial prospects due to factors such as an incurrence of large trading losses, a downgrade by the rating agencies, a decline in the level of our business activity, if regulatory authorities take significant action against us or our industry, or we discover significant employee misconduct or illegal activity.

If we are unable to raise funding using the methods described above, we would likely need to finance or liquidate unencumbered assets, such as our investment portfolios or trading assets, to meet maturing liabilities. We may be unable to sell some of our assets or we may have to sell assets at a discount to market value, either of which could adversely affect our results of operations, cash flows and financial condition.

Our borrowing costs and access to the debt capital markets depend on our credit ratings.

The cost and availability of unsecured financing generally are impacted by our long-term and short-term credit ratings. The rating agencies continue to monitor certain issuer specific factors that are important to the determination of our credit ratings, including governance, the level and quality of earnings, capital adequacy, liquidity and funding, risk appetite and management, asset quality, strategic direction, and business mix. Additionally, the rating agencies will look at other industry-wide factors such as regulatory or legislative changes, including, for example, regulatory changes, macro-economic environment, and perceived levels of third party support, and it is possible that they could downgrade our ratings and those of similar institutions.

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Our credit ratings also can have a significant impact on certain trading revenues, particularly in those businesses where longer term counterparty performance is a key consideration, such as OTC and other derivative transactions, including credit derivatives and interest rate swaps. In connection with certain OTC trading agreements and certain other agreements associated with our Institutional Securities business segment, we may be required to provide additional collateral to, or immediately settle any outstanding liability balance with, certain counterparties in the event of a credit ratings downgrade.

Termination of our trading and other agreements could cause us to sustain losses and impair our liquidity by requiring us to find other sources of financing or to make significant cash payments or securities movements. The additional collateral or termination payments which may occur in the event of a future credit rating downgrade vary by contract and can be based on ratings by either or both of Moody's Investors Service, Inc. and S&P Global Ratings. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Credit Ratings-Incremental Collateral or Terminating Payments upon Potential Future Rating Downgrade."

We are a holding company and depend on payments from our subsidiaries.

The Parent Company has no operations and depends on dividends, distributions and other payments from its subsidiaries to fund dividend payments and to fund all payments on its obligations, including debt obligations. Regulatory, tax restrictions or elections and other legal restrictions may limit our ability to transfer funds freely, either to or from our subsidiaries. In particular, many of our subsidiaries, including our broker-dealer subsidiaries, are subject to laws, regulations and self-regulatory organization rules that limit, as well as authorize regulatory bodies to block or reduce, the flow of funds to the Parent Company, or that prohibit such transfers or dividends altogether in certain circumstances, including steps to "ring fence" entities by regulators outside of the U.S. to protect clients and creditors of such entities in the event of financial difficulties involving such entities.

These laws, regulations and rules may hinder our ability to access funds that we may need to make payments on our obligations. Furthermore, as a BHC, we may become subject to a prohibition or to limitations on our ability to pay dividends. The OCC, the Federal Reserve and the FDIC have the authority, and under certain circumstances the duty, to prohibit or to limit the payment of dividends by the banking organizations they supervise, including us and our U.S. Bank Subsidiaries.

Our liquidity and financial condition have in the past been, and in the future could be, adversely affected by U.S. and international markets and economic conditions.

Our ability to raise funding in the long-term or short-term debt capital markets or the equity markets, or to access secured lending markets, has in the past been, and could in the future be, adversely affected by conditions in the U.S. and international markets and economies. Global market and economic conditions have been particularly disrupted and volatile in the last several years and may be in the future.

In particular, our cost and availability of funding in the past have been, and may in the future be, adversely affected by illiquid credit markets and wider credit spreads. Significant turbulence in the U.S., the E.U. and other international markets and economies could adversely affect our liquidity and financial condition and the willingness of certain counterparties and customers to do business with us.

Legal, Regulatory and Compliance Risk

Legal, regulatory and compliance risk includes the risk of legal or regulatory sanctions, material financial loss including fines, penalties, judgments, damages and/or settlements, or loss to reputation we may suffer as a result of our failure to comply with laws, regulations, rules, related self-regulatory organization standards and codes of conduct applicable to our business activities. This risk also includes contractual and commercial risk, such as the risk that a counterparty's performance obligations will be unenforceable. It also includes compliance with AML, anti-corruption and terrorist financing rules and regulations. For more information on how we monitor and manage legal, regulatory and compliance risk, see "Quantitative and Qualitative Disclosures about Market Risk-Risk Management-Legal and Compliance Risk."

The financial services industry is subject to extensive regulation, and changes in regulation will impact our business.

Like other major financial services firms, we are subject to extensive regulation by U.S. federal and state regulatory agencies and securities exchanges and by regulators and exchanges in each of the major markets where we conduct our business. These laws and regulations significantly affect the way we do business and can restrict the scope of our existing businesses and limit our ability to expand our product offerings and pursue certain investments.

The regulation of major financial firms, including the Firm, as well as of the markets in which we operate, is extensive and subject to ongoing change. We are, or will become,

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subject to (among other things) wide-ranging regulation and supervision, intensive scrutiny of our businesses and any plans for expansion of those businesses, limitations on new activities, a systemic risk regime that imposes heightened capital and liquidity requirements and other enhanced prudential standards, resolution regimes and resolution planning requirements, requirements for maintaining minimum amounts of external TLAC and external long-term debt, restrictions on activities and investments imposed by the Volcker Rule, comprehensive derivatives regulation, market structure regulation, tax regulations, antitrust laws, trade and transaction reporting obligations, and broadened fiduciary obligations.

In some areas, regulatory standards are subject to final rulemaking or transition periods or may otherwise be revised in whole or in part. Ongoing implementation of, or changes in, laws and regulations could materially impact the profitability of our businesses and the value of assets we hold, expose us to additional costs, require changes to business practices or force us to discontinue businesses, adversely affect our ability to pay dividends and repurchase our stock or require us to raise capital, including in ways that may adversely impact our shareholders or creditors.

In addition, regulatory requirements that are being imposed by foreign policymakers and regulators may be inconsistent or conflict with regulations that we are subject to in the U.S. and may adversely affect us. We expect legal and regulatory requirements to be subject to ongoing change for the foreseeable future, which may result in significant new costs to comply with new or revised requirements as well as to monitor for compliance on an ongoing basis.

The application of regulatory requirements and strategies in the U.S. or other jurisdictions to facilitate the orderly resolution of large financial institutions may pose a greater risk of loss for our security holders, and subject us to other restrictions.

Pursuant to the Dodd-Frank Act, we are required to periodically submit to the Federal Reserve and the FDIC a resolution plan that describes our strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of material financial distress or failure. If the Federal Reserve and the FDIC were to jointly determine that our resolution plan submission was not credible or would not facilitate an orderly resolution, and if we were unable to address any deficiencies identified by the regulators, we or any of our subsidiaries may be subject to more stringent capital, leverage, or liquidity requirements or restrictions on our growth, activities, or operations, or after a two-year period, we may be required to divest assets or operations.

In addition, provided that certain procedures are met, we can be subject to a resolution proceeding under the orderly liquidation authority under Title II of the Dodd-Frank Act with the FDIC being appointed as receiver. The FDIC's power under the orderly liquidation authority to disregard the priority of creditor claims and treat similarly situated creditors differently in certain circumstances, subject to certain limitations, could adversely impact holders of our unsecured debt. See "Business-Supervision and Regulation" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Regulatory Requirements."

Further, because both our resolution plan contemplates an SPOE strategy under the U.S. Bankruptcy Code and the FDIC has proposed an SPOE strategy through which it may apply its orderly liquidation authority powers, we believe that the application of an SPOE strategy is the reasonably likely outcome if either our resolution plan were implemented or a resolution proceeding were commenced under the orderly liquidation authority. An SPOE strategy generally contemplates the provision of additional capital and liquidity by the Parent Company to certain of its subsidiaries so that such subsidiaries have the resources necessary to implement the resolution strategy, and the Parent Company has entered into a secured amended and restated support agreement with its material entities, as defined in our 2017 resolution plan pursuant to which it would provide such capital and liquidity.

Under the secured amended and restated support agreement, upon the occurrence of a resolution scenario, including one in which an SPOE strategy is used, the Parent Company will be obligated to contribute or loan on a subordinated basis all of its contributable material assets, other than shares in subsidiaries of the Parent Company and certain intercompany payables, to provide capital and liquidity, as applicable, to our material entities, as defined in our 2017 resolution plan. The obligations of the Parent Company under the secured amended and restated support agreement are in most cases secured on a senior basis by the assets of the Parent Company (other than shares in subsidiaries of the Parent Company). As a result, claims of our material entities against the assets of the Parent Company (other than shares in subsidiaries of the Parent Company) will be effectively senior to unsecured obligations of the Parent Company. Such unsecured obligations would be at risk of absorbing losses of the Parent Company and its subsidiaries.

Although an SPOE strategy, whether applied pursuant to our resolution plan or in a resolution proceeding under the orderly liquidation authority, is intended to result in better outcomes for creditors overall, there is no guarantee that the application of an SPOE strategy, including the provision of support to the

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Parent Company's material entities pursuant to the secured amended and restated support agreement, will not result in greater losses for holders of our securities compared to a different resolution strategy for us.

Regulators have taken and proposed various actions to facilitate an SPOE strategy under the U.S. Bankruptcy Code, the orderly liquidation authority or other resolution regimes. For example, the Federal Reserve has issued a final rule that requires top-tier BHCs of U.S. G-SIBs, including Morgan Stanley, to maintain minimum amounts of equity and eligible long-term debt TLAC in order to ensure that such institutions have enough loss-absorbing resources at the point of failure to be recapitalized through the conversion of debt to equity or otherwise by imposing losses on eligible TLAC where the SPOE strategy is used. The combined implication of the SPOE resolution strategy and the TLAC final rule is that our losses will be imposed on the holders of eligible long-term debt and other forms of eligible TLAC issued by the Parent Company before any losses are imposed on the holders of the debt securities of our operating subsidiaries or before putting U.S. taxpayers at risk.

In addition, certain jurisdictions, including the U.K. and other E.U. jurisdictions, have implemented, or are in the process of implementing, changes to resolution regimes to provide resolution authorities with the ability to recapitalize a failing entity organized in such jurisdiction by writing down certain unsecured liabilities or converting certain unsecured liabilities into equity. Such "bail-in" powers are intended to enable the recapitalization of a failing institution by allocating losses to its shareholders and unsecured creditors. Non-U.S. regulators are also considering requirements that certain subsidiaries of large financial institutions maintain minimum amounts of TLAC that would pass losses up from the subsidiaries to the Parent Company and, ultimately, to security holders of the Parent Company in the event of failure.

We may be prevented from paying dividends or taking other capital actions because of regulatory constraints or revised regulatory capital standards.

We are subject to comprehensive consolidated supervision, regulation and examination by the Federal Reserve, which requires us to submit, on an annual basis, a capital plan describing proposed dividend payments to shareholders, proposed repurchases of our outstanding securities and other proposed capital actions that we intend to take. The Federal Reserve may object to, or otherwise require us to modify, such plan, or may object or require modifications to a resubmitted capital plan, any of which would adversely affect shareholders.

In addition, beyond review of the plan, the Federal Reserve may impose other restrictions or conditions on us that prevent

us from paying or increasing dividends, repurchasing securities or taking other capital actions that would benefit shareholders. Finally, the Federal Reserve may change regulatory capital standards to impose higher requirements that restrict our ability to take capital actions or may modify or impose other regulatory standards that increase our operating expenses and reduce our ability to take capital actions.

The financial services industry faces substantial litigation and is subject to extensive regulatory and law enforcement investigations, and we may face damage to our reputation and legal liability.

As a global financial services firm, we face the risk of investigations and proceedings by governmental and self-regulatory organizations in all countries in which we conduct our business. Investigations and proceedings initiated by these authorities may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. In addition to the monetary consequences, these measures could, for example, impact our ability to engage in, or impose limitations on, certain of our businesses.

The number of these investigations and proceedings, as well as the amount of penalties and fines sought, has increased substantially in recent years with regard to many firms in the financial services industry, including the Firm, and certain U.S. and international governmental entities have increasingly brought criminal actions against, or have sought criminal convictions, pleas or deferred prosecution agreements from, financial institutions. Significant regulatory or law enforcement action against us could materially adversely affect our business, financial condition or results of operations or cause us significant reputational harm, which could seriously harm our business.

The Dodd-Frank Act also provides compensation to whistleblowers who present the SEC or CFTC with information related to securities or commodities law violations that leads to a successful enforcement action. As a result of this compensation, it is possible we could face an increased number of investigations by the SEC or CFTC.

We have been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, as well as investigations or proceedings brought by regulatory agencies, arising in connection with our activities as a global diversified financial services institution. Certain of the actual or threatened legal or regulatory actions include claims for substantial compensatory and/or punitive damages, claims for indeterminate amounts of damages, or may result in penalties, fines, or other results adverse to us.

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In some cases, the issuers that would otherwise be the primary defendants in such cases are bankrupt or are in financial distress. In other cases, including antitrust litigation, we may be subject to claims for joint and several liability with other defendants for treble damages or other relief related to alleged conspiracies involving other institutions. Like any large corporation, we are also subject to risk from potential employee misconduct, including non-compliance with policies and improper use or disclosure of confidential information, or improper sales practices or conduct.

We may be responsible for representations and warranties associated with residential and commercial real estate loans and may incur losses in excess of our reserves.

We originate loans secured by commercial and residential properties. Further, we securitize and trade in a wide range of commercial and residential real estate and real estate-related whole loans, mortgages and other real estate and commercial assets and products, including residential and CMBS. In connection with these activities, we have provided, or otherwise agreed to be responsible for, certain representations and warranties. Under certain circumstances, we may be required to repurchase such assets or make other payments related to such assets if such representations and warranties were breached. We have also made representations and warranties in connection with our role as an originator of certain commercial mortgage loans that we securitized in CMBS. For additional information, see also Note 12 to the financial statements.

We currently have several legal proceedings related to claims for alleged breaches of representations and warranties. If there are decisions adverse to us in those legal proceedings, we may incur losses substantially in excess of our reserves. In addition, our reserves are based, in part, on certain factual and legal assumptions. If those assumptions are incorrect and need to be revised, we may need to adjust our reserves substantially.

Our commodities activities and investments subject us to extensive regulation, and environmental risks and regulation that may expose us to significant costs and liabilities.

In connection with the commodities activities in our Institutional Securities business segment, we execute transactions involving the storage, transportation and market-making of several commodities, including metals, natural gas, electric power, environmental attributes and other commodity products. In addition, we are an electricity power marketer in the U.S. and own a minority interest in Heidmar Holdings LLC, which owns a group of companies that provide international marine transportation and U.S. marine logistics services.

These activities subject us to extensive energy, commodities, environmental, health and safety and other governmental laws and regulations.

Although we have attempted to mitigate our environmental risks by, among other measures, limiting the scope of activities involving storage and transportation, adopting appropriate policies and procedures, and implementing emergency response programs, these actions may not prove adequate to address every contingency. In addition, insurance covering some of these risks may not be available, and the proceeds, if any, from insurance recovery may not be adequate to cover liabilities with respect to particular incidents. As a result, our financial condition, results of operations and cash flows may be adversely affected by these events.

During the past several years, intensified scrutiny of certain energy markets by federal, state and local authorities in the U.S. and abroad and by the public has resulted in increased regulatory and legal enforcement, litigation and remedial proceedings involving companies conducting the activities in which we are engaged. In addition, enhanced regulation of OTC derivatives markets in the U.S. and the E.U., as well as similar legislation proposed or adopted elsewhere, will impose significant costs and requirements on our commodities derivatives activities.

We may incur substantial costs or loss of revenue in complying with current or future laws and regulations and our overall businesses and reputation may be adversely affected by the current legal environment. In addition, failure to comply with these laws and regulations may result in substantial civil and criminal fines and penalties.

A failure to address conflicts of interest appropriately could adversely affect our businesses and reputation.

As a global financial services firm that provides products and services to a large and diversified group of clients, including corporations, governments, financial institutions and individuals, we face potential conflicts of interest in the normal course of business. For example, potential conflicts can occur when there is a divergence of interests between us and a client, among clients, between an employee on the one hand and us or a client on the other, or situations in which we may be a creditor of a client.

We have policies, procedures and controls that are designed to identify and address potential conflicts of interest, and we utilize various measures, such as the use of disclosure, to manage these potential conflicts. However, identifying and mitigating potential conflicts of interest can be complex and challenging and can become the focus of media and regulatory scrutiny. Indeed, actions that merely appear to create a conflict can put our reputation at risk even if the likelihood of

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an actual conflict has been mitigated. It is possible that potential conflicts could give rise to litigation or enforcement actions, which may lead to our clients being less willing to enter into transactions in which a conflict may occur and could adversely affect our businesses and reputation.

Our regulators have the ability to scrutinize our activities for potential conflicts of interest, including through detailed examinations of specific transactions. For example, our status as a BHC supervised by the Federal Reserve subjects us to direct Federal Reserve scrutiny with respect to transactions between our U.S. Bank Subsidiaries and their affiliates. Further, the Volcker Rule subjects us to regulatory scrutiny regarding certain transactions between us and our clients.

Uncertainties and ambiguities as to the interpretation and application of the Tax Cuts and Jobs Act could adversely affect us.

The Tax Act, enacted on December 22, 2017, significantly revised U.S. corporate income tax law by, among other things, reducing the corporate income tax rate to 21%, and implementing a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of non-U.S. subsidiaries; imposes a minimum tax on global intangible low-taxed income ("GILTI") and an alternative base erosion and anti-abuse tax ("BEAT") on U.S. corporations that make deductible payments to non-U.S. related persons in excess of specified amounts; and broadens the tax base by partially or wholly eliminating tax deductions for certain historically deductible expenses (e.g., FDIC premiums and executive compensation). The enactment of the Tax Act resulted in an aggregate net discrete tax provision of approximately $1.2 billion for the year ended December 31, 2017 as described further under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Supplemental Financial Information and Disclosures-Income Tax Matters."

There are a number of uncertainties and ambiguities as to the interpretation and application of many of the provisions in the Tax Act, including the provisions relating to the modified territorial tax system, the one-time transition tax, GILTI, and the BEAT. In the absence of guidance on these issues, we use what we believe are reasonable interpretations and assumptions in applying the Tax Act for purposes of determining our tax balances and results of operations, which may change as we receive additional clarification and implementation guidance and as the interpretation of the Tax Act evolves over time. We expect that the U.S. Treasury Department will issue additional guidance on the application of various provisions in the Tax Act. It is possible that such additional guidance or positions taken by the IRS in an audit could differ from the interpretations and assumptions that we previously made,

which could have a material adverse effect on our results of operations and financial condition.

Risk Management

Our risk management strategies, models and processes may not be fully effective in mitigating our risk exposures in all market environments or against all types of risk.

We have devoted significant resources to develop our risk management capabilities and expect to continue to do so in the future. Nonetheless, our risk management strategies, models and processes, including our use of various risk models for assessing market exposures and hedging strategies, stress testing and other analysis, may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk, including risks that are unidentified or unanticipated.

As our businesses change and grow, and the markets in which we operate evolve, our risk management strategies, models and processes may not always adapt with those changes. Some of our methods of managing risk are based upon our use of observed historical market behavior and management's judgment. As a result, these methods may not predict future risk exposures, which could be significantly greater than the historical measures indicate.

In addition, many models we use are based on assumptions or inputs regarding correlations among prices of various asset classes or other market indicators and therefore cannot anticipate sudden, unanticipated or unidentified market or economic movements, which could cause us to incur losses.

Management of market, credit, liquidity, operational, legal, regulatory and compliance risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may not be fully effective. Our trading risk management strategies and techniques also seek to balance our ability to profit from trading positions with our exposure to potential losses.

While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate every economic and financial outcome or the timing of such outcomes. For example, to the extent that our trading or investing activities involve less liquid trading markets or are otherwise subject to restrictions on sales or hedging, we may not be able to reduce our positions and therefore reduce our risk associated with such positions. We may, therefore, incur losses in the course of our trading or investing activities. For more information on how we monitor and manage market and certain other risks and related strategies, models and processes, see "Quantitative and Qualitative Disclosures about Market Risk-Risk Management-Market Risk."

19 December 2017 Form 10-K
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Competitive Environment

We face strong competition from other financial services firms, which could lead to pricing pressures that could materially adversely affect our revenue and profitability.

The financial services industry and all aspects of our businesses are intensely competitive, and we expect them to remain so. We compete with commercial banks, brokerage firms, insurance companies, exchanges, electronic trading and clearing platforms, financial data repositories, sponsors of mutual funds, hedge funds, energy companies, financial technology firms and other companies offering financial or ancillary services in the U.S., globally and through the internet. We compete on the basis of several factors, including transaction execution, capital or access to capital, products and services, innovation, technology, reputation, risk appetite and price.

Over time, certain sectors of the financial services industry have become more concentrated, as institutions involved in a broad range of financial services have left businesses, been acquired by or merged into other firms, or have declared bankruptcy. Such changes could result in our remaining competitors gaining greater capital and other resources, such as the ability to offer a broader range of products and services and geographic diversity, or new competitors may emerge.

We have experienced and may continue to experience pricing pressures as a result of these factors and as some of our competitors seek to obtain market share by reducing prices. In addition, certain of our competitors may be subject to different, and, in some cases, less stringent, legal and regulatory regimes, than we are, thereby putting us at a competitive disadvantage. Some new competitors in the financial technology sector have sought to target existing segments of our businesses that could be susceptible to disruption by innovative or less regulated business models. For more information regarding the competitive environment in which we operate, see "Business-Competition" and "Business-Supervision and Regulation."

Automated trading markets may adversely affect our business and may increase competition.

We have experienced intense price competition in some of our businesses in recent years. In particular, the ability to execute securities, derivatives and other financial instrument trades electronically on exchanges, swap execution facilities, and other automated trading platforms has increased the pressure on bid-offer spreads, commissions, markups or comparable fees. The trend toward direct access to automated, electronic markets will likely continue and will likely increase as additional markets move to more automated trading plat-

forms. We have experienced and it is likely that we will continue to experience competitive pressures in these and other areas in the future as some of our competitors may seek to obtain market share by reducing bid-offer spreads, commissions, markups or comparable fees.

Our ability to retain and attract qualified employees is critical to the success of our business and the failure to do so may materially adversely affect our performance.

Our people are our most important resource and competition for qualified employees is intense. If we are unable to continue to attract and retain highly qualified employees, or do so at rates or in forms necessary to maintain our competitive position, or if compensation costs required to attract and retain employees become more expensive, our performance, including our competitive position, could be materially adversely affected.

The financial industry has experienced and may continue to experience more stringent regulation of employee compensation, including limitations relating to incentive-based compensation, clawback requirements and special taxation, which could have an adverse effect on our ability to hire or retain the most qualified employees.

International Risk

We are subject to numerous political, economic, legal, tax, operational, franchise and other risks as a result of our international operations which could adversely impact our businesses in many ways.

We are subject to political, economic, legal, tax, operational, franchise and other risks that are inherent in operating in many countries, including risks of possible nationalization, expropriation, price controls, capital controls, exchange controls, increased taxes and levies, and other restrictive governmental actions, as well as the outbreak of hostilities or political and governmental instability. In many countries, the laws and regulations applicable to the securities and financial services industries are uncertain and evolving, and it may be difficult for us to determine the exact requirements of local laws in every market.

Our inability to remain in compliance with local laws in a particular market could have a significant and negative effect not only on our business in that market but also on our reputation generally. We are also subject to the risk that transactions we structure might not be legally enforceable in all cases.

Various emerging market countries have experienced severe political, economic or financial disruptions, including significant devaluations of their currencies, defaults or potential defaults on sovereign debt, capital and currency exchange

December 2017 Form 10-K 20
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controls, high rates of inflation and low or negative growth rates in their economies. Crime and corruption, as well as issues of security and personal safety, also exist in certain of these countries. These conditions could adversely impact our businesses and increase volatility in financial markets generally.

The emergence of a disease pandemic or other widespread health emergency, or concerns over the possibility of such an emergency as well as natural disasters, terrorist activities or military actions, could create economic and financial disruptions in emerging markets and other areas throughout the world, and could lead to operational difficulties (including travel limitations) that could impair our ability to manage our businesses around the world.

As a U.S. company, we are required to comply with the economic sanctions and embargo programs administered by OFAC and similar multi-national bodies and governmental agencies worldwide, as well as applicable anti-corruption laws in the jurisdictions in which we operate, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act. A violation of a sanction, embargo program, or anti-corruption law could subject us, and individual employees, to a regulatory enforcement action as well as significant civil and criminal penalties.

The U.K.'s anticipated withdrawal from the E.U. could adversely affect us.

It is difficult to predict the future of the U.K.'s relationship with the E.U., which uncertainty may increase the volatility in the global financial markets in the short- and medium-term. On June 23, 2016, the U.K. electorate voted to leave the E.U. On March 29, 2017, the U.K. invoked Article 50 of the Lisbon Treaty, which triggered a two-year period, subject to extension (which would need the unanimous approval of the E.U. Member States), during which the U.K. government is expected to negotiate its withdrawal agreement with the E.U. Absent any changes to this time schedule, the U.K. is expected to leave the E.U. in March 2019. The terms and conditions of the anticipated withdrawal from the E.U., and which of the several alternative models of relationship that the U.K. might seek to negotiate with the E.U., remain uncertain. However, the U.K. government has stated that the U.K. will leave the E.U. single market and will seek a phased period of implementation for the new relationship that may cover the legal and regulatory framework applicable to financial institutions with significant operations in Europe, such as the Firm. Since any transition or implementation periods and the eventual successor arrangements require agreement of both the U.K. and the E.U., there is a risk that these arrangements may not be agreed by March 2019.

Potential effects of the U.K. exit from the E.U. and potential mitigation actions may vary considerably depending on the timing of withdrawal and the nature of any transition, implementation or successor arrangements. We are taking steps to make changes to our European operations in an effort to ensure that we can continue to provide cross-border banking and investment services in E.U. Member States without the need for separate regulatory authorizations in each member state. These changes must be approved by the relevant regulatory authorities and therefore it is currently unclear what the final post-Brexit structure of our European operations will be. Depending on the extent to which we may be required to make material changes to our European operations beyond those currently planned, our results of operations and business prospects could be negatively affected.

Acquisition, Divestiture and Joint Venture Risk

We may be unable to fully capture the expected value from acquisitions, divestitures, joint ventures, minority stakes or strategic alliances.

In connection with past or future acquisitions, divestitures, joint ventures, minority stakes or strategic alliances (including with MUFG), we face numerous risks and uncertainties combining, transferring, separating or integrating the relevant businesses and systems, including the need to combine or separate accounting and data processing systems and management controls and to integrate relationships with clients, trading counterparties and business partners. In the case of joint ventures and minority stakes, we are subject to additional risks and uncertainties because we may be dependent upon, and subject to liability, losses or reputational damage relating to systems, controls and personnel that are not under our control.

In addition, conflicts or disagreements between us and any of our joint venture partners may negatively impact the benefits to be achieved by the relevant joint venture.

There is no assurance that any of our acquisitions or divestitures will be successfully integrated or disaggregated or yield all of the positive benefits anticipated. If we are not able to integrate or disaggregate successfully our past and future acquisitions or dispositions, there is a risk that our results of operations, financial condition and cash flows may be materially and adversely affected.

Certain of our business initiatives, including expansions of existing businesses, may bring us into contact, directly or indirectly, with individuals and entities that are not within our traditional client and counterparty base and may expose us to new asset classes and new markets. These business activities expose us to new and enhanced risks, greater regulatory scrutiny of these activities, increased credit-related, sovereign and

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operational risks, and reputational concerns regarding the manner in which these assets are being operated or held.

For more information regarding the regulatory environment in which we operate, see also "Business-Supervision and Regulation."

Unresolved Staff Comments

We, like other well-known seasoned issuers, from time to time receive written comments from the staff of the SEC regarding our periodic or current reports under the Exchange Act. There are no comments that remain unresolved that we received not less than 180 days before the end of the year to which this report relates that we believe are material.

Properties

We have offices, operations and data centers located around the world. Our properties that are not owned are leased on terms and for durations that are reflective of commercial standards in the communities where these properties are located. We believe the facilities we own or occupy are adequate for the purposes for which they are currently used and are well- maintained. Our principal offices include the following properties:

Location

Owned/Leased

Lease
Expiration

Approximate

Square Footage
at

December 31,
2017 1

    U.S. Locations

1585 Broadway New York, New York

(Global Headquarters and Institutional Securities Headquarters)

Owned N/A

1,335,500

square feet

2000 Westchester   Avenue Purchase,   New York

(Wealth Management Headquarters)

Owned N/A 626,100 square feet
522 Fifth Avenue
New York, New York

(Investment Management Headquarters)

Owned N/A

564,900

square feet

    International Locations

20 Bank Street London

(London Headquarters)

Leased 2038

546,500

square feet

1 Austin Road West Kowloon

(Hong Kong Headquarters)

Leased 2019 499,900 square feet
Otemachi Financial City South Tower
Otemachi,   Chiyoda-ku

(Tokyo Headquarters)

Leased 2028 245,600 square feet

1.

The indicated total aggregate square footage leased does not include space leased by our branch offices.

December 2017 Form 10-K 22
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Legal Proceedings

In addition to the matters described below, in the normal course of business, the Firm has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or are in financial distress.

The Firm is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding the Firm's business, and involving, among other matters, sales and trading activities, financial products or offerings sponsored, underwritten or sold by the Firm, and accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief.

The Firm contests liability and/or the amount of damages as appropriate in each pending matter. Where available information indicates that it is probable a liability had been incurred at the date of the financial statements and the Firm can reasonably estimate the amount of that loss, the Firm accrues the estimated loss by a charge to income. The Firm's future legal expenses may fluctuate from period to period, given the current environment regarding government investigations and private litigation affecting global financial services firms, including the Firm.

In many proceedings and investigations, however, it is inherently difficult to determine whether any loss is probable or even possible, or to estimate the amount of any loss. The Firm cannot predict with certainty if, how or when such proceedings or investigations will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be, particularly for proceedings and investigations where the factual record is being developed or contested or where plaintiffs or government entities seek substantial or indeterminate damages, restitution, disgorgement or penalties. Numerous issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters, determination of issues related to class certification and the calculation of damages or other relief, and by addressing novel or unsettled legal questions relevant to the proceedings or investigations in question, before a loss or additional loss or range of loss or additional loss can be reasonably estimated for a proceeding or investigation. Subject to the foregoing, the Firm believes, based on current

knowledge and after consultation with counsel, that the outcome of such proceedings and investigations will not have a material adverse effect on the financial condition of the Firm, although the outcome of such proceedings or investigations could be material to the Firm's operating results and cash flows for a particular period depending on, among other things, the level of the Firm's revenues or income for such period.

Over the last several years, the level of litigation and investigatory activity (both formal and informal) by government and self-regulatory agencies has increased materially in the financial services industry. As a result, the Firm expects that it will continue to be the subject of elevated claims for damages and other relief and, while the Firm has identified below certain proceedings that the Firm believes to be material, individually or collectively, there can be no assurance that additional material losses will not be incurred from claims that have not yet been asserted or are not yet determined to be material.

Residential Mortgage and Credit Crisis Related Matters

On July 15, 2010, China Development Industrial Bank ("CDIB") filed a complaint against the Firm, styled China Development Industrial Bank v. Morgan Stanley  & Co. Incorporated et al ., which is pending in the Supreme Court of the State of New York, New York County ("Supreme Court of NY"). The complaint relates to a $275 million CDS referencing the super senior portion of the STACK 2006-1 CDO. The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges that the Firm misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that the Firm knew that the assets backing the CDO were of poor quality when it entered into the CDS with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the CDS, rescission of CDIB's obligation to pay an additional $12 million, punitive damages, equitable relief, pre- and post-judgment interest, fees and costs. On February 28, 2011, the court denied the Firm's motion to dismiss the complaint.

On August 8, 2012, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust 2006-14SL, Mortgage Pass-Through Certificates, Series 2006-14SL, Morgan Stanley Mortgage Loan Trust 2007-4SL and Mortgage Pass-Through Certificates, Series 2007-4SL against the Firm styled Morgan Stanley Mortgage Loan Trust 2006-14SL, et al. v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc . in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trusts, which had original principal balances of approximately $354 million and

23 December 2017 Form 10-K
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$305 million respectively, breached various representations and warranties. The complaint seeks, among other relief, rescission of the mortgage loan purchase agreements underlying the transactions, specific performance and unspecified damages and interest. On August 16, 2013, the court granted in part and denied in part the Firm's motion to dismiss the complaint. On December 1, 2017, the parties reached an agreement in principle to settle the litigation.

On December 14, 2012, Royal Park Investments SA/NV filed a complaint against the Firm, certain affiliates, and other defendants in the Supreme Court of NY, styled Royal Park Investments SA/NV v. Merrill Lynch et al. On October 24, 2013, plaintiff filed a new complaint against the Firm in the Supreme Court of NY, styled Royal Park Investments SA/NV v. Morgan Stanley et al. , alleging that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Firm to plaintiff was approximately $597 million. The complaint raises common law claims of fraud, fraudulent inducement, negligent misrepresentation, and aiding and abetting fraud and seeks, among other things, compensatory and punitive damages. The plaintiff filed an amended complaint on December 1, 2015. On April 12, 2017, the Supreme Court of the State of New York granted the Firm's motion to dismiss the amended complaint. On May 12, 2017, plaintiff filed a notice of appeal from that decision.

On May 3, 2013, plaintiffs in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. filed a complaint against the Firm, certain affiliates, and other defendants in the Supreme Court of NY. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Firm to plaintiff was approximately $634 million. The complaint alleges causes of action against the Firm for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and seeks, among other things, compensatory and punitive damages. On June 10, 2014, the court granted in part and denied in part the defendants' motion to dismiss the complaint. The Firm perfected its appeal from that decision on June 12, 2015. On June 20, 2017, the Appellate Division, First Department ("Appellate Division"), affirmed the order granting in part and denying in part the Firm's motion to dismiss. On October 3, 2017, the Appellate Division denied the Firm's motion for leave to appeal that decision.

On May 17, 2013, plaintiff in IKB International S.A. in Liquidation, et al. v. Morgan Stanley, et al. filed a complaint against the Firm and certain affiliates in the Supreme Court of NY. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Firm to plaintiff was approximately $133 million. The complaint alleges causes of action against the Firm for common law fraud, fraudulent concealment, aiding and abetting fraud, and negligent misrepresentation, and seeks, among other things, compensatory and punitive damages. On October 29, 2014, the court granted in part and denied in part the Firm's motion to dismiss. All claims regarding four certificates were dismissed. After these dismissals, the remaining amount of certificates allegedly issued by the Firm or sold to plaintiff by the Firm was approximately $116 million. On August 11, 2016, the Appellate Division affirmed the trial court's order denying in part the Firm's motion to dismiss the complaint.

On July 2, 2013, Deutsche Bank, in its capacity as trustee, became the named plaintiff in Federal Housing Finance Agency, as Conservator for the Federal Home Loan Mortgage Corporation, on behalf of the Trustee of the Morgan Stanley ABS Capital I Inc. Trust, Series 2007-NC1 (MSAC 2007-NC1) v. Morgan Stanley ABS Capital I Inc. , and filed a complaint in the Supreme Court of NY under the caption Deutsche Bank National Trust Company, as Trustee for the Morgan Stanley ABS Capital I Inc. Trust, Series 2007-NC1 v. Morgan Stanley ABS Capital I, Inc. On February 3, 2014, the plaintiff filed an amended complaint, which asserts claims for breach of contract and breach of the implied covenant of good faith and fair dealing and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $1.25 billion, breached various representations and warranties. The amended complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified damages, rescission and interest. On April 12, 2016, the court granted in part and denied in part the Firm's motion to dismiss the amended complaint, dismissing all claims except a single claim alleging failure to notify, regarding which the motion was denied without prejudice. On December 9, 2016, the Firm renewed its motion to dismiss that notification claim. On January 17, 2017, the First Department affirmed the lower court's April 12, 2016 order. On April 13, 2017, the Appellate Division denied plaintiff's motion for leave to appeal to the New York Court of Appeals.

On July 8, 2013, U.S. Bank National Association, in its capacity as trustee, filed a complaint against the Firm styled U.S. Bank National Association, solely in its capacity as

December 2017 Form 10-K 24
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Trustee of the Morgan Stanley Mortgage Loan Trust 2007-2AX (MSM 2007-2AX) v. Morgan Stanley Mortgage Capital Holdings LLC, Successor-by-Merger to Morgan Stanley Mortgage Capital Inc. and GreenPoint Mortgage Funding, Inc. , pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $650 million, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified damages and interest. On November 24, 2014, the court granted in part and denied in part the Firm's motion to dismiss the complaint.

On November 6, 2013, Deutsche Bank, in its capacity as trustee, became the named plaintiff in Federal Housing Finance Agency, as Conservator for the Federal Home Loan Mortgage Corporation, on behalf of the Trustee of the Morgan Stanley ABS Capital I Inc. Trust, Series 2007-NC3 (MSAC 2007-NC3) v. Morgan Stanley Mortgage Capital Holdings LLC , and filed a complaint in the Supreme Court of NY under the caption Deutsche Bank National Trust Company, solely in its capacity as Trustee for Morgan Stanley ABS Capital I Inc. Trust, Series 2007-NC3 v. Morgan Stanley Mortgage Capital Holdings LLC, as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc. The complaint asserts claims for breach of contract and breach of the implied covenant of good faith and fair dealing and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $1.3 billion, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified damages, rescission, interest and costs. On April 12, 2016, the court granted the Firm's motion to dismiss the complaint, and granted the plaintiff the ability to seek to replead certain aspects of the complaint. On January 17, 2017, the First Department affirmed the lower court's order granting the motion to dismiss the complaint. On January 9, 2017, plaintiff filed a motion to amend its complaint. On April 13, 2017, the Appellate Division denied plaintiff's motion for leave to appeal to the New York Court of Appeals.

On December 30, 2013, Wilmington Trust Company, in its capacity as trustee for Morgan Stanley Mortgage Loan Trust 2007-12, filed a complaint against the Firm styled Wilmington Trust Company v. Morgan Stanley Mortgage Capital Holdings LLC et al. , pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $516 million, breached various representations and warran-

ties. The complaint seeks, among other relief, unspecified damages, attorneys' fees, interest and costs. On June 14, 2016, the court granted in part and denied in part the Firm's motion to dismiss the complaint. On July 11, 2017, the Appellate Division affirmed in part and reversed in part an order granting in part and denying in part the Firm's motion to dismiss. On September 26, 2017, the Appellate Division denied plaintiff's motion for leave to appeal to the New York Court of Appeals.

On April 28, 2014, Deutsche Bank National Trust Company, in its capacity as trustee for Morgan Stanley Structured Trust I 2007-1, filed a complaint against the Firm styled Deutsche Bank National Trust Company v. Morgan Stanley Mortgage Capital Holdings LLC , pending in the United States District Court for the Southern District of New York ("SDNY"). The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $735 million, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified compensatory and/or rescissory damages, interest and costs. On April 3, 2015, the court granted in part and denied in part the Firm's motion to dismiss the complaint. On January 10, 2018, the court reinstated plaintiff's breach of contract claim based on failure to notify, which had been dismissed in its April 3, 2015 order. On January 25, 2018, the court denied the Firm's motion for summary judgment. On February 5, 2018, the Firm filed a motion for judgment on the pleadings and a renewed motion for summary judgment.

On September 19, 2014, Financial Guaranty Insurance Company ("FGIC") filed a complaint against the Firm in the Supreme Court of NY, styled Financial Guaranty Insurance Company v. Morgan Stanley ABS Capital I Inc. et al. relating to a securitization issued by Basket of Aggregated Residential NIMS 2007-1 Ltd. The complaint asserts claims for breach of contract and alleges, among other things, that the net interest margin securities ("NIMS") in the trust breached various representations and warranties. FGIC issued a financial guaranty policy with respect to certain notes that had an original balance of approximately $475 million. The complaint seeks, among other relief, specific performance of the NIMS breach remedy procedures in the transaction documents, unspecified damages, reimbursement of certain payments made pursuant to the transaction documents, attorneys' fees and interest. On November 24, 2014, the Firm filed a motion to dismiss the complaint, which the court denied on January 19, 2017. On February 24, 2017, the Firm filed a notice of appeal of the denial of its motion to dismiss the complaint and perfected its appeal on November 22, 2017.

25 December 2017 Form 10-K
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On September 23, 2014, FGIC filed a complaint against the Firm in the Supreme Court of NY styled Financial Guaranty Insurance Company v. Morgan Stanley ABS Capital I Inc. et al . relating to the Morgan Stanley ABS Capital I Inc. Trust 2007-NC4. The complaint asserts claims for breach of contract and fraudulent inducement and alleges, among other things, that the loans in the trust breached various representations and warranties and defendants made untrue statements and material omissions to induce FGIC to issue a financial guaranty policy on certain classes of certificates that had an original balance of approximately $876 million. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, compensatory, consequential and punitive damages, attorneys' fees and interest. On January 23, 2017, the court denied the Firm's motion to dismiss the complaint. On February 24, 2017, the Firm filed a notice of appeal of the denial of its motion to dismiss the complaint and perfected its appeal on November 22, 2017.

On January 23, 2015, Deutsche Bank National Trust Company, in its capacity as trustee, filed a complaint against the Firm styled Deutsche Bank National Trust Company solely in its capacity as Trustee of the Morgan Stanley ABS Capital I Inc. Trust 2007-NC4 v. Morgan Stanley Mortgage Capital Holdings LLC as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc., and Morgan Stanley ABS Capital I Inc. , pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $1.05 billion, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, compensatory, consequential, rescissory, equitable and punitive damages, attorneys' fees, costs and other related expenses, and interest. On December 11, 2015, the court granted in part and denied in part the Firm's motion to dismiss the complaint. On February 11, 2016, plaintiff filed a notice of appeal of that order, and the appeal was fully briefed on August 19, 2016.

On April 1, 2016, the California Attorney General's Office filed an action against the Firm in California state court styled California v. Morgan Stanley, et al. , on behalf of California investors, including the California Public Employees' Retirement System and the California Teachers' Retirement System. The complaint alleges that the Firm made misrepresentations and omissions regarding RMBS and notes issued by the Cheyne SIV, and asserts violations of the California False Claims Act and other state laws and seeks treble damages, civil penalties, disgorgement, and injunctive relief. On September 30, 2016, the court granted the Firm's demurrer, with leave to replead. On October 21, 2016, the

California Attorney General filed an amended complaint. On January 25, 2017, the court denied the Firm's demurrer with respect to the amended complaint.

Currency Related Matters

The Firm is responding to a number of regulatory and governmental inquiries both in the U.S. and abroad related to its foreign exchange business. In addition, on June 29, 2015, the Firm and a number of other financial institutions were named as respondents in a proceeding before Brazil's Council for Economic Defense related to alleged anticompetitive activity in the foreign exchange market for the Brazilian Real.

European Matters

On October 11, 2011, an Italian financial institution, Banco Popolare Societá Cooperativa ("Banco Popolare"), filed a civil claim against the Firm in the Milan courts, styled Banco Popolare Societá Cooperativa v Morgan Stanley  & Co. International plc  & others , related to its purchase of €100 million of bonds issued by Parmalat. The claim asserted by Banco Popolare alleges, among other things, that the Firm was aware of Parmalat's impending insolvency and conspired with others to deceive Banco Popolare into buying bonds by concealing both Parmalat's true financial condition and certain features of the bonds from the market and Banco Popolare. Banco Popolare seeks damages of €76 million (approximately $91 million) plus damages for loss of opportunity and moral damages. The Firm filed its answer on April 20, 2012, and the hearing on the parties' final submissions is scheduled for March 20, 2018.

On June 22, 2017, the public prosecutor for the Court of Accounts for the Republic of Italy filed a claim against the Firm styled Case No. 2012/00406/MNV, which is pending in the Regional Prosecutor's Office at the Judicial Section of the Court of Auditors for Lazio, Italy. The claim relates to certain derivative transactions between the Republic of Italy and the Firm. The transactions were originally entered into between 1999 and 2005, and were restructured (and certain of the transactions were terminated) in December 2011 and January 2012. The claim alleges, inter alia, that the Firm effectively acted as an agent of the state in connection with these transactions and asserts claims related to, among other things, whether the Ministry of Finance was authorized to enter into these transactions, whether the transactions were appropriate and whether the Firm's conduct related to the termination of certain transactions was proper. The prosecutor is seeking damages through an administrative process against the Firm for €2.76 billion (approximately $3.3 billion). A hearing regarding this matter has been scheduled for April 19, 2018.

In matters styled Case number 15/3637 and Case number 15/4353 , the Dutch Tax Authority ("Dutch Authority") is

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challenging in the District Court in Amsterdam the prior set-off by the Firm of approximately €124 million (approximately $149 million) plus accrued interest of withholding tax credits against the Firm's corporation tax liabilities for the tax years 2007 to 2013. The Dutch Authority alleges that the Firm was not entitled to receive the withholding tax credits on the basis, inter alia, that a Firm subsidiary did not hold legal title to certain securities subject to withholding tax on the relevant dates. The Dutch Authority has also alleged that the Firm failed to provide certain information to the Dutch Authority and keep adequate books and records. A hearing in this matter took place on September 19, 2017.

On October 5, 2017, various institutional investors filed a claim against the Firm and another bank in a matter styled Case number BS 99-6998/2017, in the City Court of Copenhagen, Denmark concerning their roles as underwriters of the initial public offering ("IPO") in March 2014 of the Danish company OW Bunker A/S. The claim seeks damages of DKK 534,270,456 (approximately $86 million) plus interest in respect of alleged losses arising from investing in shares in OW Bunker, which entered into bankruptcy in November 2014. Separately, on November 29, 2017, another group of institutional investors joined the Firm and another bank as defendants to pending proceedings in the High Court of Eastern Denmark against various other parties involved in the IPO in a matter styled Case number B-2073-16 . The investors claim damages of DKK 767,235,885 (approximately $124 million) plus interest, from the Firm and the other bank on a joint and several basis with the Defendants to these proceedings. Both claims are based on alleged prospectus liability; the second claim also alleges professional liability of banks acting as financial intermediaries.

Other Litigation

On October 20, 2014, a purported class action complaint was filed against the Firm and other defendants styled Genesee County Employees' Retirement System v. Bank of America Corporation et al. in the SDNY. The action was later consolidated with four similar actions in SDNY under the lead case styled Alaska Electrical Pension Fund v. Bank of America Corporation et al. A consolidated amended complaint was filed on February 2, 2015 asserting claims for alleged violations of the Sherman Act, breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and tortious interference with contract. The consolidated amended complaint alleges, among other things, that the defendants engaged in antitrust violations with regards to the process of setting ISDAfix, a financial benchmark and seeks treble damages, injunctive relief, attorneys' fees and other relief. On March 28, 2016, the court granted in part and denied in part the defendants' motion to dismiss the consolidated amended complaint. On February 7, 2017, the

plaintiffs filed a second consolidated amended complaint. On February 2, 2018, the court denied a partial motion to dismiss that complaint. On November 3, 2017, the Firm filed its opposition to plaintiffs' motion for class certification.

Beginning in February of 2016, the Firm was named as a defendant in multiple purported antitrust class actions now consolidated into a single proceeding in the United States District Court for the SDNY styled In Re: Interest Rate Swaps Antitrust Litigation . Plaintiffs allege, inter alia, that the Firm, together with a number of other financial institution defendants violated U.S. and New York state antitrust laws from 2008 through December of 2016 in connection with their alleged efforts to prevent the development of electronic exchange-based platforms for interest rates swaps trading. Complaints were filed both on behalf of a purported class of investors who purchased interest rates swaps from defendants, as well as on behalf of two swap execution facilities that allegedly were thwarted by the defendants in their efforts to develop such platforms. The consolidated complaints seek, among other relief, certification of the investor class of plaintiffs and treble damages. On July 28, 2017, the court granted in part and denied in part the defendants' motion to dismiss the complaints.

The following matters were terminated during or following the quarter ended December 31, 2017:

On August 26, 2013, a complaint was filed against the Firm and certain affiliates in the Supreme Court of NY, styled Phoenix Light SF Limited et al. v. Morgan Stanley et al ., which was amended on April 23, 2015 and June 15, 2017. The amended complaint alleges that defendants made untrue statements and material omissions in the sale to plaintiffs, or their assignors, of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued by the Firm and/or sold to plaintiffs or their assignors by the Firm was approximately $344 million. The amended complaint raises common law claims of fraud, fraudulent inducement, aiding and abetting fraud, negligent misrepresentation and rescission based on mutual mistake and seeks, among other things, compensatory damages, punitive damages or alternatively rescission or rescissionary damages associated with the purchase of such certificates. On July 7, 2017, the court so-ordered a stipulation of partial discontinuance dismissing claims relating to certificates having an original face value of approximately $76 million. On January 3, 2018, the parties reached an agreement in principle to settle the litigation.

On June 2, 2015, the Firm submitted to the Environmental Protection Agency ("EPA") a self-disclosure that certain reformulated blendstock the Firm blended and sold during

27 December 2017 Form 10-K
Table of Contents

2013 and 2014 potentially did not meet the applicable volatile organic compound reduction standards of the EPA's Phase II Reformulated Gasoline standard. On December 1, 2017, the parties reached an agreement to settle the litigation. On December 18, 2017, the final settlement of approximately $1 million was approved by the District Court for the Southern District of Texas.

Mine Safety Disclosures

Not applicable.

December 2017 Form 10-K 28
Table of Contents

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Morgan Stanley's common stock trades under the symbol "MS" on the New York Stock Exchange. As of February 15, 2018, we had 61,442 holders of record; however, we believe the number of beneficial owners of our common stock exceeds this number.

The table below sets forth, for each of the last eight quarters, the high and low sales prices per share of our common stock and the amount of dividends declared per common share by our Board of Directors for such quarter.

2017 2016
            High                     Low         Dividend
Declared per
Common Share
            High                     Low     Dividend
Declared per
Common Share

First quarter

$ 47.33 $ 40.06 $ 0.20 $ 31.70 $ 21.16 $ 0.15

Second quarter

45.98 40.43 0.20 28.29 23.11 0.15

Third quarter

48.90 43.84 0.25 32.44 24.57 0.20

Fourth quarter

54.25 47.42 0.25 44.04 30.96 0.20

The table below sets forth the information with respect to purchases made by or on behalf of the Firm of its common stock during the fourth quarter of the year ended December 31, 2017.

Issuer Purchases of Equity Securities

$ in millions, except per share data Total Number of
Shares
Purchased
Average
Price
Paid Per
Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs 1
Approximate Dollar
Value of
Shares That May
Yet Be Purchased
Under the Plans

or Programs

Month #1 (October 1, 2017-October 31, 2017)

Share Repurchase Program 2

4,810,000 $ 50.55 4,810,000 $ 3,507

Employee transactions 3

312,377 $ 48.66 - $ -

Month #2 (November 1, 2017-November 30, 2017)

Share Repurchase Program 2

11,310,000 $ 49.29 11,310,000 $ 2,949

Employee transactions 3

189,235 $ 49.63 - $ -

Month #3 (December 1, 2017-December 31, 2017)

Share Repurchase Program 2

8,531,166 $ 52.67 8,531,166 $ 2,500

Employee transactions 3

194,165 $ 52.78 - $ -

Quarter ended December 31, 2017

Share Repurchase Program 2

24,651,166 $ 50.71 24,651,166 $ 2,500

Employee transactions 3

695,777 $ 50.08 - $ -

1.

Share purchases under publicly announced programs are made pursuant to open-market purchases, Rule 10b5-1 plans or privately negotiated transactions (including with employee benefit plans) as market conditions warrant and at prices we deem appropriate and may be suspended at any time.

2.

The Firm's Board of Directors has authorized the repurchase of the Firm's outstanding stock under a share repurchase program ("Share Repurchase Program"). The Share Repurchase Program is a program for capital management purposes that considers, among other things, business segment capital needs, as well as equity-based compensation and benefit plan requirements. The Share Repurchase Program has no set expiration or termination date. Share repurchases by the Firm are subject to regulatory approval. On June 28, 2017 the Board of Governors of the Federal Reserve System ("Federal Reserve") announced that it did not object to our 2017 capital plan, which included a share repurchase of up to $5.0 billion of the Firm's outstanding common stock during the period beginning July 1, 2017 through June 30, 2018. During the quarter ended December 31, 2017, the Firm repurchased approximately $1.25 billion of the Firm's outstanding common stock as part of its Share Repurchase Program. For further information, see "Liquidity and Capital Resources-Capital Management."

3.

Includes shares acquired by us in satisfaction of the tax withholding obligations on stock-based awards and the exercise of stock options granted under our stock-based compensation plans.

29 December 2017 Form 10-K
Table of Contents

Stock Performance Graph

The following graph compares the cumulative total shareholder return (rounded to the nearest whole dollar) of our common stock, the S&P 500 Stock Index and the S&P 500 Financials Sector Index for the last five years. The graph assumes a $100 investment at the closing price on December 31, 2012 and reinvestment of dividends on the respective dividend payment dates without commissions. This graph does not forecast future performance of our common stock.

Cumulative Total Return

December 31, 2012 – December 31, 2017

At December 31,
2012 2013 2014 2015 2016 2017

Morgan Stanley

$ 100.00 $ 165.33 $ 206.81 $ 172.16 $ 234.24 $ 296.60

S&P 500 Stock Index

100.00 132.37 150.48 152.55 170.78 208.05

S&P 500 Financials Sector Index

100.00 135.59 156.17 153.73 188.69 228.59

December 2017 Form 10-K 30
Table of Contents

Selected Financial Data

Income Statement Data

$ in millions 2017 2016 2015 2014 2013

Revenues

Total non-interest revenues

$   34,645 $   30,933 $   32,062 $   32,540 $   31,715

Interest income

8,997 7,016 5,835 5,413 5,209

Interest expense

5,697 3,318 2,742 3,678 4,431

Net interest

3,300 3,698 3,093 1,735 778

Net revenues

37,945 34,631 35,155 34,275 32,493

Non-interest expenses

Compensation and benefits

17,166 15,878 16,016 17,824 16,277

Non-compensation expenses

10,376 9,905 10,644 12,860 11,658

Total non-interest expenses

27,542 25,783 26,660 30,684 27,935

Income from continuing operations before income taxes

10,403 8,848 8,495 3,591 4,558

Provision for (benefit from) income taxes

4,168 2,726 2,200 (90 902

Income from continuing operations

6,235 6,122 6,295 3,681 3,656

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

(19 1 (16 (14 (43

Net income

$ 6,216 $ 6,123 $ 6,279 $ 3,667 $ 3,613

Net income applicable to redeemable non-controlling interests

- - - - 222

Net income applicable to nonredeemable non-controlling interests

105 144 152 200 459

Net income applicable to Morgan Stanley

$ 6,111 $ 5,979 $ 6,127 $ 3,467 $ 2,932

Preferred stock dividends and other

523 471 456 315 277

Earnings (loss) applicable to Morgan Stanley common shareholders

$ 5,588 $ 5,508 $ 5,671 $ 3,152 $ 2,655

Amounts applicable to Morgan Stanley

Income from continuing operations

$ 6,130 $ 5,978 $ 6,143 $ 3,481 $ 2,975

Income (loss) from discontinued operations

(19 1 (16 (14 (43

Net income applicable to Morgan Stanley

$ 6,111 $ 5,979 $ 6,127 $ 3,467 $ 2,932

Effective income tax rate from continuing operations

40.1 30.8 25.9 (2.5 )%  19.8

Per Share Data

in millions, except
per share amounts
2017 2016 2015 2014 2013

Earnings (loss) per basic common share 1

Income from continuing operations

$ 3.15 $ 2.98 $ 2.98 $ 1.65 $ 1.42

Income (loss) from discontinued operations

(0.01 - (0.01 (0.01 (0.03

Earnings (loss) per basic common share

$ 3.14 $ 2.98 $ 2.97 $ 1.64 $ 1.39

Earnings (loss) per diluted common share 1

Income from continuing operations

$ 3.08 $ 2.92 $ 2.91 $ 1.61 $ 1.38

Income (loss) from discontinued operations

(0.01 - (0.01 (0.01 (0.02

Earnings (loss) per diluted common share

$ 3.07 $ 2.92 $ 2.90 $ 1.60 $ 1.36

Book value per common share

$     38.52 $     36.99 $     35.24 $     33.25 $     32.24

Common shares outstanding at December 31 st

1,788 1,852 1,920 1,951 1,945

Dividends declared per common share

0.90 0.70 0.55 0.35 0.20

Average common shares outstanding

Basic

1,780 1,849 1,909 1,924 1,906

Diluted

1,821 1,887 1,953 1,971 1,957

Balance Sheet and Other Operating Data

Trading assets

$     298,282 $     262,154 $     239,505 $     278,117 $     301,252

Loans 2

104,126 94,248 85,759 66,577 42,874

GLR 3

192,660 202,297 203,264 193,169 201,842

Total assets

851,733 814,949 787,465 801,510 832,702

Deposits

159,436 155,863 156,034 133,544 112,379

Borrowings

192,582 165,716 155,941 155,033 155,717

Morgan Stanley shareholders' equity

77,391 76,050 75,182 70,900 65,921

Common shareholders' equity

68,871 68,530 67,662 64,880 62,701

ROE 4

8.0% 8.0% 8.5% 4.8% 4.3%

GLR-Global

Liquidity Reserve

1.

For the calculation of basic and diluted earnings (loss) per common share, see Note 16 to the financial statements.

2.

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

3.

For a discussion of the GLR, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Liquidity Risk Management Framework-Global Liquidity Reserve."

4.

The calculation of ROE equals net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity. For further discussion on ROE, see "Executive Summary - Selected Non-GAAP Financial Information."

31 December 2017 Form 10-K
Table of Contents

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

Introduction

Morgan Stanley, an FHC, is a global financial services firm that maintains significant market positions in each of its business segments-Institutional Securities, Wealth Management and Investment Management. Morgan Stanley, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Unless the context otherwise requires, the terms "Morgan Stanley," "Firm," "us," "we" or "our" mean Morgan Stanley (the "Parent Company") together with its consolidated subsidiaries. We define the following as part of our consolidated financial statements ("financial statements"): consolidated income statements ("income statements"), consolidated balance sheets ("balance sheets"), and consolidated cash flow statements ("cash flow statements"). See the "Glossary of Common Acronyms" for definitions of certain acronyms used throughout the 2017 Form 10-K.

A description of the clients and principal products and services of each of our business segments is as follows:

Institutional Securities provides investment banking, sales and trading, lending and other services to corporations, governments, financial institutions and high to ultra-high net worth clients. Investment banking services consist of capital raising and financial advisory services, including services relating to the underwriting of debt, equity and other securities, as well as advice on mergers and acquisitions, restructurings, real estate and project finance. Sales and trading services include sales, financing and market-making activities in equity and fixed income products, including prime brokerage services, global macro, credit and commodities products. Lending services include originating and/or purchasing corporate loans, commercial and residential mortgage lending, asset-backed lending, and financing extended to equities and commodities customers and municipalities. Other services include investment and research activities.

Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small to medium-sized businesses/institutions covering brokerage and investment advisory services, financial and wealth planning services, annuity and insurance products, credit and other lending products, banking and retirement plan services.

Investment Management provides a broad range of investment strategies and products that span geographies, asset classes, and public and private markets to a diverse group of clients across institutional and intermediary channels. Strategies and products include equity, fixed income, liquidity and alternative/other products. Institutional clients include defined benefit/defined contribution plans, foundations, endowments, government entities, sovereign wealth funds, insurance companies, third-party fund sponsors and corporations. Individual clients are serviced through intermediaries, including affiliated and non-affiliated distributors.

The results of operations in the past have been, and in the future may continue to be, materially affected by competition; risk factors; and legislative, legal and regulatory developments; as well as other factors. These factors also may have an adverse impact on our ability to achieve our strategic objectives. Additionally, the discussion of our results of operations herein may contain forward-looking statements. These statements, which reflect management's beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect our future results, see "Forward-Looking Statements," "Business-Competition" and "Business-Supervision and Regulation," "Risk Factors" and "Liquidity and Capital Resources-Regulatory Requirements" herein.

December 2017 Form 10-K 32
Table of Contents
Management's Discussion and Analysis

Executive Summary

Overview of Financial Results

Consolidated Results

Net Revenues

($ in millions)

Net Income Applicable to Morgan Stanley 1

($ in millions)

Earnings per Common Share 1, 2

Financial Results on a U.S. GAAP and Adjusted Basis

$ in millions, except per share data 2017 2016 2015

Net revenues

U.S. GAAP

$     37,945 $     34,631 $     35,155

Adjusted 3

37,945 34,631 34,537

Net income applicable to Morgan Stanley

U.S. GAAP 1

$ 6,111 $ 5,979 $ 6,127

Adjusted 3

7,079 5,911 5,164

Earnings per diluted common share

U.S. GAAP 1

$ 3.07 $ 2.92 $ 2.90

Adjusted 3

3.60 2.88 2.41

1.

Subsequent to the release of the Firm's 2017 earnings on January 18, 2018, the net discrete tax provision associated with the enactment of the Tax Act increased by $43 million due to a change in estimate. For further discussion, see "Supplemental Financial Information and Disclosures-Income Tax Matters" herein.

2.

For the calculation of basic and diluted EPS, see Note 16 to the financial statements.

3.

Adjusted amounts exclude intermittent net discrete tax provisions (benefits) for all periods presented. For 2015, results are also adjusted to exclude DVA. For further information on the net discrete tax provisions (benefits), see "Supplemental Financial Information and Disclosures-Income Tax Matters" herein. Beginning in 2017, income tax consequences associated with employee share-based awards are recognized in Provision for income taxes in the income statements but are excluded from the intermittent net discrete tax provisions (benefits) adjustment as we anticipate conversion activity each year. See Note 2 to the financial statements on the adoption of the accounting update Improvements to Employee Share-Based Payment Accounting . For further information on non-GAAP measures, see "Selected Non-GAAP Financial Information" herein.

2017 Compared with 2016

We reported net revenues of $37,945 million in 2017 compared with $34,631 million in 2016. For 2017, net income applicable to Morgan Stanley was $6,111 million, or $3.07 per diluted common share, compared with $5,979 million, or $2.92 per diluted common share, in 2016.

Results for 2017 included an intermittent net discrete tax provision of $968 million, or $0.53 per diluted common share, primarily related to the impact of the Tax Cuts and Jobs Act ("Tax Act"), partially offset by net discrete tax benefits related to the remeasurement of reserves and related interest due to new information regarding the status of multi-year IRS tax examinations. Results for 2016 included intermittent net discrete tax benefits of $68 million, or $0.04 per diluted common share, primarily related to the remeasurement of reserves and related interest due to new information regarding the status of multi-year IRS tax examinations, partially offset by adjustments for other tax matters. For a further discussion of the

33 December 2017 Form 10-K
Table of Contents
Management's Discussion and Analysis

Tax Act and the net discrete tax benefits, see "Supplemental Financial Information and Disclosures-Income Tax Matters" herein.

Excluding the intermittent net discrete tax items, net income applicable to Morgan Stanley was $7,079 million, or $3.60 per diluted common share, in 2017 compared with $5,911 million, or $2.88 per diluted common share, in 2016 (see "Selected Non-GAAP Financial Information" herein).

Non-interest Expenses

($ in millions)

Compensation and benefits expenses of $17,166 million in 2017 increased 8% from $15,878 million in 2016. The 2017 results primarily reflected increases in the formulaic payout to Wealth Management representatives linked to higher revenues, the fair value of investments to which certain deferred compensation plans are referenced, incentive compensation mainly driven by higher revenues and deferred compensation associated with carried interest in the Investment Management business segment.

Non-compensation expenses were $10,376 million in 2017 compared with $9,905 million in 2016, representing a 5% increase. This increase was primarily a result of higher volume-related expenses and litigation costs.

2016 Compared with 2015

We reported net revenues of $34,631 million in 2016, compared with $35,155 million in 2015. For 2016, net income applicable to Morgan Stanley was $5,979 million, or $2.92 per diluted common share, compared with $6,127 million, or $2.90 per diluted common share, in 2015.

Results for 2016 included intermittent net discrete tax benefits of $68 million, or $0.04 per diluted common share, primarily related to the remeasurement of reserves and related interest due to new information regarding the status of multi-year IRS tax examinations, partially offset by adjustments for other tax matters. Results for 2015 included intermittent net discrete tax benefits of $564 million, or $0.29 per diluted common share, primarily associated with the repatriation of non-U.S. earnings at a cost lower than originally estimated and positive revenues due to the impact of DVA of $618 million, or $0.20 per diluted common share. For a further discussion of the net discrete tax benefits, see "Supplemental Financial Information and Disclosures-Income Tax Matters" herein.

Effective January 1, 2016, we early adopted a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities that requires unrealized gains and losses from debt-related credit spreads and other credit factors ( i.e. , DVA) to be presented in OCI as opposed to Trading revenues. Results for 2015 are not restated pursuant to that guidance.

Net revenues were $34,631 million in 2016 compared with net revenues of $34,537 million excluding DVA in 2015. Excluding the intermittent net discrete tax benefits, net income applicable to Morgan Stanley was $5,911 million, or $2.88 per diluted common share, in 2016 compared with $5,164 million, or $2.41 per diluted common share, excluding both DVA and the intermittent net discrete tax benefits in 2015 (see "Selected Non-GAAP Financial Information" herein).

Compensation and benefits expenses of $15,878 million in 2016 decreased 1% from $16,016 million in 2015, primarily due to a decrease in salaries, severance costs, discretionary incentive compensation and employer taxes, partially offset by an increase in the fair value of investments to which certain deferred compensation plans are referenced.

Non-compensation expenses were $9,905 million in 2016 compared with $10,644 million in 2015, representing a 7% decrease, primarily due to lower litigation costs and expense management.

December 2017 Form 10-K 34
Table of Contents
Management's Discussion and Analysis

Expense Efficiency Ratio

Return on Average Common Equity 1, 3

Return on Average Tangible Common Equity 1, 3

1.

Represents a non-GAAP measure. See "Selected Non-GAAP Financial Information" herein.

2.

The calculation used in determining the expense efficiency ratio for 2015 excludes DVA.

3.

Adjusted amounts exclude intermittent net discrete tax provisions (benefits) for all periods presented. For 2015, results are also adjusted to exclude DVA. For further information on the net discrete tax provisions (benefits), see "Supplemental Financial Information and Disclosures-Income Tax Matters" herein. Beginning in 2017, income tax consequences associated with employee share-based awards are recognized in Provision for income taxes in the income statements but are excluded from the intermittent net discrete tax provisions (benefits) adjustment as we anticipate conversion activity each year. See Note 2 to the financial statements on the adoption of the accounting update Improvements to Employee Share-Based Payment Accounting .

Business Segment Results

Net Revenues by Segment 1, 2

($ in millions)

Net Income Applicable to Morgan Stanley by Segment 1, 3

($ in millions)

1.

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

2.

The total amount of Net Revenues by Segment also includes intersegment eliminations of $(290) million in 2017, $(290) million in 2016 and $(213) million in 2015.

3.

The total amount of Net Income Applicable to Morgan Stanley by Segment also includes intersegment eliminations of $4 million in 2017 and $1 million in 2016.

35 December 2017 Form 10-K
Table of Contents
Management's Discussion and Analysis

2017 Compared with 2016

Institutional Securities net revenues of $18,813 million in 2017 increased 8% from 2016, primarily reflecting higher revenues from Investment banking.

Wealth Management net revenues of $16,836 million in 2017 increased 10% from 2016, primarily reflecting growth in Asset management revenues and Net interest income.

Investment Management net revenues of $2,586 million in 2017 increased 22% from 2016, primarily reflecting higher revenues from Investments and Asset management.

2016 Compared with 2015

Institutional Securities net revenues of $17,459 million in 2016 decreased 3% compared with $17,953 million in 2015. The decrease was primarily a result of lower Investment banking and sales and trading revenues, which included DVA gains in 2015, partially offset by higher Other revenues.

Wealth Management net revenues of $15,350 million in 2016 increased 2% from $15,100 million in 2015, primarily as a result of growth in Net interest income, partially offset by lower Commissions and fees and Investment banking revenues.

Investment Management net revenues of $2,112 million in 2016 decreased 9% from $2,315 million in 2015, primarily reflecting weaker investment performance compared with 2015. This was partially offset by carried interest losses in 2015 associated with Asia private equity that did not re-occur in 2016. Asset management fees in 2016 were relatively unchanged from 2015.

Net Revenues by Region 1

($ in millions)

1.

For a discussion of how the geographic breakdown for net revenues is determined, see Note 21 to the financial statements.

Capital Ratios

At December 31,
2017
At December 31,
2016

 Common Equity Tier 1 capital ratio 1

16.5% 16.9%

 Tier 1 capital ratio 1

18.9% 19.0%

 Total capital ratio 1

21.7% 22.0%

 Tier 1 leverage ratio

8.3% 8.4%

1.

At December 31, 2017, our capital ratios are based on the Standardized Approach transitional rules. At December 31, 2016, our capital ratios were based on the Advanced Approach transitional rules. For a discussion of our regulatory capital ratios, see "Liquidity and Capital Resources-Regulatory Requirements" herein.

December 2017 Form 10-K 36
Table of Contents
Management's Discussion and Analysis

Selected Non-GAAP Financial Information

We prepare our financial statements using U.S. GAAP. From time to time, we may disclose certain "non-GAAP financial measures" in this document or in the course of our earnings releases, earnings and other conference calls, financial presentations, Definitive Proxy Statement and otherwise. A "non-GAAP financial measure" excludes, or includes, amounts from the most directly comparable measure calculated and presented in accordance with U.S. GAAP. We consider the non-GAAP financial measures we disclose to be useful to us, investors and analysts by providing further transparency about, or an alternate means of assessing, our financial condition, operating results, prospective regulatory capital requirements or capital adequacy. These measures are not in accordance with, or a substitute for, U.S. GAAP and may be different from or inconsistent with non-GAAP financial measures used by other companies. Whenever we refer to a non-GAAP financial measure, we will also generally define it or present the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, along with a reconciliation of the differences between the U.S. GAAP financial measure and the non-GAAP financial measure.

The principal non-GAAP financial measures presented in this document are set forth below.

Reconciliations from U.S. GAAP to Non-GAAP Consolidated Financial Measures

$ in millions, except per share data 2017 2016 2015

Net revenues

$         37,945 $     34,631 $     35,155 

Impact of adjustments 1

- - (618)

Adjusted net revenue-non-GAAP

37,945 34,631 34,537 

Net income applicable to Morgan Stanley

$ 6,111 $ 5,979 $ 6,127 

Impact of adjustments 1

968 (68) (963)

Adjusted net income applicable to Morgan Stanley-non-GAAP

7,079 5,911 5,164 

Earnings per diluted common share

$ 3.07 $ 2.92 $ 2.90 

Impact of adjustments 1

0.53 (0.04) (0.49)

Adjusted earnings per diluted common share-non-GAAP

$ 3.60 $ 2.88 $ 2.41 

Effective income tax rate

40.1% 30.8% 25.9%

Impact of adjustments 1

(9.3)% 0.8% 6.4%

Adjusted effective income tax rate-non-GAAP

30.8% 31.6% 32.3%
At
December 31,
2017
At
December 31,
2016
Average Monthly Balance
Twelve Months Ended
December 31,
$ in millions 2017 2016 2015

Tangible Equity

U.S. GAAP

Common equity

$         68,871 $       68,530 $   69,787 $     68,870 $     66,936

Preferred equity

8,520 7,520 8,443 7,520 7,174

Morgan Stanley shareholders' equity

$ 77,391 $ 76,050 $ 78,230 $ 76,390 $ 74,110

Junior subordinated debentures issued to capital trusts

- - - 1,753 3,640

Less: Goodwill and net intangible assets

(9,042 (9,296 (9,158 (9,410 (9,661

Morgan Stanley tangible shareholders' equity-non-GAAP

$ 68,349 $ 66,754 $ 69,072 $ 68,733 $ 68,089

U.S. GAAP

Common equity

$ 68,871 $ 68,530 $ 69,787 $ 68,870 $ 66,936

Less: Goodwill and net intangible assets

(9,042 (9,296 (9,158 (9,410 (9,661

Tangible common equity-non-GAAP

$ 59,829 $ 59,234 $ 60,629 $ 59,460 $ 57,275

Consolidated Non-GAAP Financial Measures

$ in billions 2017 2016 2015

Average common equity

Unadjusted

$       69.8 $ 68.9 $ 66.9

Adjusted 1, 2

69.9 68.9 67.1

ROE

Unadjusted

8.0% 8.0% 8.5%

Adjusted 1, 2

9.4% 7.9% 7.0%

Average tangible common equity

Unadjusted

$ 60.6 $ 59.5 $ 57.3

Adjusted 1, 2

60.7 59.5 57.5

ROTCE

Unadjusted

9.2% 9.3% 9.9%

Adjusted 1, 2

10.8% 9.1% 8.2%

Expense efficiency ratio 3

72.6% 74.5% 77.2%

At

December 31,
2017

At

December 31,
2016

Tangible book value per common share 4

$ 33.46 $ 31.98

37 December 2017 Form 10-K
Table of Contents
Management's Discussion and Analysis

Non-GAAP Financial Measures by Business Segment

$ in billions 2017 2016 2015

Pre-tax profit margin 5

Institutional Securities

30% 29% 26%

Wealth Management

26% 22% 22%

Investment Management

18% 14% 21%

Consolidated

27% 26% 24%

Average common equity 6

Institutional Securities

$         40.2 $         43.2 $       34.6

Wealth Management

17.2 15.3 11.2

Investment Management

2.4 2.8 2.2

Parent Company

10.0 7.6 18.9

Consolidated average common equity

$ 69.8 $ 68.9 $ 66.9

ROE 2, 7

Institutional Securities

7.8% 7.6% 9.9%

Wealth Management

12.9% 13.3% 16.9%

Investment Management

10.1% 7.7% 15.8%

Consolidated

8.0% 8.0% 8.5%

1.

Adjustments to the related U.S. GAAP figures are made to exclude intermittent net discrete tax provisions (benefits) for all periods presented. Beginning in 2017, income tax consequences associated with employee share-based awards are recognized in Provision for income taxes in the income statements but are excluded from the intermittent net discrete tax provisions (benefits) adjustment as we anticipate conversion activity each year. See Note 2 to the financial statements for information on the adoption of the accounting update Improvements to Employee Share-Based Payment Accounting . For 2015, results are also adjusted to exclude DVA, whereas in 2017 and 2016 unrealized DVA gains (losses) were recorded within OCI in the comprehensive income statements in accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities. The effect of DVA on Net revenues and Net income applicable to Morgan Stanley in 2015 was $618 million and $399 million, respectively. The effect of DVA on average common equity and average tangible common equity for 2015 was $637 million. See Note 15 to the financial statements for further information on DVA. See "Supplemental Financial Information and Disclosures-Income Tax Matters" herein for further information on the net discrete tax provisions (benefits).

2.

The calculations used in determining the Firm's "ROE and ROTCE Targets" are the Adjusted ROE and Adjusted ROTCE amounts shown in the previous table. ROE and ROTCE equal net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity and average tangible common equity, respectively, on a consolidated basis as indicated. When excluding intermittent net discrete tax provisions (benefits) for all periods presented and DVA for 2015, both the numerator and denominator are adjusted.

3.

The expense efficiency ratio represents total non-interest expenses as a percentage of net revenues. For 2015, the expense efficiency ratio is adjusted to exclude DVA.

4.

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

5.

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

6.

Average common equity for each business segment is determined using our Required Capital framework (see "Liquidity and Capital Resources-Regulatory Requirements-Attribution of Average Common Equity According to the Required Capital Framework" herein).

7.

The calculation of ROE by segment uses net income applicable to Morgan Stanley by segment less preferred dividends allocated to each segment as a percentage of average common equity allocated to each segment. Adjusted ROE excludes intermittent net discrete tax items by business segment for all periods presented. Adjusted ROE for 2015 also excludes DVA. Adjusted ROE for 2017: IS 8.9%, WM 15.3%, IM 13.6%; for 2016: IS 7.4%, WM 13.4%, IM 7.6%; and for 2015: IS 7.1%, WM 16.9%, IM 15.8%.

Return on Equity and Tangible Common Equity Targets

We previously established an ROE Target of 9% to 11% to be achieved by 2017. Excluding the impact of intermittent net discrete tax items, primarily related to the Tax Act, we generated a 9.4% ROE for 2017.

In January 2018, we established an ROE Target of 10% to 13% for the medium term. This is equivalent to an ROTCE Target range of 11.5% to 14.5%.

Our ROE and ROTCE Targets are forward-looking statements that may be materially affected by many factors, including, among other things: macroeconomic and market conditions; legislative and regulatory developments; industry trading and investment banking volumes; equity market levels; interest rate environment; outsize legal expenses or penalties and the ability to maintain a reduced level of expenses; capital levels; and intermittent discrete tax items. Given the uncertainties surrounding these and other factors, there are significant risks that our ROE and ROTCE Targets may not be realized. Actual results may differ from our objectives and the differences may be material and adverse. Accordingly, we caution that undue reliance should not be placed on any of these forward-looking statements. See "Forward-Looking Statements" and "Risk Factors" for additional information regarding these forward-looking statements.

For non-GAAP measures (ROE and ROTCE), see "Selected Non-GAAP Financial Information" herein. For information on the impact of intermittent net discrete tax items, including the Tax Act, see "Supplemental Financial Information and Disclosures-Income Tax Matters" herein.

Business Segments

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

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

December 2017 Form 10-K 38
Table of Contents
Management's Discussion and Analysis

Net Revenues

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

Trading.     Trading revenues include revenues from customers' purchases and sales of financial instruments in which we act as a market maker, as well as gains and losses on our related positions and other positions carried at fair value. Trading revenues include the realized gains and losses from sales of cash instruments and derivative settlements, unrealized gains and losses from ongoing fair value changes of our positions related to market-making activities, and gains and losses related to investments associated with certain employee deferred compensation plans and other positions carried at fair value. In many markets, the realized and unrealized gains and losses from the purchase and sale transactions will include any spreads between bids and offers. Certain fees received on loans carried at fair value and dividends from equity securities are also recorded in Trading revenues since they relate to positions carried at fair value.

As a market maker, we stand ready to buy, sell or otherwise transact with customers under a variety of market conditions and to provide firm or indicative prices in response to customer requests. Our liquidity obligations can be explicit in some cases, and in others, customers expect us to be willing to transact with them. In order to most effectively fulfill our market-making function, we engage in activities across all of our trading businesses that include, but are not limited to:

(i)

taking positions in anticipation of, and in response to, customer demand to buy or sell and-depending on the liquidity of the relevant market and the size of the position-to hold those positions for a period of time;

(ii)

building, maintaining and rebalancing inventory through trades with other market participants;

(iii)

managing and assuming basis risk (risk associated with imperfect hedging) between customized customer risks and the standardized products available in the market to hedge those risks;

(iv)

trading in the market to remain current on pricing and trends; and

(v)

engaging in other activities to provide efficiency and liquidity for markets.

Interest income and expense are also impacted by market-making activities, as debt securities held by us earn interest and securities are loaned, borrowed, sold with agreements to repurchase and purchased with agreements to resell.

We invest in investments or other financial instruments to economically hedge our obligations under certain deferred compensation plans. Changes in the value of such investments are recorded in either Trading revenues or Investments revenues. Expenses associated with the related deferred compensation plans are recorded in Compensation and benefits. See "Compensation Expense" herein for more details.

Investments.     Our investments generally are held for long-term appreciation or, as discussed above, for hedging purposes, and generally are subject to significant sales restrictions. Estimates of the fair value of the investments may involve significant judgment and may fluctuate significantly over time in light of business, market, economic and financial conditions generally or in relation to specific transactions. In some cases, such investments are required or are a necessary part of offering other products.

The revenues recorded are the result of realized gains and losses from sales and unrealized gains and losses from ongoing fair value changes of our holdings, as well as from investments associated with certain employee deferred compensation and co-investment plans.

Typically, there are no fee revenues from these investments. The sales restrictions on the investments relate primarily to redemption and withdrawal restrictions on investments in certain Investment Management funds, which include investments made in connection with certain employee deferred compensation plans (see Note 3 to the financial statements). Restrictions on interests in exchanges and clearinghouses generally include a requirement to hold those interests for the period of time where we are clearing trades on that exchange or clearinghouse. Additionally, there are certain sponsored Investment Management funds consolidated by us primarily related to holders of noncontrolling interests.

Commissions and Fees.     Commission and fee revenues primarily arise from agency transactions in listed and OTC equity securities, services related to sales and trading activities, and sales of mutual funds, futures, insurance products and options. Commissions received for purchasing and selling listed equity securities and options are recorded in Commissions and fees. Other cash and derivative instruments typically do not have fees associated with them, and fees for any related services are recorded in Commissions and fees.

Asset Management.     Asset management revenues include fees associated with the management and supervision of assets, account services and administration, performance-based fees relating to certain funds, separately managed accounts, shareholder servicing and the distribution of certain open-ended mutual funds.

39 December 2017 Form 10-K
Table of Contents
Management's Discussion and Analysis

Net Interest.     Interest income and Interest expense are a function of the level and mix of total assets and liabilities, including Trading assets and Trading liabilities, Investment securities (which include AFS securities and HTM securities), Securities borrowed or purchased under agreements to resell, Securities loaned or sold under agreements to repurchase, Loans, Deposits, and Borrowings. In addition, Net interest is a function of trading strategies, customer activity in the prime brokerage business, and the prevailing level, term structure and volatility of interest rates.

Other.     Other revenues include revenues from equity method investments, realized gains and losses on AFS securities, gains and losses on loan commitments and loans held for sale, provision for loan losses, and other miscellaneous revenues.

Net Revenues by Segment

Institutional Securities

Net revenues are composed of Investment banking revenues, sales and trading net revenues, Investments and Other revenues.

For information about the composition of Investment banking revenues, see "Net Revenues" herein.

Sales and trading net revenues are composed of Trading revenues, Commissions and fees, Asset management revenues, and Net interest. In assessing the profitability of our sales and trading activities, we view these net revenues in the aggregate. In addition, decisions relating to trading are based on an overall review of aggregate revenues and costs associated with each transaction or series of transactions. This review includes, among other things, an assessment of the potential gain or loss associated with a transaction, including any associated commissions and fees, dividends, the interest income or expense associated with financing or hedging our positions and other related expenses.

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

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

Equities-Execution services. A significant portion of the results for this business is generated by commissions and fees from executing and clearing client transactions on major

stock and derivative exchanges as well as from OTC transactions. We make markets for our clients in equity-related securities and derivative products, including providing liquidity and hedging products. Market-making also generates gains and losses on inventory, which are reflected in Trading revenues.

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

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

Credit products. We make markets in credit-sensitive products, such as corporate bonds and mortgage securities and other securitized products, and related derivative instruments. The values of positions in this business are sensitive to changes in credit spreads and interest rates, which result in gains and losses reflected in Trading revenues. We undertake lending activities, which include commercial and residential mortgage lending, asset-backed lending, and financing extended to municipalities. Due to the amount and type of the interest-bearing securities and loans making up this business, a significant portion of the results is also reflected in Net interest revenues.

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

Other sales and trading revenues include impacts from certain central treasury functions, such as liquidity costs and gains (losses) on economic hedges related to certain borrowings, as well as certain activities associated with corporate lending.

For information about revenue from Investments, see "Net Revenues" herein.

Other revenues include revenues from equity method investments, gains and losses on loans held for sale and loan commitments, provision for loan losses, and other miscellaneous revenues.

Wealth Management

Net revenues are composed of Transactional, Asset management, Net interest and Other revenues.

December 2017 Form 10-K 40
Table of Contents
Management's Discussion and Analysis

Transactional revenues include Investment banking, Trading, and Commissions and fees. Investment banking revenues include revenues from the distribution of equity and fixed income securities, including initial public offerings, secondary offerings, closed-end funds and unit trusts. Trading revenues include revenues from customers' purchases and sales of financial instruments, in which we act as principal, and gains and losses associated with certain employee deferred compensation plans. Revenues from Commissions and fees primarily arise from agency transactions in listed and OTC equity securities and sales of mutual funds, futures, insurance products and options.

Asset management revenues include revenues from individual and institutional investors electing a fee-based pricing arrangement and fees from Investment Management. Mutual fund distribution fees are based on either the average daily fund net asset balances or average daily aggregate net fund sales and are affected by changes in the overall level and mix of AUM.

Net interest income includes interest related to bank deposits, interest on AFS securities and HTM securities, interest on lending activities and other net interest. Interest income and Interest expense are a function of the level and mix of total assets and liabilities. Net interest is driven by securities-based lending, mortgage lending, margin loans, securities borrowed and securities loaned transactions, bank deposit activity, time deposits and savings deposits.

Other revenues include revenues from realized gains and losses on AFS securities, provision for loan losses, referral fees and other miscellaneous revenues.

Investment Management

Net revenues are composed of Investments and Asset management revenues.

Investments revenue is primarily earned on investments in certain closed-end funds that generally are held for long-term appreciation and generally subject to sales restrictions. Estimates of the fair value of the investments involve significant judgment and may fluctuate materially over time in light of business, market, economic and financial conditions generally or in relation to specific transactions. Investments revenue also contains performance fees from fund management activities in the form of carried interest that are subject to reversal.

Asset management revenues include revenues from investment management services we provide to investment vehicles pursuant to various contractual arrangements. We receive

fees primarily based upon mutual fund daily average net assets or based on monthly or quarterly invested equity for other vehicles. Performance-based fees, not in the form of carried interest, are earned on certain products as a percentage of appreciation earned by those products and, in certain cases, are based upon the achievement of performance criteria. These fees are normally earned annually and are recognized on a monthly or quarterly basis.

Compensation Expense

Compensation and benefits expense includes accruals for base salaries and fixed allowances, formulaic programs, discretionary incentive compensation, amortization of deferred cash and equity awards, changes in the fair value of investments to which certain deferred compensation plans are referenced, carried interest, severance costs, and other items such as health and welfare benefits.

The factors that drive compensation for our employees vary from quarter to quarter, from segment to segment and within a segment. For certain revenue-producing employees in the Wealth Management and Investment Management business segments, compensation is largely paid on the basis of formulaic payouts that link employee compensation to revenues. Compensation for certain employees, including revenue-producing employees in the Institutional Securities business segment, may also include incentive compensation that is determined following the assessment of the Firm, business unit and individual performance. Compensation for our remaining employees is largely fixed in nature ( i.e. , base salary and benefits).

Compensation expense for deferred cash-based compensation plans is calculated based on the notional value of the award granted, adjusted for upward and downward changes in fair value of the referenced investment, and is recognized ratably over the prescribed vesting period for the award. However, there may be a timing difference between the immediate revenue recognition of gains and losses on our investments and the deferred recognition of the related compensation expense over the vesting period.

Income Taxes

The income tax provision for our business segments is generally determined based on the revenues, expenses and activities directly attributable to each business segment. Certain items have been allocated to each business segment, generally in proportion to its respective net revenues or other relevant measures.

41 December 2017 Form 10-K
Table of Contents
Management's Discussion and Analysis

Institutional Securities

Income Statement Information

% Change
$ in millions 2017 2016 2015 2017 2016

Revenues

Investment banking

$ 5,537 $ 4,476 $ 5,008 24% (11)%

Trading

10,295 9,387 9,400 10% -%

Investments

368 147 274 150% (46)%

Commissions and fees

2,433 2,456 2,616 (1)% (6)%

Asset management

359 293 281 23% 4%

Other

630 535 221 18% 142%

Total non-interest revenues

19,622 17,294 17,800 13% (3)%

Interest income

5,377 4,005 3,190 34% 26%

Interest expense

6,186 3,840 3,037 61% 26%

Net interest

(809 165 153 N/M 8%

Net revenues

18,813 17,459 17,953 8% (3)%

Compensation and benefits

6,625 6,275 6,467 6% (3)%

Non-compensation expenses

6,544 6,061 6,815 8% (11)%

Total non-interest expenses

13,169 12,336 13,282 7% (7)%

Income from continuing operations before income taxes

5,644 5,123 4,671 10% 10%

Provision for income taxes

1,993 1,318 825 51% 60%

Income from continuing operations

3,651 3,805 3,846 (4)% (1)%

Income (loss) from discontinued operations net of income taxes

(19 (1 (17 N/M 94%

Net income

3,632 3,804 3,829 (5)% (1)%

Net income applicable to noncontrolling interests

96 155 133 (38)% 17%

Net income applicable to Morgan Stanley

$ 3,536 $ 3,649 $ 3,696 (3)% (1)%

Investment Banking

Investment Banking Revenues

% Change
$ in millions 2017 2016 2015 2017 2016

Advisory

$   2,077 $   2,220 $   1,967 (6)% 13%

Underwriting:

Equity

1,484 887 1,398 67% (37)%

Fixed income

1,976 1,369 1,643 44% (17)%

Total underwriting

3,460 2,256 3,041 53% (26)%

Total investment banking

$ 5,537 $ 4,476 $ 5,008 24% (11)%

Investment Banking Volumes

$ in billions 2017 2016 2015

Completed mergers and acquisitions 1

$     733 $     1,021 $     664

Equity and equity-related offerings 2, 3

65 45 67

Fixed income offerings 2, 4

260 236 254

Source: Thomson Reuters, data at January 2, 2018. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal or change in the value of a transaction.

1.

Amounts include transactions of $100 million or more. Completed mergers and acquisitions volumes are based on full credit to each of the advisors in a transaction.

2.

Equity and equity-related offerings and fixed income offerings are based on full credit for single book managers and equal credit for joint book managers.

3.

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

4.

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

2017 Compared with 2016

Investment banking revenues of $5,537 million in 2017 increased 24% from 2016 due to higher underwriting revenues, partially offset by lower advisory revenues.

Advisory revenues decreased reflecting the lower volumes of completed M&A (see Investment Banking Volumes table), partially offset by the positive impact of higher fee realizations.

Equity underwriting revenues increased as a result of higher global market volumes in both follow-on and initial public offerings (see Investment Banking Volumes table) combined with a higher share of fees. Fixed income underwriting revenues increased due to higher bond fees and non-investment grade loan fees.

2016 Compared with 2015

Investment banking revenues of $4,476 million in 2016 decreased 11% from 2015 due to lower underwriting revenues, partially offset by an increase in advisory revenues in 2016.

Advisory revenues increased reflecting the higher dollar volume of completed M&A activity (see Investment Banking Volumes table). As the number of completed transactions decreased in 2016 versus 2015, the 2016 revenue increase was at a lower rate than the percentage increase in dollar volume.

Equity underwriting revenues decreased as a result of lower equity-related offerings in 2016 (see Investment Banking Volumes table). Fixed income underwriting revenues decreased in 2016, primarily due to lower bond and loan fees.

December 2017 Form 10-K 42
Table of Contents
Management's Discussion and Analysis

Sales and Trading Net Revenues

By Income Statement Line Item

    % Change
$ in millions 2017 2016 2015 2017 2016

Trading

$ 10,295 $ 9,387 $ 9,400 10% -  0 ⁄ 0

Commissions and fees

2,433 2,456 2,616 (1)% (6)%

Asset management

359 293 281 23% 4%

Net interest

(809 165 153 N/M 8%

Total

$         12,278 $     12,301 $     12,450 N/M (1)%

By Business

    % Change
$ in millions 2017

2016

2015 2017     2016

Equity-U.S. GAAP

$ 7,982 $ 8,037 $ 8,288 (1)% (3)%

Impact of DVA 1

- - (163 -% N/M

Equity-non-GAAP

$ 7,982 $ 8,037 $ 8,125 (1)% (1)%
Fixed Income-
U.S. GAAP 2
$ 4,928 $ 5,117 $ 4,758 (4)% 8%

Impact of DVA 1

- - (455 -% N/M

Fixed income-non-GAAP

$ 4,928 $ 5,117 $ 4,303 (4)% 19%

Other-U.S. GAAP

(632 (853 (596 26% (43)%

Total-U.S. GAAP

$ 12,278 $ 12,301 $ 12,450 -  0 ⁄ 0 (1)%

Total-Impact of DVA

- - (618 -% N/M

Total

$       12,278 $     12,301 $     11,832 -  0 ⁄ 0 4%

1.

In 2017 and 2016, in accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities , unrealized DVA gains (losses) are recorded within OCI in the comprehensive income statements. In 2015, the DVA gains (losses) were recorded within Trading revenues in the income statements. For further information, see "Selected Non-GAAP Financial Information" herein and Note 15 to the financial statements.

2.

Effective in 2016, the Institutional Securities "Fixed Income and Commodities" business has been renamed the "Fixed Income" business.

2017
$ in millions Trading Fees 1 Net
Interest 2
Total

Financing

$         4,140 $ 363 $ (762 $ 3,741

Execution services

2,294 2,191 (244 4,241

Total Equity

$ 6,434 $     2,554 $ (1,006 $ 7,982

Total Fixed income

$ 4,453 $ 238 $         237 $     4,928
2016
$ in millions Trading Fees 1 Net
Interest 2
Total

Financing

$ 3,668 $ 347 $ (283 $ 3,732

Execution services

2,231 2,241 (167 4,305

Total Equity

$ 5,899 $ 2,588 $ (450 $ 8,037

Total Fixed income

$ 4,115 $ 162 $ 840 $ 5,117
2015
$ in millions Trading Fees 1 Net
Interest 2
Total

Financing

$ 3,300 $ 322 $ 126 $ 3,748

Execution services

2,210 2,437 (270 4,377

Impact of DVA 3

163 - - 163

Total Equity

$         5,673 $     2,759 $ (144 $ 8,288

Fixed Income

$ 3,333 $ 139 $ 831 $ 4,303

Impact of DVA 3

455 - - 455

Total Fixed income

$ 3,788 $ 139 $ 831 $     4,758

1.

Includes Commissions and fees and Asset management revenues.

2.

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

3.

In 2017 and 2016, in accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities , unrealized DVA gains (losses) are recorded within OCI in the comprehensive income statements. In 2015, the DVA gains (losses) were recorded within Trading revenues in the income statements. For further information, see "Selected Non-GAAP Financial Information" herein and Note 15 to the financial statements.

As discussed in "Net Revenues by Segment" herein, we manage each of the sales and trading businesses based on its aggregate net revenues, which are comprised of the income statement line items quantified in the previous table. Trading revenues are affected by a variety of market dynamics, including volumes, bid-offer spreads and inventory prices, as well as impacts from hedging activity, which are interrelated. We provide qualitative commentary in the discussion of results that follow on the key drivers of period-over-period variances, as the quantitative impact of the various market dynamics typically cannot be disaggregated.

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

2017 Compared with 2016

Equity

Equity sales and trading net revenues of $7,982 million in 2017 decreased 1% from 2016, reflecting lower results in execution services.

Financing revenues remained relatively unchanged from 2016. The results reflected higher client activity in equity swaps reflected in Trading revenues, offset by a decline in Net interest revenues from higher net interest costs, reflecting the business' increased portion of GLR requirements and a shift in the mix of financing transactions.

43 December 2017 Form 10-K
Table of Contents
Management's Discussion and Analysis

Execution services decreased from 2016, primarily reflecting lower results in derivatives products mainly driven by lower corporate activity and volatility, partially offset by higher gains on cash equity products recorded in Trading revenues.

Fixed Income

Fixed income net revenues of $4,928 million in 2017 were 4% lower than in 2016, driven by lower results in global macro products, partially offset by higher results in credit products, and commodities products and other.

Global macro products decreased primarily due to the lack of a constructive market environment, inventory positioning, and lower client activity reflected in both Trading and Net interest.

Credit products increased primarily due to the absence of losses driven by a widening spread environment in 2016 and increased securitization activity reflected in Trading revenues, partially offset by reduced Net interest revenues. Net interest revenues decreased as a result of a lower level of interest realized in securitized products and lower net interest spreads, partially offset by increased lending activity.

Commodities products and Other increased primarily due to higher revenues in other lending and OTC client clearing.

Other

Other sales and trading net losses of $632 million in 2017 decreased from 2016, primarily reflecting lower losses associated with corporate loan hedging activity and increases in the fair value of investments to which certain deferred compensation plans are referenced, partially offset by higher funding costs.

2016 Compared with 2015

Equity

Excluding the $163 million positive impact of DVA on 2015 results, equity sales and trading net revenues of $8,037 million in 2016 were lower than in 2015.

Financing revenues were in line with the results from 2015 as Net interest revenues declined from higher net interest costs, reflecting the business' increased portion of GLR requirements, offset by increased client activity in equity swaps reflected in Trading.

Execution services decreased 2% from 2015, primarily reflecting a decrease in fee revenues of $196 million due to reduced client activity.

Fixed Income

Excluding the $455 million positive impact of DVA on 2015 results, fixed income net revenues of $5,117 million in 2016 were 19% higher than in 2015, primarily due to improved results in credit products.

Credit products Trading revenues were the primary driver for the overall increase in fixed income Trading revenues of $782 million, reflecting an improved credit market environment that resulted in gains on inventory in 2016 compared with losses in 2015.

Overall results from other fixed income businesses were relatively unchanged. There was a net increase in Trading revenues from global macro products, reflecting gains on inventory in interest rate products, offset by declines in commodities activities, primarily due to the absence of revenues from the global oil merchanting business, which was sold on November 1, 2015. For more information on the sale of the global oil merchanting business, see "Investments, Other Revenues, Non-interest Expenses, Income Tax Items, Dispositions and Noncontrolling Interests-2016 Compared with 2015-Dispositions" herein.

Other

Other sales and trading net losses of $853 million in 2016 increased from 2015, primarily reflecting losses in 2016 associated with corporate loan hedging activity.

Investments, Other Revenues, Non-interest Expenses, Income Tax Items, Dispositions and Noncontrolling Interests

2017 Compared with 2016

Investments

Net investment gains of $368 million in 2017 increased from 2016 as a result of higher gains on business-related and real estate investments. In addition, in 2017, we recorded gains on investments to which certain deferred compensation plans are referenced compared with losses in 2016.

Other

Other revenues of $630 million in 2017 increased from 2016, primarily reflecting a decrease in the provision on loans held for investment and higher results from other investments, partially offset by lower mark-to-market gains on loans held for sale.

December 2017 Form 10-K 44
Table of Contents
Management's Discussion and Analysis

Non-interest Expenses

Non-interest expenses of $13,169 million in 2017 increased from 2016, primarily reflecting a 6% increase in Compensation and benefits expenses and an 8% increase in Non-compensation expenses in 2017.

Compensation and benefits expenses increased in 2017, primarily due to increases in the fair value of investments to which certain deferred compensation plans are referenced, and incentive compensation driven mainly by higher revenues.

Non-compensation expenses increased in 2017, primarily due to higher volume-related expenses and litigation costs related to legacy RMBS matters.

2016 Compared with 2015

Investments

Net investment gains of $147 million in 2016 decreased from 2015 as a result of lower gains on real estate and business-related investments and losses on investments to which certain deferred compensation plans are referenced in 2016 compared with gains in 2015.

Other

Other revenues of $535 million in 2016 increased from 2015, primarily reflecting mark-to-market gains on loans held for sale in 2016 compared with mark-to-market losses in 2015, partially offset by lower results related to our 40% stake in Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. ("MUMSS") (see Note 8 to the financial statements for further information).

Non-interest Expenses

Non-interest expenses of $12,336 million in 2016 decreased from 2015, primarily reflecting a 3% reduction in Compensation and benefits expenses and an 11% reduction in Non-compensation expenses in 2016.

Compensation and benefits expenses decreased in 2016, primarily due to a decrease in salaries, severance costs, discretionary incentive compensation and employer taxes, partially offset by an increase in the fair value of investments to which certain deferred compensation plans are referenced.

Non-compensation expenses decreased in 2016, primarily due to lower litigation costs and Professional services expense. In 2015, Non-compensation expenses included increases to reserves for the settlement of a CDS antitrust litigation matter and legacy RMBS.

Income Tax Items

In 2017, we recognized in Provision for income taxes an intermittent net discrete tax provision of $471 million. This net discrete tax provision included an approximate $705 million impact from the Tax Act, partially offset by net discrete tax benefits primarily associated with the remeasurement of reserves and related interest due to new information regarding the status of multi-year IRS tax examinations. For a further discussion of the Tax Act and other discrete items, see "Supplemental Financial Information and Disclosures-Income Tax Matters" herein and Note 21 to the financial statements.

In 2016, we recognized in Provision for income taxes intermittent net discrete tax benefits of $83 million. These net discrete tax benefits were primarily related to the remeasurement of reserves and related interest due to new information regarding the status of multi-year IRS tax examinations, partially offset by adjustments for other tax matters.

In 2015, we recognized in Provision for income taxes intermittent net discrete tax benefits of $564 million. These net discrete tax benefits were primarily associated with the repatriation of non-U.S. earnings at a cost lower than originally estimated due to an internal restructuring to simplify our legal entity organization in the U.K.

Dispositions

On November 1, 2015, we completed the sale of our global oil merchanting unit of the commodities division to Castleton Commodities International LLC. The loss on sale of approximately $71 million was recognized in Other revenues.

Noncontrolling Interests

Noncontrolling interests primarily relate to MUFG's interest in Morgan Stanley MUFG Securities Co. Ltd. ("MSMS").

45 December 2017 Form 10-K
Table of Contents
Management's Discussion and Analysis

Wealth Management

Income Statement Information

% Change    
$ in millions 2017 2016 1 2015 1 2017 2016

Revenues

Investment banking

$ 533 $ 484 $ 623 10% (22)%

Trading

848 861 731 (2)% 18%

Investments

3 - 18 N/M N/M

Commissions and fees

1,737 1,745 1,981 -% (12)%

Asset management

9,342 8,454 8,536 11% (1)%

Other

268 277 255 (3)% 9%

Total non-interest revenues

12,731 11,821 12,144 8% (3)%

Interest income

4,591 3,888 3,105 18% 25%

Interest expense

486 359 149 35% 141%

Net interest

4,105 3,529 2,956 16% 19%

Net revenues

16,836 15,350 15,100 10% 2%

Compensation and benefits

9,360 8,666 8,595 8% 1%

Non-compensation expenses

3,177 3,247 3,173 (2)% 2%

Total non-interest expenses

12,537 11,913 11,768 5% 1%

Income from continuing operations before income taxes

4,299 3,437 3,332 25% 3%

Provision for income taxes

1,974 1,333 1,247 48% 7%

Net income applicable to Morgan Stanley

$      2,325 $     2,104 $     2,085 11% 1%

1.

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

Financial Information and Statistical Data

$ in billions At
December 31,
2017
At
December 31,
2016

Client assets

$ 2,373 $ 2,103

Fee-based client assets 1

$ 1,045 $ 877

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

44% 42%

Client liabilities 2

$ 80 $ 73

Investment securities portfolio

$ 59.2 $ 63.9

Loans and lending commitments

$ 77.3 $ 68.7

Wealth Management representatives

15,712 15,763

    2017         2016         2015    
Revenues per representative
(dollars in thousands) 3
$ 1,068 $ 968 $ 950
Client assets per representative
(dollars in millions) 4
$ 151 $ 133 $ 125
Fee-based asset flows 5
(dollars in billions)
$ 75.4 $ 48.5 $ 46.3

1.

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

2.

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

3.

Revenues per representative equal Wealth Management's net revenues divided by the average representative headcount.

4.

Client assets per representative equal total period-end client assets divided by period-end representative headcount.

5.

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

Transactional Revenues

% Change
$ in millions 2017 2016 2015 2017 2016

Investment banking

$   533 $   484 $   623 10% (22)%

Trading

848 861 731 (2)% 18%

Commissions and fees

1,737 1,745 1,981 -% (12)%

Total

$   3,118 $   3,090 $   3,335 1% (7)%

Transactional revenues as a % of Net revenues

19% 20% 22%

2017 Compared with 2016

Net Revenues

Transactional Revenues

Transactional revenues of $3,118 million in 2017 were relatively unchanged from 2016, as increased Investment banking revenues were offset by decreased Trading revenues.

December 2017 Form 10-K 46
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Management's Discussion and Analysis

Investment banking revenues increased in 2017, primarily due to higher revenues from structured products and equity syndicate activities, partially offset by lower preferred stock syndicate activity.

Trading revenues decreased in 2017, primarily due to lower revenues related to the Fixed Income Integration and lower client activity in fixed income products, partially offset by gains on investments to which certain deferred compensation plans are referenced.

Commissions and fees were relatively unchanged in 2017 compared with 2016.

Asset Management

Asset management revenues of $9,342 million in 2017 increased 11% compared with 2016, primarily due to market appreciation and net positive flows. These increases were partially offset by decreases in average fee rates across all account types.

See "Fee-Based Client Assets" herein for more details.

Net Interest

Net interest of $4,105 million in 2017 increased 16% compared with 2016, primarily due to higher loan balances and higher interest rates, partially offset by higher interest expense on deposits.

Other

Other revenues of $268 million in 2017 decreased 3% compared with 2016, primarily due to lower realized gains from the AFS securities portfolio.

Non-interest Expenses

Non-interest expenses of $12,537 million in 2017 increased 5% compared with 2016 due to higher Compensation and benefits expenses, partially offset by a decrease in Non-compensation expenses.

Compensation and benefits expenses increased in 2017, primarily due to the formulaic payout to Wealth Management representatives linked to higher revenues, and due to increases in the fair value of investments to which certain deferred compensation plans are referenced.

Non-compensation expenses decreased in 2017, primarily due to the absence of a $70 million provision recorded in 2016 related to certain brokerage service reporting activities (see prior year explanation for "Non-interest Expenses" herein) and lower litigation and information processing costs, partially offset by higher consulting fees related to strategic initiatives and higher FDIC insurance expenses.

2016 Compared with 2015

Net Revenues

Transactional Revenues

Transactional revenues of $3,090 million in 2016 decreased 7% compared with 2015, primarily reflecting lower revenues related to commissions and fees and investment banking revenues, partially offset by higher trading revenues.

Investment banking revenues decreased in 2016, primarily due to lower revenues from the distribution of unit investment trusts, and equity and structured products.

Trading revenues increased in 2016, primarily due to gains on investments to which certain employee deferred compensation plans are referenced compared with losses in 2015.

Commissions and fees decreased in 2016, reflecting lower daily average commissions, primarily due to reduced client activity in equity, annuity and mutual fund products. This decrease was partially offset by increased fees due to the Fixed Income Integration.

Asset Management

Asset management revenues of $8,454 million in 2016 decreased 1% compared with 2015, primarily due to the decrease in mutual fund fees. Revenues from fee-based accounts were relatively flat with decreased client fee rates, partially offset by positive flows.

See "Fee-Based Client Assets" herein for more details.

Net Interest

Net interest of $3,529 million in 2016 increased 19% compared with 2015, primarily due to higher loan balances and investment portfolio yields.

Other

Other revenues of $277 million in 2016 increased 9% compared with 2015 due to the combination of higher referral fees in 2016 and a decrease in provision for loan losses in 2016.

Non-interest Expenses

Non-interest expenses of $11,913 million in 2016 increased 1% compared with 2015.

Compensation and benefits expenses increased in 2016, primarily due to an increase in the fair value of investments to which certain deferred compensation plans are referenced.

47 December 2017 Form 10-K
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Management's Discussion and Analysis

Non-compensation expenses increased in 2016, primarily as a result of a $70 million provision related to identified operational issues that resulted in the reporting of incorrect cost basis tax information to the IRS and retail brokerage clients for tax years 2011 through 2016.

Income Tax Items

In 2017, we recognized in Provision for income taxes an intermittent net discrete tax provision of $411 million, which included approximately $402 million related to the enactment of the Tax Act. For a discussion of the Tax Act, see "Supplemental Financial Information and Disclosures-Income Tax Matters" herein. For the impact of other discrete tax items, see Note 21 to the financial statements.

Fee-Based Client Assets

Wealth Management earns fees based on a contractual percentage of fee-based client assets related to certain account types that we offer. These fees, which we record in the Asset management line on our income statement, are earned based on the client assets in the specific account types in which the client participates and are generally not driven by asset class. For most account types, fees are billed in the first month of each quarter based on the related client assets as of the end of the prior quarter. Across the account types, fees will vary based on both the distinct services provided within each account type and on the level of household assets under supervision in Wealth Management.

Fee-Based Client Assets Rollforward

$ in billions

At

December 31,
2016
Inflows Outflows Market
Impact

At

December 31,
2017

Separately managed 1, 2

$ 222 $ 39 $ (21 $ 12 $ 252

Unified managed 2

204 47 (30 29 250

Mutual fund advisory

21 2 (4 2 21

Advisor

125 34 (25 15 149

Portfolio manager

285 74 (41 35 353

Subtotal

$ 857 $ 196 $ (121 $ 93 $ 1,025

Cash management

20 13 (13 - 20

Total fee-based client assets

$ 877 $ 209 $ (134 $ 93 $ 1,045
$ in billions

At

December 31,
2015
Inflows Outflows Market
Impact

At

December 31,
2016

Separately managed 1

$ 283 $ 33 $ (97 $ 3 $ 222

Unified managed

105 107 (17 9 204

Mutual fund advisory

25 2 (6 - 21

Advisor

115 31 (26 5 125

Portfolio manager

252 63 (41 11 285

Subtotal

$ 780 $ 236 $ (187 $ 28 $ 857

Cash management

15 14 (9 - 20

Total fee-based client assets

$ 795 $ 250 $ (196 $ 28 $ 877

$ in billions

At

December 31,
2014
Inflows Outflows Market
Impact

At

December 31,
2015

Separately managed 1

$ 285 $ 42 $ (32 $ (12 $ 283

Unified managed

93 29 (14 (3 105

Mutual fund advisory

31 3 (6 (3 25

Advisor

119 29 (25 (8 115

Portfolio manager

241 58 (38 (9 252

Subtotal

$ 769 $ 161 $ (115 $ (35 $ 780

Cash management

16 9 (10 - 15

Total fee-based client assets

$ 785 $ 170 $ (125 $ (35 $ 795

Average Fee Rates 3

Fee rate in bps

2017

2016

2015

Separately managed 2

17 34 40

Unified managed 2

99 107 114

Mutual fund advisory

120 121 122

Advisor

86 88 90

Portfolio manager

97 101 105

Subtotal

77 79 81

Cash management

6 6 6

Total fee-based client assets

76 77 80

1.

Includes non-custody account values reflecting prior quarter-end balances due to a lag in the reporting of asset values by third-party custodians.

2.

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

3.

Certain data enhancements made in the first quarter of 2017 resulted in a modification to the fee rate calculations. Prior periods have been restated to reflect the revised calculations.

Inflows -include new accounts, account transfers, deposits, dividends and interest.

Outflows -include closed or terminated accounts, account transfers, withdrawals and client fees.

December 2017 Form 10-K 48
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Management's Discussion and Analysis

Market impact -includes realized and unrealized gains and losses on portfolio investments.

Separately managed -accounts by which third-party asset managers are engaged to manage clients' assets with investment decisions made by the asset manager. One third-party asset manager strategy can be held per account.

Unified managed -accounts that provide the client with the ability to combine separately managed accounts, mutual funds and exchange traded funds all in one aggregate account. Unified managed accounts can be client-directed, financial advisor-directed or directed by us (with "directed" referring to the investment direction or decision/discretion/ power of attorney).

Mutual fund advisory -accounts that give the client the ability to systematically allocate assets across a wide range of mutual funds. Investment decisions are made by the client.

Advisor -accounts where the investment decisions must be approved by the client and the financial advisor must obtain approval each time a change is made to the account or its investments.

Portfolio manager -accounts where a financial advisor has discretion (contractually approved by the client) to make ongoing investment decisions without the client's approval for each individual change.

Cash management -accounts where the financial advisor provides discretionary cash management services to institutional clients, whereby securities or proceeds are invested and reinvested in accordance with the client's investment criteria. Generally, the portfolio will be invested in short-term fixed income and cash equivalent investments.

49 December 2017 Form 10-K
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Management's Discussion and Analysis

Investment Management

Income Statement Information

% Change

 $ in millions 2017 2016 2015 2017 2016    

 Revenues

 Investment banking

$ - $ - $ 1 -% (100)%

 Trading

(22 (2 (1 N/M (100)%

 Investments

449 13 249 N/M (95)%

 Commissions and fees

- 3 1 (100)% 200%

 Asset management

2,196 2,063 2,049 6% 1%

 Other

(37 31 32 N/M (3)%

 Total non-interest revenues

2,586 2,108 2,331 23% (10)%

 Interest income

4 5 2 (20)% 150%

 Interest expense

4 1 18 N/M (94)%

 Net interest

- 4 (16 (100)% 125%

 Net revenues

2,586 2,112 2,315 22% (9)%

 Compensation and benefits

1,181 937 954 26% (2)%

 Non-compensation expenses

949 888 869 7% 2%

 Total non-interest expenses

2,130 1,825 1,823 17% -%

 Income from continuing operations before income taxes

456 287 492 59% (42)%

 Provision for income taxes

201 75 128 168% (41)%

 Income from continuing operations

255 212 364 20% (42)%

 Income from discontinued operations, net of income taxes

- 2 1 (100)% 100%

 Net income

255 214 365 19% (41)%

 Net income (loss) applicable to noncontrolling interests

9 (11 19 182% (158)%

 Net income applicable to Morgan Stanley

$ 246 $ 225 $ 346 9% (35)%

2017 Compared with 2016

Net Revenues

Investments

Investments gains of $449 million in 2017 compared with $13 million in 2016 reflected higher carried interest and performance gains in all asset classes.

Asset Management

Asset management revenues of $2,196 million increased 6% compared with 2016, primarily as a result of higher average AUM across all asset classes. This increase was partially offset by lower effective fee rates in Alternative/Other due to a shift in product mix and the absence of fees recognized in 2016 related to the completion of certain fund raisings.

See "Assets under Management or Supervision" herein.

Other

Other losses of $37 million were recognized in 2017 compared with other revenues of $31 million in 2016, primarily as a result of an impairment of an equity method investment in a third-party asset manager.

Non-interest Expenses

Non-interest expenses of $2,130 million in 2017 increased 17% compared with 2016.

Compensation and benefits expenses increased in 2017 due to higher incentive compensation, increases in deferred compensation associated with carried interest, and increases in the fair value of investments to which certain deferred compensation plans are referenced.

Non-compensation expenses increased in 2017, primarily due to higher brokerage, clearing and exchange fees.

2016 Compared with 2015

Net Revenues

Investments

Investments gains of $13 million in 2016 decreased 95% from 2015, reflecting weaker investment performance compared with the prior year. This was partially offset by carried interest losses in 2015 associated with Asia private equity that did not re-occur in 2016.

Asset Management

Asset management revenues of $2,063 million in 2016 were relatively unchanged from 2015, as increases in management fees resulting from higher AUM and average fee rates in certain products were offset by lower performance fees.

See "Assets under Management or Supervision" herein.

Non-interest Expenses

Non-interest expenses of $1,825 million in 2016 were relatively unchanged from 2015, primarily due to higher Non-compensation expenses offset by lower Compensation and benefits expenses.

Compensation and benefits expenses decreased, primarily due to a decrease in salaries.

Non-compensation expenses increased, primarily due to higher brokerage, clearing and exchange fees, partially offset by lower litigation costs and expense management.

December 2017 Form 10-K 50
Table of Contents
Management's Discussion and Analysis

Income Tax Items

In 2017, we recognized in Provision for income taxes an intermittent net discrete tax provision of $86 million, which included approximately $94 million related to the enactment of the Tax Act. For a discussion of the Tax Act, see "Supplemental Financial Information and Disclosures-Income Tax Matters" herein. For the impact of other discrete tax items, see Note 21 to the financial statements.

Assets under Management or Supervision

AUM Rollforwards

$ in billions

At

December 31,
2016
Inflows Outflows Market
Impact
Other

At

December 31,
2017

Equity

$ 79 $ 23 $ (21 $ 23 $ 1 $ 105

Fixed income

60 27 (21 4 3 73

Liquidity

163 1,239 (1,227 1 - 176

Alternative/Other

115 24 (18 8 (1 128

Total AUM

$ 417 $ 1,313 $ (1,287 $ 36 $ 3 $ 482

Shares of minority stake assets

8 7

$ in billions

At

December 31,
2015
Inflows Outflows Market
Impact
Other

At

December 31,
2016

Equity

$ 83 $ 19 $ (24 $ 1 $ - $ 79

Fixed income

60 25 (26 2 (1 60

Liquidity

149 1,325 (1,310 - (1 163

Alternative/Other

114 27 (27 4 (3 115

Total AUM

$ 406 $ 1,396 $ (1,387 $ 7 $ (5 $ 417

Shares of minority stake assets

8 8

$ in billions

At

December 31,
2014
Inflows 1 Outflows Market
Impact
Other

At

December 31,
2015

Equity

$ 99 $ 15 $ (30 $ - $ (1 $ 83

Fixed income

65 21 (23 (1 (2 60

Liquidity

128 1,259 (1,238 - - 149

Alternative/Other

111 28 (18 - (7 114

Total AUM

$ 403 $ 1,323 $ (1,309 $ (1 $ (10 $ 406

Shares of minority stake assets

7 8

Average AUM

$ in billions         2017                 2016                 2015        

Equity

$ 93 $ 81 $ 93

Fixed income

66 61 63

Liquidity

157 151 136

Alternative/Other

122 115 113

Total AUM

$ 438 $ 408 $ 405

Shares of minority stake assets

7 8 7

Average Fee Rate

Fee rate in bps         2017                 2016                 2015        

Equity

73 72 69

Fixed income

33 32 32

Liquidity

17 18 10

Alternative/Other

70 75 79

Total AUM

46 47 46

1.

Includes $4.6 billion related to the transfer of certain equity portfolio managers and their portfolios from the Wealth Management business segment to the Investment Management business segment.

Inflows -represent investments or commitments from new and existing clients in new or existing investment products, including reinvestments of client dividends and increases in invested capital. Inflows exclude the impact of exchanges occurring, whereby a client changes positions within the same asset class.

Outflows -represent redemptions from clients' funds, transition of funds from the committed capital period to the invested capital period and decreases in invested capital. Outflows exclude the impact of exchanges occurring, whereby a client changes positions within the same asset class.

Market impact -includes realized and unrealized gains and losses on portfolio investments. This excludes any funds where market impact does not impact management fees.

Other -contains both distributions and foreign currency impact. Distributions represent decreases in invested capital due to returns of capital after the investment period of a fund. It also includes fund dividends for which the client has not elected to reinvest. Foreign currency impact reflects foreign currency changes for non-U.S. dollar denominated funds.

Alternative/Other -asset class includes products in fund of funds, real assets, private equity and credit strategies, as well as multi-asset portfolios.

Shares of minority stake assets -represent the Investment Management business segment's proportional share of assets managed by entities in which it owns a minority stake.

Average fee rate -based on Asset management revenues, net of waivers. It excludes performance-based fees and other non-management fees. For certain non-U.S. funds, it includes the portion of advisory fees that the advisor collects on behalf of third-party distributors. The payment of those fees to the distributor is included in Non-compensation expenses in the income statements.

51 December 2017 Form 10-K
Table of Contents
Management's Discussion and Analysis

Supplemental Financial Information and Disclosures

Income Tax Matters

Effective Tax Rate from Continuing Operations

2017    

2016    

2015    

U.S. GAAP

40.1% 30.8% 25.9%

Adjusted effective income tax rate-non-GAAP 1

30.8% 31.6% 32.3%

1.

Beginning in 2017, income tax consequences associated with employee share-based awards are recognized in Provision for income taxes in the income statements but are excluded from the intermittent net discrete tax provisions (benefits) adjustment as we anticipate conversion activity each year. See Note 2 to the financial statements on the adoption of the accounting update Improvements to Employee Share-Based Payment Accounting . For 2015, adjusted effective income tax rate also excludes DVA. For further information on non-GAAP measures, see "Selected Non-GAAP Financial Information" herein.

2017

The effective tax rate from continuing operations for 2017 included an intermittent net discrete tax provision of $968 million, primarily related to the impact of the Tax Act, partially offset by net discrete tax benefits primarily associated with the remeasurement of reserves and related interest due to new information regarding the status of multi-year IRS tax examinations.

The Tax Act, enacted on December 22, 2017, significantly revised U.S. corporate income tax law by, among other things, reducing the corporate income tax rate to 21%, and implementing a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of non-U.S. subsidiaries; imposes a minimum tax on global intangible low-taxed income ("GILTI") and an alternative base erosion and anti-abuse tax ("BEAT") on U.S. corporations that make deductible payments to non-U.S. related persons in excess of specified amounts; and broadens the tax base by partially or wholly eliminating tax deductions for certain historically deductible expenses (e.g., FDIC premiums and executive compensation).

We recorded an approximate $1.2 billion net discrete tax provision as a result of the enactment of the Tax Act, primarily from the remeasurement of certain deferred tax assets using the lower enacted corporate tax rate. This provision incorporates the best available information as of the enactment date as well as assumptions made based upon our current interpretation of the Tax Act. Our estimates may change as we receive additional clarification and implementation guidance from the U.S. Treasury Department and as the

interpretation of the Tax Act evolves over time. The ultimate

impact of the income tax effects of the Tax Act will be determined in connection with the preparation of our U.S. consolidated federal income tax return.

Taking into account our current assumptions, estimates and interpretations related to the Tax Act and other factors, we expect our effective tax rate from continuing operations for 2018 to be approximately 22% to 25%, depending on factors such as the geographic mix of earnings and employee share-based awards (see "Forward-Looking Statements").

Subsequent to the release of the Firm's 2017 earnings on January 18, 2018, certain estimates related to the net discrete tax provision associated with the enactment of the Tax Act were revised, resulting in a $43 million increase in the Provision for income taxes and a reallocation of impacts among segments. This decreased diluted EPS and diluted EPS from continuing operations by $0.03 and $0.02 in the fourth quarter and year ended December 31, 2017, respectively. On a business segment basis, the change resulted in an $89 million increase in Provision for income taxes for Wealth Management, a $45 million decrease for Institutional Securities, and a $1 million decrease for Investment Management.

2016

The effective tax rate from continuing operations for 2016 included intermittent net discrete tax benefits of $68 million, primarily related to the remeasurement of reserves and related interest due to new information regarding the status of multi-year IRS tax examinations, partially offset by adjustments for other tax matters.

2015

The effective tax rate from continuing operations for 2015 included intermittent net discrete tax benefits of $564 million, primarily associated with the repatriation of non-U.S. earnings at a cost lower than originally estimated due to an internal restructuring to simplify the legal entity organization in the U.K.

U.S. Bank Subsidiaries

We provide loans to a variety of customers, from large corporate and institutional clients to high net worth individuals, primarily through our U.S. bank subsidiaries, Morgan Stanley Bank N.A. ("MSBNA") and Morgan Stanley Private Bank, National Association ("MSPBNA") (collectively, "U.S. Bank Subsidiaries"). The lending activities in the Institutional Securities business segment primarily include loans and lending commitments to corporate clients. The lending activities in the Wealth Management business segment primarily include securities-based lending that allows clients to borrow

December 2017 Form 10-K 52
Table of Contents
Management's Discussion and Analysis

money against the value of qualifying securities and also include residential real estate loans.

We expect our lending activities to continue to grow through further market penetration of the client base. For a further discussion of our credit risks, see "Quantitative and Qualitative Disclosures about Market Risk-Risk Management-Credit Risk." For further discussion about loans and lending commitments, see Notes 7 and 12 to the financial statements.

U.S. Bank Subsidiaries' Supplemental Financial Information 1

$ in billions

At

December 31,

2017

At December 31,
2016

Assets 2

$ 185.3 $ 176.8

Investment securities portfolio:

Investment securities-AFS

42.0 50.3

Investment securities-HTM

17.5 13.6

Total investment securities

$ 59.5 $ 63.9

Deposits 3

$ 159.1 $ 154.7

Wealth Management

Securities-based lending and other loans 4

$ 41.2 $ 36.0

Residential real estate loans

26.7 24.4

Total

$ 67.9 $ 60.4

Institutional Securities

Corporate loans

$ 24.2 $ 20.3

Wholesale real estate loans

12.2 9.9

Total

$ 36.4 $ 30.2

1.

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

2.

Prior period amounts have been revised to conform to the current presentation.

3.

For further information on deposits, see "Liquidity and Capital Resources-Funding Management-Unsecured Financing" herein.

4.

Other loans primarily include tailored lending.

Accounting Development Updates

The Financial Accounting Standards Board has issued certain accounting updates that apply to us. Accounting updates not listed below were assessed and determined to be either not applicable or are not expected to have a significant impact on our financial statements.

The following accounting update was adopted on January 1, 2018.

Revenue from Contracts with Customers. This accounting update aims to clarify the principles of revenue recognition, develop a common revenue recognition standard across all industries for U.S. GAAP and provide enhanced disclosures for users of the financial statements. The core principle of this guidance is that an entity should recognize

revenues to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update is not applicable to financial instruments.

We applied the modified retrospective method of adoption which resulted in an immaterial impact to Retained earnings as of January 1, 2018.

This accounting update will change the presentation of certain costs related to underwriting and advisory activities so that such costs will be recorded in the relevant non-compensation expense line item versus the current practice of netting such costs against Investment banking revenues. This change is estimated to gross up Investment banking revenues and non-compensation expenses for the Institutional Securities business segment by approximately 5%. Similarly, certain costs related to the selling and distribution of investment funds will no longer be netted against Asset management revenues, and therefore is expected to result in a gross-up of such revenues by less than 5% and non-compensation expenses by less than 10% for the Investment Management business segment. These changes will not have an impact on net income.

In addition, the timing of the recognition of certain performance fees from fund management activities, not in the form of carried interest, is generally expected to be deferred within a fiscal year until the fees are no longer probable of being reversed. Thus, the recognition of a greater portion of such revenues are expected to be recognized in the second half of each fiscal year based on current fee arrangements. These revenues are recorded in Asset management revenues within the Investment Management business segment, which approximated $80 million in 2017 and were recognized throughout the year.

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

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

Hedge Accounting. This accounting update aims to better align the hedge accounting requirements with an entity's risk management strategies and improve the financial reporting of hedging relationships. It will also result in simplification of the application of hedge accounting related to the assessment of hedge effectiveness. This update is effective as of January 1, 2019 with early adoption permitted.

53 December 2017 Form 10-K
Table of Contents
Management's Discussion and Analysis

Currently, we plan to early adopt this accounting update in the first quarter of 2018 and estimate that the resulting transition adjustment to 2018 opening retained earnings would not be significant. This adjustment would represent the cumulative effect of applying the new rules from the inception of certain fair value hedges of the interest rate risk of our borrowings, in particular the provision allowing only the benchmark rate component of coupon cash flows to be hedged.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income . This accounting update allows companies the option to reclassify from AOCI to retained earnings the stranded tax effects that resulted from the remeasurement of and other adjustments to deferred tax assets and liabilities upon enactment of the Tax Act. The total impact of the remeasurement and other adjustments was reflected in 2017 income from continuing operations, regardless of where deferred taxes were originally recorded. This update is effective as of January 1, 2019 with early adoption permitted. For a discussion of the Tax Act, see "Supplemental Financial Information and Disclosures-Income Tax Matters" herein.

Leases. This accounting update requires lessees to recognize in the balance sheet all leases with terms exceeding one year, which results in the recognition of a right of use asset and corresponding lease liability, including for those leases that we currently classify as operating leases. The right of use asset and lease liability will initially be measured using the present value of the remaining rental payments. The accounting for leases where we are the lessor is largely unchanged. This update is effective as of January 1, 2019 with early adoption permitted.

Financial Instruments-Credit Losses. This accounting update impacts the impairment model for certain financial assets measured at amortized cost by requiring a CECL methodology to estimate expected credit losses over the entire life of the financial asset, recorded at inception or purchase. CECL will replace the loss model currently applicable to loans held for investment, HTM securities and other receivables carried at amortized cost.

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

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

Overall, the amendments in this update are expected to accelerate the recognition of credit losses for portfolios where CECL models will be applied. This update is effective as of January 1, 2020 with early adoption permitted as of January 1, 2019.

Critical Accounting Policies

Our financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions (see Note 1 to the financial statements). We believe that of our significant accounting policies (see Note 2 to the financial statements), the following policies involve a higher degree of judgment and complexity.

Fair Value

Financial Instruments Measured at Fair Value

A significant number of our financial instruments are carried at fair value. We make estimates regarding valuation of assets and liabilities measured at fair value in preparing the financial statements. These assets and liabilities include, but are not limited to:

Trading assets and Trading liabilities;

Investment Securities-AFS securities;

Certain Securities purchased under agreements to resell;

Certain Deposits, primarily structured certificates of deposits;

Certain Securities sold under agreements to repurchase;

Certain Other secured financings; and

Certain Borrowings, primarily structured notes.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability ( i.e. , the exit price) in an orderly transaction between market participants at the measurement date.

In determining fair value, we use various valuation approaches. A hierarchy for inputs is used in measuring fair value that maximizes the use of observable prices and inputs and minimizes the use of unobservable prices and inputs by requiring that the relevant observable inputs be used when available. The hierarchy is broken down into three levels, wherein Level 1 represents quoted prices in active markets, Level 2 represents valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, and Level 3 consists of valuation techniques that incorporate significant unobservable inputs and, therefore, require the greatest use of judgment.

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In periods of market disruption, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be recategorized from Level 1 to Level 2 or from Level 2 to Level 3. In addition, a downturn in market conditions could lead to declines in the valuation of many instruments. For further information on the valuation process, fair value definition, Level 1, Level 2, Level 3 and related valuation techniques, and quantitative information about and sensitivity of significant unobservable inputs used in Level 3 fair value measurements, see Notes 2 and 3 to the financial statements.

Where appropriate, valuation adjustments are made to account for various factors such as liquidity risk (bid-ask adjustments), credit quality, model uncertainty and concentration risk in order to arrive at fair value. For a further discussion of valuation adjustments that we apply, see Note 2 to the financial statements.

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

At December 31, 2017 and December 31, 2016, certain of our assets and liabilities were measured at fair value on a non-recurring basis, primarily relating to loans, other investments, premises, equipment and software costs, intangible assets, other assets and other liabilities, and accrued expenses. We incur losses or gains for any adjustments of these assets to fair value. A downturn in market conditions could result in impairment charges in future periods.

For assets and liabilities measured at fair value on a non-recurring basis, fair value is determined by using various valuation approaches. The same hierarchy as described above, which maximizes the use of observable inputs and minimizes the use of unobservable inputs by generally requiring that the observable inputs be used when available, is used in measuring fair value for these items.

See Note 3 to the financial statements for further information on assets and liabilities that are measured at fair value on a non-recurring basis.

Fair Value Control Processes

We employ control processes designed to validate the fair value of our financial instruments, including those derived from pricing models. These control processes are designed to ensure that the values used for financial reporting are based on observable inputs wherever possible. In the event that observable inputs are not available, the control processes are designed to ensure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable.

See Note 2 to the financial statements for additional information regarding our valuation policies, processes and procedures.

Goodwill and Intangible Assets

Goodwill

Evaluating goodwill for impairment requires management to make significant judgments. Goodwill impairment tests are performed at the reporting unit level, which is generally at the level of or one level below its business segments. Goodwill no longer retains its association with a particular acquisition once it has been assigned to a reporting unit. As such, all the activities of a reporting unit, whether acquired or organically developed, are available to support the value of the goodwill.

We test goodwill for impairment on an annual basis as of July 1 and on an interim basis when certain events or circumstances exist.

For both the annual and interim tests, we have the option to either (a) perform a quantitative impairment test or (b) first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, in which case the quantitative test would be performed.

When performing a quantitative impairment test, we compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less than its carrying amount, the goodwill impairment loss is equal to the lesser of the excess of the carrying value over the fair value or the carrying amount of goodwill allocated to that reporting unit.

The estimated fair value of the reporting units is derived based on valuation techniques we believe market participants would use for each of the reporting units. The estimated fair value is generally determined by utilizing a discounted cash flow methodology or methodologies that incorporate price-to-book and price-to-earnings multiples of certain comparable companies. At each annual goodwill impairment testing date, each of our reporting units with goodwill had a fair value that was substantially in excess of its carrying value.

Intangible Assets

Amortizable intangible assets are amortized over their estimated useful lives and are reviewed for impairment on an interim basis when certain events or circumstances exist. An impairment exists when the carrying amount of the intangible asset exceeds its fair value. An impairment loss will be recognized only if the carrying amount of the intangible asset is not recoverable and exceeds its fair value. The carrying amount

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of the intangible asset is not recoverable if it exceeds the sum of the expected undiscounted cash flows.

For both goodwill and intangible assets, to the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. For amortizable intangible assets, the new cost basis is amortized over the remaining useful life of that asset. Adverse market or economic events could result in impairment charges in future periods.

See Notes 2, 3 and 9 to the financial statements for additional information about goodwill and intangible assets.

Legal and Regulatory Contingencies

In the normal course of business, we have been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with our activities as a global diversified financial services institution.

Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or in financial distress.

We are also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding our business and involving, among other matters, sales and trading activities, wealth and investment management services, financial products or offerings sponsored, underwritten or sold by us, and accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief.

Accruals for litigation and regulatory proceedings are generally determined on a case-by-case basis. Where available information indicates that it is probable a liability had been incurred at the date of the financial statements and we can reasonably estimate the amount of that loss, we accrue the estimated loss by a charge to income. In many proceedings, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss.

For certain legal proceedings and investigations, we can estimate possible losses, additional losses, ranges of loss or ranges of additional loss in excess of amounts accrued. For certain other legal proceedings and investigations, we cannot reasonably estimate such losses, particularly for proceedings and investigations where the factual record is being developed or contested or where plaintiffs or government entities seek substantial or indeterminate damages, restitution, disgorgement or penalties.

Numerous issues may need to be resolved before a loss or additional loss or range of loss or additional range of loss can be reasonably estimated for a proceeding or investigation, including through potentially lengthy discovery and determination of important factual matters, determination of issues related to class certification and the calculation of damages or other relief, and addressing novel or unsettled legal questions relevant to the proceedings or investigations in question.

Significant judgment is required in deciding when and if to make these accruals, and the actual cost of a legal claim or regulatory fine/penalty may ultimately be materially different from the recorded accruals.

See Note 12 to the financial statements for additional information on legal proceedings.

Income Taxes

We are subject to the income and indirect tax laws of the U.S., its states and municipalities and those of the foreign jurisdictions in which we have significant business operations. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. We must make judgments and interpretations about the application of these inherently complex tax laws when determining the provision for income taxes and the expense for indirect taxes and must also make estimates about when certain items affect taxable income in the various tax jurisdictions.

Disputes over interpretations of the tax laws may be settled with the taxing authority upon examination or audit. We periodically evaluate the likelihood of assessments in each taxing jurisdiction resulting from current and subsequent years' examinations, and unrecognized tax benefits related to potential losses that may arise from tax audits are established in accordance with the guidance on accounting for unrecognized tax benefits. Once established, unrecognized tax benefits are adjusted when there is more information available or when an event occurs requiring a change.

Our provision for income taxes is composed of current and deferred taxes. Current income taxes approximate taxes to be paid or refunded for the current period. Our deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the applicable enacted tax rates and laws that will be in effect when such differences are expected to reverse.

Our deferred tax balances also include deferred assets related to tax attribute carryforwards, such as net operating losses and tax credits that will be realized through reduction of future tax liabilities and, in some cases, are subject to expiration if not

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utilized within certain periods. We perform regular reviews to ascertain whether deferred tax assets are realizable. These reviews include management's estimates and assumptions regarding future taxable income and incorporate various tax planning strategies, including strategies that may be available to tax attribute carryforwards before they expire.

Once the deferred tax asset balances have been determined, we may record a valuation allowance against the deferred tax asset balances to reflect the amount of these balances (net of valuation allowance) that we estimate it is more likely than not to realize at a future date. Both current and deferred income taxes could reflect adjustments related to our unrecognized tax benefits.

Significant judgment is required in estimating the consolidated provision for (benefit from) income taxes, current and deferred tax balances (including valuation allowance, if any), accrued interest or penalties and uncertain tax positions. Revisions in estimates and/or the actual costs of a tax assessment may ultimately be materially different from the recorded accruals and unrecognized tax benefits, if any.

See Note 2 to the financial statements for additional information on our significant assumptions, judgments and interpretations associated with the accounting for income taxes and Note 20 to the financial statements for additional information on our tax examinations.

Liquidity and Capital Resources

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

Balance Sheet

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

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

Total Assets by Business Segment

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

Assets

Cash and cash equivalents 1

$ 63,597 $ 16,733 $ 65 $ 80,395

Trading assets at fair value

295,678 59 2,545 298,282

Investment securities

19,556 59,246 - 78,802

Securities purchased under agreements to resell

74,732 9,526 - 84,258

Securities borrowed

123,776 234 - 124,010

Customer and other receivables

36,803 18,763 621 56,187

Loans, net of allowance

36,269 67,852 5 104,126

Other assets 2

14,563 9,596 1,514 25,673

Total assets

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

At December 31, 2016
$ in millions IS WM IM Total

Assets

Cash and cash equivalents 1, 3

$ 56,190 $ 21,102 $ 68 $ 77,360

Trading assets at fair value

259,680 64 2,410 262,154

Investment securities

16,222 63,870 - 80,092

Securities purchased under agreements to resell

96,735 5,220 - 101,955

Securities borrowed

124,840 396 - 125,236

Customer and other receivables

26,624 19,268 568 46,460

Loans, net of allowance

33,816 60,427 5 94,248

Other assets 2, 3

15,042 10,788 1,614 27,444

Total assets

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

IS-Institutional Securities

WM-Wealth Management

IM-Investment Management

1.

Cash and cash equivalents includes Cash and due from banks, Interest bearing deposits with banks and Restricted cash.

2.

Other assets primarily includes Goodwill, Intangible assets, premises, equipment, software, other investments, and deferred tax assets.

3.

Prior period amounts have been revised to conform to the current presentation.

A substantial portion of total assets consists of liquid marketable securities and short-term receivables arising principally from sales and trading activities in the Institutional Securities business segment. Total assets increased to $851.7 billion at December 31, 2017 from $814.9 billion at December 31, 2016, primarily due to increases within the Institutional Securities business segment to support client activity, including increased trading assets such as corporate equities and other sovereign government obligations, as well as customer and other receivables resulting from client activity. Lending

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activity increased across both the Wealth Management and Institutional Securities loan portfolios. These increases were partially offset by reductions in securities purchased under agreements to resell and other types of investments in the GLR. For further information regarding our GLR, see "Global Liquidity Reserve" herein.

Securities Repurchase Agreements and Securities Lending

Securities borrowed or securities purchased under agreements to resell and securities loaned or securities sold under agreements to repurchase are treated as collateralized financings (see Notes 2 and 6 to the financial statements).

Collateralized Financing Transactions

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

Securities purchased under agreements to resell and Securities borrowed

$ 208,268 $ 227,191

Securities sold under agreements to repurchase and Securities loaned

$ 70,016 $ 70,472

Securities received as collateral 1

$ 13,749 $ 13,737

Average Daily Balance

Three Months Ended

$ in millions December 31,
2017
December 31,
2016

Securities purchased under agreements to resell and Securities borrowed

$ 214,343 $ 224,355

Securities sold under agreements to repurchase and Securities loaned

$ 66,879 $ 68,908

1.

Included in Trading assets in the balance sheets.

Customer Securities Financing

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

Liquidity Risk Management Framework

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

The following principles guide our Liquidity Risk Management Framework:

Sufficient liquid assets should be maintained to cover maturing liabilities and other planned and contingent outflows;

Maturity profile of assets and liabilities should be aligned, with limited reliance on short-term funding;

Source, counterparty, currency, region and term of funding should be diversified; and

Liquidity Stress Tests should anticipate, and account for, periods of limited access to funding.

The core components of our Liquidity Risk Management Framework are the Required Liquidity Framework, Liquidity Stress Tests and the GLR, which support our target liquidity profile.

Required Liquidity Framework

Our Required Liquidity Framework establishes the amount of liquidity we must hold in both normal and stressed environments to ensure that our financial condition and overall soundness are not adversely affected by an inability (or perceived inability) to meet our financial obligations in a timely manner. The Required Liquidity Framework considers the most constraining liquidity requirement to satisfy all regulatory and internal limits at a consolidated and legal entity level.

Liquidity Stress Tests

We use Liquidity Stress Tests to model external and intercompany liquidity flows across multiple scenarios and a range of time horizons. These scenarios contain various combinations of idiosyncratic and systemic stress events of different severity and duration. The methodology, implementation, production and analysis of our Liquidity Stress Tests are important components of the Required Liquidity Framework.

The scenarios or assumptions used by us in our Liquidity Stress Tests include, but are not limited to, the following:

No government support;

No access to equity and unsecured debt markets;

Repayment of all unsecured debt maturing within the stress horizon;

Higher haircuts for and significantly lower availability of secured funding;

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Additional collateral that would be required by trading counterparties, certain exchanges and clearing organizations related to credit rating downgrades;

Additional collateral that would be required due to collateral substitutions, collateral disputes and uncalled collateral;

Discretionary unsecured debt buybacks;

Drawdowns on lending commitments provided to third parties; and

Client cash withdrawals and reduction in customer short positions that fund long positions.

Liquidity Stress Tests are produced and results are reported at different levels including major operating subsidiaries and major currencies, to capture specific cash requirements and cash availability across the Firm, including a limited number of asset sales in a stressed environment. The Liquidity Stress Tests assume that subsidiaries will use their own liquidity first to fund their obligations before drawing liquidity from the Parent Company and that the Parent Company will support its subsidiaries and will not have access to subsidiaries' liquidity reserves. In addition to the assumptions underpinning the Liquidity Stress Tests, we take into consideration settlement risk related to intraday settlement and clearing of securities and financing activities.

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

Global Liquidity Reserve

We maintain sufficient liquidity reserves to cover daily funding needs and to meet strategic liquidity targets sized by the Required Liquidity Framework and Liquidity Stress Tests. The size of the GLR is actively managed by us considering the following components: unsecured debt maturity profile; balance sheet size and composition; funding needs in a stressed environment, inclusive of contingent cash outflows; legal entity, regional and segment liquidity requirements; regulatory requirements; and collateral requirements. In addition, our GLR includes a discretionary surplus based on risk tolerance and is subject to change depending on market and Firm-specific events. The GLR is held within the Parent Company and its major operating subsidiaries.

GLR by Type of Investment

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

Cash deposits with banks 1

$ 7,167 $ 8,679

Cash deposits with central banks 2

33,791 30,568

Unencumbered highly liquid securities:

U.S. government obligations

73,422 78,615

U.S. agency and agency mortgage-backed securities

55,750 46,360

Non-U.S. sovereign obligations 3

19,424 30,884

Other investment grade securities

3,106 7,191

Total

$ 192,660 $ 202,297

1.

Included in Interest bearing deposits with banks in the balance sheets.

2.

Included in Restricted cash in the balance sheets.

3.

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

GLR Managed by Bank and Non-Bank Legal Entities

At
December 31,

2017

At
December 31,

2016

Average Daily
Balance
Three Months Ended
$ in millions December 31, 2017

Bank legal entities

Domestic

$ 70,364 $ 74,411 $ 69,192

Foreign

4,756 4,238 4,242

Total Bank legal entities

75,120 78,649 73,434

Non-Bank legal entities

Domestic:

Parent Company

41,642 66,514 45,319

Non-Parent Company

35,264 18,801 32,400

Total Domestic

76,906 85,315 77,719

Foreign

40,634 38,333 39,186

Total Non-Bank legal entities

117,540 123,648 116,905

Total

$ 192,660 $ 202,297 $ 190,339

Regulatory Liquidity Framework

Liquidity Coverage Ratio

We and our U.S. Bank Subsidiaries are subject to the LCR requirements including a requirement to calculate each entity's LCR on each business day. The requirements are designed to ensure that banking organizations have sufficient HQLA to cover net cash outflows arising from significant stress over 30 calendar days, thus promoting the short-term resilience of the liquidity risk profile of banking organizations. We and our U.S. Bank Subsidiaries are compliant with the minimum required LCR of 100%.

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HQLA by Type of Asset and LCR

At

December 31,
2017

At

December 31,
2016
Average Daily
Balance
Three Months Ended
$ in millions

December 31,

2017

HQLA

Cash deposits with central banks

$ 32,964 $ 30,569 $ 33,450

Securities 1

125,993 129,524 125,269

Total

$ 158,957 $ 160,093 $ 158,719

LCR

128%

1.

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

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

Net Stable Funding Ratio

The objective of the NSFR is to reduce funding risk over a one-year horizon by requiring banking organizations to fund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress.

The Basel Committee on Banking Supervision ("Basel Committee") finalized the NSFR framework in 2014. In May 2016, the U.S. banking agencies issued a proposal to implement the NSFR in the U.S. The proposal would require a covered company to maintain an amount of available stable funding, which is measured with reference to sources of funding, including deposit and debt liabilities, that is no less than the amount of its required stable funding, which is measured by applying standardized weightings to its assets, derivatives exposures and certain other items.

If adopted as proposed, the requirements would apply to us and our U.S. Bank Subsidiaries. We continue to evaluate the potential impact of the proposal, which is subject to further rulemaking procedures. Our preliminary estimates, based on the current proposal, indicate that actions will be necessary to meet the requirement, which we would expect to accomplish by the effective date of any final rule. Our preliminary estimates are subject to risks and uncertainties that may cause actual results based on the final rule to differ materially from estimates. For a discussion of risks and uncertainties that may affect our future results, see "Risk Factors."

Funding Management

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

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

Secured Financing

A substantial portion of our total assets consist of liquid marketable securities and short-term receivables arising principally from sales and trading activities in the Institutional Securities business segment. The liquid nature of these assets provides us with flexibility in managing the composition and size of our balance sheet. Our goal is to achieve an optimal mix of durable secured and unsecured financing. Secured financing investors principally focus on the quality of the eligible collateral posted. Accordingly, we actively manage our secured financings based on the quality of the assets being funded.

We utilize shorter-term secured financing only for highly liquid assets and have established longer tenor limits for less liquid asset classes, for which funding may be at risk in the event of a market disruption. We define highly liquid assets as government-issued or government-guaranteed securities with a high degree of fundability and less liquid assets as those that do not meet these criteria. At December 31, 2017 and December 31, 2016, the weighted average maturity of our secured financing of less liquid assets was greater than 120 days.

To further minimize the refinancing risk of secured financing for less liquid assets, we have established concentration limits to diversify our investor base and reduce the amount of monthly maturities for secured financing of less liquid assets. Furthermore, we obtain term secured funding liabilities in excess of less liquid inventory as an additional risk mitigant to replace maturing trades in the event that secured financing markets, or our ability to access them, become limited. As a component of the Liquidity Risk Management Framework, we hold a portion of our GLR against the potential disruption to our secured financing capabilities.

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We also maintain a pool of liquid and easily fundable securities, which provide a valuable future source of liquidity. With the implementation of liquidity standards, we have also incorporated HQLA classifications that are consistent with the LCR definitions into our encumbrance reporting, which further substantiates the demonstrated liquidity characteristics of the unencumbered asset pool and our ability to readily identify new funding sources for such assets.

Unsecured Financing

We view borrowings and deposits as stable sources of funding. Unencumbered securities and non-security assets are financed with a combination of borrowings and deposits. Our unsecured financings include structured borrowings, whose payments and redemption values are based on the performance of certain underlying assets, including equity, credit, foreign exchange, interest rates and commodities. When appropriate, we may use derivative products to conduct asset and liability management and to make adjustments to our interest rate and structured borrowings risk profile (see Note 4 to the financial statements).

Deposits

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

Savings and demand deposits:

Brokerage sweep deposits 1

$ 135,946 $ 153,042

Savings and other

8,541 1,517
Total Savings and demand deposits 144,487 154,559

Time deposits 2

14,949 1,304

Total

$ 159,436 $ 155,863

1.

Represents balances swept from client brokerage accounts.

2.

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

Deposits are primarily sourced from our Wealth Management clients and are considered to have stable, low-cost funding characteristics. Total deposits at December 31, 2017 were up slightly compared with December 31, 2016, primarily driven by proactive measures to increase Time deposits and Savings and other deposits, partially offset by a reduction in Brokerage sweep deposits due to client deployment of cash into the markets.

Borrowings

We believe that accessing debt investors through multiple distribution channels helps provide consistent access to the unsecured markets. In addition, the issuance of borrowings with original maturities greater than one year allows us to reduce reliance on short-term credit sensitive instruments. Borrowings with original maturities greater than one year are generally managed to achieve staggered maturities, thereby mitigating refinancing risk, and to maximize investor diversification through sales to global institutional and retail clients across regions, currencies and product types. The availability and cost of financing to us can vary depending on market conditions, the volume of certain trading and lending activities, our credit ratings and the overall availability of credit. We also engage in, and may continue to engage in, repurchases of our borrowings in the ordinary course of business.

Borrowings increased to $192,582 million as of December 31, 2017 compared with $165,716 million at December 31, 2016. This increase is a result of issuances, partially offset by maturities and retirements as presented in the following table.

$ in millions 2017

Issued

$                     55,416 

Matured or retired

(35,825)

For further information on Borrowings, see Note 11 to the financial statements.

Credit Ratings

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

Our credit ratings do not include any uplift from perceived government support from any rating agency given the significant progress of U.S. financial reform legislation and regulations. Some rating agencies have stated that they currently incorporate various degrees of credit rating uplift from non-governmental third-party sources of potential support.

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Parent Company and MSBNA Senior Unsecured Ratings at February 21, 2018

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

DBRS, Inc.

R-1 (middle) A (high) Stable

Fitch Ratings, Inc.

F1 A Stable

Moody's Investors Service, Inc.

P-2 A3 Stable

Rating and Investment Information, Inc.

a-1 A- Stable

S&P Global Ratings

A-2 BBB+ Stable

MSBNA
Short-Term
Debt
Long-Term
Debt
Rating
Outlook

Fitch Ratings, Inc.

F1 A+ Stable

Moody's Investors Service, Inc.

P-1 A1 Stable

S&P Global Ratings

A-1 A+ Stable

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

The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by contract and can be based on ratings by either or both of Moody's Investors Service, Inc. ("Moody's") and S&P Global Ratings. The following table shows the future potential collateral amounts and termination payments that could be called or required by counterparties or exchanges and clearing organizations in the event of one-notch or two-notch downgrade scenarios, from the lowest of Moody's ratings or S&P Global Ratings, based on the relevant contractual downgrade triggers.

Incremental Collateral or Terminating Payments upon Potential Future Rating Downgrade

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

One-notch downgrade

$ 822 $ 1,292

Two-notch downgrade

596 875

While certain aspects of a credit rating downgrade are quantifiable pursuant to contractual provisions, the impact it would have on our business and results of operations in future periods is inherently uncertain and would depend on a number of interrelated factors, including, among others, the magnitude of the downgrade, the rating relative to peers, the rating assigned by the relevant agency pre-downgrade,

individual client behavior and future mitigating actions we might take. The liquidity impact of additional collateral requirements is included in our Liquidity Stress Tests.

Capital Management

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

Common Stock

$ in millions 2017 2016

Repurchases of common stock

$     3,750 $     3,500

Our Board has authorized the repurchase of the Firm's outstanding stock under a share repurchase program ("Share Repurchase Program"). Pursuant to the Share Repurchase Program, we consider, among other things, business segment capital needs, as well as stock-based compensation and benefit plan requirements. Share repurchases under our program will be exercised from time to time at prices we deem appropriate subject to various factors, including our capital position and market conditions. The share repurchases may be effected through open market purchases or privately negotiated transactions, including through Rule 10b5-1 plans, and may be suspended at any time. Share repurchases by us are subject to regulatory approval (see "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities").

Common Stock Dividend Announcement

Announcement date

January 18, 2018

Amount per share

$0.25

Date paid

February 15, 2018

Shareholders of record as of

January 31, 2018

Preferred Stock

Preferred Stock Dividend Announcement

Announcement date

December 15, 2017

Date paid

January 16, 2018

Shareholders of record as of

December 29, 2017

For additional information on common and preferred stock, see Note 15 to the financial statements.

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Management's Discussion and Analysis

Regulatory Requirements

Regulatory Capital Framework

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

In December 2017, the Basel Committee released its agreement on a comprehensive set of revisions to its Basel III Framework. The revised requirements are expected to take effect starting January 2022, subject to U.S. banking agencies issuing implementation proposals. The impact on us of any revisions to the Basel Committee's capital standards is uncertain and depends on future rulemakings by the U.S. banking agencies.

Regulatory Capital Requirements

We are required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. A summary of the calculations of regulatory capital, RWAs and transition provisions follows.

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

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

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

The Common Equity Tier 1 G-SIB capital surcharge, currently at 3%; and

Up to a 2.5% Common Equity Tier 1 CCyB, currently set by U.S. banking agencies at zero.

The phase-in amount for each of the buffers was 50% of the fully phased-in buffer requirement in 2017, and increases to 75% in 2018. Failure to maintain the buffers would result in restrictions on our ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers. For a further discussion of the G-SIB capital surcharge, see "G-SIB Capital Surcharge" herein.

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

Risk-Weighted Assets.  RWAs reflect both our on- and off-balance sheet risk, as well as capital charges attributable to the risk of loss arising from the following:

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

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

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

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

Our risk-based capital ratios for purposes of determining regulatory compliance are the lower of the capital ratios computed under (i) the standardized approaches for calculating credit risk and market risk RWAs ("Standardized Approach") and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWAs ("Advanced Approach"). The credit risk RWA calculations between the two approaches differ in that the Standardized Approach requires calculation of RWAs using prescribed risk weights, whereas the Advanced Approach utilizes models to calculate exposure amounts and risk weights. At December 31, 2017, our ratios are based on the Standardized Approach transitional rules. At December 31, 2016, the ratios were based on the Advanced Approach transitional rules.

The minimum risk-based capital ratios applicable to us will change through January 1, 2019 as presented in the following chart.

63 December 2017 Form 10-K
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Management's Discussion and Analysis

Minimum Risk-Based Capital Ratios: Transitional Provisions

1.

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

Transitional and Fully Phased-In Regulatory Capital Ratios

At December 31, 2017

Transitional Pro Forma Fully Phased-In
$ in millions Standardized Advanced Standardized Advanced

Risk-based capital

Common Equity Tier 1 capital

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

Tier 1 capital

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

Total capital

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

Total RWAs

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

Common Equity Tier 1 capital ratio

16.5% 17.5% 16.1% 16.9%

Tier 1 capital ratio

18.9% 20.0% 18.3% 19.3%

Total capital ratio

21.7% 22.9% 21.1% 22.1%

Leverage-based capital

Adjusted average assets 1

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

Tier 1 leverage ratio 2

8.3% N/A 8.2% N/A

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

Risk-based capital

Common Equity Tier 1 capital

$ 60,398 $ 60,398 $ 58,616 $ 58,616

Tier 1 capital

68,097 68,097 66,315 66,315

Total capital

78,917 78,642 77,155 76,881

Total RWAs

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

Common Equity Tier 1 capital ratio

17.8% 16.9% 16.7% 15.9%

Tier 1 capital ratio

20.0% 19.0% 18.9% 17.9%

Total capital ratio

23.2% 22.0% 22.0% 20.8%

Leverage-based capital

Adjusted average assets 1

$ 811,402 N/A $ 810,288 N/A

Tier 1 leverage ratio 2

8.4% N/A 8.2% N/A
1.

Adjusted average assets represent the denominator of the Tier 1 leverage ratio and are composed of the average daily balance of consolidated on-balance sheet assets under U.S. GAAP during the quarter ended December 31, 2017 and December 31, 2016 adjusted for disallowed goodwill, transitional intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other adjustments.

2.

The minimum Tier 1 leverage ratio requirement is 4.0%.

The fully phased-in pro forma estimates in the previous tables are based on our current understanding of the capital rules and other factors, which may be subject to change as we receive additional clarification and implementation guidance from the Federal Reserve and as the interpretation of the regulations evolves over time. These fully phased-in pro forma estimates are non-GAAP financial measures because they were not yet effective at December 31, 2017. These preliminary estimates are subject to risks and uncertainties that may cause actual results to differ materially and should not be taken as a projection of what our capital, capital ratios, RWAs, earnings or other results will actually be at future dates. For a discussion of risks and uncertainties that may affect our future results, see "Risk Factors."

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

At December 31, 2017

Common Equity Tier 1 risk-based capital ratio

6.5%

Tier 1 risk-based capital ratio

8.0%

Total risk-based capital ratio

10.0%

Tier 1 leverage ratio

5.0%

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

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Management's Discussion and Analysis

Regulatory Capital Calculated under Transitional Rules

$ in millions

At

December 31,
2017

At

December 31,

2016

Common Equity Tier 1 capital

Common stock and surplus

$ 14,354 $ 17,494 

Retained earnings

57,577 53,679 

AOCI

(3,060 (2,643)

Regulatory adjustments and deductions:

Net goodwill

(6,599 (6,526)

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

(1,956 (1,631)

Other adjustments and deductions 1

818 25 

Total Common Equity Tier 1 capital

$ 61,134 $ 60,398 

Additional Tier 1 capital

Preferred stock

$ 8,520 $ 7,520 

Noncontrolling interests

494 613 

Other adjustments and deductions 2

146 (246)

Additional Tier 1 capital

$ 9,160 $ 7,887 

Deduction for investments in covered funds

(356 (188)

Total Tier 1 capital

$ 69,938 $ 68,097 

Standardized Tier 2 capital

Subordinated debt

$ 9,839 $ 10,303 

Noncontrolling interests

83 62 

Eligible allowance for credit losses

423 464 

Other adjustments and deductions

(8 (9)

Total Standardized Tier 2 capital

$ 10,337 $ 10,820 

Total Standardized capital

$ 80,275 $ 78,917 

Advanced Tier 2 capital

Subordinated debt

$ 9,839 $ 10,303 

Noncontrolling interests

83 62 

Eligible credit reserves

194 189 

Other adjustments and deductions

(8 (9)

Total Advanced Tier 2 capital

$ 10,108 $ 10,545 

Total Advanced capital

$ 80,046 $ 78,642 

Regulatory Capital Rollforward Calculated under Transitional Rules

$ in millions 2017

Common Equity Tier 1 capital

Common Equity Tier 1 capital at December 31, 2016

$         60,398

Change related to the following items:

Value of shareholders' common equity

341

Net goodwill

(73

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

(325

Other adjustments and deductions 1

793

Common Equity Tier 1 capital at December 31, 2017

$ 61,134

Additional Tier 1 capital

Additional Tier 1 capital at December 31, 2016

$ 7,887

New issuance of qualifying preferred stock

1,000

Change related to the following items:

Noncontrolling interests

(119

Other adjustments and deductions 2

392

Additional Tier 1 capital at December 31, 2017

9,160

Deduction for investments in covered funds at December 31, 2016

(188 )

Change in deduction for investments in covered funds

(168

Deduction for investments in covered funds at December 31, 2017

(356

Tier 1 capital at December 31, 2017

$ 69,938

Standardized Tier 2 capital

Tier 2 capital at December 31, 2016

$ 10,820

Change related to the following items:

Eligible allowance for credit losses

(41

Other changes, adjustments and deductions 3

(442

Standardized Tier 2 capital at December 31, 2017

$ 10,337

Total Standardized capital at December 31, 2017

$ 80,275

Advanced Tier 2 capital

Tier 2 capital at December 31, 2016

$ 10,545

Change related to the following items:

Eligible credit reserves

5

Other changes, adjustments and deductions 3

(442

Advanced Tier 2 capital at December 31, 2017

$ 10,108

Total Advanced capital at December 31, 2017

$ 80,046

1.

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

2.

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

3.

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

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Management's Discussion and Analysis

RWAs Rollforward Calculated under Transitional Rules

2017 1

$ in millions

Standardized Advanced

Credit risk RWAs

Balance at December 31, 2016

$     278,874 $     169,231

Change related to the following items:

Derivatives

8,387 181 

Securities financing transactions

7,455 2,663 

Securitizations

1,609 1,485 

Investment securities

(3,491 (1,936)

Commitments, guarantees and loans

2,716 (7,702)

Cash

(689 (997)

Equity investments

(1,007 (1,085)

Other credit risk 2

429 802 

Total change in credit risk RWAs

$ 15,409 $ (6,589)

Balance at December 31, 2017

$ 294,283 $ 162,642 

Market risk RWAs

Balance at December 31, 2016

$ 61,317 $ 60,872 

Change related to the following items:

Regulatory VaR

40 40 

Regulatory stressed VaR

4,970 4,970 

Incremental risk charge

3,878 3,878 

Comprehensive risk measure

(2,610 (2,590)

Specific risk:

Non-securitizations

3,568 3,568 

Securitizations

4,132 4,169 

Total change in market risk RWAs

$ 13,978 $ 14,035 

Balance at December 31, 2017

$ 75,295 $ 74,907 

Operational risk RWAs

Balance at December 31, 2016

$ N/A $ 128,038 

Change in operational risk RWAs

N/A (15,375)

Balance at December 31, 2017

$ N/A $ 112,663 

Total RWAs

$ 369,578 $ 350,212 

Regulatory VaR-VaR for regulatory capital requirements

1.

The RWAs for each category in the table reflect both on- and off-balance sheet exposures, where appropriate.

2.

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

Credit risk RWA increased $15,409 million in 2017 under the Standardized Approach, primarily driven by increased exposures in derivatives and margin lending. Credit risk RWA under the Advanced Approach decreased $6,589 million in 2017, primarily due to reduced exposures in corporate loans.

Market risk RWA increased $13,978 million and $14,035 million in 2017 under the Standardized and Advanced Approaches, respectively, primarily driven by increases in stressed VaR, specific risk charges from securitizations and non-securitizations, and incremental risk charges from broad-based increases in trading exposures in response to client demand.

The decrease of $15,375 million in operational risk RWAs in 2017 under the Advanced Approach reflects a reduction in the internal loss frequency related to litigation utilized in the operational risk capital model.

Supplementary Leverage Ratio

Pro Forma Supplementary Leverage Exposure and Ratio

At December 31, 2017 At December 31, 2016
$ in millions Transitional
Basis
Fully
Phased-in 1
Transitional
Basis
Fully
Phased-in 1

Average total assets 2

$ 851,510 $ 851,510 $ 820,536 $ 820,536 

Adjustments 3, 4

231,173 230,660 242,113 240,999 

Pro forma supplementary leverage exposure

$  1,082,683 $  1,082,170 $  1,062,649 $  1,061,535 

Pro forma SLR

6.5% 6.4% 6.4% 6.2%

1.

Estimated amounts utilize fully phased-in Tier 1 capital and take into consideration the Tier 1 capital deductions that would be applicable in 2018 after the phase-in period has ended.

2.

Computed as the average daily balance of consolidated total assets under U.S. GAAP during the quarter ended December 31, 2017 and December 31, 2016.

3.

Computed as the average of the month-end balances over the quarter ended December 31, 2017 and December 31, 2016.

4.

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

The SLR becomes effective as a capital standard on January 1, 2018. Beginning on that date, we will be required to maintain a Tier 1 supplementary leverage ratio of 3% as well as an SLR capital buffer of at least 2% (for a total of at least 5%) in order to avoid limitations on capital distributions, including dividends and stock repurchases, and discretionary bonus payments to executive officers. In addition, our U.S. Bank Subsidiaries must maintain an SLR of 6% to be considered well-capitalized.

U.S. Subsidiary Banks' Pro Forma Supplementary Leverage Ratios on a Transitional Basis

At December 31, 2017 At December 31, 2016 

MSBNA

9.1% 7.7%

MSPBNA

9.3% 10.2%

The pro forma transitional and fully phased-in supplementary leverage exposures and ratios for both us and our U.S. Bank Subsidiaries are non-GAAP financial measures because they were not yet effective at December 31, 2017. Our estimates are subject to risks and uncertainties that may cause actual results to differ materially from estimates based on these regulations. Further, these expectations should not be taken as projections of what our SLR, earnings, assets or exposures will actually be at future dates. For a discussion of risks and uncertainties that may affect our future results, see "Risk Factors."

G-SIB Capital Surcharge

We and other U.S. G-SIBs are subject to a risk-based capital surcharge. A G-SIB must calculate its G-SIB capital

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Management's Discussion and Analysis

surcharge under two methods and use the higher of the two surcharges. The first method considers the G-SIB's size, interconnectedness, cross-jurisdictional activity, substitutability and complexity, which is generally consistent with the methodology developed by the Basel Committee ("Method 1"). The second method uses similar inputs, but replaces substitutability with the use of short-term wholesale funding ("Method 2") and generally results in higher surcharges than the first method. The G-SIB capital surcharge must be satisfied using Common Equity Tier 1 capital and functions as an extension of the capital conservation buffer. Our current G-SIB surcharge is 3%. The surcharge is being phased in between January 1, 2016 and January 1, 2019. The phase-in amount was 50% of the applicable surcharge in 2017, and increases to 75% in 2018 (see "Minimum Risk-Based Capital Ratios: Transitional Provisions" herein).

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

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

The main purpose of the Federal Reserve's minimum external TLAC and LTD requirements is to ensure that covered BHCs, including the Parent Company, will have enough loss-absorbing resources at the point of failure to be recapitalized through the conversion of eligible LTD to equity or otherwise by imposing losses on eligible LTD or other forms of TLAC where an SPOE resolution strategy is used (see "Business-Supervision and Regulation-Financial Holding Company-Resolution and Recovery Planning" and "Risk Factors-Legal, Regulatory and Compliance Risk").

Under the final rule, a covered BHC is required to maintain minimum external TLAC equal to the greater of 18% of total RWAs and 7.5% of its total leverage exposure (the denominator of its SLR). In addition, covered BHCs must meet a separate external LTD requirement equal to the greater of 6% of total RWAs plus the greater of the Method 1 and Method 2 G-SIB capital surcharge applicable to the Parent Company and 4.5% of its total leverage exposure.

In addition, the final rule imposes TLAC buffer requirements on top of both the risk-based and leverage-exposure-based

external TLAC minimum requirements. The risk-based TLAC buffer is equal to the sum of 2.5%, the covered BHC's Method 1 G-SIB surcharge and the CCyB, if any, as a percentage of total RWAs. The leverage-exposure-based TLAC buffer is equal to 2% of the covered BHC's total leverage exposure. Failure to maintain the TLAC buffers would result in restrictions on capital distributions and discretionary bonus payments to executive officers.

The final rule provides permanent grandfathering for debt instruments issued prior to December 31, 2016 that would be eligible LTD but for having impermissible acceleration clauses or being governed by foreign law.

Furthermore, under the clean holding company requirements of the final rule, a covered BHC is prohibited from incurring any external short-term debt or certain other liabilities, regardless of whether the liabilities are fully secured or otherwise senior to eligible LTD, or entering into certain other prohibited transactions. Certain other external liabilities, including structured notes, are subject to a cap equal to 5% of the covered BHC's outstanding external TLAC amount.

Capital Plans and Stress Tests

Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements for large BHCs, including us, which form part of the Federal Reserve's annual CCAR framework.

We must submit an annual capital plan to the Federal Reserve, taking into account the results of separate stress tests designed by us and the Federal Reserve, so that the Federal Reserve may assess our systems and processes that incorporate forward-looking projections of revenues and losses to monitor and maintain our internal capital adequacy.

The capital plan must include a description of all planned capital actions over a nine-quarter planning horizon, including any issuance or redemption of a debt or equity capital instrument, any capital distribution ( i.e. , payments of dividends or stock repurchases) and any similar action that the Federal Reserve determines could impact our consolidated capital. The capital plan must include a discussion of how we will maintain capital above the minimum regulatory capital ratios, including the requirements that are phased in over the planning horizon, and serve as a source of strength to our U.S. Bank Subsidiaries under supervisory stress scenarios. In addition, the Federal Reserve has issued guidance setting out its heightened expectations for capital planning practices at certain large financial institutions, including us.

The capital plan rule requires that large BHCs receive no objection from the Federal Reserve before making a capital distribution. In addition, even with an approved capital plan,

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Management's Discussion and Analysis

the BHC must seek the approval of the Federal Reserve before making a capital distribution if, among other reasons, the BHC would not meet its regulatory capital requirements after making the proposed capital distribution. A BHC's ability to make capital distributions (other than scheduled payments on Additional Tier 1 and Tier 2 capital instruments) is also limited if its net capital issuances are less than the amount indicated in its capital plan.

In January 2017, the Federal Reserve adopted revisions to the capital plan and stress test rules that, among other things, reduce the de minimis threshold for additional capital distributions that a firm may make during a capital plan cycle without seeking the Federal Reserve's prior approval. The final rule also establishes a "blackout period" beginning in March of each year while the Federal Reserve is conducting CCAR reviews, during which firms are not permitted to submit de minimis exception notices or prior approval requests for additional capital distributions. The Federal Reserve is currently considering making further changes to CCAR requirements.

We submitted our 2017 Capital Plan ("Capital Plan") and company-run stress test results to the Federal Reserve on April 5, 2017. On June 22, 2017, the Federal Reserve published summary results of the Dodd-Frank Act supervisory stress tests of each large BHC, including us. On June 28, 2017, the Federal Reserve published summary results of CCAR and announced that it did not object to the Capital Plan.

The Capital Plan includes the repurchase of up to $5.0 billion of outstanding common stock for the period beginning July 1, 2017 through June 30, 2018, an increase from $3.5 billion in the 2016 Capital Plan. Additionally, the Capital Plan includes an increase in our quarterly common stock dividend to $0.25 per share from $0.20 per share, beginning with the common stock dividend declared on July 19, 2017. We disclosed a summary of the results of our company-run stress tests on June 23, 2017 on our Investor Relations website. In addition, we submitted the results of our mid-cycle company-run stress test to the Federal Reserve on October 5, 2017 and disclosed a summary of the results on October 20, 2017 on our Investor Relations website.

For the 2018 capital planning and stress test cycle, we are required to submit our capital plan and company-run stress test results to the Federal Reserve by April 5, 2018. We expect that the Federal Reserve will provide its response to our 2018 capital plan by June 30, 2018. The Federal Reserve is expected to publish summary results of the CCAR and Dodd-Frank Act supervisory stress tests of each large BHC, including us, by June 30, 2018. We are required to disclose a summary of the results of our company-run stress tests within 15 days of the date the Federal Reserve discloses the results

of the supervisory stress tests. In addition, we must submit the results of our mid-cycle company-run stress test to the Federal Reserve by October 5, 2018 and disclose a summary of the results between October 5, 2018 and November 4, 2018.

In addition, we must conduct semiannual company-run stress tests and are subject to an annual Dodd-Frank Act supervisory stress test conducted by the Federal Reserve.

The Dodd-Frank Act requires each of our U.S. Bank Subsidiaries to conduct an annual stress test. MSBNA and MSPBNA submitted their 2017 annual company-run stress tests to the OCC on April 5, 2017 and published a summary of their stress test results on June 23, 2017 on our Investor Relations website. For the 2018 stress test cycle, MSBNA and MSPBNA must submit their annual company-run stress tests to the OCC by April 5, 2018 and publish the summary results between June 15, 2018 and July 15, 2018.

Attribution of Average Common Equity According to the Required Capital Framework

Our required capital ("Required Capital") estimation is based on the Required Capital framework, an internal capital adequacy measure. Common equity attribution to the business segments is based on capital usage calculated under the Required Capital framework, as well as each business segment's relative contribution to our total Required Capital.

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

Effective January 1, 2016, the common equity estimation and attribution to the business segments are based on our pro forma fully phased-in regulatory capital estimates. Prior periods were attributed based on transitional regulatory capital provisions and have not been recast. The amount of capital allocated to the business segments is generally set at the beginning of each year and remains fixed throughout the year until the next annual reset unless a significant business change occurs ( e.g. , acquisition or disposition). Differences between available and Required Capital are attributed to Parent Company equity during the year.

The Required Capital framework is expected to evolve over time in response to changes in the business and regulatory

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environment, for example, to incorporate changes in stress testing or enhancements to modeling techniques. We will continue to evaluate the framework with respect to the impact of future regulatory requirements, as appropriate.

Average Common Equity Attribution 1

$ in billions 2017 2016 2015

Institutional Securities

$             40.2 $             43.2 $             34.6 

Wealth Management

17.2 15.3 11.2 

Investment Management

2.4 2.8 2.2 

Parent Company

10.0 7.6 18.9 

Total

$ 69.8 $ 68.9 $ 66.9 

1.

Average common equity is a non-GAAP financial measure. See "Selected Non-GAAP Financial Information" herein.

Regulatory Developments

Resolution and Recovery Planning

Pursuant to the Dodd-Frank Act, we are required to periodically submit to the Federal Reserve and the FDIC a resolution plan that describes our strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of our material financial distress or failure.

Our preferred resolution strategy, which is set out in our 2017 resolution plan, is an SPOE strategy. We submitted our full 2017 resolution plan on June 30, 2017. As indicated in our 2017 resolution plan, the Parent Company has amended and restated its support agreement with its material entities, as defined in our 2017 resolution plan. Under the secured amended and restated support agreement, upon the occurrence of a resolution scenario, the Parent Company would be obligated to contribute or loan on a subordinated basis all of its contributable material assets, other than shares in subsidiaries of the Parent Company and certain intercompany receivables, to provide capital and liquidity, as applicable, to our material entities.

The obligations of the Parent Company under the secured amended and restated support agreement are in most cases secured on a senior basis by the assets of the Parent Company (other than shares in subsidiaries of the Parent Company). As a result, claims of our material entities against the assets of the Parent Company (other than shares in subsidiaries of the Parent Company) are effectively senior to unsecured obligations of the Parent Company.

In December 2017, we received joint feedback on our 2017 resolution plan from the Federal Reserve and the FDIC. The feedback identified no deficiencies in our 2017 resolution plan but noted one shortcoming to be remediated in our next resolution plan submission.

Further, the Federal Reserve and the FDIC have extended the next resolution plan filing deadline for eight large domestic banks, including us, by one year to July 1, 2019.

For more information about resolution and recovery planning requirements and our activities in these areas, including the implications of such activities in a resolution scenario, see "Business-Supervision and Regulation-Financial Holding Company-Resolution and Recovery Planning" and "Risk Factors-Legal, Regulatory and Compliance Risk."

Legacy Covered Funds under the Volcker Rule

The Volcker Rule prohibits "banking entities," including us and our affiliates, from engaging in certain "proprietary trading" activities, as defined in the Volcker Rule, subject to exemptions for underwriting, market-making-related activities, risk-mitigating hedging and certain other activities. The Volcker Rule also prohibits certain investments and relationships by banking entities with "covered funds," with a number of exemptions and exclusions. In June 2017, we received approval from the Federal Reserve of our application for a five-year extension of the transition period to conform investments in certain legacy Volcker covered funds that are also illiquid funds. The approval covered essentially all of our non-conforming investments in, and relationships with, legacy covered funds subject to the Volcker Rule. For more information about the Volcker Rule, see "Business-Supervision and Regulation-Activities Restrictions under the Volcker Rule."

U.S. Department of Labor Conflict of Interest Rule

The U.S. DOL's final Conflict of Interest Rule under ERISA went into effect on June 9, 2017, with certain aspects subject to phased-in compliance. Full compliance with the rule's related exemptions is currently scheduled to be required by July 1, 2019. In addition, the U.S. DOL is undertaking an examination of the rule that may result in changes to the rule or its related exemptions or a change in the full compliance date. For a discussion of the U.S. DOL Conflict of Interest Rule, see "Business-Supervision and Regulation-Institutional Securities and Wealth Management."

U.K. Referendum

Following the U.K. electorate vote to leave the E.U., the U.K. invoked Article 50 of the Lisbon Treaty on March 29, 2017, which triggered a two-year period, subject to extension (which would need the unanimous approval of the E.U. Member States), during which the U.K. government is expected to negotiate its withdrawal agreement with the E.U. For further discussion of U.K. referendum's potential impact on our operations, see "Risk Factors-International Risk." For further information regarding our exposure to the U.K., see also "Quantitative and Qualitative Disclosures about Market Risk-Risk Management-Credit Risk-Country Risk Exposure."

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Management's Discussion and Analysis

Expected Replacement of London Interbank Offered Rate

Central banks around the world, including the Federal Reserve, have commissioned working groups of market participants and others with the goal of finding suitable replacements for LIBOR based on observable market transactions. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next few years.

Effects of Inflation and Changes in Interest and Foreign Exchange Rates

To the extent that an increased inflation outlook results in rising interest rates or has negative impacts on the valuation of financial instruments that exceed the impact on the value of our liabilities, it may adversely affect our financial position and profitability. Rising inflation may also result in increases in our non-interest expenses that may not be readily recoverable in higher prices of services offered. Other changes in the interest rate environment and related volatility, as well as expectations about the level of future interest rates, could also impact our results of operations.

A significant portion of our business is conducted in currencies other than the U.S. dollar, and changes in foreign exchange rates relative to the U.S. dollar, therefore, can affect the value of non-U.S. dollar net assets, revenues and expenses. Potential exposures as a result of these fluctuations in currencies are closely monitored, and, where cost-justified, strategies are adopted that are designed to reduce the impact of these fluctuations on our financial performance. These strategies may include the financing of non-U.S. dollar assets with direct or swap-based borrowings in the same currency and the use of currency forward contracts or the spot market in various hedging transactions related to net assets, revenues, expenses or cash flows. For information about cumulative foreign currency translation adjustments, see Note 15 to the financial statements.

Off-Balance Sheet Arrangements and Contractual Obligations

Off-Balance Sheet Arrangements

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

We utilize SPEs primarily in connection with securitization activities. For information on our securitization activities, see Note 13 to the financial statements.

For information on our commitments, obligations under certain guarantee arrangements and indemnities, see Note 12 to the financial statements. For further information on our lending commitments, see "Quantitative and Qualitative Disclosures about Market Risk-Risk Management-Credit Risk-Lending Activities."

Contractual Obligations

In the normal course of business, we enter into various contractual obligations that may require future cash payments. Contractual obligations include certain borrowings, other secured financings, contractual interest payments, contractual payments on time deposits, operating leases and purchase obligations.

Contractual Obligations

At December 31, 2017
Payments Due in:
$ in millions 2018 2019-2020 2021-2022 Thereafter Total

Borrowings 1

$ 23,870 $    45,963 $    36,649 $    84,581 $     191,063 

Other secured financings 1

4,992 3,142 153 398 8,685 

Contractual interest payments 2

4,903 7,930 5,680 17,031 35,544 

Time deposits 3

12,300 2,481 108 129 15,018 

Operating leases-premises 4

664 1,183 938 2,639 5,424 

Purchase obligations

598 607 217 197 1,619 

Total 5

$     47,327 $    61,306 $    43,745 $    104,975 $     257,353 

1.

For further information on Borrowings and Other secured financings, see Note 11 to the financial statements. Amounts presented for Borrowings and Other secured financings are financings with original maturities greater than one year.

2.

Amounts represent estimated future contractual interest payments related to unsecured borrowings with original maturities greater than one year based on applicable interest rates at December 31, 2017.

3.

Amounts represent contractual principal and interest payments related to time deposits primarily held at our U.S. Bank Subsidiaries.

4.

For further information on operating leases covering premises and equipment, see Note 12 to the financial statements.

5.

Amounts exclude unrecognized tax benefits, as the timing and amount of future cash payments are not determinable at this time (see Note 20 to the financial statements for further information).

Purchase obligations for goods and services include payments for, among other things, consulting, outsourcing, computer and telecommunications maintenance agreements, and certain transmission, transportation and storage contracts related to the commodities business. Purchase obligations at December 31, 2017 reflect the minimum contractual obligation under legally enforceable contracts with contract terms that are both fixed and determinable. These amounts exclude obligations for goods and services that already have been incurred and are reflected in the balance sheets.

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Quantitative and Qualitative Disclosures about Market Risk

Risk Management

Overview

We believe effective risk management is vital to the success of our business activities. Accordingly, we have an ERM framework to integrate the diverse roles of risk management into a holistic enterprise structure and to facilitate the incorporation of risk assessment into decision-making processes across the Firm. Risk is an inherent part of our businesses and activities.

We have policies and procedures in place to identify, measure, monitor, advise, challenge and control the principal risks involved in the activities of the Institutional Securities, Wealth Management and Investment Management business segments, as well as at the Parent Company level. The principal risks involved in our business activities include market (including non-trading interest rate risk), credit, operational, liquidity, model, compliance, strategic and reputational risk. Strategic risk is integrated into our business planning, embedded in the evaluation of all principal risks and overseen by the Board.

The cornerstone of our risk management philosophy is the pursuit of risk-adjusted returns through prudent risk taking that protects our capital base and franchise. This philosophy is implemented through the ERM framework. Five key principles underlie this philosophy: integrity, comprehensiveness, independence, accountability and transparency. To help ensure the efficacy of risk management, which is an essential component of our reputation, senior management requires thorough and frequent communication and the appropriate escalation of risk matters. The fast-paced, complex and constantly evolving nature of global financial markets requires us to maintain a risk management culture that is incisive, knowledgeable about specialized products and markets, and subject to ongoing review and enhancement.

Our risk appetite defines the types of risk that the Firm is willing to accept in pursuit of our strategic objectives and business plan, taking into account the interest of clients and fiduciary duties to shareholders, as well as capital and other regulatory requirements. This risk appetite is embedded in our risk culture and linked to our short-term and long-term strategic, capital and financial plans, as well as compensation programs. This risk appetite and the related Board-level risk limits and risk tolerance statements are reviewed and approved by the BRC, and the Board on, at least, an annual basis.

Risk Governance Structure

Risk management at the Firm requires independent Firm-level oversight, accountability of our business divisions, and effective communication of risk matters across the Firm, to senior management and ultimately to the Board. Our risk governance structure is composed of the Board; the Board Risk Committee ("BRC"); the Audit Committee of the Board ("BAC"); the Operations and Technology Committee of the Board ("BOTC"); the Firm Risk Committee ("FRC"); the functional risk and control committees; senior management oversight (including the Chief Executive Officer, Chief Risk Officer, Chief Financial Officer, Chief Legal Officer and Chief Compliance Officer); the Internal Audit Department; and risk managers, committees, and groups within and across the business segments and operating legal entities. The ERM framework, composed of independent but complementary entities, facilitates efficient and comprehensive supervision of our risk exposures and processes.

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1.

Committees include Securities Risk Committee, Wealth Management Risk Committee and Investment Management Risk Committee.

2.

Committees include Capital Commitment Committee, Global Large Loan Committee, Equity Underwriting Committee, Leveraged Finance Underwriting Committee, and Municipal Capital Commitment Committee.

Morgan Stanley Board of Directors.     The Board has oversight of the ERM framework and is responsible for helping to ensure that our risks are managed in a sound manner. The Board has authorized the committees within the ERM framework to help facilitate our risk oversight responsibilities. As set forth in our Corporate Governance Policies, the Board also oversees, and receives reports on, our financial performance, strategy and business plans, as well as our practices and procedures relating to culture, values and conduct.

Risk Committee of the Board.     The BRC is composed of non-management directors. The BRC oversees our global ERM framework; oversees the major risk exposures of the Firm, including market, credit, operational, model, liquidity, and reputational risk, against established risk measurement methodologies and the steps management has taken to monitor and control such exposures; oversees our risk appetite statement, including risk limits and tolerances; reviews capital, liquidity and funding strategy and related guidelines and policies; reviews the contingency funding plan and internal capital adequacy assessment process and capital plan; oversees our significant risk management and risk assessment guidelines and policies; oversees the performance of the Chief Risk Officer; reviews reports from our Strategic Transactions Committee, CCAR Committee, and Resolution and Recovery Planning Committee ("RRP Committee"); reviews significant reputational risk, franchise risk, new product risk, emerging risks and regulatory matters; and reviews results of Internal Audit reviews and assessment of the risk management, liquidity and capital functions. The BRC reports to the entire Board on a regular basis, and coordinates with other Board committees with respect to oversight of risk management and risk assessment guidelines.

Audit Committee of the Board.     The BAC is composed of independent directors. The BAC oversees the integrity of our financial statements, compliance with legal and regulatory requirements and system of internal controls; oversees risk management and risk assessment guidelines in coordination with the Board, BRC and BOTC and reviews the major legal and compliance risk exposures of the Firm and the steps management has taken to monitor and control such exposures; selects, determines the fees, evaluates and, when appropriate, replaces the independent auditor; oversees the qualifications, independence and performance of our independent auditor, and pre-approves audit and permitted non-audit services; oversees the performance of our Global Audit Director; and, after review, recommends to the Board the acceptance and inclusion of the annual audited financial statements in the Firm's Annual Report on Form 10-K. The BAC reports to the entire Board on a regular basis.

Operations and Technology Committee of the Board. The BOTC is composed of non-management directors. The BOTC oversees our operations and technology strategy, including trends that may affect such strategy; reviews operations and technology budget and significant expenditures and investments in support of such strategy; reviews operations and technology metrics; oversees risk management and risk assessment guidelines and policies regarding operations and technology risk; reviews the major operations and technology risk exposures of the Firm, including information security and cybersecurity risks, and the steps management has taken to monitor and control such exposures; and oversees our business continuity planning. The BOTC reports to the entire Board on a regular basis.

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Firm Risk Committee.     The Board has also authorized the FRC, a management committee appointed and chaired by the Chief Executive Officer, which includes the most senior officers of the Firm, including the Chief Risk Officer, Chief Financial Officer and Chief Legal Officer, to oversee the global ERM framework. The FRC's responsibilities include oversight of our risk management principles, procedures and limits and the monitoring of capital levels and material market, credit, operational, model, liquidity, legal, compliance and reputational risk matters, and other risks, as appropriate, and the steps management has taken to monitor and manage such risks. The FRC also establishes and communicates risk tolerance, including aggregate Firm limits and tolerance, as appropriate. The Governance Process Review Subcommittee of the FRC oversees governance and process issues on behalf of the FRC. The FRC reports to the entire Board, the BAC, the BOTC and the BRC through the Chief Risk Officer, Chief Financial Officer and Chief Legal Officer.

Functional Risk and Control Committees.     Functional risk and control committees comprising the ERM framework, including the Firm Credit Risk Committee, the Operational Risk Oversight Committee, the Asset/Liability Management Committee, the Global Compliance Committee, the Technology Governance Committee and the Firm Franchise Committee, facilitate efficient and comprehensive supervision of our risk exposures and processes. The Strategic Transactions Committee reviews large strategic transactions and principal investments for the Firm; the CCAR Committee oversees our CCAR and Dodd-Frank Act Stress Testing; our RRP Committee oversees our Title I Resolution Plan and Recovery Plan; the Global Legal Entity Oversight and Governance Committee monitors the governance framework that operates over our consolidated legal entity population; the Enterprise Regulatory Oversight Committee oversees significant regulatory and supervisory requirements and assessments; various commitment and underwriting committees are responsible for reviewing capital, lending and underwriting commitments on behalf of us; and the Culture, Values and Conduct Committee oversees Firm-wide standards and initiatives relating to culture, values and conduct, including training and enhancements to performance and compensation processes.

In addition, each business segment has a risk committee that is responsible for helping to ensure that the business segment, as applicable, adheres to established limits for market, credit, operational and other risks; implements risk measurement, monitoring, and management policies, procedures, controls and systems that are consistent with the risk framework established by the FRC; and reviews, on a periodic basis, our aggregate risk exposures, risk exception experience, and the efficacy of our risk identification, measurement, monitoring and management policies and procedures, and related controls.

Chief Risk Officer.     The Chief Risk Officer, who is independent of business units, reports to the BRC and the Chief Executive Officer. The Chief Risk Officer oversees compliance with our risk limits; approves exceptions to our risk limits; independently reviews material market, credit, liquidity, model and operational risks; and reviews results of risk management processes with the Board, the BRC and the BAC, as appropriate. The Chief Risk Officer also coordinates with the Chief Financial Officer regarding capital and liquidity management and works with the Compensation, Management Development and Succession Committee of the Board to help ensure that the structure and design of incentive compensation arrangements do not encourage unnecessary and excessive risk taking.

Independent Risk Management Functions.     The risk management functions (Market Risk, Credit Risk, Operational Risk, Model Risk and Liquidity Risk Management departments) are independent of our business units and they report to the Chief Risk Officer. These functions assist senior management and the FRC in monitoring and controlling our risk through a number of control processes. Each function maintains its own risk governance structure with specified individuals and committees responsible for aspects of managing risk. Further discussion about the responsibilities of the risk management functions may be found under "Market Risk," "Credit Risk," "Operational Risk," "Model Risk," and "Liquidity Risk."

Support and Control Groups.     Our support and control groups include the Legal and Compliance Division, the Finance Division, the Operations Division, the Technology and Data Division, the Human Resources Department, and Corporate Services. Our support and control groups coordinate with the business segment control groups to review the risk monitoring and risk management policies and procedures relating to, among other things, controls over financial reporting and disclosure; the business segment's market, credit and operational risk profile; liquidity risks; model risks; sales practices; reputational, legal enforceability, compliance and regulatory risk; and technological risks. Participation by the senior officers of the Firm and business segment control groups helps ensure that risk policies and procedures, exceptions to risk limits, new products and business ventures, and transactions with risk elements undergo thorough review.

Internal Audit Department.     The Internal Audit Department provides independent risk and control assessment and reports to the BAC. The Internal Audit Department provides an independent assessment of the design and effectiveness of our control environment and risk management processes using a risk-based audit coverage model and audit execution methodology developed from professional auditing standards. The Internal Audit Department also reviews and tests our compli-

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ance with internal guidelines set for risk management and risk monitoring, as well as external rules and regulations governing the industry. It effects these responsibilities through periodic reviews (with specified minimum frequency) of our processes, activities, products or information systems; targeted reviews of specific controls and activities; pre-implementation or initiative reviews of new or significantly changed processes, activities, products or information systems; and special investigations required as a result of internal factors or regulatory requests. In addition to regular reports to the BAC, the Global Audit Director also periodically reports to the BRC and BOTC on risk-related control issues.

Culture, Values and Conduct of Employees.     Employees of the Firm are accountable for conducting themselves in accordance with our core values: Putting Clients First, Doing the Right Thing, Leading with Exceptional Ideas, and Giving Back . We are committed to reinforcing and confirming adherence to the core values through our governance framework, tone from the top, management oversight, risk management and controls, and three lines of defense structure (business, control functions such as Risk Management and Compliance, and Internal Audit).

The Board is responsible for overseeing the Firm's practices and procedures relating to culture, values and conduct, as set forth in the Firm's Corporate Governance Policies. Our Culture, Values and Conduct Committee, which is part of the ERM framework, is the senior management committee that oversees the Firm-wide culture, values and conduct program. A fundamental building block of this program is the Firm's Code of Conduct, which establishes standards for employee conduct that further reinforce the Firm's commitment to integrity and ethical conduct. Every new hire and every employee annually must certify to their understanding of and adherence to the Code of Conduct.

The employee annual performance review process includes evaluation of employee conduct related to risk management practices and the Firm's expectations. We also have several mutually reinforcing processes to identify employee conduct that may have an impact on employment status, current year compensation and/or prior year compensation. For example, the Global Incentive Compensation Discretion Policy sets forth standards for managers when making annual compensation decisions and specifically provides that managers must consider whether their employees effectively managed and/or supervised risk control practices during the performance year. Management committees from control functions periodically meet to discuss employees whose conduct is not in line with our expectations. These results are incorporated into identified employees' performance reviews and compensation and promotion decisions.

The Firm's clawback and cancellation provisions apply to deferred incentive compensation and cover a broad scope of employee conduct, including any act or omission (including with respect to direct supervisory responsibilities) that constitutes a breach of obligation to the Firm or causes a restatement of the Firm's financial results, constitutes a violation of the Firm's global risk management principles, policies and standards, or causes a loss of revenue associated with a position on which the employee was paid and the employee operated outside of internal control policies.

Risk Management Process

The following is a discussion of our risk management policies and procedures for our principal risks. The discussion primarily focuses on our Institutional Securities trading activities and corporate lending and related activities. We believe that these activities generate a substantial portion of our principal risks. This discussion and the estimated amounts of our risk exposure generated by our statistical analyses are forward-looking statements. However, the analyses used to assess such risks are not predictions of future events, and actual results may vary significantly from such analyses due to events in the markets in which we operate and certain other factors described in the following paragraphs.

Risk Limits Framework

Risk limits and quantitative metrics provide the basis for monitoring risk taking activity and avoiding outsized risk-taking. Our risk-taking capacity is sized through the Firm's capital planning process where losses are estimated under the Firm's BHC Severely Adverse stress testing scenario. We also maintain a comprehensive suite of risk limits and quantitative metrics to support and implement our risk appetite statement. Our risk limits support linkages between the overall risk appetite, which is reviewed by the Board, and more granular risk-taking decisions and activities.

Risk limits, once established, are reviewed and updated on at least an annual basis, with more frequent updates as necessary. Board-level risk limits address the most important Firm-wide aggregations of risk, including, but not limited to, stressed market, credit and liquidity risks. Additional risk limits approved by the FRC address more specific types of risk and are bound by the higher-level Board risk limits.

Market Risk

Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio. Generally, we incur market risk as a result of trading, investing and client facilitation activities, principally within the Institutional Securities business segment where the substantial majority of our VaR for market risk exposures is generated. In addition, we incur market risk within the Wealth Management and Investment

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Risk Disclosures

Management business segments. The Wealth Management business segment primarily incurs non-trading market risk from lending and deposit-taking activities. The Investment Management business segment primarily incurs non-trading market risk from capital investments in alternative and other funds. Market risk includes non-trading interest rate risk. Non-trading interest rate risk in the banking book (amounts classified for regulatory capital purposes under the banking book regime) refers to the exposure that a change in interest rates will result in prospective earnings changes for assets and liabilities in the banking book.

Sound market risk management is an integral part of our culture. The various business units and trading desks are responsible for ensuring that market risk exposures are well-managed and prudent. The control groups help ensure that these risks are measured and closely monitored and are made transparent to senior management. The Market Risk Department is responsible for ensuring transparency of material market risks, monitoring compliance with established limits and escalating risk concentrations to appropriate senior management.

To execute these responsibilities, the Market Risk Department monitors our risk against limits on aggregate risk exposures, performs a variety of risk analyses, routinely reports risk summaries, and maintains our VaR and scenario analysis systems. These limits are designed to control price and market liquidity risk. Market risk is also monitored through various measures: by use of statistics (including VaR and related analytical measures); by measures of position sensitivity; and through routine stress testing, which measures the impact on the value of existing portfolios of specified changes in market factors, and scenario analyses conducted by the Market Risk Department in collaboration with the business units. The material risks identified by these processes are summarized in reports produced by the Market Risk Department that are circulated to and discussed with senior management, the FRC, the BRC and the Board.

The Chief Risk Officer, among other things, monitors market risk through the Market Risk Department, which reports to the Chief Risk Officer and is independent of the business units, and has close interactions with senior management and the risk management control groups in the business units. The Chief Risk Officer is a member of the FRC, chaired by the Chief Executive Officer, which includes the most senior officers of the Firm, and regularly reports on market risk matters to this committee, as well as to the BRC and the Board.

Sales and Trading and Related Activities

Primary Market Risk Exposures and Market Risk Management.     During 2017, we had exposures to a wide range of interest rates, equity prices, foreign exchange rates and

commodity prices-and the associated implied volatilities and spreads-related to the global markets in which we conduct our trading activities.

We are exposed to interest rate and credit spread risk as a result of our market-making activities and other trading in interest rate-sensitive financial instruments ( e.g ., risk arising from changes in the level or implied volatility of interest rates, the timing of mortgage prepayments, the shape of the yield curve and credit spreads). The activities from which those exposures arise and the markets in which we are active include, but are not limited to, the following: corporate and government debt across both developed and emerging markets and asset-backed debt (including mortgage-related securities).

We are exposed to equity price and implied volatility risk as a result of making markets in equity securities and derivatives and maintaining other positions (including positions in non-public entities). Positions in non-public entities may include, but are not limited to, exposures to private equity, venture capital, private partnerships, real estate funds and other funds. Such positions are less liquid, have longer investment horizons and are more difficult to hedge than listed equities.

We are exposed to foreign exchange rate and implied volatility risk as a result of making markets in foreign currencies and foreign currency derivatives, from maintaining foreign exchange positions and from holding non-U.S. dollar-denominated financial instruments.

We are exposed to commodity price and implied volatility risk as a result of market-making activities in commodity products related primarily to electricity, natural gas, oil and precious metals. Commodity exposures are subject to periods of high price volatility as a result of changes in supply and demand. These changes can be caused by weather conditions; physical production and transportation; or geopolitical and other events that affect the available supply and level of demand for these commodities.

We manage our trading positions by employing a variety of risk mitigation strategies. These strategies include diversification of risk exposures and hedging. Hedging activities consist of the purchase or sale of positions in related securities and financial instruments, including a variety of derivative products ( e.g ., futures, forwards, swaps and options). Hedging activities may not always provide effective mitigation against trading losses due to differences in the terms, specific characteristics or other basis risks that may exist between the hedge instrument and the risk exposure that is being hedged.

We manage the market risk associated with our trading activities on a Firm-wide basis, on a worldwide trading division level and on an individual product basis. We manage and

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monitor our market risk exposures in such a way as to maintain a portfolio that we believe is well-diversified in the aggregate with respect to market risk factors and that reflects our aggregate risk tolerance as established by our senior management.

Aggregate market risk limits have been approved for the Firm across all divisions worldwide. Additional market risk limits are assigned to trading desks and, as appropriate, products and regions. Trading division risk managers, desk risk managers, traders and the Market Risk Department monitor market risk measures against limits in accordance with policies set by our senior management.

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

VaR Methodology, Assumptions and Limitations.     We estimate VaR using a model based on volatility-adjusted historical simulation for general market risk factors and Monte Carlo simulation for name-specific risk in corporate shares, bonds, loans and related derivatives. The model constructs a distribution of hypothetical daily changes in the value of trading portfolios based on the following: historical observation of daily changes in key market indices or other market risk factors; and information on the sensitivity of the portfolio values to these market risk factor changes.

Our VaR model uses four years of historical data with a volatility adjustment to reflect current market conditions. VaR for risk management purposes ("Management VaR") is computed at a 95% level of confidence over a one-day time horizon, which is a useful indicator of possible trading losses resulting from adverse daily market moves. The 95%/one-day VaR corresponds to the unrealized loss in portfolio value that, based on historically observed market risk factor movements, would have been exceeded with a frequency of 5%, or five times in every 100 trading days, if the portfolio were held constant for one day.

Our VaR model generally takes into account linear and non-linear exposures to equity and commodity price risk, interest rate risk, credit spread risk and foreign exchange rates. The model also takes into account linear exposures to implied volatility risks for all asset classes and non-linear exposures to implied volatility risks for equity, commodity and foreign exchange referenced products. The VaR model also captures certain implied correlation risks associated with portfolio credit derivatives, as well as certain basis risks ( e.g., corporate debt and related credit derivatives).

We use VaR as one of a range of risk management tools. Among their benefits, VaR models permit estimation of a

portfolio's aggregate market risk exposure, incorporating a range of varied market risks and portfolio assets. One key element of the VaR model is that it reflects risk reduction due to portfolio diversification or hedging activities. However, VaR has various limitations, which include, but are not limited to: use of historical changes in market risk factors, which may not be accurate predictors of future market conditions and may not fully incorporate the risk of extreme market events that are outsized relative to observed historical market behavior or reflect the historical distribution of results beyond the 95% confidence interval; and reporting of losses in a single day, which does not reflect the risk of positions that cannot be liquidated or hedged in one day. A small proportion of market risk generated by trading positions is not included in VaR.

The modeling of the risk characteristics of some positions relies on approximations that, under certain circumstances, could produce significantly different results from those produced using more precise measures. VaR is most appropriate as a risk measure for trading positions in liquid financial markets and will understate the risk associated with severe events, such as periods of extreme illiquidity. We are aware of these and other limitations and, therefore, use VaR as only one component in our risk management oversight process. This process also incorporates stress testing and scenario analyses and extensive risk monitoring, analysis and control at the trading desk, division and Firm levels.

Our VaR model evolves over time in response to changes in the composition of trading portfolios and to improvements in modeling techniques and systems capabilities. We are committed to continuous review and enhancement of VaR methodologies and assumptions in order to capture evolving risks associated with changes in market structure and dynamics. As part of our regular process improvements, additional systematic and name-specific risk factors may be added to improve the VaR model's ability to more accurately estimate risks to specific asset classes or industry sectors.

Since the reported VaR statistics are estimates based on historical data, VaR should not be viewed as predictive of our future revenues or financial performance or of our ability to monitor and manage risk. There can be no assurance that our actual losses on a particular day will not exceed the VaR amounts indicated in the following paragraphs or that such losses will not occur more than five times in 100 trading days for a 95%/one-day VaR. VaR does not predict the magnitude of losses that, should they occur, may be significantly greater than the VaR amount.

VaR statistics are not readily comparable across firms because of differences in the firms' portfolios, modeling assumptions and methodologies. These differences can result in materially different VaR estimates across firms for similar

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Risk Disclosures

portfolios. The impact of such differences varies depending on the factor history assumptions, the frequency with which the factor history is updated and the confidence level. As a result, VaR statistics are more useful when interpreted as indicators of trends in a firm's risk profile rather than as an absolute measure of risk to be compared across firms.

We utilize the same VaR model for risk management purposes and for regulatory capital calculations. Our regulators have approved our VaR model for use in regulatory calculations.

The portfolio of positions used for Management VaR differs from that used for Regulatory VaR. Management VaR contains certain positions that are excluded from Regulatory VaR. Examples include counterparty CVA and related hedges, as well as loans that are carried at fair value and associated hedges.

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

Trading Risks

95%/One-Day Management VaR

95%/One-Day VaR for 2017

$ in millions

Period

End

Average High Low

Interest rate and credit spread

$ 32 $ 31 $ 44 $ 23 

Equity price

11 15 26 10 

Foreign exchange rate

9 10 18

Commodity price

7 8 11

Less: Diversification benefit 1, 2

(20 (24 N/A N/A 

Primary Risk Categories

$ 39 $ 40 $       60 $       28 

Credit Portfolio

9 12 17

Less: Diversification benefit 1, 2

(5 (8 N/A N/A 

Total Management VaR

$           43 $ 44 $ 64 $ 33 
95%/One-Day VaR for 2016
$ in millions

Period

End

Average High Low

Interest rate and credit spread

$ 24 $ 29 $ 39 $ 22 

Equity price

12 16 43 11 

Foreign exchange rate

7 8 12

Commodity price

8 10 13

Less: Diversification benefit 1, 2

(21 (27 N/A N/A 

Primary Risk Categories

$ 30 $ 36 $ 61 $ 29 

Credit Portfolio

15 19 24 12 

Less: Diversification benefit 1, 2

(11 (12 N/A N/A 

Total Management VaR

$           34 $ 43 $ 68 $ 34 

1.

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

2.

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

Average total Management VaR and average Management VaR for the Primary Risk Categories of $44 million and $40 million, respectively, increased from 2016, primarily as a result of increases in trading inventory across the global macro, and credit businesses within Institutional Securities, in response to client demand.

Distribution of VaR Statistics and Net Revenues for 2017. One method of evaluating the reasonableness of our VaR model as a measure of our potential volatility of net revenues is to compare VaR with corresponding actual trading revenues. Assuming no intraday trading, for a 95%/one-day VaR, the expected number of times that trading losses should exceed VaR during the year is 13, and, in general, if trading losses were to exceed VaR more than 21 times in a year, the adequacy of the VaR model would be questioned.

We evaluate the reasonableness of our VaR model by comparing the potential declines in portfolio values generated by the model with corresponding actual trading results for the Firm, as well as individual business units. For days where losses exceed the VaR statistic, we examine the drivers of trading losses to evaluate the VaR model's accuracy relative to realized trading results. During 2017, we experienced net trading losses on 15 days, which were not in excess of the 95%/one-day Total Management VaR.

The distribution of VaR statistics and net revenues is presented in the following histograms for the Total Trading populations.

Total Trading.     As shown in the 95%/One-Day Management VaR table, the average 95%/one-day total Management VaR for 2017 was $44 million. The following histogram presents

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Risk Disclosures

the distribution of the daily 95%/one-day total Management VaR for 2017, which was in a range between $35 million and $60 million for approximately 96% of trading days during the year.

Daily 95%/One-Day Total Management VaR for 2017

($ in millions)

The following histogram shows the distribution for 2017 of daily net trading revenues, including profits and losses from Interest rate and credit spread, Equity price, Foreign exchange rate, Commodity price, and Credit Portfolio positions and intraday trading activities, for our Trading businesses. Daily net trading revenues also include intraday trading activities but exclude certain items not captured in the VaR model, such as fees, commissions and net interest income. Daily net trading revenues differ from the definition of revenues required for Regulatory VaR backtesting, which further excludes intraday trading.

Daily Net Trading Revenues for 2017

($ in millions)

Non-Trading Risks

We believe that sensitivity analysis is an appropriate representation of our non-trading risks. The following sensitivity analyses cover substantially all of the non-trading risk in our portfolio.

Credit Spread Sensitivity to Our Own Credit Spread.

Credit Spread Risk Sensitivity 1

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

Derivatives

$                     6 $                     6

Funding liabilities 2

29 17

1.

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

2.

Relates to structured note liabilities carried at fair value.

Credit spread risk sensitivity for funding liabilities per basis point as of December 31, 2017 has increased compared with December 31, 2016, primarily as a result of new structured note issuances.

Interest Rate Risk Sensitivity.     The following table presents an analysis of selected instantaneous upward and downward parallel interest rate shocks on net interest income over the next 12 months for our U.S. Bank Subsidiaries. These shocks are applied to our 12-month forecast for our U.S. Bank Subsidiaries, which incorporates market expectations of interest rates and our forecasted business activity, including our deposit deployment strategy and asset-liability management hedges.

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

$ in millions

At

December 31, 2017

At

December 31, 2016

Basis point change

+200

$                 489 $                     550

+100

367 262

-100

(500 (655 )

We do not manage to any single rate scenario but rather manage net interest income in our U.S. Bank Subsidiaries to optimize across a range of possible outcomes, including non-parallel rate change scenarios. The sensitivity analysis assumes that we take no action in response to these scenarios, assumes there are no changes in other macroeconomic variables normally correlated with changes in interest rates, and includes subjective assumptions regarding customer and market re-pricing behavior and other factors. The change in sensitivity to interest rates between December 31, 2017 and December 31, 2016 is related to overall changes in our asset-liability profile and higher market rates.

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

Investments Sensitivity, Including Related Performance Fees

Loss from 10% Decline

$ in millions

At

December 31,

2017

At

December 31,

2016

Investments related to Investment Management activities

$

             316

$

             332

Other investments:

Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.

168

158

Other Firm investments

178 130

Investments sensitivity for other investments as of December 31, 2017 increased compared with December 31, 2016, primarily as a result of an increase in the value of underlying investments.

Equity Market Sensitivity.     In the Wealth Management and Investment Management business segments, certain fee-based revenue streams are driven by the value of clients' equity holdings. The overall level of revenues for these streams also depends on multiple additional factors that include, but are not limited to, the level and duration of the equity market increase or decline, price volatility, the geographic and industry mix of client assets, the rate and magnitude of client investments and redemptions, and the impact of such market increase or decline and price volatility on client behavior. Therefore, overall revenues do not correlate completely with changes in the equity markets.

Credit Risk

Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial obligations to us. We primarily incur credit risk to institutions and individuals through our Institutional Securities and Wealth Management business segments.

We may incur credit risk in our Institutional Securities business segment through a variety of activities, including, but not limited to, the following:

extending credit to clients through lending commitments;

entering into swap or other derivative contracts under which counterparties may have obligations to make payments to us;

providing short- or long-term funding that is secured by physical or financial collateral whose value may at times be insufficient to fully cover the repayment amount;

posting margin and/or collateral to clearinghouses, clearing agencies, exchanges, banks, securities firms and other financial counterparties;

placing funds on deposit at other financial institutions to support our clearing and settlement obligations; and

investing or trading in securities and loan pools, whereby the value of these assets may fluctuate based on realized or expected defaults on the underlying obligations or loans.

We incur credit risk in our Wealth Management business segment, primarily through lending to individuals and entities, including, but not limited to, the following:

margin loans collateralized by securities;

securities-based lending and other forms of secured loans, including tailored lending, to high net worth clients; and

single-family residential mortgage loans in conforming, non-conforming or HELOC form, primarily to existing Wealth Management clients.

Monitoring and Control

In order to help protect us from losses, the Credit Risk Management Department ("CRM") establishes Firm-wide practices to evaluate, monitor and control credit risk at the transaction, obligor and portfolio levels. CRM approves extensions of credit, evaluates the creditworthiness of the counterparties and borrowers on a regular basis, and helps ensure that credit exposure is actively monitored and managed. The evaluation of counterparties and borrowers includes an assessment of the probability that an obligor will default on its financial obligations and any losses that may occur when an obligor defaults. In addition, credit risk exposure is actively managed by credit professionals and committees within CRM and through various risk committees, whose membership includes individuals from CRM. A comprehensive and global Credit Limits Framework is utilized to manage credit risk levels across the Firm. The Credit Limits Framework is calibrated within our risk tolerance and includes single-name limits and portfolio concentration limits by country, industry and product type.

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CRM helps ensure timely and transparent communication of material credit risks, compliance with established limits and escalation of risk concentrations to appropriate senior management. CRM also works closely with the Market Risk Department and applicable business units to monitor risk exposures and to perform stress tests to identify, analyze and control credit risk concentrations arising from the lending and trading activities. The stress tests shock market factors ( e.g. , interest rates, commodity prices, credit spreads), risk parameters (e.g. , default probabilities and loss given default), recovery rates and expected losses in order to assess the impact of stresses on exposures, profit and loss, and our capital position. Stress tests are conducted in accordance with our established policies and procedures.

Credit Evaluation

The evaluation of corporate and institutional counterparties and borrowers includes assigning obligor credit ratings, which reflect an assessment of an obligor's probability of default and loss given default. Credit evaluations typically involve the assessment of financial statements; leverage; liquidity; capital strength; asset composition and quality; market capitalization; access to capital markets; adequacy of collateral, if applicable; and in the case of certain loans, cash flow projections and debt service requirements. CRM also evaluates strategy, market position, industry dynamics, management and other factors that could affect the obligor's risk profile. Additionally, CRM evaluates the relative position of our exposure in the borrower's capital structure and relative recovery prospects, as well as other structural elements of the particular transaction.

The evaluation of consumer borrowers is tailored to the specific type of lending. Margin and securities-based loans are evaluated based on factors that include, but are not limited to, the amount of the loan, the degree of leverage and the quality, diversification, price volatility and liquidity of the collateral. The underwriting of residential real estate loans includes, but is not limited to, review of the obligor's income, net worth, liquidity, collateral, loan-to-value ratio and credit bureau information. Subsequent credit monitoring for individual loans is performed at the portfolio level, and collateral values are monitored on an ongoing basis. Credit risk metrics assigned to our borrowers during the evaluation process are incorporated into CRM maintenance of the allowance for loan losses for the

loans held for the investment portfolio. Such allowance serves as a reserve for probable inherent losses, as well as probable losses related to loans identified for impairment. For more information on the allowance for loan losses, see Notes 2 and 7 to the financial statements.

Risk Mitigation

We may seek to mitigate credit risk from our lending and trading activities in multiple ways, including collateral provisions, guarantees and hedges. At the transaction level, we seek to mitigate risk through management of key risk elements such as size, tenor, financial covenants, seniority and collateral. We actively hedge our lending and derivatives exposure through various financial instruments that may include single-name, portfolio and structured credit derivatives. Additionally, we may sell, assign or syndicate loans and lending commitments to other financial institutions in the primary and secondary loan markets.

In connection with our derivatives trading activities, we generally enter into master netting agreements and collateral arrangements with counterparties. These agreements provide us with the ability to demand collateral, as well as to liquidate collateral and offset receivables and payables covered under the same master agreement in the event of a counterparty default. A collateral management group monitors collateral levels against requirements and oversees the administration of the collateral function. See Note 6 to the financial statements for additional information about our collateralized transactions.

Lending Activities Included in Loans and Trading Assets

We provide loans and lending commitments to a variety of customers, from large corporate and institutional clients to high net worth individuals. In addition, we purchase loans in the secondary market. In the balance sheets, these loans and lending commitments are carried as held for investment, which are recorded at amortized cost; as held for sale, which are recorded at the lower of cost or fair value; or at fair value with changes in fair value recorded in earnings. Loans held for investment and loans held for sale are classified in Loans, and loans held at fair value are classified in Trading assets in the balance sheets. See Notes 3, 7 and 12 to the financial statements for further information.

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Loans and Lending Commitments

At December 31, 2017

$ in millions

IS WM IM 1 Total

Corporate loans

$ 15,332 $ 14,417 $ 5 $ 29,754

Consumer loans

- 26,808 - 26,808

Residential real estate loans

- 26,635 - 26,635

Wholesale real estate loans

9,980 - - 9,980

Loans held for investment, gross of allowance

25,312 67,860 5 93,177

Allowance for loan losses

(182 (42 - (224

Loans held for investment, net of allowance

25,130 67,818 5 92,953

Corporate loans

9,456 - - 9,456

Residential real estate loans

1 34 - 35

Wholesale real estate loans

1,682 - - 1,682

Loans held for sale

11,139 34 - 11,173

Corporate loans

8,336 - 22 8,358

Residential real estate loans

799 - - 799

Wholesale real estate loans

1,579 - - 1,579

Loans held at fair value

10,714 - 22 10,736

Total loans

46,983 67,852 27 114,862

Lending commitments 2, 3

92,588 9,481 - 102,069

Total loans and lending commitments 2, 3

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

At December 31, 2016

$ in millions

IS WM IM 1 Total

Corporate loans

$ 13,858 $ 11,162 $ 5 $ 25,025

Consumer loans

- 24,866 - 24,866

Residential real estate loans

- 24,385 - 24,385

Wholesale real estate loans

7,702 - - 7,702

Loans held for investment, gross of allowance

21,560 60,413 5 81,978

Allowance for loan losses

(238 (36 - (274

Loans held for investment, net of allowance

21,322 60,377 5 81,704

Corporate loans

10,710 - - 10,710

Residential real estate loans

11 50 - 61

Wholesale real estate loans

1,773 - - 1,773

Loans held for sale

12,494 50 - 12,544

Corporate loans

7,199 - 18 7,217

Residential real estate loans

966 - - 966

Wholesale real estate loans

519 - - 519

Loans held at fair value

8,684 - 18 8,702

Total loans

42,500 60,427 23 102,950

Lending commitments 2, 3

90,143 8,299 - 98,442

Total loans and lending commitments 2, 3

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

1.

Investment Management business segment loans are entered into in conjunction with certain investment advisory activities.

2.

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

3.

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

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

Allowance for Loans and Lending Commitments Held for Investment

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

Loans

$ 224 $ 274

Commitments

198 190

The allowance for loan losses decreased in 2017, primarily due to the charge-off of an energy industry related loan. See Note 7 to the financial statements for further information.

Status of Loans Held for Investment

At December 31, 2017     At December 31, 2016    
IS     WM     IS      WM    

Current

99.5% 99.9% 98.6% 99.9%

Non-accrual 1

0.5% 0.1% 1.4% 0.1%

1.

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

Institutional Securities

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

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We also participate in securitization activities, whereby we extend short-term or long-term funding to clients through loans and lending commitments that are secured by the assets of the borrower and generally provide for over-collateralization, including commercial real estate loans, loans secured by loan pools, corporate loans and secured lines of revolving credit. Credit risk with respect to these loans and lending commitments arises from the failure of a borrower to perform according to the terms of the loan agreement or a decline in the underlying collateral value. See Note 13 to the financial statements for information about our securitization activities. In addition, a collateral management group monitors collateral levels against requirements and oversees the administration of the collateral function. See Note 6 to the financial statements for additional information about our collateralized transactions.

Institutional Securities Loans and Lending Commitments by Credit Rating 1

At December 31, 2017
Years to Maturity
$ in millions

Less than

1

1-3 3-5 Over 5 Total

Loans

AAA

$ - $ - $ - $ - $ -

AA

14 503 30 5 552

A

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

BBB

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

NIG

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

Unrated 2

243 291 621 1,487 2,642

Total loans

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

Lending commitments

AAA

- 165 - - 165

AA

3,745 1,108 3,002 - 7,855

A

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

BBB

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

NIG

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

Unrated 2

9 40 42 47 138

Total lending

commitments

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

Total exposure

$ 25,085 $   50,340 $   54,033 $   10,113 $   139,571
At December 31, 2016
Years to Maturity
$ in millions

Less than

1

1-3 3-5 Over 5 Total

Loans

AAA

$ - $ - $ - $ - $ -

AA

- - 38 - 38

A

235 775 1,391 552 2,953

BBB

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

NIG

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

Unrated 2

699 126 175 1,483 2,483

Total loans

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

Lending commitments

AAA

50 105 50 - 205

AA

3,724 451 3,989 - 8,164

A

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

BBB

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

NIG

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

Unrated 2

107 6 - 4 117

Total lending

commitments

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

Total exposure

$ 22,285 $   42,600 $   57,590 $   10,168 $   132,643

NIG-Non-investment grade

1.

Obligor credit ratings are determined by CRM.

2.

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

Institutional Securities Loans and Lending Commitments by Industry

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

Industry

Real estate

$ 28,426 $ 19,807

Financials 1

22,112 20,624

Information technology

11,862 8,602

Consumer discretionary

11,555 12,059

Industrials

11,090 11,465

Energy

10,233 11,757

Healthcare

9,956 11,534

Utilities

9,592 9,216

Consumer staples

8,315 7,329

Materials

5,069 7,630

Insurance

4,739 4,190

Telecommunications services

4,172 6,156

Other

2,450 2,274

Total

$ 139,571 $ 132,643

1.

Prior period amounts have been revised to conform to the current presentation.

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

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loans. In connection with the relationship-based lending activities, we had hedges (which included single-name and index hedges) with a notional amount of $16.6 billion and $20.2 billion at December 31, 2017 and December 31, 2016, respectively.

Event-Driven Loans and Lending Commitments

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

Loans

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

Lending commitments

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

Total loans and lending commitments

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

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

Loans

$ 666 $   1,593 $   1,216 $   1,622 $ 5,097

Lending commitments

6,594 1,460 4,807 3,391 16,252

Total loans and lending commitments

$ 7,260 $ 3,053 $ 6,023 $ 5,013 $   21,349

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

Institutional Securities Lending Exposures Related to the Energy Industry. At December 31, 2017, Institutional Securities' loans and lending commitments related to the energy industry were $10.2 billion, of which approximately 66% are accounted for as held for investment and 34% are accounted for as either held for sale or at fair value. Additionally, approximately 60% of the total energy industry loans and lending commitments were to investment grade counterparties.

At December 31, 2017, the energy industry portfolio included $0.8 billion in loans and $2.0 billion in lending commitments to Oil and Gas Exploration and Production ("E&P") companies. The E&P loans were to non-investment grade counterparties, which are generally subject to periodic borrowing base reassessments based on the value of the underlying oil and gas reserves pledged as collateral. In limited situations, we may extend the period related to borrowing base reassessments typically in conjunction with taking certain risk mitigating actions with the borrower. Approximately 52% of the E&P lending commitments were to investment grade counterparties. To the extent oil and natural gas prices deteriorate, we may incur lending losses.

Wealth Management

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

Securities-based lending provided to our retail clients is primarily conducted through our Portfolio Loan Account ("PLA") and Liquidity Access Line ("LAL") platforms. These loans allow the client to borrow money against the value of qualifying securities, generally for any purpose other than purchasing securities. We establish approved credit lines against qualifying securities and monitor limits daily and, pursuant to such guidelines, require customers to deposit additional collateral, or reduce debt positions, when necessary. These credit lines are primarily uncommitted loan facilities, as we reserve the right to not make any advances or may terminate these credit lines at any time. Factors considered in the review of these loans include, but are not limited to, the loan amount, the client's credit profile, the degree of leverage, collateral diversification, price volatility and liquidity of the collateral.

Residential real estate loans consist of first and second lien mortgages, including HELOC loans. Our underwriting policy is designed to ensure that all borrowers pass an assessment of capacity and willingness to pay, which includes an analysis utilizing industry standard credit scoring models ( e.g. , FICO scores), debt ratios and assets of the borrower. Loan-to-value ratios are determined based on independent third-party property appraisal/valuations, and security lien position is established through title/ownership reports. The vast majority of mortgage and HELOC loans are held for investment in the Wealth Management business segment's loan portfolio.

For the year ended December 31, 2017, loans and lending commitments associated with the Wealth Management business segment lending activities increased by approximately 13%, primarily due to growth in securities-based lending and other loans.

Wealth Management Loans and Lending Commitments by Remaining Contractual Maturity

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

Securities-based lending and other loans 1

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

Residential real estate loans

- 24 15 26,607 26,646

Total loans

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

Lending commitments

7,253 1,827 120 281 9,481

Total loans and lending commitments

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

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

Securities-based lending and other loans 1

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

Residential real estate loans

- - 45 24,369 24,414

Total loans

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

Lending commitments

6,372 1,413 268 246 8,299

Total loans and lending commitments

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

1.

PLA and LAL platforms had an outstanding loan balance of $32.2 billion and $29.7 billion at December 31, 2017 and December 31, 2016, respectively.

Lending Activities Included in Customer and Other Receivables

Margin Loans

At December 31, 2017
$ in millions IS WM Total

Net customer receivables representing margin loans

$  19,977 $  12,135 $  32,112

At December 31, 2016
$ in millions IS WM Total

Net customer receivables representing margin loans

$  11,876 $  12,483 $  24,359

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

Employee Loans

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

Employee loans:

Balance

$ 4,185 $ 4,804

Allowance for loan losses

(77 ) (89

Balance, net

$ 4,108 $ 4,715

Repayment term range, in years

1 to 20 1 to 12

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

Credit Exposure-Derivatives

We incur credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instruments arises from the possibility that a counterparty may fail to perform according

to the terms of the contract. In connection with our OTC derivative activities, we generally enter into master netting agreements and collateral arrangements with counterparties. These agreements provide us with the ability to demand collateral, as well as to liquidate collateral and offset receivables and payables covered under the same master netting agreement in the event of counterparty default.

We manage our trading positions by employing a variety of risk mitigation strategies. These strategies include diversification of risk exposures and hedging. Hedging activities consist of the purchase or sale of positions in related securities and financial instruments, including a variety of derivative products ( e.g. , futures, forwards, swaps and options).

Fair values as shown below represent the Firm's net exposure to counterparties related to its OTC derivative products. Obligor credit ratings are determined internally by CRM.

Counterparty Credit Rating and Remaining Contractual Maturity of OTC Derivative Assets

Fair Value at December 31, 2017
Contractual Years to Maturity
Total
Derivative

Assets

$ in millions Less than 1 1-3 3-5 Over 5

Credit Rating

AAA

$ 157 $ 404 $ 406 $ 3,759 $ 4,726

AA

1,586 2,070 1,030 5,802 10,488

A

6,473 4,738 4,434 20,613 36,258

BBB

3,941 2,379 1,764 13,135 21,219

Non-investment grade

2,691 2,816 3,663 2,294 11,464

Total

$ 14,848 $ 12,407 $ 11,297 $ 45,603 $ 84,155

Fair Value at December 31, 2017
$ in millions Total
Derivative
Assets
Cross-
Maturity
and Cash
Collateral
Netting 1

Net

Amounts
Post-cash
Collateral
Net
Amounts
Post-
Collateral 2

Credit Rating

AAA

$ 4,726 $ (3,780 $ 946 $ 880

AA

10,488 (5,444 5,044 2,224

A

36,258 (27,277 8,981 4,859

BBB

21,219 (14,207 7,012 4,974

Non-investment grade

11,464 (5,409 6,055 2,738

Total

$ 84,155 $ (56,117 $ 28,038 $ 15,675

Fair Value at December 31, 2016
Contractual Years to Maturity

Total

Derivative

Assets

$ in millions Less than 1 1-3 3-5 Over 5

Credit Rating

AAA

$ 150 $ 428 $ 918 $ 2,931 $ 4,427

AA

3,177 2,383 2,942 10,194 18,696

A

9,244 6,676 5,495 21,322 42,737

BBB

4,423 3,085 2,434 13,023 22,965

Non-investment grade

2,283 1,702 1,722 1,794 7,501

Total

$     19,277 $     14,274 $     13,511 $     49,264 $     96,326

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Fair Value at December 31, 2016
$ in millions Total
Derivative
Assets
Cross-
Maturity
and Cash
Collateral
Netting 1

Net

Amounts
Post-cash
Collateral
Net
Amounts
Post-
Collateral 2

Credit Rating

AAA

$ 4,427 $ (3,900 $ 527 $ 485

AA

18,696 (11,813 6,883 4,114

A

42,737 (31,425 11,312 6,769

BBB

22,965 (16,629 6,336 4,852

Non-investment grade

7,501 (4,131 3,370 1,915

Total

$     96,326 $     (67,898 $     28,428 $     18,135

1.

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.

2.

Fair value is shown net of collateral received (primarily cash and U.S. government and agency securities).

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

$ in millions

At

December 31,

2017

At

December 31,
2016 1

Industry

Utilities

$ 4,382 $ 4,184

Financials

3,330 4,008

Industrials

1,124 1,644

Sovereign governments

1,084 709

Regional governments

1,005 1,352

Healthcare

882 1,103

Information technology

715 267

Not-for-profit organizations

703 830

Energy

646 533

Consumer discretionary

464 590

Real estate

374 503

Materials

329 235

Insurance

206 570

Consumer staples

161 567

Other

270 1,040

Total 2

$                         15,675 $                     18,135

1.

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

2.

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

Credit Derivatives . A credit derivative is a contract between a seller and buyer of protection against the risk of a credit event occurring on one or more debt obligations issued by a specified reference entity. The buyer typically pays a periodic premium over the life of the contract and is protected for the period. If a credit event occurs, the seller is required to make payment to the beneficiary based on the terms of the credit derivative contract. Credit events, as defined in the contract, may be one or more of the following defined events: bankruptcy, dissolution or insolvency of the referenced entity, failure to pay, obligation acceleration, repudiation, payment moratorium and restructurings.

We trade in a variety of credit derivatives and may either purchase or write protection on a single name or portfolio of referenced entities. In transactions referencing a portfolio of entities or securities, protection may be limited to a tranche of exposure or a single name within the portfolio. We are an active market maker in the credit derivatives markets. As a market maker, we work to earn a bid-offer spread on client flow business and manage any residual credit or correlation risk on a portfolio basis. Further, we use credit derivatives to manage our exposure to residential and commercial mortgage loans and corporate lending exposures. The effectiveness of our CDS protection as a hedge of our exposures may vary depending upon a number of factors, including the contractual terms of the CDS.

We actively monitor our counterparty credit risk related to credit derivatives. A majority of our counterparties are composed of banks, broker-dealers, insurance and other financial institutions. Contracts with these counterparties may include provisions related to counterparty rating downgrades, which may result in the counterparty posting additional collateral to us. As with all derivative contracts, we consider counterparty credit risk in the valuation of our positions and recognize CVAs as appropriate within Trading revenues in the income statements.

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

Country Risk Exposure

Country risk exposure is the risk that events in, or that affect, a foreign country (any country other than the U.S.) might adversely affect us. We actively manage country risk exposure through a comprehensive risk management framework that combines credit and market fundamentals and allows us to effectively identify, monitor and limit country risk. Country risk exposure before and after hedging is monitored and managed.

Our obligor credit evaluation process may also identify indirect exposures, whereby an obligor has vulnerability or exposure to another country or jurisdiction. Examples of indirect exposures include mutual funds that invest in a single country, offshore companies whose assets reside in another country to that of the offshore jurisdiction and finance company subsidiaries of corporations. Indirect exposures identified through the credit evaluation process may result in a reclassification of country risk.

We conduct periodic stress testing that seeks to measure the impact on our credit and market exposures of shocks stemming from negative economic or political scenarios. When deemed appropriate by our risk managers, the stress test scenarios include possible contagion effects. Second order

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risks such as the impact for core European banks of their peripheral exposures may also be considered. This analysis, and results of the stress tests, may result in the amendment of limits or exposure mitigation.

In addition to our country risk exposure, we disclose our cross-border risk exposure in "Financial Statements and Supplementary Data-Financial Data Supplement (Unaudited)." It is based on the FFIEC's regulatory guidelines for reporting cross-border information and represents the amounts that we may not be able to obtain from a foreign country due to country-specific events, including unfavorable economic and political conditions, economic and social instability, and changes in government policies.

There can be substantial differences between our country risk exposure and cross-border risk exposure. For instance, unlike the cross-border risk exposure, our country risk exposure includes the effect of certain risk mitigants. In addition, the basis for determining the domicile of the country risk exposure is different from the basis for determining the cross-border risk exposure. Cross-border risk exposure is reported based on the country of jurisdiction for the obligor or guarantor. For country risk exposure, we consider factors in addition to that of country of jurisdiction, including physical location of operations or assets, location and source of cash flows/revenues and location of collateral (if applicable) in order to

determine the basis for country risk exposure. Furthermore, cross-border risk exposure incorporates CDS only where protection is purchased, while country risk exposure incorporates CDS where protection is purchased or sold.

Our sovereign exposures consist of financial instruments entered into with sovereign and local governments. Our non-sovereign exposures consist of exposures to primarily corporations and financial institutions. The following table shows our 10 largest non-U.S. country risk net exposures at December 31, 2017.

Index credit derivatives are included in the country risk exposure table. Each reference entity within an index is allocated to that reference entity's country of risk. Index exposures are allocated to the underlying reference entities in proportion to the notional weighting of each reference entity in the index, adjusted for any fair value receivable/payable for that reference entity. Where credit risk crosses multiple jurisdictions, for example, a CDS purchased from an issuer in a specific country that references bonds issued by an entity in a different country, the fair value of the CDS is reflected in the Net Counterparty Exposure column based on the country of the CDS issuer. Further, the notional amount of the CDS adjusted for the fair value of the receivable/payable is reflected in the Net Inventory column based on the country of the underlying reference entity.

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Top Ten Country Exposures at December 31, 2017