MS Q1 2017 10-Q

Morgan Stanley (MS) SEC Quarterly Report (10-Q) for Q2 2017

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

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

OR

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

EXCHANGE ACT OF 1934

Commission File Number 1-11758

(Exact Name of Registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

1585 Broadway

New York, NY 10036

(Address of principal executive offices, including zip code)

36-3145972

(I.R.S. Employer Identification No.)

(212) 761-4000

(Registrant's telephone number, including area code)

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

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in 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 the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of July 31, 2017, there were 1,836,580,691 shares of the Registrant's Common Stock, par value $0.01 per share, outstanding.

Table of Contents

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended June 30, 2017

Table of Contents Part Item Page

Financial Information

I 1

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

2 1

Introduction

1

Executive Summary

2

Business Segments

7

Supplemental Financial Information and Disclosures

18

Accounting Development Updates

18

Critical Accounting Policies

19

Liquidity and Capital Resources

19

Quantitative and Qualitative Disclosures about Market Risk

3 31

Controls and Procedures

4 41

Report of Independent Registered Public Accounting Firm

42

Financial Statements

1 43

Consolidated Financial Statements and Notes

43

Consolidated Income Statements (Unaudited)

43

Consolidated Comprehensive Income Statements (Unaudited)

44

Consolidated Balance Sheets (Unaudited at June 30, 2017)

45

Consolidated Statements of Changes in Total Equity (Unaudited)

46

Consolidated Cash Flow Statements (Unaudited)

47

Notes to Consolidated Financial Statements (Unaudited)

48

   1. Introduction and Basis of Presentation

48

   2. Significant Accounting Policies

49

  3. Fair Values

50

   4. Derivative Instruments and Hedging Activities

62

  5. Investment Securities

67

  6. Collateralized Transactions

71

   7. Loans and Allowance for Credit Losses

73

  8. Equity Method Investments

76

  9. Deposits

76

10. Long-Term Borrowings and Other Secured Financings

77

11. Commitments, Guarantees and Contingencies

77

12. Variable Interest Entities and Securitization Activities

82

13. Regulatory Requirements

85

14. Total Equity

87

15. Earnings per Common Share

89

16. Interest Income and Interest Expense

90

17. Employee Benefit Plans

90

18. Income Taxes

90

19. Segment and Geographic Information

91

20. Subsequent Events

92

Financial Data Supplement (Unaudited)

93

Other Information

II 96

Legal Proceedings

1 96

Unregistered Sales of Equity Securities and Use of Proceeds

2 98

Exhibits

6 98

Signatures

99

Exhibit Index

E-1

i

Table of Contents

Available Information

We file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission (the "SEC"). You may read and copy any document we file with the SEC at the SEC's public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site, 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 (the "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 Communication with the Board of Directors;

Policy Regarding Director Candidates Recommended by Shareholders;

Policy Regarding Corporate Political Activities;

Policy Regarding Shareholder Rights Plan;

Equity Ownership Commitment;

Code of Ethics and Business Conduct;

Code of Conduct;

Integrity Hotline Information; and

Environmental and Social Policies.

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

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Table of Contents

Financial Information

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

Introduction

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

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, financing extended to equities and commodities customers, and loans to 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" immediately preceding Part I, Item 1, "Business-Competition" and "Business-Supervision and Regulation" in Part I, Item 1, "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 (the "2016 Form 10-K") and "Liquidity and Capital Resources-Regulatory Requirements" herein.

1 June 2017 Form 10-Q
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

($ in millions)

Earnings per Common Share 1

1.

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

We reported net revenues of $9,503 million in the three months ended June 30, 2017 ("current quarter," or "2Q 2017"), compared with $8,909 million in the three months ended June 30, 2016 ("prior year quarter," or "2Q 2016"). For the current quarter, net income applicable to Morgan Stanley was $1,757 million, or $0.87 per diluted common share, compared with $1,582 million, or $0.75 per diluted common share, in the prior year quarter.

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

Non-interest Expenses

($ in millions)

Compensation and benefits expenses of $4,252 million in the current quarter and $8,718 million in the current year period increased 6% and 13%, respectively, from $4,015 million in the prior year quarter and $7,698 million in the prior year period, primarily due to increases in incentive compensation driven mainly by higher revenues and

June 2017 Form 10-Q 2
Table of Contents
Management's Discussion and Analysis

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

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

Expense Efficiency Ratio

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

Return on Average Common Equity

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

year period. The annualized ROE was 8.3% in the prior year quarter and 7.2% in the prior year period (see "Selected Non-Generally Accepted Accounting Principles ("Non-GAAP") Financial Information" herein).

Business Segment Results

Net Revenues by Segment 1, 2

($ in millions)

3 June 2017 Form 10-Q
Table of Contents
Management's Discussion and Analysis

Net Income Applicable to Morgan Stanley by Segment 2, 3

($ in millions)

1.

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

2.

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

3.

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

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

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

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

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

Net Revenues by Region 1

($ in millions)

EMEA-Europe, Middle East and Africa

1.

For a discussion of how the geographic breakdown for net revenues is determined, see Note 21 to the consolidated financial statements in Item 8 of the 2016 Form 10-K.

June 2017 Form 10-Q 4
Table of Contents
Management's Discussion and Analysis

Selected Financial Information and Other Statistical Data

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

Income from continuing operations applicable to Morgan Stanley

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

Income (loss) from discontinued operations applicable to Morgan Stanley

(5 (4 (27 (7

Net income applicable to Morgan Stanley

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

Preferred stock dividends and other

170 157 260 235

Earnings applicable to Morgan Stanley common shareholders

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

Effective income tax rate from continuing operations

32.0 33.5 30.5 33.4

At June 30,

2017

At December 31,

2016

Capital ratios (Transitional-Advanced) 1

Common Equity Tier 1 capital ratio

16.6 16.9

Tier 1 capital ratio

19.0 19.0

Total capital ratio

21.9 22.0

Capital ratios (Transitional-Standardized) 1

Tier 1 leverage ratio 2

8.5 8.4

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

Loans 3

$ 97,639 $ 94,248

Total assets

$ 841,016 $ 814,949

Global Liquidity Reserve 4

$ 188,296 $ 202,297

Deposits

$ 144,913 $ 155,863

Long-term borrowings

$ 184,112 $ 164,775

Common shareholders' equity

$ 70,306 $ 68,530

Common shares outstanding

1,840 1,852

Book value per common share 5

$ 38.22 $ 36.99

Worldwide employees

56,187 55,311

1.

For a discussion of our regulatory capital ratios, see "Liquidity and Capital Resources-Regulatory Requirements" herein.

2.

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

3.

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

4.

For a discussion of Global Liquidity Reserve, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Liquidity Risk Management Framework-Global Liquidity Reserve" in Part II, Item 7 of the 2016 Form 10-K.

5.

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

Selected Non-Generally Accepted Accounting Principles ("Non-GAAP") Financial Information

We prepare our consolidated financial statements using accounting principles generally accepted in the United States of America ("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.

Non-GAAP Financial Measures by Business Segment

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

Pre-tax profit margin 1

Institutional Securities

30 33 32 29

Wealth Management

25 23 25 22

Investment Management

21 20 19 15

Consolidated

28 28 28 25

Average common equity 2

Institutional Securities

$ 40.2 $ 43.2 $ 40.2 $ 43.2

Wealth Management

17.2 15.3 17.2 15.3

Investment Management

2.4 2.8 2.4 2.8

Parent Company

10.1 7.7 9.7 7.3

Consolidated average common equity

$ 69.9 $ 69.0 $ 69.5 $ 68.6

Return on average common equity 2

Institutional Securities

8.5 8.0 9.9 6.4

Wealth Management

14.6 12.9 14.6 12.7

Investment Management

16.3 10.6 13.7 8.8

Consolidated

9.1 8.3 9.9 7.2

5 June 2017 Form 10-Q
Table of Contents
Management's Discussion and Analysis

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

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

$ in millions, except per

share data

2017 2016 2017 2016

Net income applicable to Morgan Stanley

U.S. GAAP

$ 1,757 $ 1,582 $ 3,687 $ 2,716

Impact of discrete tax provision 3

4 - 18 -

Net income applicable to Morgan Stanley, excluding discrete tax provision-non-GAAP

$ 1,761 $ 1,582 $ 3,705 $ 2,716

Earnings per diluted common share

U.S. GAAP

$ 0.87 $ 0.75 $ 1.87 $ 1.30

Impact of discrete tax provision 3

- - 0.01 -

Earnings per diluted common share, excluding discrete tax provision-non-GAAP

$ 0.87 $ 0.75 $ 1.88 $ 1.30

Effective income tax rate

U.S. GAAP

32.0 33.5 30.5 33.4

Impact of discrete tax provision 3

(0.1 )%  - (0.4 )%  -

Effective income tax rate from continuing

operations, excluding discrete

tax provision-non-GAAP

31.9 33.5 30.1 33.4

1.

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

2.

Average common equity for each business segment is determined at the beginning of each year using our Required Capital framework, an internal capital adequacy measure (see "Liquidity and Capital Resources-Regulatory Requirements-Attribution of Average Common Equity According to the Required Capital Framework" herein) and will remain fixed throughout the year until the next annual reset. Each business segment's return on average common equity equals annualized net income applicable to Morgan Stanley less an allocation of preferred dividends as a percentage of average common equity for that segment. Consolidated return on average common equity equals annualized consolidated net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity.

3.

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

Consolidated Non-GAAP Financial Measures

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

Average common equity 1, 2, 3

Unadjusted

$ 69.9 $ 69.0 $ 69.5 $ 68.6

Excluding DVA

70.5 69.1 70.1 68.7

Excluding DVA and discrete tax provision (benefit)

70.5 69.1 70.1 68.7

Return on average common equity 1, 2, 4, 5

Unadjusted

9.1 8.3 9.9 7.2

Excluding DVA

9.0 8.3 9.8 7.2

Excluding DVA and discrete tax provision (benefit)

9.0 8.3 9.8 7.2

Average tangible common equity 1, 2, 3 , 6

Unadjusted

$ 60.7 $ 59.5 $ 60.2 $ 59.1

Excluding DVA

61.3 59.6 60.8 59.2

Excluding DVA and discrete tax provision (benefit)

61.3 59.6 60.8 59.2

Return on average tangible common equity 1, 2, 5

Unadjusted

10.4 9.6 11.4 8.4

Excluding DVA

10.3 9.6 11.3 8.4

Excluding DVA and discrete tax provision (benefit)

10.4 9.6 11.3 8.4

Expense efficiency ratio 7

72.2 72.1 71.7 74.7

At June 30,
2017
At December 31,
2016

Tangible book value per common share 6

$ 33.24 $ 31.98

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

1.

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

2.

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

3.

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

4.

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

5.

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

June 2017 Form 10-Q 6
Table of Contents
Management's Discussion and Analysis

6.

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

7.

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

Return on Equity Target

We have an ROE Target of 9% to 11% to be achieved by 2017. Our ROE Target and the related strategies and goals 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; legal expenses and the ability to reduce expenses in general; capital levels; and discrete tax items. For further information on our ROE Target and related assumptions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Executive Summary-Return on Equity Target" in Part II, Item 7 of the 2016 Form 10-K.

Business Segments

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

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

Net Revenues, Compensation Expense and Income Taxes

For discussions of our net revenues, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Business Segments-Net Revenues" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Business Segments-Net Revenues by Segment" in Part II, Item 7 of the 2016 Form 10-K. For a discussion of our compensation expense, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Business Segments-Compensation Expense" in Part II, Item 7 of the 2016 Form 10-K. For a discussion of our Income Tax expense, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Business Segments-Income Taxes" in Part II, Item 7 of the 2016 Form 10-K.

7 June 2017 Form 10-Q
Table of Contents
Management's Discussion and Analysis

Institutional Securities

Income Statement Information

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

Revenues

Investment banking

$ 1,413 $ 1,108 28%

Trading

2,725 2,498 9%

Investments

37 76 (51)%

Commissions and fees

630 607 4%

Asset management, distribution and administration fees

89 69 29%

Other

126 138 (9)%

Total non-interest revenues

5,020 4,496 12%

Interest income

1,243 966 29%

Interest expense

1,501 884 70%

Net interest

(258 82 N/M

Net revenues

4,762 4,578 4%

Compensation and benefits

1,667 1,625 3%

Non-compensation expenses

1,652 1,447 14%

Total non-interest expenses

3,319 3,072 8%

Income from continuing operations before income taxes

1,443 1,506 (4)%

Provision for income taxes

413 453 (9)%

Income from continuing operations

1,030 1,053 (2)%

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

(5 (4 (25)%

Net income

1,025 1,049 (2)%

Net income applicable to noncontrolling interests

33 61 (46)%

Net income applicable to Morgan Stanley

$ 992 988 -%

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

Revenues

Investment banking

$ 2,830 $ 2,098 35%

Trading

5,737 4,389 31%

Investments

103 108 (5)%

Commissions and fees

1,250 1,262 (1)%

Asset management, distribution and administration fees

180 142 27%

Other

299 142 111%

Total non-interest revenues

10,399 8,141 28%

Interest income

2,367 2,019 17%

Interest expense

2,852 1,868 53%

Net interest

(485 151 N/M

Net revenues

9,914 8,292 20%

Compensation and benefits

3,537 3,007 18%

Non-compensation expenses

3,204 2,871 12%

Total non-interest expenses

6,741 5,878 15%

Income from continuing operations before income taxes

3,173 2,414 31%

Provision for income taxes

872 728 20%

Income from continuing operations

2,301 1,686 36%

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

(27 (7 N/M

Net income

2,274 1,679 35%

Net income applicable to noncontrolling interests

68 100 (32)%

Net income applicable to Morgan Stanley

$ 2,206 $ 1,579 40%

N/M-Not Meaningful

June 2017 Form 10-Q 8
Table of Contents
Management's Discussion and Analysis

Investment Banking

Investment Banking Revenues

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

Advisory

$ 504 $ 497 1%

Underwriting revenues:

Equity

405 266 52%

Fixed income

504 345 46%

Total underwriting

909 611 49%

Total investment banking

$ 1,413 $ 1,108 28%

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

Advisory

$ 1,000 $ 1,088 (8)%

Underwriting revenues:

Equity

795 426 87%

Fixed income

1,035 584 77%

Total underwriting

1,830 1,010 81%

Total investment banking

$ 2,830 $ 2,098 35%

Investment Banking Volumes

Three Months Ended
June 30,
Six Months Ended
June 30,
$ in billions 2017 1 2016 1 2017 1 2016 1

Completed mergers and acquisitions 2

$   205 $   241 $   356 $   538

Equity and equity-related offerings 3

20 14 30 21

Fixed income offerings 4

67 62 142 113

1.

Source: Thomson Reuters, data at July 12, 2017. Completed mergers and acquisitions volumes are based on full credit to each of the advisors in a transaction. Equity and equity-related offerings and fixed income offerings are based on full credit for single book managers and equal credit for joint book managers. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal or change in the value of a transaction.

2.

Amounts include transactions of $100 million or more.

3.

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

4.

Amounts 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.

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

Investment banking revenues of $1,413 million in the current quarter and $2,830 million in the current year period increased 28% and 35% from the comparable prior year periods. The increase in the current quarter primarily reflected higher underwriting revenues. The increase in the current year period was due to higher underwriting revenues, partially offset by lower advisory revenues.

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

Equity underwriting revenues increased in the current quarter and current year period as a result of higher global market volumes in both follow-on and initial public offerings (see Investment Banking Volumes table). In the current year period, equity underwriting revenues also increased as a result of higher fee realizations. Fixed income underwriting revenues increased in the current quarter and current year period primarily due to higher non-investment grade loan fees and bond fees.

Sales and Trading Net Revenues

By Income Statement Line Item

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

Trading

$   2,725 $   2,498 9%

Commissions and fees

630 607 4%

Asset management, distribution and administration fees

89 69 29%

Net interest

(258 82 N/M

Total

$ 3,186 $ 3,256 (2)%

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

Trading

$   5,737 $   4,389 31%

Commissions and fees

1,250 1,262 (1)%

Asset management, distribution and administration fees

180 142 27%

Net interest

(485 151 N/M

Total

$ 6,682 $ 5,944 12%

N/M-Not Meaningful

9 June 2017 Form 10-Q
Table of Contents
Management's Discussion and Analysis

By Business

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

Equity

$ 2,155 $ 2,145 -%

Fixed income

1,239 1,297 (4)%

Other

(208 (186 (12)%

Total

$ 3,186 $ 3,256 (2)%

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

Equity

$ 4,171 $ 4,201 (1)%

Fixed income

2,953 2,170 36%

Other

(442 (427 (4)%

Total

$ 6,682 $ 5,944 12%

Sales and Trading Activities-Equity and Fixed Income

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

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

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

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

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

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

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

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

Sales and Trading Net Revenues-Equity and Fixed Income

Three Months Ended
June 30, 2017
$ in millions Trading Fees 1 Net
Interest 2
Total

Financing

$ 1,166 $ 88 $ (227 $ 1,027

Execution services

601 580 (53 1,128

Total Equity

$ 1,767 $ 668 $ (280 $ 2,155

Total Fixed Income

$ 1,114 $ 48 $ 77 $ 1,239

Three Months Ended
June 30, 2016
$ in millions Trading Fees 1 Net
Interest 2
Total

Financing

$ 1,039 $ 90 $ (82 $ 1,047

Execution services

576 549 (27 1,098

Total Equity

$ 1,615 $ 639 $ (109 $ 2,145

Total Fixed Income

$ 1,018 $ 37 $ 242 $ 1,297

Six Months Ended
June 30, 2017
$ in millions Trading Fees 1 Net
Interest 2
Total

Financing

$ 2,097 $ 177 $ (415 $ 1,859

Execution services

1,265 1,148 (101 2,312

Total Equity

$ 3,362 $ 1,325 $ (516 $ 4,171

Total Fixed Income

$ 2,712 $ 102 $ 139 $ 2,953

Six Months Ended
June 30, 2016
$ in millions Trading Fees 1 Net
Interest 2
Total

Financing

$ 1,925 $ 176 $ (42 $ 2,059

Execution services

1,085 1,149 (92 2,142

Total Equity

$ 3,010 $ 1,325 $ (134 $ 4,201

Total Fixed Income

$ 1,573 $ 77 $ 520 $ 2,170

1.

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

2.

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

June 2017 Form 10-Q 10
Table of Contents
Management's Discussion and Analysis

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

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

Sales and Trading Net Revenues during the Current Quarter

Equity

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

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

Execution services increased 3% from the prior year quarter primarily reflecting higher revenues from derivative products and improved commissions and fees driven by increased client activity, partially offset by higher net interest costs.

Fixed Income

Fixed income net revenues of $1,239 million in the current quarter were 4% lower than the prior year quarter, driven by a decrease in Net interest revenues across all three product areas, partially offset by an increase in Trading revenues.

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

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

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

Sales and Trading Net Revenues during the Current Year Period

Equity

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

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

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

Fixed Income

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

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

Global macro products increased due to a more favorable environment across products compared with the prior year period when results were impacted by inventory losses. This was partially offset by higher interest costs in the current year period which resulted from interest rate products inventory management.

Commodities products and Other increased due to improved energy trading and the absence of losses from counterparty risk management incurred in the prior year period.

11 June 2017 Form 10-Q
Table of Contents
Management's Discussion and Analysis

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

Investments

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

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

Other

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

Non-interest Expenses

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

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

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

Other Items

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

June 2017 Form 10-Q 12
Table of Contents
Management's Discussion and Analysis

Wealth Management

Income Statement Information

Three Months Ended
June 30,

% Change

$ in millions 2017 2016 1

Revenues

Investment banking

$ 135 $ 123 10%

Trading

207 252 (18)%

Investments

1 -   N/M

Commissions and fees

424 423 -%

Asset management, distribution and administration fees

2,302 2,082 11%

Other

73 102 (28)%

Total non-interest revenues

3,142 2,982 5%

Interest income

1,114 920 21%

Interest expense

105 91 15%

Net interest

1,009 829 22%

Net revenues

4,151 3,811 9%

Compensation and benefits

2,297 2,152 7%

Non-compensation expenses

797 800 -%

Total non-interest expenses

3,094 2,952 5%

Income from continuing operations before income taxes

1,057 859 23%

Provision for income taxes

392 343 14%

Net income applicable to Morgan Stanley

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

% Change

$ in millions 2017 2016 1

Revenues

Investment banking

$ 280 $ 244 15%

Trading

445 446 -%

Investments

2 (2 200%

Commissions and fees

864 835 3%

Asset management, distribution and administration fees

4,486 4,136 8%

Other

129 160 (19)%

Total non-interest revenues

6,206 5,819 7%

Interest income

2,193 1,834 20%

Interest expense

190 174 9%

Net interest

2,003 1,660 21%

Net revenues

8,209 7,479 10%

Compensation and benefits

4,614 4,240 9%

Non-compensation expenses

1,565 1,594 (2)%

Total non-interest expenses

6,179 5,834 6%

Income from continuing operations before income taxes

2,030 1,645 23%

Provision for income taxes

718 636 13%

Net income applicable to Morgan Stanley

$ 1,312 $ 1,009 30%

N/M – Not Meaningful

1.

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

Statistical Data

Financial Information and Statistical Data

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

Client assets

$ 2,239 $ 2,103

Fee-based client assets 1

$ 962 $ 877

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

43% 42%

Client liabilities 2

$ 77 $ 73

Bank deposit program

$ 139 $ 153

Investment securities portfolio

$ 53.5 $ 63.9

Loans and lending commitments

$ 74.2 $ 68.7

Wealth Management representatives

15,777 15,763

Three Months Ended
June 30,
  2017       2016    

Annualized revenues per representative

(dollars in thousands) 3

$ 1,052 $ 959

Client assets per representative

(dollars in millions) 4

$ 142 $ 128

Fee-based asset flows 5

(dollars in billions)

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

Annualized revenues per representative

(dollars in thousands) 3

$ 1,041 $ 941

Client assets per representative

(dollars in millions) 4

$ 142 $ 128

Fee-based asset flows 5

(dollars in billions)

$ 38.7 $ 17.9

1.

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

2.

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

3.

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

4.

Client assets per representative equal 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.

13 June 2017 Form 10-Q
Table of Contents
Management's Discussion and Analysis

Transactional Revenues

Three Months Ended
June 30,

% Change

$ in millions 2017 2016

Investment banking

$ 135 $ 123 10%

Trading

207 252 (18)%

Commissions and fees

424 423 -%

Total

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

% Change

$ in millions 2017 2016

Investment banking

$ 280 $ 244 15%

Trading

445 446 -%

Commissions and fees

864 835 3%

Total

$ 1,589 $ 1,525 4%

Net Revenues

Transactional Revenues

Transactional revenues of $766 million in the current quarter decreased 4% from the prior year quarter primarily reflecting lower Trading revenues, partially offset by higher Investment banking revenues.

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

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

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

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

Asset Management

Asset management, distribution and administration fees of $2,302 million in the current quarter and $4,486 million in the current year period increased 11% from the prior year quarter and increased 8% from the prior year period. The increase in each respective period is primarily due to market appreciation and net positive flows, partially offset by lower average client fee rates. See "Fee-Based Client Assets Activity and Average Fee Rate by Account Type" herein.

Net Interest

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

Other

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

Non-interest Expenses

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

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

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

June 2017 Form 10-Q 14
Table of Contents
Management's Discussion and Analysis

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

For a description of fee-based client assets, including descriptions for the fee based client asset types and rollforward items in the following tables, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Business Segments-Wealth Management-Fee-Based Client Assets Activity and Average Fee Rate by Account Type" in Part II, Item 7 of the 2016 Form 10-K.

At
March 31,

2017

Inflows Outflows

Market

Impact

At
June 30,

2017

Average for the
Three Months Ended
June 30, 2017
$ in billions, Fee Rate in bps Fee Rate 1

Separately managed accounts 2, 3

$ 230 $ 8 $ (7 $ 6 $ 237 17

Unified managed accounts 3

217 13 (7 5 228 98

Mutual fund advisory

21 - (1 1 21 118

Representative as advisor

133 10 (8 3 138 84

Representative as portfolio manager

305 23 (11 4 321 96

Subtotal

$ 906 $ 54 $ (34 $ 19 $ 945 77

Cash management

21 2 (6 - 17 6

Total fee-based client assets

$ 927 $ 56 $ (40 $ 19 $ 962 75
At
March 31,

2016

Inflows

Outflows

Market

Impact

At
June 30,

2016

Average for the
Three Months Ended
June 30, 2016
$ in billions, Fee Rate in bps Fee Rate 1

Separately managed accounts 2

$ 278 $ 9 $ (7 $ (1 $ 279 37

Unified managed accounts

112 11 (5 2 120 106

Mutual fund advisory

24 - (1 - 23 119

Representative as advisor

114 8 (8 3 117 85

Representative as portfolio manager

255 17 (12 5 265 99

Subtotal

$ 783 $ 45 $ (33 $ 9 $ 804 78

Cash management

15 4 (3 - 16 6

Total fee-based client assets

$ 798 $ 49 $ (36 $ 9 $ 820 76
At
December 31,

2016

Inflows

Outflows

Market

Impact

At
June 30,

2017

Average for the
Six Months Ended
June 30, 2017
$ in billions, fee rate in bps Fee Rate 1

Separately managed accounts 2, 3

$ 222 $ 16 $ (11 $ 10 $ 237 16

Unified managed accounts 3

204 25 (15 14 228 98

Mutual fund advisory

21 1 (3 2 21 118

Representative as advisor

125 19 (14 8 138 85

Representative as portfolio manager

285 42 (21 15 321 97

Subtotal

$ 857 $ 103 $ (64 $ 49 $ 945 76

Cash management

20 5 (8 - 17 6

Total fee-based client assets

$ 877 $ 108 $ (72 $ 49 $ 962 75
At
December 31,

2015

Inflows

Outflows

Market

Impact

At
June 30,

2016

Average for the
Six Months Ended
June 30, 2016
$ in billions, Fee Rate in bps Fee Rate 1

Separately managed accounts 2

$ 283 $ 17 $ (17 $ (4 $ 279 37

Unified managed accounts

105 21 (9 3 120 107

Mutual fund advisory

25 1 (3 - 23 119

Representative as advisor

115 13 (14 3 117 86

Representative as portfolio manager

252 31 (22 4 265 100

Subtotal

$ 780 $ 83 $ (65 $ 6 $ 804 77

Cash management

15 7 (6 - 16 6

Total fee-based client assets

$ 795 $ 90 $ (71 $ 6 $ 820 76

bps-Basis points

1.

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

2.

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

3.

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

15 June 2017 Form 10-Q
Table of Contents
Management's Discussion and Analysis

Investment Management

Income Statement Information

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

Revenues

Trading

$ (3 $ 5 (160 )% 

Investments

125 50 150

Asset management, distribution and administration fees

539 517 4

Other

4 9 (56 )% 

Total non-interest revenues

665 581 14

Interest income

1 3 (67 )% 

Interest expense

1 1 -

Net interest

- 2 (100 )% 

Net revenues

665 583 14

Compensation and benefits

288 238 21

Non-compensation expenses

235 227 4

Total non-interest expenses

523 465 12

Income from continuing operations before income taxes

142 118 20

Provision for income taxes

41 37 11

Net income

101 81 25

Net income applicable to noncontrolling interests

1 3 (67 )% 

Net income applicable to Morgan Stanley

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

Revenues

Investment banking

$ - $ 1 (100 )% 

Trading

(14 (5 (180 )% 

Investments

223 (14 N/M

Commissions and fees

- 3 (100 )% 

Asset management, distribution and administration fees

1,056 1,043 1

Other

8 31 (74 )% 

Total non-interest revenues

1,273 1,059 20

Interest income

2 4 (50 )% 

Interest expense

1 3 (67 )% 

Net interest

1 1 -

Net revenues

1,274 1,060 20

Compensation and benefits

567 451 26

Non-compensation expenses

462 447 3

Total non-interest expenses

1,029 898 15

Income from continuing operations before income taxes

245 162 51

Provision for income taxes

71 47 51

Net income

174 115 51

Net income (loss) applicable to noncontrolling interests

7 (13 (154 )% 

Net income applicable to Morgan Stanley

$ 167 $ 128 30

N/M – Not Meaningful

Net Revenues

Investments    

Investments gains of $125 million in the current quarter compared with Investment gains of $50 million in the prior quarter reflected higher realized gains and higher carried interest in Infrastructure and Private Equity investments.

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

Asset Management, Distribution and Administration Fees    

Asset management, distribution and administration fees of $539 million increased 4% in the current quarter compared to the prior year quarter primarily as a result of higher average assets under management or supervision ("AUM") in Equity and Fixed income products, with higher performance fees, partially offset by lower fee rates in Liquidity products and Alternative/Other products.

Asset management, distribution and administration fees of $1,056 million were relatively unchanged in the current year period, reflecting higher average AUM in Equity and Fixed income products, essentially offset by lower fee rates in Alternative/Other products.

See "AUM and Average Fee Rate by Asset Class" herein.

Non-interest Expenses

Non-interest expenses of $523 million in the current quarter and $1,029 million in the current year period increased 12% and 15% from the comparable periods primarily due to higher Compensation and benefit expenses.

Compensation and benefits expenses increased in the current quarter and current year period principally due to an increase in deferred compensation associated with carried interest.

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

June 2017 Form 10-Q 16
Table of Contents
Management's Discussion and Analysis

Assets Under Management or Supervision

AUM and Average Fee Rate by Asset Class

For a description of the rollforward items in the following tables, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Business Segments-Investment Management-Assets Under Management or Supervision" in Part II, Item 7 of the 2016 Form 10-K.

At

March 31,
2017
Inflows Outflows

Market

Impact

Other 1

At

June 30,
2017

Average for the

Three Months Ended

June 30, 2017

$ in billions, Fee Rate in bps

Total

AUM

Fee

Rate

Equity

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

Fixed income

62 8 (6 1 1 66 64 33

Liquidity

153 308 (308 -   1 154 153 17

Alternative / Other products

119 6 (6 3 (1 121 120 70

Total assets under management or supervision

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

Shares of minority stake assets

7 8 8

At

March 31,

2016

Inflows Outflows Market
Impact
Other 1

At

June 30,
2016

Average for the

Three Months Ended

June 30, 2016

$ in billions, Fee Rate in bps

Total

AUM

Fee

Rate

Equity

$ 81 $ 5 $ (6 $ 1 $ - $ 81 $ 81 74

Fixed income

62 7 (8 - - 61 61 32

Liquidity

146 291 (289 1 - 149 146 19

Alternative / Other products

116 9 (10 1 (1 115 116 74

Total assets under management or supervision

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

Shares of minority stake assets

8 8 8

At

December 31,
2016
Inflows Outflows Market
Impact
Other 1

At

June 30,
2017

Average for the

Six Months Ended

June 30, 2017

$ in billions, Fee Rate in bps

Total

AUM

Fee

Rate

Equity

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

Fixed income

60 13 (11 2 2 66 63 33

Liquidity

163 636 (646 - 1 154 155 18

Alternative / Other products

115 13 (10 4 (1 121 119 70

Total assets under management or supervision

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

Shares of minority stake assets

8 8 8

At

December 31,
2015
Inflows Outflows Market
Impact
Other 1

At

June 30,
2016

Average for the

Six Months Ended

June 30, 2016

$ in billions, Fee Rate in bps

Total

AUM

Fee

Rate

Equity

$ 83 $ 10 $ (12 $ - - $ 81 $ 80 73

Fixed income

60 12 (14 2 1 61 60 32

Liquidity

149 627 (627 - - 149 148 18

Alternative / Other products

114 14 (14 1 - 115 115 77

Total assets under management or supervision

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

Shares of minority stake assets

8 8 8

bps-Basis points

1.

Includes distributions and foreign currency impact.

17 June 2017 Form 10-Q
Table of Contents
Management's Discussion and Analysis

Supplemental Financial Information and Disclosures

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 or lending commitments to corporate clients. The lending activities in the Wealth Management business segment primarily include securities-based lending that allows clients to borrow 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 Wealth Management business segment's client base. For a further discussion of our credit risks, see "Quantitative and Qualitative Disclosures about Market Risk-Risk Management-Credit Risk." For further discussion about loans and lending commitments, see Notes 7 and 11 to the consolidated financial statements.

U.S. Bank Subsidiaries' Supplemental Financial Information Excluding Transactions with the Parent Company

$ in billions

At
June 30,

2017

At
December 31,
2016

U.S. Bank Subsidiaries assets

$ 175.4 $ 180.7

U.S. Bank Subsidiaries investment securities portfolio:

Investment securities-AFS

38.3 50.3

Investment securities-HTM

15.3 13.6

Total

$ 53.6 $ 63.9

Wealth Management U.S. Bank Subsidiaries data

Securities-based lending and other loans 1

$ 39.4 $ 36.0

Residential real estate loans

25.7 24.4

Total

$ 65.1 $ 60.4

Institutional Securities U.S. Bank Subsidiaries data

Corporate loans

$ 20.0 $ 20.3

Wholesale real estate loans

10.7 9.9

Total

$ 30.7 $ 30.2

AFS-Available for sale

HTM-Held to maturity

1.

Other loans primarily include tailored lending.

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

Income Tax Matters

Effective Tax Rate

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

From continuing operations

32.0 33.5 30.5 33.4

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

Accounting Development Updates

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

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

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

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

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

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

June 2017 Form 10-Q 18
Table of Contents
Management's Discussion and Analysis

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

Leases.     This accounting update requires lessees to recognize on 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.

Financial Instruments–Credit Losses.     This accounting update impacts the impairment model for certain financial assets measured at amortized cost such as loans held for investment and HTM securities. The amendments in this update will accelerate the recognition of credit losses by replacing the incurred loss impairment methodology with a current expected credit loss ("CECL") methodology that requires an estimate of expected credit losses over the entire life of the financial asset. Additionally, although the CECL methodology will not apply to AFS debt securities, the update will require establishment of an allowance to reflect impairment of these securities, thereby eliminating the concept of a permanent write-down. This update is effective as of January 1, 2020.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions (see Note 1 to the consolidated financial statements). We believe that of our significant accounting policies (see Note 2 to the consolidated financial statements in Item 8 of the 2016 Form 10-K and Note 2 to the consolidated financial statements), the fair value, goodwill and intangible assets, legal and regulatory contingencies and income taxes policies involve a higher degree of judgment and complexity. For a further discussion about our critical accounting policies, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in Part II, Item 7 of the 2016 Form 10-K.

Liquidity and Capital Resources

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

The Balance Sheet

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

We establish balance sheet thresholds at the consolidated and business segment levels. We monitor balance sheet utilization and review variances resulting from business activity or market fluctuations. On a regular basis, we review current performance versus established thresholds and assess the need 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 June 30, 2017

$ in millions

Institutional
Securities
Wealth
Management
Investment
Management
Total

Assets

Cash and cash equivalents 1

$ 30,203 $ 14,391 $ 65 $ 44,659

Trading assets at fair value

288,255 77 2,470 290,802

Investment securities

18,077 53,499 - 71,576

Securities purchased under agreements to resell

90,490 6,918 - 97,408

Securities borrowed

126,428 294 - 126,722

Customer and other receivables

35,954 18,380 583 54,917

Loans, net of allowance

32,528 65,106 5 97,639

Other assets 2

43,668 12,070 1,555 57,293

Total assets

$ 665,603 $ 170,735 $ 4,678 $ 841,016

19 June 2017 Form 10-Q
Table of Contents
Management's Discussion and Analysis

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

Assets

Cash and cash equivalents 1

$ 25,291 $ 18,022 $ 68 $ 43,381

Trading assets at fair value

259,680 64 2,410 262,154

Investment securities

16,222 63,870 - 80,092

Securities purchased under agreements to resell

96,735 5,220 - 101,955

Securities borrowed

124,840 396 - 125,236

Customer and other receivables

26,624 19,268 568 46,460

Loans, net of allowance

33,816 60,427 5 94,248

Other assets 2

45,941 13,868 1,614 61,423

Total assets

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

1.

Cash and cash equivalents include cash and due from banks and interest bearing deposits with banks.

2.

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

A substantial portion of total assets consists of liquid marketable securities and short-term receivables arising principally from sales and trading activities in the Institutional Securities business segment. Total assets increased to $841.0 billion at June 30, 2017 from $814.9 billion at December 31, 2016, primarily driven by an increase in trading inventory within Institutional Securities. The increase reflects higher market values for corporate equities compared with December 31, 2016, along with increased trading activity across fixed income products including U.S. government and agency securities and Other sovereign government obligations.

Securities Repurchase Agreements and Securities Lending

Securities borrowed or securities purchased under agreements to resell and securities loaned or securities sold under agreements to repurchase are treated as collateralized financings (see Note 2 to the consolidated financial statements in the 2016 Form 10-K and Note 6 to the consolidated financial statements).

Collateralized Financing Transactions

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

Securities purchased under agreements to resell and Securities borrowed 1

$ 224,130 $ 227,191

Securities sold under agreements to repurchase and Securities loaned 1

$ 67,559 $ 70,472

Securities received as collateral 2

$ 14,408 $ 13,737

Daily Average Balance

Three Months Ended

$ in millions

June 30,
2017
December 31,
2016

Securities purchased under agreements to resell and Securities borrowed 1

$ 220,045 $ 224,355

Securities sold under agreements to repurchase and Securities loaned 1

$ 72,040 $ 68,908
1.

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

2.

Included in Trading assets in the consolidated balance sheets.

Customer Securities Financing

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

Liquidity Risk Management Framework

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

The core components of our Liquidity Risk Management Framework are the Required Liquidity Framework, Liquidity Stress Tests and the Global Liquidity Reserve ("GLR"), which support our target liquidity profile. For further discussion about the Firm's Required Liquidity Framework and Liquidity Stress Tests, see "Management's Discussion and Analysis of Financial Condition and Results of Operations- Liquidity and Capital Resources-Liquidity Risk Management Framework" in Part II, Item 7 of the 2016 Form 10-K.

At June 30, 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 global liquidity reserves pursuant to our Required Liquidity Framework. For further discussion of our GLR, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Liquidity Risk Management Framework-Global Liquidity Reserve" in Part II, Item 7 of the 2016 Form 10-K.

June 2017 Form 10-Q 20
Table of Contents
Management's Discussion and Analysis

GLR by Type of Investment

$ in millions

At

June 30,

2017

At

December 31,
2016

Cash deposits with banks

$ 10,057 $ 8,679

Cash deposits with central banks

29,427 30,568

Unencumbered highly liquid securities:

U.S. government obligations

71,336 78,615

U.S. agency and agency mortgage-backed securities

52,967 46,360

Non-U.S. sovereign obligations 1

21,290 30,884

Other investment grade securities

3,219 7,191

Total

$ 188,296 $ 202,297

1.

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

June 30,
2017

At

December 31,
2016
Daily Average
Balance
Three Months
Ended
$ in millions June 30,
2017

Bank legal entities

Domestic

$ 62,897 $ 74,411 $ 65,976

Foreign

4,145 4,238 3,949

Total Bank legal entities

67,042 78,649 69,925

Non-Bank legal entities

Domestic:

Parent Company

48,987 66,514 56,070

Non-Parent Company

32,953 18,801 31,557

Total Domestic

81,940 85,315 87,627

Foreign

39,314 38,333 42,620

Total Non-Bank legal entities

121,254 123,648 130,247

Total

$ 188,296 $ 202,297 $ 200,172

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

Regulatory Liquidity Framework

Liquidity Coverage Ratio

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

HQLA by Type of Asset

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

Cash 1

$ 29,608 $ 30,569

Securities 2

138,666 129,524

Total 3

$ 168,274 $ 160,093

1.

Cash on deposit with central banks.

2.

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

3.

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

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

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

Net Stable Funding Ratio

The objective of the Net Stable Funding Ratio ("NSFR") 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 finalized the NSFR framework in 2014. In May 2016, the U.S. banking regulators issued a proposal to implement the NSFR in the U.S. If adopted as proposed, the requirements would apply to us and our U.S. Bank Subsidiaries beginning January 1, 2018. We continue to evaluate the potential impact of the proposal, which is subject to further rulemaking procedures following the closing of the public comment period in August 2016. Our preliminary estimates, based on the current proposal, indicate that actions will be necessary to meet the requirement, which we expect to accomplish by the effective date of the final rule. For an additional discussion of NSFR, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Regulatory Liquidity Framework-Net Stable Funding Ratio" in Part II, Item 7 of the 2016 Form 10-K.

21 June 2017 Form 10-Q
Table of Contents
Management's Discussion and Analysis

Funding Management

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

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

Secured Financing

For a discussion of our secured financing activities, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Funding Management-Secured Financing" in Part II, Item 7 of the 2016 Form 10-K.

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

Unsecured Financing

For a discussion of our unsecured financing activities, see "Management's Discussion and Analysis of Financing Condition and Results of Operations-Liquidity and Capital Resources-Funding Management-Unsecured Financing" in Part II, Item 7 of the 2016 Form 10-K and see Note 4 to the consolidated financial statements.

Deposits

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

Deposits

$ 144,913 $ 155,863

The majority of deposits in our U.S. Bank Subsidiaries are sourced from our retail brokerage accounts and are considered to have stable, low-cost funding characteristics. Available funding sources to our U.S. Bank Subsidiaries include demand deposit accounts, money market deposit accounts, time deposits, repurchase agreements, federal funds purchased and Federal Home Loan Bank advances. The reduction in Deposits as of June 30, 2017 compared with December 31, 2016 was primarily due to client deployment of cash into the markets and typical seasonal client tax payments.

Short-Term Borrowings

$ in millions

At

June 30, 2017

At

December 31, 2016

Short-term borrowings

$ 916 $ 941

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

Long-Term Borrowings    

We believe that accessing debt investors through multiple distribution channels helps provide consistent access to the unsecured markets. In addition, the issuance of long-term borrowings allows us to reduce reliance on short-term credit sensitive instruments. Long-term borrowings are generally managed to achieve staggered maturities, thereby mitigating refinancing risk, and to maximize investor diversification through sales to global institutional and retail clients across regions, currencies and product types. Availability 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 may engage in various transactions in the credit markets (including, for example, debt retirements) that we believe are in our investors' best interests.

Long-term Borrowings by Maturity at June 30, 2017

$ in millions Parent
Company
Subsidiaries Total

2017

$ 8,742 $ 4,079 $ 12,821

2018

18,532 2,044 20,576

2019

21,738 1,567 23,305

2020

19,238 1,860 21,098

2021

15,826 1,350 17,176

Thereafter

80,485 8,651 89,136

Total

$ 164,561 $ 19,551 $ 184,112

Maturities over next 12 months

$ 28,823

Approximate net increase in long-term borrowings June 30, 2017 through July 28, 2017

$ 7,518

Includes:

Senior debt issuance on July 24, 2017

7,000

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

June 2017 Form 10-Q 22
Table of Contents
Management's Discussion and Analysis

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. 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 the 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.

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

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

Standard & Poor's Global Ratings

A-2 BBB+ Stable

Morgan Stanley Bank, N.A.
Short-term
Debt
Long-term
Debt
Rating
Outlook

Fitch Ratings, Inc.

F1 A+ Stable

Moody's Investors Service, Inc.

P-1 A1 Stable

Standard & Poor's 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 Standard & Poor's Global Ratings ("S&P"). 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 or S&P ratings, based on the relevant contractual downgrade triggers.

Incremental Collateral or Terminating Payments upon Potential Future Rating Downgrade

$ in millions

At

June 30, 2017

At

December 31, 2016

One-notch downgrade

$ 950 $ 1,292

Two-notch downgrade

720 875

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

We repurchased approximately $500 million of our outstanding common stock as part of our share repurchase program during the current quarter and $1,250 million during the current year period. We repurchased approximately $625 million during the prior year quarter and $1,250 million in the prior year period (see Note 14 to the consolidated financial statements).

For a description of our share repurchase program, see "Unregistered Sales of Equity Securities and Use of Proceeds."

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

23 June 2017 Form 10-Q
Table of Contents
Management's Discussion and Analysis

Preferred Stock

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

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

Tangible Equity

At
June 30,
2017

At
December 31,
2016
Monthly Average
Balance
Three Months Ended
$ in millions June 30, 2017

Common equity

$ 70,306 $ 68,530 $ 69,916

Preferred equity

8,520 7,520 8,520

Morgan Stanley shareholders' equity

78,826 76,050 78,436

Less: Goodwill and net intangible assets

(9,156 (9,296 (9,194

Morgan Stanley tangible shareholders' equity 1

$ 69,670 $ 66,754 $ 69,242

Common equity

$ 70,306 $ 68,530 $ 69,916

Less: Goodwill and net intangible assets

(9,156 (9,296 (9,194

Tangible common equity 1

$ 61,150 $ 59,234 $ 60,722

1.

Morgan Stanley tangible shareholders' equity and tangible common equity are non-GAAP financial measures.

Regulatory Requirements

Regulatory Capital Framework

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

The Basel Committee has recently published revisions to certain standards in its capital framework, and is actively considering potential revisions to other capital standards, that, if adopted by the U.S. banking agencies, could substantially change the U.S. regulatory capital framework. For additional discussion of regulatory capital framework, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Regulatory Requirements-Regulatory Capital Framework" in Part II, Item 7 of the 2016 Form 10-K.

Regulatory Capital Requirements

We are required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. A summary of the calculations of regulatory capital, risk-weighted assets ("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 Accumulated other comprehensive income (loss) ("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:

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

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

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

In 2017, the phase-in amount for each of the buffers is 50% of the fully phased-in buffer requirement. 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Regulatory Requirements-G-SIB Capital Surcharge" in Part II, Item 7 of the 2016 Form 10-K.

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;

June 2017 Form 10-Q 24
Table of Contents
Management's Discussion and Analysis

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

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

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

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

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

Minimum Risk-Based Capital Ratios: Transitional Provisions

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

Risk-based capital

Common Equity Tier 1 capital

$ 61,604 $ 61,604 $ 60,862 $ 60,862

Tier 1 capital

70,380 70,380 69,603 69,603

Total capital

81,302 81,025 80,537 80,261

Total RWAs

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

Common Equity Tier 1 capital ratio

16.7 16.6 16.1 16.0

Tier 1 capital ratio

19.1 19.0 18.4 18.2

Total capital ratio

22.0 21.9 21.2 21.0

Leverage-based capital

Adjusted average assets 1

$ 828,365 N/A $ 827,842 N/A

Tier 1 leverage ratio 2

8.5 N/A 8.4 N/A

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

Risk-based capital

Common Equity Tier 1 capital

$ 60,398 $ 60,398 $ 58,616 $ 58,616

Tier 1 capital

68,097 68,097 66,315 66,315

Total capital

78,917 78,642 77,155 76,881

Total RWAs

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

Common Equity Tier 1 capital ratio

17.8 16.9 16.7 15.9

Tier 1 capital ratio

20.0 19.0 18.9 17.9

Total capital ratio

23.2 22.0 22.0 20.8

Leverage-based capital

Adjusted average assets 1

$ 811,402 N/A $ 810,288 N/A

Tier 1 leverage ratio 2

8.4 N/A 8.2 N/A

N/A-Not Applicable

1.

Adjusted average assets represent the denominator of the Tier 1 leverage ratio and are composed of the average daily balance of consolidated on-balance sheet assets under U.S. GAAP during the calendar quarter ended June 30, 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 June 30, 2017. These preliminary estimates are subject to risks and uncertainties that may cause actual results to differ materially and should not be taken as a projection of what our capital, capital ratios, RWAs, earnings or other results will actually be at future dates. For a discussion of risks and uncertainties that may affect our future results, see "Risk Factors" in Part I, Item 1A of the 2016 Form 10-K.

25 June 2017 Form 10-Q
Table of Contents
Management's Discussion and Analysis

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

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

Regulatory Capital Calculated under Transitional Rules

$ in millions

At

June 30, 2017

At

December 31,

2016

Common Equity Tier 1 capital

Common stock and surplus

$               16,469 $               17,494

Retained earnings

56,325 53,679

AOCI

(2,488 (2,643

Regulatory adjustments and deductions:

Net goodwill

(6,532 (6,526

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

(2,051 (1,631

Other adjustments and deductions 1

(119 25

Total Common Equity Tier 1 capital

$ 61,604 $ 60,398

Additional Tier 1 capital

Preferred stock

$ 8,520 $ 7,520

Noncontrolling interests

489 613

Other adjustments and deductions 2

(66 (246

Additional Tier 1 capital

$ 8,943 $ 7,887

Deduction for investments in covered funds

(167 (188

Total Tier 1 capital

$ 70,380 $ 68,097

Standardized Tier 2 capital

Subordinated debt

$ 10,351 $ 10,303

Noncontrolling interests

80 62

Eligible allowance for credit losses

493 464

Other adjustments and deductions

(2 (9

Total Standardized Tier 2 capital

$ 10,922 $ 10,820

Total Standardized capital

$ 81,302 $ 78,917

Advanced Tier 2 capital

Subordinated debt

$ 10,351 $ 10,303

Noncontrolling interests

80 62

Eligible credit reserves

216 189

Other adjustments and deductions

(2 (9

Total Advanced Tier 2 capital

$ 10,645 $ 10,545

Total Advanced capital

$ 81,025 $ 78,642

June 2017 Form 10-Q 26
Table of Contents
Management's Discussion and Analysis

Regulatory Capital Rollforward Calculated under Transitional Rules

$ in millions Six Months Ended
June 30, 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

1,776

Net goodwill

(6

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

(420

Other adjustments and deductions 1

(144

Common Equity Tier 1 capital at June 30, 2017

$ 61,604

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

(124

Other adjustments and deductions 2

180

Additional Tier 1 capital at June 30, 2017

8,943

Deduction for investments in covered funds at December 31, 2016

(188

Change in deduction for investments in covered funds

21

Deduction for investments in covered funds at June 30, 2017

(167

Tier 1 capital at June 30, 2017

$ 70,380

Standardized Tier 2 capital

Tier 2 capital at December 31, 2016

$ 10,820

Change related to the following items:

Eligible allowance for credit losses

29

Other changes, adjustments and deductions 3

73

Standardized Tier 2 capital at June 30, 2017

$ 10,922

Total Standardized capital at June 30, 2017

$ 81,302

Advanced Tier 2 capital

Tier 2 capital at December 31, 2016

$ 10,545

Change related to the following items:

Eligible credit reserves

27

Other changes, adjustments and deductions 3

73

Advanced Tier 2 capital at June 30, 2017

$ 10,645

Total Advanced capital at June 30, 2017

$ 81,025

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 derivatives 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.

RWAs Rollforward Calculated under Transitional Rules

Six Months Ended

June 30, 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

3,799 1,896

Securities financing transactions

4,406 1,719

Securitizations

1,362 992

Investment securities

(3,025 (1,593

Commitments, guarantees and loans

40 228

Cash

(452 (520

Equity investments

(933 (991

Other credit risk 2

1,141 622

Total change in credit risk RWAs

$ 6,338 $ 2,353

Balance at June 30, 2017

$ 285,212 $ 171,584

Market risk RWAs

Balance at December 31, 2016

$ 61,317 $ 60,872

Change related to the following items:

Regulatory VaR

2,366 2,366

Regulatory stressed VaR

14,279 14,279

Incremental risk charge

2,448 2,448

Comprehensive risk measure

(1,935 (1,670

Specific risk:

Non-securitizations

2,138 2,138

Securitizations

3,138 3,175

Total change in market risk RWAs

$ 22,434 $ 22,736

Balance at June 30, 2017

$ 83,751 $ 83,608

Operational risk RWAs

Balance at December 31, 2016

$ N/A $ 128,038

Change in operational risk RWAs 3

N/A (12,551

Balance at June 30, 2017

$ N/A $ 115,487

Total RWAs

$ 368,963 $ 370,679

VaR-Value-at-Risk

N/A-Not Applicable

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.

3.

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

Regulatory stressed VaR increased $14,279 million in the current year period under both the Standardized and the Advanced approaches. These increases were primarily driven by increases in trading inventory across the equities, global macro, and credit businesses within Institutional Securities, in response to client demand.

27 June 2017 Form 10-Q
Table of Contents
Management's Discussion and Analysis

Supplementary Leverage Ratio

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

Pro Forma Supplementary Leverage Exposure and Ratio

At June 30, 2017 At December 31, 2016

$ in millions

Transitional
basis
Fully
phased-in 1
Transitional
basis
Fully
phased-in 1

Average total assets 2

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

Adjustments 3, 4

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

Pro forma supplementary leverage exposure

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

Pro forma supplementary leverage ratio

6.5% 6.5% 6.4% 6.2%

1.

Estimated amounts utilize fully phased-in Tier 1 capital and take into consideration the Tier 1 capital deduction 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 calendar quarter ended June 30, 2017 and December 31, 2016.

3.

Computed as the arithmetic mean of the month-end balances over the calendar quarter ended June 30, 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.

Pro forma fully phased-in supplementary leverage exposure and ratio are based on our current understanding of rules and other factors.

U.S. Subsidiary Banks' Pro Forma Supplementary Leverage Ratios on a Transitional Basis

At June 30, 2017 At December 31, 2016

MSBNA

8.8 7.7%

MSPBNA

9.9 10.2%

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

discussion of risks and uncertainties that may affect our future results, see "Risk Factors" in Part I, Item 1A of the 2016 Form 10-K.

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 bank holding companies of U.S. G-SIBs ("covered BHCs"), including the Parent Company, that establishes external total loss-absorbing capacity ("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.

For a further discussion of TLAC and LTD requirements, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Regulatory Requirements-Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements" in Part II, Item 7 of the 2016 Form 10-K. For discussions about the interaction between the single point of entry resolution strategy and the TLAC and LTD requirements, see "Business-Supervision and Regulation-Financial Holding Company-Resolution and Recovery Planning" in Part I, Item 1 and "Risk Factors-Legal, Regulatory and Compliance Risk" in Part I, Item 1A of the 2016 Form 10-K.

Capital Plans and Stress Tests

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

We submitted our 2017 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 bank holding company, including us. On June 28, 2017, the Federal Reserve published summary results of CCAR and announced that they did not object to our 2017 Capital Plan ("Capital Plan"). The Capital Plan includes the repurchase of up to $5.0 billion of outstanding common stock for the period beginning July 1, 2017 through June 30, 2018, an increase from $3.5 billion in the 2016 Capital Plan. Additionally, the Capital Plan includes an increase in our quarterly common

June 2017 Form 10-Q 28
Table of Contents
Management's Discussion and Analysis

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 must submit the results of our mid-cycle company-run stress test to the Federal Reserve by October 5, 2017 and disclose a summary of the results between October 5, 2017 and November 4, 2017.

The Dodd-Frank Act also 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 a further discussion of our capital plans and stress tests, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Regulatory Requirements-Capital Plans and Stress Tests" in Part II, Item 7 of the 2016 Form 10-K.

Attribution of Average Common Equity According to the Required Capital Framework

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

The Required Capital framework is a risk-based and 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.

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

annual reset. Differences between available and Required Capital are attributed to Parent Company equity during the year.

The Required Capital framework is expected to evolve over time in response to changes in the business and regulatory environment. We will continue to evaluate the framework with respect to the impact of future regulatory requirements, as appropriate.

Average Common Equity Attribution

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

Institutional Securities

$ 40.2 $ 43.2 $ 40.2 $ 43.2

Wealth Management

17.2 15.3 17.2 15.3

Investment Management

2.4 2.8 2.4 2.8

Parent Company

10.1 7.7 9.7 7.3

Total 1

$ 69.9 $ 69.0 $ 69.5 $ 68.6

1.

Average common equity is a non-GAAP financial measure.

Regulatory Developments

Resolution and Recovery Planning

Pursuant to the Dodd-Frank Act, we are required to submit to the Federal Reserve and the Federal Deposit Insurance Corporation ("FDIC") an annual resolution plan that describes our strategy for a rapid and orderly resolution under the U.S. Bankruptcy Code in the event of our material financial distress or failure.

Our preferred resolution strategy, which is set out in our 2017 resolution plan, is a single point of entry strategy. We submitted our full 2017 resolution plan on June 30, 2017. We previously submitted a status report in respect of certain shortcomings identified in our 2015 resolution plan on September 30, 2016. As indicated in our 2017 resolution plan and anticipated in our 2016 status report, the Parent Company has amended and restated its support agreement with its material subsidiaries. Under the 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 material assets, other than shares in subsidiaries of the Parent Company and certain intercompany receivables, to provide capital and liquidity, as applicable, to our material subsidiaries. The obligations of the Parent Company under the amended and restated support agreement are 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 subsidiaries against the assets of the Parent Company (other than shares in subsidiaries of the

29 June 2017 Form 10-Q
Table of Contents
Management's Discussion and Analysis

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

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

For more information about resolution and recovery planning requirements and our activities in these areas, including the implications of such activities in a resolution scenario, see "Business-Supervision and Regulation-Financial Holding Company-Resolution and Recovery Planning" in Part I, Item 1, "Risk Factors-Legal, Regulatory and Compliance Risk" in Part I, Item 1A and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Regulatory Developments-Resolution and Recovery Planning" in Part II, Item 7 of the 2016 Form 10-K.

Legacy Covered Funds under the Volcker Rule

The Volcker Rule prohibits "banking entities," including us and our affiliates, from engaging in certain "proprietary trading" activities, as defined in the Volcker Rule, subject to exemptions for underwriting, market-making-related activities, risk-mitigating hedging and certain other activities. The Volcker Rule also prohibits certain investments and relationships by banking entities with "covered funds," with a number of exemptions and exclusions. In June 2017, we received approval from the Federal Reserve of our application for a five-year extension of the transition period to conform investments in certain legacy Volcker covered funds that are also illiquid funds. The approval covers essentially all of our non-conforming investments in, and relationships with, legacy covered funds subject to the Volcker Rule.

For more information about Volcker Rule requirements and our activities in these areas, including the conformance periods applicable to certain covered funds and our application for a statutory extension, see "Business-Supervision and Regulation-Financial Holding Company-Activities Restrictions under the Volcker Rule" in Part I, Item 1 and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Regulatory Developments-Legacy Covered Funds under the Volcker Rule" in Part II, Item 7 of the 2016 Form 10-K.

U.S. Department of Labor Conflict of Interest Rule

The U.S. Department of Labor's final Conflict of Interest Rule went into effect on June 9, 2017, with certain aspects subject to phased-in compliance, and full compliance required by January 1, 2018. The U.S. Department of Labor is undertaking an examination of the rule which may result in changes to the rule or related exemptions or a change in the January 1, 2018 full compliance date. For a discussion of the U.S. Department of Labor Conflict of Interest Rule, see "Business-Supervision and Regulation-Institutional Securities and Wealth Management" in Part I, Item 1 of the 2016 Form 10-K.

U.K. Referendum

Following the U.K. electorate vote to leave the European Union, the U.K. invoked Article 50 of the Lisbon Treaty on March 29, 2017. For further discussion of U.K. referendum's potential impact on our operations, see "Risk Factors-International Risk" in Part I, Item 1A of the 2016 Form 10-K. For further information regarding our exposure to the U.K., see also "Quantitative and Qualitative Disclosures about Market Risk-Risk Management-Credit Risk-Country Risk Exposure."

Off-Balance Sheet Arrangements

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

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

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

Effects of Inflation and Changes in Interest and Foreign Exchange Rates

For a discussion of the effects of inflation and changes in interest and foreign exchange rates on our business and financial results and strategies to mitigate potential exposures, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Effects of Inflation and Changes in Interest and Foreign Exchange Rates" in Part II, Item 7 of the 2016 Form 10-K.

June 2017 Form 10-Q 30
Table of Contents
Quantitative and Qualitative Disclosures about Market Risk

Risk Management

Management believes effective risk management is vital to the success of our business activities. For a discussion of our risk management functions, see "Quantitative and Qualitative Disclosures about Market Risk-Risk Management" in Part II, Item 7A of the 2016 Form 10-K.

Market Risk

Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, implied volatilities (the price volatility of the underlying instrument imputed from option prices), correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio. Generally, we incur market risk as a result of trading, investing and client facilitation activities, principally within the Institutional Securities business segment where the substantial majority of our Value-at-Risk ("VaR") for market risk exposures is generated. In addition, we incur market risk within the Wealth Management and Investment Management business segments. The Wealth Management business segment primarily 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 real estate funds and investments in private equity vehicles. For a further discussion of market risk, see "Quantitative and Qualitative Disclosures about Market Risk-Risk Management-Market Risk" in Part II, Item 7A of the 2016 Form 10-K.

VaR

We use the statistical technique known as VaR as one of the tools used 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. For information regarding our VaR methodology, assumptions and limitations, see "Quantitative and Qualitative Disclosures about Market Risk-Risk Management-Market Risk-Sales and Trading and Related Activities-VaR Methodology, Assumptions and Limitations" in Part II, Item 7A of the 2016 Form 10-K.

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

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

Management VaR contains certain positions that are excluded from Regulatory VaR. Examples include counterparty credit valuation adjustment ("CVA") 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, quarterly average and quarterly high and low basis. To further enhance the transparency of the traded market risk, the Credit Portfolio VaR has been disclosed as a separate category from the Primary Risk Categories. The Credit Portfolio includes counterparty CVA and related hedges, as well as loans that are carried at fair value and associated hedges.

Trading Risks

95%/One-Day Management VaR

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

$ in millions

Period

End

Average High Low

Interest rate and credit spread

$ 35 $ 35 $ 44 $ 27

Equity price

15 18 26 15

Foreign exchange rate

10 11 15 8

Commodity price

9 9 10 8

Less: Diversification benefit 1, 2

(27 (27 N/A N/A

Primary Risk Categories

$ 42 $ 46 $ 60 $ 36

Credit Portfolio

11 12 14 11

Less: Diversification benefit 1, 2

(7 (7 N/A N/A

Total Management VaR

$ 46 $ 51 $ 64 $ 41

95%/One-Day VaR for the

Three Months Ended
March 31, 2017

$ in millions

Period

End

Average High Low

Interest rate and credit spread

$ 40 $ 30 $ 40 $ 23

Equity price

19 15 26 12

Foreign exchange rate

11 11 18 7

Commodity price

8 8 11 7

Less: Diversification benefit 1, 2

(26 (25 N/A N/A

Primary Risk Categories

$ 52 $ 39 $ 52 $ 28

Credit Portfolio

14 15 17 14

Less: Diversification benefit 1, 2

(9 (10 N/A N/A

Total Management VaR

$ 57 $ 44 $ 57 $ 33

N/A-Not Applicable

1.

Diversification benefit equals the difference between the total Management VaR and the sum of the component VaRs. This benefit arises because the 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.

31 June 2017 Form 10-Q
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Risk Disclosures

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

Distribution of VaR Statistics and Net Revenues for the Current Quarter. 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 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 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.

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 on the preceding page, the average 95%/one-day total Management VaR for the current quarter was $51 million. The following histogram presents the distribution of the daily 95%/one-day total Management VaR for the current quarter, which was in a range between $40 million and $60 million for approximately 95% of trading days during the current quarter.

The following histogram shows the distribution for the current quarter of daily net trading revenues, including profits and losses from Interest rate and credit spread, Equity price, Foreign exchange rate, Commodity price, and Credit Portfolio positions and intraday trading activities, for our Trading businesses. Daily net trading revenues also include intraday trading activities but exclude certain items not captured in the VaR model, such as fees, commissions and net interest income. Daily net trading revenues differ from the definition of revenues required for Regulatory VaR backtesting, which further excludes intraday trading. During the current quarter, we experienced net trading losses on one day, which was not in excess of the 95%/one-day Total Management VaR.

Non-Trading Risks

We believe that sensitivity analysis is an appropriate representation of our non-trading risks. Reflected below is this analysis covering substantially all of the non-trading risk in our portfolio.

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

Funding Liabilities. The credit spread risk sensitivity of our mark-to-market funding liabilities corresponded to an increase in value of approximately $26 million and $19 million for each 1 basis point widening in our credit spread level at June 30, 2017 and March 31, 2017, respectively.

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

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Risk Disclosures

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 June 30, 2017 At March 31, 2017

Basis point change

+200

$ 716 $ 537

+100

413 332

-100

(577 (569)

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. 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 increase in positive sensitivity to interest rates arising in the +200 and +100 basis points scenarios between March 31, 2017 and June 30, 2017 is related to overall changes in our asset-liability positioning, primarily lower holdings of fixed-rate AFS Investment securities.

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

Investments Sensitivity, Including Related Performance Fees

10% Sensitivity
$ in millions

At

June 30,

2017

At

March 31,

2017

Investments related to Investment Management activities

$ 326 $ 337

Other investments:

Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.

171 171

Other Firm investments

151 151

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 exposure to institutions and individuals through our Institutional Securities and Wealth Management business segments. For a further discussion of our credit risks, see "Quantitative and Qualitative Disclosures about Market Risk–Risk Management–Credit Risk" in Part II, Item 7A of the 2016 Form 10-K. Also, see Notes 7 and 11 to the consolidated financial statements for additional information about our loans and lending commitments, respectively.

Lending Activities

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

Loan and Lending Commitment Portfolio by Business Segment

At June 30, 2017

$ in millions

Institutional
Securities
Wealth
Management
Investment
Management 1
Total

Corporate loans

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

Consumer loans

- 26,354 -         26,354

Residential real estate loans

- 25,646 -         25,646

Wholesale real estate loans

8,482 - -         8,482

Loans held for investment, gross of allowance

22,212 65,096 5         87,313

Allowance for loan losses

(266 (40 -         (306)

Loans held for investment, net of allowance

21,946 65,056 5         87,007

Corporate loans

9,394 - -         9,394

Residential real estate loans

10 50 -         60

Wholesale real estate loans

1,178 - -         1,178

Loans held for sale

10,582 50 -         10,632

Corporate loans

6,755 - 20         6,775

Residential real estate loans

662 - -         662

Wholesale real estate loans

1,788 - -         1,788

Loans held at fair value

9,205 - 20         9,225

Total loans 2

41,733 65,106 25         106,864

Lending commitments 3,4

88,739 9,110 -         97,849

Total loans and lending commitments 2,3,4

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

33 June 2017 Form 10-Q
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Risk Disclosures

At December 31, 2016

$ in millions

Institutional
Securities
Wealth
Management
Investment
Management 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 2

42,500 60,427 23         102,950

Lending commitments 3,4

90,143 8,299 -         98,442

Total loans and lending commitments 2,3,4

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

1.

Loans in Investment Management are entered into in conjunction with certain investment advisory activities.

2.

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

3.

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

4.

For syndications led by us, the lending commitments accepted by the borrower but not yet closed are net of the amounts agreed to by counterparties that will participate in the syndication. For syndications that we participate in and do not lead, 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.

At June 30, 2017 and December 31, 2016, the allowance for loan losses related to loans that were accounted for as held for

investment was $306 million and $274 million, respectively, and the allowance for commitment losses related to lending commitments that were accounted for as held for investment was $186 million and $190 million, respectively. The aggregate allowance for loan and commitment losses increased during the current year period primarily due to updates to model parameters used in determining the inherent allowance. See Note 7 to the consolidated financial statements for further information.

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

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

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

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Risk Disclosures

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

Institutional Securities Loans and Lending Commitments by Credit Rating 1

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

Loans

AAA

$ - $ - $ - $ - $ -

AA

- - 34 187 221

A

800 2,018 860 781 4,459

BBB

2,213 4,505 2,737 590 10,045

NIG

5,314 13,016 4,275 2,246 24,851

Unrated 2

320 129 430 1,278 2,157

Total Loans 3

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

Lending Commitments

AAA

- 165 - - 165

AA

3,885 614 3,620 4 8,123

A

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

BBB

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

NIG

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

Unrated 2

41 46 4 23 114

Total Lending Commitments

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

Total Exposure

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

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 3

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

1.

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

2.

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

3.

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

Event-Driven Loans and Lending Commitments

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

Loans

$ 4,777 $ 5,097

Lending commitments

9,685 16,252

Total

$ 14,462 $ 21,349

Loans and lending commitments to non-investment grade borrowers

$ 11,550 $ 15,339

Maturity Profile of Event-Driven Loans and Lending Commitments

At
June 30,
2017
At
December 31,
2016

Less than 1 year

22% 34%

1-3 years

34% 14%

3-5 years

21% 28%

Over 5 years

23% 24%

Institutional Securities Credit Exposure from Loans and Lending Commitments by Industry

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

Industry 1

Real estate

$ 23,794 $ 19,807

Consumer discretionary

13,171 12,059

Funds, exchanges and other financial services 2

12,382 11,481

Energy

11,572 11,757

Industrials

11,049 11,465

Utilities

9,515 9,216

Healthcare

9,185 11,534

Information technology

8,138 8,602

Consumer staples

7,707 7,329

Mortgage finance

5,553 6,296

Materials

5,283 7,630

Telecommunications services

4,437 6,156

Insurance

3,510 4,190

Consumer finance

2,572 2,847

Other

2,604 2,274

Total

$ 130,472 $ 132,643

1.

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

2.

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

35 June 2017 Form 10-Q
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Risk Disclosures

Institutional Securities Lending Exposures Related to the Energy Industry. At June 30, 2017, Institutional Securities' loans and lending commitments related to the energy industry were $11.6 billion, of which approximately 67% are accounted for as held for investment and 33% are accounted for as either held for sale or at fair value. Additionally, approximately 56% of the total energy industry loans and lending commitments were to investment grade counterparties.

At June 30, 2017, the energy industry portfolio included $1.1 billion in loans and $2.1 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 remain at quarter-end levels, or deteriorate further, we may incur additional lending losses.

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

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

Securities-based lending provided to our retail clients is primarily conducted through our Portfolio Loan Account ("PLA") and Liquidity Access Line ("LAL") platforms, which had an outstanding loan balance of $31.6 billion and $29.7 billion at June 30, 2017 and December 31, 2016, respectively. For more information about our securities-based lending and residential real estate loans, see "Quantitative and Qualitative Disclosures about Market Risk–Risk Management–Credit Risk–Lending Activities" in Part II, Item 7A of the 2016 Form 10-K.

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

Wealth Management Lending Activities by Remaining Contractual Maturity

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

Securities-based lending and other loans

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

Residential real estate loans

- 9 35 25,631 25,675

Total 1

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

Lending commitments

6,484 1,903 458 265 9,110

Total loans and lending commitments

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

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

Securities-based lending and other loans

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

Residential real estate loans

- - 45 24,369 24,414

Total 1

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

Lending commitments

6,372 1,413 268 246 8,299

Total loans and lending commitments

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

1.

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

Wealth Management Loans included in Customer and Other Receivables

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

Net customer receivables representing margin loans

$ 12,328 $ 12,483

Employee loans 1 :

Balance

$ 4,323 $ 4,804

Allowance for loan losses

(83 (89

Balance, net

$ 4,240 $ 4,715

1.

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

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

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Risk Disclosures

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). For credit exposure information on our OTC derivative products, see Note 4 to the consolidated financial statements. For a discussion of our credit exposure and related credit derivative contracts, see "Quantitative and Qualitative Disclosures about Market Risk-Risk Management-Credit Risk-Credit Exposure-Derivatives" in Part II, Item 7A of the 2016 Form 10-K.

Credit Derivative Portfolio by Counterparty Type

At June 30, 2017
Fair Values 1 Notionals
$ in millions Receivable Payable Net Protection
Purchased
Protection
Sold

Banks and securities firms

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

Insurance and other financial institutions

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

Non-financial entities

39 90 (51 3,586 1,189

Total

$ 9,472 $ 10,405 $ (933 $ 383,172 $ 350,816

At December 31, 2016
Fair Values 1 Notionals
$ in millions Receivable Payable Net Protection
Purchased
Protection
Sold

Banks and securities firms

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

Insurance and other financial institutions

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

Non-financial entities

94 127 (33 5,832 4,269

Total

$ 12,229 $ 13,425 $ (1,196 $ 470,189 $ 429,730

1.

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

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

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

$ in millions At June 30,
2017
At December 31,
2016 1

Industry 2

Utilities

$ 4,052 $ 4,184

Funds, exchanges and other financial services 3

3,145 2,756

Industrials

1,269 1,644

Regional governments

1,144 1,352

Sovereign governments

1,104 709

Banks and securities firms

949 1,485

Healthcare

930 1,103

Not-for-profit organizations

730 830

Hedge funds

542 233

Consumer discretionary

392 590

Information technology

366 267

Materials

348 235

Insurance

279 570

Energy

267 533

Consumer staples

243 567

Special purpose vehicles

229 821

Other

166 256

Total 4

$ 16,155 $ 18,135

1.

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

2.

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

3.

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

4.

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

37 June 2017 Form 10-Q
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Risk Disclosures

Country Risk Exposure

Country risk exposure is the risk that events in, or that affect, a foreign country (any country other than the U.S.) might adversely affect us. We actively manage country risk exposure through a comprehensive risk management framework that combines credit and market fundamentals and allows us to effectively identify, monitor and limit country risk. Country risk exposure before and after hedging is monitored and managed. For a further discussion of our country risk exposure see, "Quantitative and Qualitative Disclosures about Market Risk-Risk Management-Country Risk Exposure" in Part II, Item 7A of the 2016 Form 10-K.

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 June 30, 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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Risk Disclosures

Top Ten Country Exposures at June 30, 2017 1

$ in millions Net Inventory 2

Net

Counterparty

Exposure 3,4

Loans Lending
Commitments
Exposure
Before Hedges
Hedges 5 Net Exposure

Country

United Kingdom:

Sovereigns

$ 1,444 $ 92 $             - $            - $ 1,536 $             (254) $ 1,282

Non-sovereigns

595 9,995 2,050 5,630 18,270 (1,824 16,446

Total

$ 2,039 $ 10,087 $ 2,050 $ 5,630 $ 19,806 $ (2,078 $ 17,728

Japan:

Sovereigns

$ 2,205 $             76 $ - $ - $ 2,281 $ (82 $ 2,199

Non-sovereigns

512 3,161 95 - 3,768 (144 3,624

Total

$ 2,717 $ 3,237 $ 95 $ - $ 6,049 $ (226 $ 5,823

Brazil:

Sovereigns

$ 4,088 $ - $ - $ - $ 4,088 $ (12 $ 4,076

Non-sovereigns

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

Total

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

Germany:

Sovereigns

$ 1,237 $ 772 $ - $ - $ 2,009 $ (908 $ 1,101

Non-sovereigns

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

Total

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

Canada:

Sovereigns

$ 182 $ 100 $ - $ - $ 282 $ - $ 282

Non-sovereigns

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

Total

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

United Arab Emirates:

Sovereigns

$ (25 $ 831 $ - $ - $ 806 $ (24 $ 782

Non-sovereigns

5 191 28 1,983 2,207 (15 2,192

Total

$ (20 $ 1,022 $ 28 $ 1,983 $ 3,013 $ (39 $ 2,974

China:

Sovereigns

$ (45 $ 213 $ - $ - $ 168 $ (249 $ (81

Non-sovereigns

1,032 157 759 515 2,463 (10 2,453

Total

$ 987 $ 370 $ 759 $ 515 $ 2,631 $ (259 $ 2,372

India:

Sovereigns

$ 1,157 $ - $ - $ - $ 1,157 $ - $ 1,157

Non-sovereigns

562 507 - - 1,069 - 1,069

Total

$             1,719 $ 507 $ - $ - $ 2,226 $ - $ 2,226

Ireland:

Sovereigns

$ 13 $ 5 $ - $ - $ 18 $ (82 $ (64

Non-sovereigns

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

Total

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

Singapore:

Sovereigns

$ 1,482 $ 149 $ - $ - $ 1,631 $ - $ 1,631

Non-sovereigns

50 228 29 117 424 - 424

Total

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

1.

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

2.

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

3.

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

4.

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

5.

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

39 June 2017 Form 10-Q
Table of Contents
Risk Disclosures

Country Risk Exposures Related to the United Kingdom.     At June 30, 2017, our country risk exposures in the U.K. included net exposures of $17,728 million as shown in the previous table, and overnight deposits of $6,657 million. The $16,446 million of exposures to non-sovereigns were diversified across both names and sectors. Of this exposure $14,162 million was to investment grade counterparties, with the largest single component ($5,334 million) to exchanges and clearing houses.

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

Operational Risk

Operational risk refers to the risk of loss, or of damage to our reputation, resulting from inadequate or failed processes or systems, human factors or from external events ( e.g. , fraud, theft, legal and compliance risks, cyber attacks or damage to physical assets). We may incur operational risk across the full scope of our business activities, including revenue-generating activities ( e.g ., sales and trading) and support and control groups ( e.g. , information technology and trade processing). For a further discussion about our operational risk, see "Quantitative and Qualitative Disclosures about Market Risk-Risk Management-Operational Risk" in Part II, Item 7A of the 2016 Form 10-K.

Model Risk

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

complexity and uncertainty around inputs and assumptions. Model risk is generated from the use of models impacting financial statements, regulatory filings, capital adequacy assessments and the formulation of business strategies. For a further discussion about our model risk, see "Quantitative and Qualitative Disclosures about Market Risk–Risk Management–Model Risk" in Part II, Item 7A of the 2016 Form 10-K.

Liquidity Risk

Liquidity risk refers to the risk that we will be unable to finance our operations due to a loss of access to the capital markets or difficulty in liquidating our assets. Liquidity risk also encompasses our ability (or perceived ability) to meet our financial obligations without experiencing significant business disruption or reputational damage that may threaten our viability as a going concern. For a further discussion about our liquidity risk, see "Quantitative and Qualitative Disclosures about Market Risk-Risk Management-Liquidity Risk" in Part II, Item 7A of the 2016 Form 10-K and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" in Part I, Item 2.

Legal and Compliance Risk

Legal and compliance risk includes the risk of legal or regulatory sanctions, material financial loss, including fines, penalties, judgments, damages and/or settlements, or loss to reputation that we may suffer as a result of failure to comply with laws, regulations, rules, related self-regulatory organization standards and codes of conduct applicable to our business activities. This risk also includes contractual and commercial risk, such as the risk that a counterparty's performance obligations will be unenforceable. It also includes compliance with anti-money laundering and terrorist financing rules and regulations. For a further discussion about our legal and compliance risk, see "Quantitative and Qualitative Disclosures about Market Risk-Risk Management-Legal and Compliance Risk" in Part II, Item 7A of the 2016 Form 10-K.

June 2017 Form 10-Q 40
Table of Contents

Controls and Procedures

Under the supervision and with the participation of the Firm's management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the Firm's disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

No change in the Firm's internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) occurred during the period covered by this report that materially affected, or is reasonably likely to materially affect, the Firm's internal control over financial reporting.

41 June 2017 Form 10-Q
Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Morgan Stanley:

We have reviewed the accompanying condensed consolidated balance sheet of Morgan Stanley and subsidiaries (the "Firm") as of June 30, 2017, and the related condensed consolidated income statements and comprehensive income statements for the three-month and six-month periods ended June 30, 2017 and 2016, and the cash flow statements and statements of changes in total equity for the six-month periods ended June 30, 2017 and 2016. These interim condensed consolidated financial statements are the responsibility of the management of the Firm.

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

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Firm as of December 31, 2016, and the consolidated income statement, comprehensive income statement, cash flow statement and statement of changes in total equity for the year then ended (not presented herein) included in the Firm's Annual Report on Form 10-K; and in our report dated February 27, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2016 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Deloitte & Touche LLP

New York, New York

August 3, 2017

June 2017 Form 10-Q 42
Table of Contents

Financial Statements

Consolidated Financial Statements and Notes

Consolidated Income Statements

(Unaudited)

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

Revenues

Investment banking

$ 1,530 $ 1,224 $ 3,075 $ 2,331

Trading

2,931 2,746 6,166 4,811

Investments

163 126 328 92

Commissions and fees

1,027 1,020 2,060 2,075

Asset management, distribution and administration fees

2,902 2,637 5,669 5,257

Other

199 243 428 323

Total non-interest revenues

8,752 7,996 17,726 14,889

Interest income

2,106 1,667 4,071 3,414

Interest expense

1,355 754 2,549 1,602

Net interest

751 913 1,522 1,812

Net revenues

9,503 8,909 19,248 16,701

Non-interest expenses

Compensation and benefits

4,252 4,015 8,718 7,698

Occupancy and equipment

333 329 660 658

Brokerage, clearing and exchange fees

525 484 1,034 949

Information processing and communications

433 429 861 871

Marketing and business development

155 154 291 288

Professional services

561 547 1,088 1,061

Other

602 468 1,146 955

Total non-interest expenses

6,861 6,426 13,798 12,480

Income from continuing operations before income taxes

2,642 2,483 5,450 4,221

Provision for income taxes

846 833 1,661 1,411

Income from continuing operations

1,796 1,650 3,789 2,810

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

(5 (4 (27 (7

Net income

$ 1,791 $ 1,646 $ 3,762 $ 2,803

Net income applicable to noncontrolling interests

34 64 75 87

Net income applicable to Morgan Stanley

$ 1,757 $ 1,582 $ 3,687 $ 2,716

Preferred stock dividends and other

170 157 260 235

Earnings applicable to Morgan Stanley common shareholders

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

Earnings per basic common share

Income from continuing operations

$ 0.89 $ 0.77 $ 1.92 $ 1.33

Income (loss) from discontinued operations

- (0.01 (0.01 (0.01

Earnings per basic common share

$ 0.89 $ 0.76 $ 1.91 $ 1.32

Earnings per diluted common share

Income from continuing operations

$ 0.87 $ 0.75 $ 1.88 $ 1.30

Income (loss) from discontinued operations

- - (0.01 -

Earnings per diluted common share

$ 0.87 $ 0.75 $ 1.87 $ 1.30

Dividends declared per common share

$ 0.20 $ 0.15 $ 0.40 $ 0.30

Average common shares outstanding

Basic

1,791 1,866 1,796 1,875

Diluted

1,830 1,899 1,836 1,907

See Notes to Consolidated Financial Statements 43 June 2017 Form 10-Q
Table of Contents
Consolidated Comprehensive Income Statements (Unaudited)

Three Months Ended

June 30,

Six Months Ended

June 30,

$ in millions     2017         2016         2017         2016    

Net income

$ 1,791 $ 1,646 $ 3,762 $ 2,803

Other comprehensive income (loss), net of tax:

Foreign currency translation adjustments

$ 12 $ 131 162 317

Change in net unrealized gains on available-for-sale securities

108 143 192 538

Pension, postretirement and other

4 (5 4 (4

Change in net debt valuation adjustment

(183 145 (174 348

Total other comprehensive income (loss)

$ (59 $ 414 $ 184 $ 1,199

Comprehensive income

$ 1,732 $ 2,060 $ 3,946 $ 4,002

Net income applicable to noncontrolling interests

34 64 75 87

Other comprehensive income (loss) applicable to noncontrolling interests

(21 81 29 136

Comprehensive income applicable to Morgan Stanley

$ 1,719 $ 1,915 $ 3,842 $ 3,779

June 2017 Form 10-Q 44 See Notes to Consolidated Financial Statements
Table of Contents
Consolidated Balance Sheets

(Unaudited)
$ in millions, except share data

At

June 30,
2017

At

December 31,
2016

Assets

Cash and due from banks

$ 25,008 $ 22,017

Interest bearing deposits with banks

19,651 21,364

Trading assets at fair value ( $163,689 and $152,548 were pledged to various parties)

290,802 262,154

Investment securities (includes $50,488 and $63,170 at fair value)

71,576 80,092

Securities purchased under agreements to resell (includes $102 and $302 at fair value)

97,408 101,955

Securities borrowed

126,722 125,236

Customer and other receivables

54,917 46,460

Loans:

Held for investment (net of allowance of $306 and $274)

87,007 81,704

Held for sale

10,632 12,544

Goodwill

6,591 6,577

Intangible assets (net of accumulated amortization of $2,575 and $2,421)

2,567 2,721

Other assets

48,135 52,125

Total assets

$ 841,016 $ 814,949

Liabilities

Deposits (includes $130 and $63 at fair value)

$ 144,913 $ 155,863

Short-term borrowings (includes $582 and $406 at fair value)

916 941

Trading liabilities at fair value

134,810 128,194

Securities sold under agreements to repurchase (includes $738 and $729 at fair value)

50,697 54,628

Securities loaned

16,862 15,844

Other secured financings (includes $5,731 and $5,041 at fair value)

16,642 11,118

Customer and other payables

197,055 190,513

Other liabilities and accrued expenses

15,042 15,896

Long-term borrowings (includes $43,226 and $38,736 at fair value)

184,112 164,775

Total liabilities

761,049 737,772

Commitments and contingent liabilities (see Note 11)

Equity

Morgan Stanley shareholders' equity:

Preferred stock

8,520 7,520

Common stock, $0.01 par value:

Shares authorized: 3,500,000,000 ; Shares issued: 2,038,893,979 ; Shares outstanding: 1,839,578,174 and 1,852,481,601

20 20

Additional paid-in capital

23,140 23,271

Retained earnings

56,325 53,679

Employee stock trusts

2,945 2,851

Accumulated other comprehensive income (loss)

(2,488 (2,643

Common stock held in treasury at cost, $0.01 par value ( 199,315,805 and 186,412,378 shares)

(6,691 (5,797

Common stock issued to employee stock trusts

(2,945 (2,851

Total Morgan Stanley shareholders' equity

78,826 76,050

Noncontrolling interests

1,141 1,127

Total equity

79,967 77,177

Total liabilities and equity

$ 841,016 $ 814,949

See Notes to Consolidated Financial Statements 45 June 2017 Form 10-Q
Table of Contents
Consolidated Statements of Changes in Total Equity (Unaudited)

$ in millions

Preferred

Stock

Common

Stock

Additional

Paid-in

Capital

Retained

Earnings

Employee

Stock

Trusts

Accumulated

Other

Comprehensive

Income (Loss)

Common

Stock

Held in

Treasury

at Cost

Common

Stock

Issued to

Employee

Stock

Trusts

Non-

controlling

Interests

Total

Equity

Balance at December 31, 2016

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

Cumulative adjustment for accounting changes 1

- - 45 (35 - - - - - 10

Net income applicable to Morgan Stanley

- - - 3,687 - - - - - 3,687

Net income applicable to noncontrolling interests

- - - - - - - - 75 75

Dividends

- - - (1,006 - - - - - (1,006

Shares issued under employee plans

- - (170 - 94 - 815 (94 - 645

Repurchases of common stock and employee tax withholdings

- - - - - - (1,709 - - (1,709

Net change in Accumulated other comprehensive income (loss)

- - - - - 155 - - 29 184

Issuance of preferred stock

1,000 - (6 - - - - - - 994

Other net decreases

- - - - - - - - (90 (90

Balance at June 30, 2017

$ 8,520 $ 20 $ 23,140 $ 56,325 $ 2,945 $ (2,488 $ (6,691 $ (2,945 $ 1,141 $ 79,967

Balance at December 31, 2015

$ 7,520 $ 20 $ 24,153 $ 49,204 $ 2,409 $ (1,656 $ (4,059 $ (2,409 $ 1,002 $ 76,184

Cumulative adjustment for accounting change related to DVA 2

- - - 312 - (312 - - - -

Net adjustment for accounting change related to consolidation 3

- - - - - - - - 106 106

Net income applicable to Morgan Stanley

- - - 2,716 - - - - - 2,716

Net income applicable to noncontrolling interests

- - - - - - - - 87 87

Dividends

- - - (822 - - - - - (822

Shares issued under employee plans and related tax effects

- - (1,456 - 464 - 2,062 (464 - 606

Repurchases of common stock and employee tax withholdings

- - - - - - (1,629 - - (1,629

Net change in Accumulated other comprehensive income (loss)

- - - - - 1,063 - - 136 1,199

Other net decreases

- - - - - - - - (72 (72

Balance at June 30, 2016

$ 7,520 $ 20 $ 22,697 $ 51,410 $ 2,873 $ (905) $ (3,626) $ (2,873) $ 1,259 $ 78,375

1.

The cumulative adjustment relates to the adoption of the following accounting updates on January 1, 2017: Improvements to Employee Share-Based Payment Accounting, for which the Firm recorded a cumulative catch-up adjustment to reflect its election to account for forfeitures as they occur (see Note 2 for further information); and Intra-Entity Transfers of Assets Other Than Inventory , for which the Firm recorded a cumulative catch-up adjustment to reflect the tax impact from an intercompany sale of assets.

2.

Debt valuation adjustment ("DVA") represents the change in the fair value resulting from fluctuations in the Firm's credit spreads and other credit factors related to liabilities carried at fair value under the fair value option, primarily related to certain Long-term and Short-term borrowings. In accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities , a cumulative catch-up adjustment was recorded as of January 1, 2016 to move the cumulative unrealized DVA amount, net of noncontrolling interests and tax, related to outstanding liabilities under the fair value option election from Retained earnings into Accumulated other comprehensive income (loss) ("AOCI"). See Note 2 to the consolidated financial statements in the Firm's Annual Report on Form 10-K for the year ended December 31, 2016 (the "2016 Form 10-K") and Note 14 for further information.

3.

In accordance with the accounting update Amendments to the Consolidation Analysis , a net adjustment was recorded as of January 1, 2016 to both consolidate and deconsolidate certain entities under the new guidance. See Note 2 to the consolidated financial statements in the 2016 Form 10-K for further information.

June 2017 Form 10-Q 46 See Notes to Consolidated Financial Statements
Table of Contents

Consolidated Cash Flow Statements

(Unaudited)

Six Months Ended

June 30,

$ in millions         2017                 2016        

Cash flows from operating activities

Net income

$ 3,762 $ 2,803

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

(Income) loss from equity method investments

- (1

Compensation payable in common stock and options

518 492

Depreciation and amortization

889 879

Net gain on sale of available-for-sale securities

(16 (82

Impairment charges

6 67

Provision for credit losses on lending activities

25 131

Other operating adjustments

(148 218

Changes in assets and liabilities:

Trading assets, net of Trading liabilities

(18,050 (333

Securities borrowed

(1,486 11,135

Securities loaned

1,018 (2,117

Customer and other receivables and other assets

(2,336 (10,537

Customer and other payables and other liabilities

5,732 9,949

Securities purchased under agreements to resell

4,547 (9,932

Securities sold under agreements to repurchase

(3,931 13,636

Net cash provided by (used for) operating activities

(9,470 16,308

Cash flows from investing activities

Proceeds from (payments for):

Other assets-Premises, equipment and software, net

(723 (645

Changes in loans, net

(5,326 (4,724

Investment securities:

Purchases

(8,418 (30,700

Proceeds from sales

13,533 20,274

Proceeds from paydowns and maturities

3,668 3,507

Other investing activities

(39 (126

Net cash provided by (used for) investing activities

2,695 (12,414

Cash flows from financing activities

Net proceeds from (payments for):

Short-term borrowings

(25 (1,293

Noncontrolling interests

(35 (43

Other secured financings

4,272 (69

Deposits

(10,950 (3,341

Proceeds from:

Derivatives financing activities

73 -

Issuance of preferred stock, net of issuance costs

994 -

Issuance of long-term borrowings

33,522 20,628

Payments for:

Long-term borrowings

(17,796 (15,900

Derivatives financing activities

(48 (120

Repurchases of common stock and employee tax withholdings

(1,709 (1,629

Cash dividends

(954 (791

Other financing activities

21 -

Net cash provided by (used for) financing activities

7,365 (2,558

Effect of exchange rate changes on cash and cash equivalents

688 714

Net increase in cash and cash equivalents

1,278 2,050

Cash and cash equivalents, at beginning of period

43,381 54,083

Cash and cash equivalents, at end of period

$ 44,659 $ 56,133

Cash and cash equivalents include:

Cash and due from banks

$ 25,008 $ 27,597

Interest bearing deposits with banks

19,651 28,536

Cash and cash equivalents, at end of period

$ 44,659 $ 56,133

Supplemental Disclosure of Cash Flow Information

Cash payments for interest were $ 1,922 million and $1,082 million.

Cash payments for income taxes, net of refunds, were $ 732 million and $340 million

See Notes to Consolidated Financial Statements 47 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

1. Introduction and Basis of Presentation

The Firm

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

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

Institutional Securities provides investment banking, sales and trading, lending and other services to corporations, governments, financial institutions, and high to ultra-high net worth clients. Investment banking services consist of capital raising and financial advisory services, including services relating to the underwriting of debt, equity and other securities, as well as advice on mergers and acquisitions, restructurings, real estate and project finance. Sales and trading services include sales, financing 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, financing extended to equities and commodities customers, and loans to 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, founda-

tions, 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.

Basis of Financial Information

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

The accompanying consolidated financial statements should be read in conjunction with the Firm's consolidated financial statements and notes thereto included in the 2016 Form 10-K. Certain footnote disclosures included in the 2016 Form 10-K have been condensed or omitted from these consolidated financial statements as they are not required for interim reporting under U.S. GAAP. The consolidated financial statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of operations for interim periods are not necessarily indicative of results for the entire year.

Consolidation

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

June 2017 Form 10-Q 48
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

For a discussion of the Firm's involvement with VIEs and its significant regulated U.S. and international subsidiaries, see Notes 1 and 2 to the consolidated financial statements in the 2016 Form 10-K.

2. Significant Accounting Policies

For a detailed discussion about the Firm's significant accounting policies, see Note 2 to the consolidated financial statements in the 2016 Form 10-K.

During the six months ended June 30, 2017 ("current year period"), other than the following, there were no significant updates made to the Firm's significant accounting policies.

Accounting Standards Adopted

The Firm adopted the following accounting update on January 1, 2017.

Improvements to Employee Share-Based Payment Accounting . This accounting update simplifies the accounting for employee share-based payments, including the recognition of forfeitures, the classification of income tax consequences, and the classification within the consolidated cash flow statements.

Beginning in 2017, the income tax consequences related to share-based payments are required to be recognized in Provision for income taxes in the consolidated income

statements upon the conversion of employee share-based awards instead of additional paid-in capital. The impact of the income tax consequences upon conversion of the awards may be either a benefit or a provision. Conversion of employee share-based awards to Firm shares will primarily occur in the first quarter of each year. The impact of recognizing excess tax benefits upon conversion of awards in the quarter in which the accounting update was adopted (three months ended March 31, 2017) was a $112 million benefit to Provision for income taxes. The classification of cash flows from excess tax benefits was moved from the financing section to the operating section of the consolidated cash flow statements, and was applied on a retrospective basis.

In addition, this accounting update permits an entity to elect whether to continue to estimate the total forfeitures, or to account for forfeitures on an actual basis as they occur. The Firm has elected to account for forfeitures on an actual basis as they occur. This change is required to be applied using a modified retrospective approach, and upon adoption, the Firm recorded a cumulative catch-up adjustment, decreasing Retained earnings by approximately $30 million net of tax, increasing Additional paid-in capital by approximately $45 million and increasing deferred tax assets by approximately $15 million.

49 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

3. Fair Values

Fair Value Measurement

Assets and Liabilities Measured at Fair Value on a Recurring

Basis

At June 30, 2017
$ in millions Level 1 Level 2 Level 3 Netting 4 Total

Assets at Fair Value

Trading assets:

U.S. government and agency securities:

U.S. Treasury securities

$ 27,473 $ - $ - $ - $ 27,473

U.S. agency securities

2,148 25,832 - - 27,980

Total U.S. government and agency securities

29,621 25,832 - - 55,453

Other sovereign government obligations 1

19,553 5,382 100 - 25,035

Corporate and other debt:

State and municipal securities

- 2,572 9 - 2,581

Residential mortgage-, commercial mortgage- and asset-backed securities

- 2,564 264 - 2,828

Corporate bonds

- 15,338 449 - 15,787

Collateralized debt and loan obligations

- 305 58 - 363

Loans and lending commitments 2

- 4,361 4,864 - 9,225

Other debt

- 2,269 186 - 2,455

Total corporate and other debt

- 27,409 5,830 - 33,239

Corporate equities 3

127,252 394 500 - 128,146

Securities received as collateral

14,402 6 - - 14,408

Derivative and other contracts:

Interest rate

623 254,677 1,850 - 257,150

Credit

- 9,049 423 - 9,472

Foreign exchange

100 54,895 62 - 55,057

Equity

803 41,506 3,073 - 45,382

Commodity and other

1,647 6,705 4,071 - 12,423

Netting 4

(2,976 (297,356 (2,360 (46,652 (349,344

Total derivative and other contracts

197 69,476 7,119 (46,652 30,140

Investments 5

305 243 946 - 1,494

Physical commodities

- 134 - - 134

Total trading assets 5

191,330 128,876 14,495 (46,652 288,049

Investment securities-AFS

22,018 28,470 - - 50,488

Securities purchased under agreements to resell

- 102 - - 102

Intangible assets

- 3 - - 3

Total assets at fair value 6

$ 213,348 $ 157,451 $ 14,495 $ (46,652 $ 338,642
At June 30, 2017
$ in millions Level 1 Level 2 Level 3 Netting 4 Total

Liabilities at Fair Value

Deposits

$ - $ 51 $ 79 $ - $ 130

Short-term borrowings

- 582 - - 582

Trading liabilities:

U.S. government and agency securities:

U.S. Treasury securities

16,142 - - - 16,142

U.S. agency securities

439 84 - - 523

Total U.S. government and agency securities

16,581 84 - - 16,665

Other sovereign government obligations 1

25,411 1,118 - - 26,529

Corporate and other debt:

Corporate bonds

- 6,653 13 - 6,666

Other debt

- 316 2 - 318

Total corporate and other debt

- 6,969 15 - 6,984

Corporate equities 3

36,338 81 27 - 36,446

Obligation to return securities received as collateral

21,471 9 1 - 21,481

Derivative and other contracts:

Interest rate

551 233,943 880 - 235,374

Credit

- 9,677 728 - 10,405

Foreign exchange

35 58,070 60 - 58,165

Equity

699 44,996 1,980 - 47,675

Commodity and other

1,847 6,757 2,562 - 11,166

Netting 4

(2,976 (297,356 (2,360 (33,388 (336,080

Total derivative and other contracts

156 56,087 3,850 (33,388 26,705

Total trading liabilities

99,957 64,348 3,893 (33,388 134,810

Securities sold under agreements to repurchase

- 590 148 - 738

Other secured financings

- 5,487 244 - 5,731

Long-term borrowings

67 40,513 2,646 - 43,226

Total liabilities at fair value 6

$ 100,024 $ 111,571 $ 7,010 $ (33,388 $ 185,217

June 2017 Form 10-Q 50
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

At December 31, 2016
$ in millions Level 1 Level 2 Level 3 Netting 4 Total

Assets at Fair Value

Trading assets:

U.S. government and agency securities:

U.S. Treasury securities

$ 25,457 $ - $ - $ - $ 25,457

U.S. agency securities

2,122 20,392 74 - 22,588

Total U.S. government and agency securities

27,579 20,392 74 - 48,045

Other sovereign government obligations

14,005 5,497 6 - 19,508

Corporate and other debt:

State and municipal securities

- 2,355 250 - 2,605

Residential mortgage-, commercial mortgage- and asset-backed securities

- 1,691 217 - 1,908

Corporate bonds

- 11,051 232 - 11,283

Collateralized debt and loan obligations

- 602 63 - 665

Loans and lending commitments 2

- 3,580 5,122 - 8,702

Other debt

- 1,360 180 - 1,540

Total corporate and other debt

- 20,639 6,064 - 26,703

Corporate equities 3

117,857 333 445 - 118,635

Securities received as collateral

13,717 19 1 - 13,737

Derivative and other contracts:

Interest rate

1,131 300,406 1,373 - 302,910

Credit

- 11,727 502 - 12,229

Foreign exchange

231 74,921 13 - 75,165

Equity

1,185 35,736 1,708 - 38,629

Commodity and other

2,808 6,734 3,977 - 13,519

Netting 4

(4,378 (353,543 (1,944 (51,381 (411,246

Total derivative and other contracts

977 75,981 5,629 (51,381 31,206

Investments 5

237 197 958 - 1,392

Physical commodities

- 112 - - 112

Total trading assets 5

174,372 123,170 13,177 (51,381 259,338

Investment securities-AFS

29,120 34,050 - - 63,170

Securities purchased under agreements to resell

- 302 - - 302

Intangible assets

- 3 - - 3

Total assets at fair value 6

$ 203,492 $ 157,525 $ 13,177 $ (51,381 $ 322,813
At December 31, 2016
$ in millions Level 1 Level 2 Level 3 Netting 4 Total

Liabilities at Fair Value

Deposits

$ - $ 21 $ 42 $ - $ 63

Short-term borrowings

- 404 2 - 406

Trading liabilities:

U.S. government and agency securities:

U.S. Treasury securities

10,745 - - - 10,745

U.S. agency securities

891 61 - - 952

Total U.S. government and agency securities

11,636 61 - - 11,697

Other sovereign government obligations

20,658 2,430 - - 23,088

Corporate and other debt:

Corporate bonds

- 5,572 34 - 5,606

Other debt

- 549 2 - 551

Total corporate and other debt

- 6,121 36 - 6,157

Corporate equities 3

37,611 29 34 - 37,674

Obligation to return securities received as collateral

20,236 25 1 - 20,262

Derivative and other contracts:

Interest rate

1,244 285,379 953 - 287,576

Credit

- 12,550 875 - 13,425

Foreign exchange

17 75,510 56 - 75,583

Equity

1,162 37,828 1,524 - 40,514

Commodity and other

2,663 6,845 2,377 - 11,885

Netting 4

(4,378 (353,543 (1,944 (39,803 (399,668

Total derivative and other contracts

708 64,569 3,841 (39,803 29,315

Physical commodities

- 1 - - 1

Total trading liabilities

90,849 73,236 3,912 (39,803 128,194

Securities sold under agreements to repurchase

- 580 149 - 729

Other secured financings

- 4,607 434 - 5,041

Long-term borrowings

47 36,677 2,012 - 38,736

Total liabilities at fair value 6

$ 90,896 $ 115,525 $ 6,551 $ (39,803 $ 173,169

AFS-Available for sale

1.

At June 30, 2017, the Firm transferred from Level 2 to Level 1 $1.3 billion and $1.8 billion of Trading assets-Other sovereign government obligations and Trading liabilities-Other sovereign government obligations, respectively, due to increased market activity in these instruments.

2.

At June 30, 2017, loans held at fair value consisted of $6,775 million of corporate loans, $662 million of residential real estate loans and $1,788 million of wholesale real estate loans. At December 31, 2016, loans held at fair value consisted of $7,217 million of corporate loans, $966 million of residential real estate loans and $519 million of wholesale real estate loans.

3.

For trading purposes, the Firm holds or sells short equity securities issued by entities in diverse industries and of varying sizes.

4.

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

5.

Amounts exclude certain investments that are measured at fair value using the net asset value ("NAV") per share, which are not classified in the fair value hierarchy. For additional disclosure about such investments, see "Fair Value of Investments Measured at NAV" herein.

6.

Amounts exclude the unsettled fair value on long futures contracts of $852 million at June 30, 2017 and $784 million at December 31, 2016 included in Customer and other receivables in the consolidated balance sheets and unsettled fair value of short futures contracts of $425 million at June 30, 2017 and $174 million at December 31, 2016 in Customer and other payables in the consolidated balance sheets. These contracts are primarily: classified as Level 1 in the fair value hierarchy, actively traded, and valued based on quoted prices from the exchange.

51 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

For a description of the valuation techniques applied to the Firm's major categories of assets and liabilities measured at fair value on a recurring basis, see Note 3 to the consolidated financial statements in the 2016 Form 10-K. During the current quarter there were no significant updates made to the Firm's valuation techniques.

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

The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended June 30, 2017 ("current quarter"), the three months ended June 30, 2016 ("prior year quarter"), the current year period and the six months ended June 30, 2016 ("prior year period"). Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilities within the Level 3 category presented in the following tables do not reflect the related realized and unrealized gains (losses) on hedging instruments that have been classified by the Firm within the Level 1 and/or Level 2 categories.

Additionally, both observable and unobservable inputs may be used to determine the fair value of positions that the Firm has classified within the Level 3 category. As a result, the unrealized gains (losses) during the period for assets and liabilities within the Level 3 category presented in the following tables herein may include changes in fair value during the period that were attributable to both observable and unobservable inputs. Total realized and unrealized gains (losses) are primarily included in Trading revenues in the consolidated income statements.

Roll-forward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis


$ in millions
Beginning
Balance at
March 31,
2017
Realized
and
Unrealized
Gains
(Losses)
Purchases 1 Sales and
Issuances 2
Settlements 1 Net
Transfers
Ending
Balance at
June 30,
2017
Unrealized
Gains
(Losses) at
June 30,
2017

Assets at Fair Value

Trading assets:

U.S. agency securities

$ 42 $ - $ - $ - $ - $ (42 $ - $ -

Other sovereign government obligations

65 - 87 (52 - - 100 -

Corporate and other debt:

State and municipal securities

55               3               3 (52 - - 9 -

Residential mortgage-, commercial mortgage- and asset backed securities

216 36 32 (44 (5 29 264 8

Corporate bonds

445 2 144 (161 - 19 449 (2

Collateralized debt and loan obligations

78 (2 5 (23 (1 1 58 (2

Loans and lending commitments

4,479 27 1,242 (417 (581 114 4,864 11

Other debt

194 33 57 (108 - 10 186 30

Total corporate and other debt

5,467 99 1,483 (805 (587 173 5,830 45

Corporate equities

309 8 101 (59 - 141 500 9

Securities received as collateral

1 - - (1                 -         -                 -             -

Net derivative and other contracts 3 :

Interest rate

298 35 28 (27 637 (1 970 58

Credit

(351 28 -                 - 16 2 (305 24

Foreign exchange

(71 53 1 (1 22 (2 2 64

Equity

217 185 677 (171 80 105 1,093 189

Commodity and other

1,503 154 3 - (108 (43 1,509 79

Total net derivative and other contracts

1,596 455 709 (199 647 61 3,269 414

Investments

961 11 20 (25 4 (25 946 7

Liabilities at Fair Value

Deposits

$ 56 $ - $ - $ 23 $ - $ - $ 79 $ -

Trading liabilities:

Corporate and other debt:

Corporate bonds

34 - (135 124 - (10 13 (1

Other debt

2 - - - - - 2 -

Total corporate and other debt

36 - (135 124 - (10 15 (1

Corporate equities

- (12 (34 44 - 5 27 (11

Obligation to return securities received as collateral

2 - (2 1 - - 1 -

Securities sold under agreements to repurchase

148 - - - - - 148 -

Other secured financings

203 (4 - 38 (1 - 244 (4

Long-term borrowings

2,092 (45 - 694 (145 (40 2,646 (49

June 2017 Form 10-Q 52
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

$ in millions Beginning
Balance at
March 31,
2016
Realized
and
Unrealized
Gains
(Losses)
Purchases 1 Sales and
Issuances 2
Settlements 1 Net
Transfers
Ending
Balance at
June 30,
2016
Unrealized
Gains
(Losses) at
June 30,
2016

Assets at Fair Value

Trading assets:

U.S. agency securities

$ 8 $ - $ - $ (18 $                 - $ 30 $ 20 $ -

Other sovereign government obligations

8               -               - (3 - (3 2             -

Corporate and other debt:

State and municipal securities

              5 1 4               - -               - 10 2

Residential mortgage-, commercial mortgage- and asset backed securities

355 (4 7 (87 - 84 355 (14

Corporate bonds

224 17 116 (35 - (46 276 17

Collateralized debt and loan obligations

348 18 3 (178 - (82 109 18

Loans and lending commitments

6,185 (46 360 (484 (596 (1 5,418 (55

Other debt

527 4 13 (19 - 3 528 2

Total corporate and other debt

7,644 (10 503 (803 (596 (42 6,696 (30

Corporate equities

430 (63 273 (82 - 14 572 (63

Net derivative and other contracts 3 :

Interest rate

169 (159 2 (7 42 (282 (235 (157

Credit

(723 65 1 - 93 (550 (1,114 53

Foreign exchange

126 (58 - - (94 25 (1 (47

Equity

(1,832 168 50 (140 263 18 (1,473 (106

Commodity and other

1,200 211 5 (4 (88 (37 1,287 130

Total net derivative and other contracts

(1,060 227 58 (151 216 (826 (1,536 (127

Investments

922 5 58 (11 - - 974 7

Intangible assets

4 - - - - (4               - -

Liabilities at Fair Value

Deposits

$ 23 $ (1 $ - $ 8 $ - $ (2 $ 30 $ (1

Trading liabilities:

Corporate and other debt:

Corporate bonds

6 (1 (5 29 - (25 6 (1

Other debt

5 1 (1 - - - 3 -

Total corporate and other debt

11 - (6 29 - (25 9 (1

Corporate equities

31 (28 (33 5 - (5 26 -

Obligation to return securities received as collateral

1 - (1 - - - - -

Securities sold under agreements to repurchase

151 1 - - - - 150 1

Other secured financings

454 (14 - 23 (22 (28 441 (14

Long-term borrowings

1,798 21 - 164 (131 119 1,929 26

53 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

$ in millions Beginning
Balance at
December 31,
2016
Realized
and
Unrealized
Gains
(Losses)
Purchases 1 Sales and
Issuances 2
Settlements 1 Net
Transfers
Ending
Balance at
June 30,
2017
Unrealized
Gains
(Losses) at
June 30,
2017

Assets at Fair Value

Trading assets:

U.S. agency securities

$ 74 $ (1 $ - $ (240 $                 - $ 167 $                 - $                 -

Other sovereign government obligations

6               - 98 (4 - - 100 -

Corporate and other debt:

State and municipal securities

              250 3 3 (77 - (170 9 -

Residential mortgage-, commercial mortgage- and asset backed securities

217 44 78 (83 (16 24 264 27

Corporate bonds

232 (2 241 (98 - 76 449 (1

Collateralized debt and loan obligations

63 (3 11 (12 (2 1 58 (3

Loans and lending commitments

5,122 89 1,596 (1,002 (1,146 205 4,864 41

Other debt

180 36 38 (115 - 47 186 34

Total corporate and other debt

6,064 167 1,967 (1,387 (1,164 183 5,830 98

Corporate equities

445 10 97 (158 - 106 500 15

Securities received as collateral

1 - - (1 - - - -

Net derivative and other contracts 3 :

Interest rate

420 (66 47 (27 652 (56 970 (55

Credit

(373 1 - - 62 5 (305 (13

Foreign exchange

(43 23 1 (1 8 14 2 43

Equity

184 118 758 (158 121 70 1,093 200

Commodity and other

1,600 104 9 (19 (188 3 1,509 (76

Total net derivative and other contracts

1,788 180 815 (205 655 36 3,269 99

Investments

958 19 82 (28 (63 (22 946 11

Liabilities at Fair Value

Deposits

$ 42 $ (1 $ - $ 36 $ - $ - $ 79 $ (1

Short-term borrowings

2 -               -               - (2 - - -

Trading liabilities:

Corporate and other debt:

Corporate bonds

34 - (164 129 - 14 13 -

Other debt

2 - - - - - 2 -

Total corporate and other debt

36 - (164 129 - 14 15 -

Corporate equities

34 - (63 5 - 51 27 -

Obligation to return securities received as collateral

1 - - - - - 1 -

Securities sold under agreements to repurchase

149 1 - - - - 148 1

Other secured financings

434 (23 - 52 (221 (44 244 (16

Long-term borrowings

2,012 (104 - 981 (286 (165 2,646 (95

June 2017 Form 10-Q 54
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

$ in millions Beginning
Balance at
December 31,
2015
Realized
and
Unrealized
Gains
(Losses)
Purchases 1 Sales and
Issuances 2
Settlements 1 Net
Transfers
Ending
Balance at
June 30,
2016
Unrealized
Gains
(Losses) at
June 30,
2016

Assets at Fair Value

Trading assets:

U.S. agency securities

$                 - $ 1 $                 - $ (19 $                 - $ 38 $ 20 $ 1

Other sovereign government obligations

4               - - (5 - 3 2 1

Corporate and other debt:

State and municipal securities

19 1 4 (15 - 1 10 1

Residential mortgage-, commercial mortgage- and asset backed securities

438 (36 26 (170 - 97 355 (33

Corporate bonds

267 62 113 (128 - (38 276 61

Collateralized debt and loan obligations

430 5 22 (224 - (124 109 17

Loans and lending commitments

5,936 (111 970 (720 (672 15 5,418 (121

Other debt

448 (2 133 (63 - 12 528 (2

Total corporate and other debt

7,538 (81 1,268 (1,320 (672 (37 6,696 (77

Corporate equities

433 (45 296 (119 - 7 572 (64

Securities received as collateral

1 - - (1 -               -               -               -

Net derivative and other contracts 3 :

Interest rate

260 305 3 (21 (60 (722 (235 205

Credit

(844 (343 1 - 153 (81 (1,114 (360

Foreign exchange

141 (109 - - (201 168 (1 (82

Equity

(2,031 (321 71 (184 1,121 (129 (1,473 (434

Commodity and other

1,050 297 7 (4 (176 113 1,287 210

Total net derivative and other contracts

(1,424 (171 82 (209 837 (651 (1,536 (461

Investments

707 (56 404 (40 (41 - 974 (53

Intangible assets

5 - - - - (5 - -

Liabilities at Fair Value

Deposits

$ 19 $ (2 $ - $ 13 $ - $ (4 $ 30 $ (2

Short-term borrowings

1 - - - (1 - - -

Trading liabilities:

Corporate and other debt:

Corporate bonds

- (5 (7 10 - (2 6 (5

Other debt

4 2 (3 4 - - 3 2

Total corporate and other debt

4 (3 (10 14 - (2 9 (3

Corporate equities

17 (3 (22 18 - 10 26 (3

Obligation to return securities received as collateral

1 - (1 - - - - -

Securities sold under agreements to repurchase

151 1 - - - - 150 1

Other secured financings

461 (32 - 69 (43 (78 441 (32

Long-term borrowings

1,987 (12 - 276 (167 (179 1,929 (6

1.

Loan originations and consolidations of VIEs are included in purchases and deconsolidations of VIEs are included in settlements.

2.

Amounts related to entering into Net derivatives and other contracts, Deposits, Short-term borrowings, Other secured financings and Long-term borrowings primarily represent issuances. Amounts for other line items primarily represent sales.

3.

Net derivative and other contracts represent Trading assets-Derivative and other contracts, net of Trading liabilities-Derivative and other contracts.

55 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

Significant Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value Measurements

The following disclosures provide information on the valuation techniques, significant unobservable inputs, and their ranges and averages for each major category of assets and liabilities measured at fair value on a recurring and nonrecurring basis with a significant Level 3 balance. The level of aggregation and breadth of products cause the range of inputs to be wide and not evenly distributed across the inventory. Further, the range of unobservable inputs may differ across firms in the financial services industry because of diversity in the types of products included in each firm's inventory. For qualitative information on the sensitivity of the fair value measurements to changes in the significant unobservable inputs, see Note 3 to the consolidated financial statements in the 2016 Form 10-K. There are no predictable relationships between multiple significant unobservable inputs attributable to a given valuation technique. A single amount is disclosed when there is no significant difference between the minimum, maximum and average (weighted average or simple average / median).

Valuation Techniques and Sensitivity of Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value Measurements

Predominant Valuation Techniques/Significant
Unobservable Inputs
Range (Weighted Averages or Simple Averages/Median) 1
$ in millions At June 30, 2017 At December 31, 2016

Recurring Fair Value Measurement

Assets at Fair Value

U.S. agency securities ( $ - and $74)

Comparable pricing:

Comparable bond price N/A 96 to 105 points (102 points)

Other sovereign government obligations ( $100 and $6)

Comparable pricing:

Comparable bond price 92 to 99 points (96 points) N/M

State and municipal securities ( $9 and $250)

Comparable pricing:

Comparable bond price N/M 53 to 100 points (91 points)

Residential mortgage-, commercial mortgage- and asset-backed securities ( $264 and $217)

Comparable pricing:

Comparable bond price 0 to 95 points (24 points) 0 to 86 points (27 points)

Corporate bonds ( $449 and $232)

Comparable pricing:

Comparable bond price 2 to 133 points (87 points) 3 to 130 points (70 points)

Option model:

At the money volatility 15% to 34% (24%) 23% to 33% (30%)

Collateralized debt and loan obligations ( $58 and $63)

Comparable pricing:

Comparable bond price 0 to 65 points (35 points) 0 to 103 points (50 points)

Correlation model:

Credit correlation 42% to 49% (44%) N/M

Loans and lending commitments ($4,864 and $5,122)

Corporate loan model:

Credit spread N/M 402 to 672 bps (557 bps)

Expected recovery:

Asset coverage 36% to 100% (85%) 43% to 100% (83%)

Option model:

Volatility skew -1% N/M

Margin loan model:

Discount rate 1% to 5% (2%) 2% to 8% (3%)
Volatility skew 10% to 32% (18%) 21% to 63% (33%)

Comparable pricing:

Comparable loan price 55 to 104 points (95 points) 45 to 100 points (84 points)

Discounted cash flow:

Implied weighted average cost of capital N/M 5%
Capitalization rate N/M 4% to 10% (4%)

Other debt ( $186 and $180)

Option model:

At the money volatility 17% to 52% (44%) 16% to 52% (52%)

Discounted cash flow:

Discount rate 9% to 12% (11%) 7% to 12% (11%)

Comparable pricing:

Comparable loan price N/M 1 to 74 points (23 points)

Corporate equities ( $500 and $445)

Comparable pricing:

Comparable equity price 100% 100%

Net derivative and other contracts 2 :

Interest rate ( $970 and $420)

Option model:

Interest rate - Foreign exchange correlation

N/M

28% to 58% (44% / 43%)
Interest rate volatility skew

26% to 94% (42% / 41%)

19% to 117% (55% / 56%)
Interest rate quanto correlation N/M -17% to 31% (1% / -5%)
Interest rate curve correlation N/M 28% to 96% (68% / 72%)
Inflation volatility 24% to 63% (44% / 41%) 23% to 55% (40% / 39%)
Interest rate - inflation correlation -48% to -27% (-36% / -34%) N/M
Interest rate curve 1% N/M

June 2017 Form 10-Q 56
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

Predominant Valuation Techniques/Significant
Unobservable Inputs
Range (Weighted Averages or Simple Averages/Median) 1
$ in millions At June 30, 2017 At December 31, 2016

Credit ( $(305) and $(373))

Comparable pricing:

Cash synthetic basis 4 to 6 points (5 points) 5 to 12 points (11 points)
Comparable bond price N/M 0 to 70 points (23 points)

Correlation model:

Credit correlation 37% to 78% (48%) 32% to 70% (45%)

Foreign exchange 3 ( $2 and $(43))

Option model:

Interest rate - Foreign exchange correlation 27% to 54% (44% / 44%) 28% to 58% (44% / 43%)
Interest rate volatility skew 29% to 102% (47% / 46%) 34% to 117% (55% / 56%)
Interest rate quanto correlation

N/M

-17% to 31% (1% / -5%)

Equity 3 ( $1,093 and $184)

Option model:

At the money volatility 6% to 57% (33%) 7% to 66% (33%)
Volatility skew -3% to 1% (-1%) -4% to 0% (-1%)
Equity - Equity correlation 5% to 99% (78%) 25% to 99% (73%)
Equity - Foreign exchange correlation -70% to 9% (-30%) -63% to 30% (-43%)
Equity - Interest rate correlation -7% to 52% (23% / 24%) -8% to 52% (12% / 4%)

Commodity and other( $1,509 and $1,600)

Option model:

Forward power price $6 to $87 ($30) per MWh $7 to $90 ($32) per MWh
Commodity volatility 6% to 62% (17%) 6% to 130% (18%)
Cross-commodity correlation 5% to 99% (92%) 5% to 99% (92%)

Investments ( $946 and $958)

Discounted cash flow:

Implied weighted average cost of capital N/M 10%
Exit multiple 10 times 10 to 24 times (11 times)

Market approach:

EBITDA multiple 8 to 24 times (13 times) 6 to 24 times (12 times)

Comparable pricing:

Comparable equity price 75% to 100% (90%) 75% to 100% (93%)

Liabilities at Fair Value

Deposits ( $79 and $42)

Option model:

At the money volatility 15% to 50% (24%) N/M
Volatility skew -1% to 0% (-1%) N/M

Securities sold under agreements to repurchase ( $148 and $149)

Discounted cash flow:

Funding spread 131 to 145 bps (136 bps) 118 to 127 bps (121 bps)

Other secured financings ( $244 and $434)

Discounted cash flow:

Funding spread 48 to 80 bps (64 bps) 63 to 92 bps (78 bps)

Option model:

Volatility skew -1% -1%
At the money volatility 10% to 40% (26%) N/M

Discounted cash flow:

Discount rate N/M 4%

Long-term borrowings ( $2,646 and $2,012)

Option model:

At the money volatility 6% to 42% (26%) 7% to 42% (30%)
Volatility skew -3% to 1% (-1%) -2% to 0% (-1%)
Equity - Equity correlation 36% to 98% (71%) 35% to 99% (84%)
Equity - Foreign exchange correlation -72% to 13% (-29%) -63% to 13% (-40%)

Option model:

Interest rate volatility skew 26% to 94% (42% / 41%) 25%
Equity volatility discount 9% to 12% (10% / 11%) 7% to 11% (10% / 10%)

Comparable pricing:

Comparable equity price 100% N/M
Nonrecurring Fair Value Measurement
Assets at Fair Value
Loans ( $1,277 and $2,443)

Corporate loan model:

Credit spread 90 to 563 bps (273 bps) 90 to 487 bps (208 bps)

Expected recovery:

Asset coverage 73% to 95% (84%) 73% to 99% (97%)

bps-Basis points. One basis point equals 1/100 th of 1%.

Points-Percentage of par

MWh-Megawatt hours

EBITDA-Earnings before interest, taxes, depreciation and amortization

N/A-Not Applicable

N/M-Not Meaningful

1.

Amounts represent weighted averages except where simple averages and the median of the inputs are provided when more relevant.

2.

Credit valuation adjustment ("CVA") and funding valuation adjustments ("FVA") are included in the balance but excluded from the Valuation Technique(s) and Significant Unobservable Inputs in the previous table. CVA is a Level 3 input when the underlying counterparty credit curve is unobservable. FVA is a Level 3 input in its entirety given the lack of observability of funding spreads in the principal market.

3.

Includes derivative contracts with multiple risks ( i.e. , hybrid products).

57 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

For a description of the Firm's significant unobservable inputs for all major categories of assets and liabilities, see Note 3 to the consolidated financial statements in the 2016 Form 10-K. During the current quarter there were no significant updates made to the Firm's significant unobservable inputs.

Fair Value of Investments Measured at NAV

For a description of the Firm's investments in private equity funds, real estate funds and hedge funds measured at fair value based on NAV, see Note 3 to the consolidated financial statements in the 2016 Form 10-K.

Investments in Certain Funds Measured at NAV per Share

At June 30, 2017 At December 31, 2016
$ in millions Fair Value Commitment Fair Value Commitment

Private equity funds

$           1,588 $                 388 $         1,566 $                 335

Real estate funds

1,050 157 1,103 136

Hedge funds

115 18 147 4

Total

$ 2,753 $ 563 $ 2,816 $ 475

Nonredeemable Funds by Contractual Maturity

Fair Value at June 30, 2017
$ in millions Private Equity Real Estate

Less than 5 years

$                              297 $                              80

5-10 years

745 644

Over 10 years

546 326

Total

$ 1,588 $ 1,050

Restrictions

Investments in hedge funds may be subject to initial period lock-up or gate provisions. A lock-up provision is a provision that provides that during a certain initial period an investor may not make a withdrawal from the fund. A gate provision restricts the amount of redemption that an investor can demand on any redemption date.

Hedge Funds Redemption Frequency

Fair Value At
June 30, 2017

Quarterly

57%

Every six months

-%

Greater than six months

21%

Subject to lock-up provisions 1

22%

Percentage of hedge fund investments that cannot be redeemed due to a gate provision 2

23%

1.

Remaining restriction period for these investments was primarily over three years.

2.

Gate provision has been imposed by the hedge fund manager primarily for indefinite periods.

The redemption notice periods for hedge funds were primarily greater than six months.

Fair Value Option

The Firm elected the fair value option for certain eligible instruments that are risk managed on a fair value basis to mitigate income statement volatility caused by measurement basis differences between the elected instruments and their associated risk management transactions or to eliminate complexities of applying certain accounting models.

Earnings Impact of Instruments under the Fair Value Option

$ in millions Trading
Revenues
Interest
Income
(Expense)
Net
Revenues

Three Months Ended June 30, 2017

Securities purchased under agreements to resell

$ (1 $        1 $ -

Deposits 1

- - -

Short-term borrowings 1

6 (1) 5

Securities sold under agreements to repurchase 1

(3 (4) (7)

Long-term borrowings 1

(901 (111) (1,012)

Three Months Ended June 30, 2016

Securities purchased under agreements to resell

$ (1 $        2 $ 1

Deposits 1

(1 (1) (2)

Short-term borrowings 1

(9 - (9)

Securities sold under agreements to repurchase 1

(3 (3) (6)

Long-term borrowings 1

(1,289 (130) (1,419)

Six Months Ended June 30, 2017

Securities purchased under agreements to resell

$ (1 $        2 $ 1

Deposits 1

(1 - (1)

Short-term borrowings 1

(9 (1) (10)

Securities sold under agreements to repurchase 1

(1 (8) (9)

Long-term borrowings 1

(2,511 (230) (2,741)

Six Months Ended June 30, 2016

Securities purchased under agreements to resell

$ (1 $        4 $ 3

Deposits 1

(3 (1) (4)

Short-term borrowings 1

36 - 36

Securities sold under agreements to repurchase 1

(12 (5) (17)

Long-term borrowings 1

(2,254 (269) (2,523)

1.

Gains (losses) in all periods are mainly attributable to changes in foreign currency rates or interest rates or movements in the reference price or index for short-term and long-term borrowings before the impact of related hedges.

The amounts in the previous table are included within Net revenues and do not reflect any gains or losses on related hedging instruments. In addition to the amounts in the

June 2017 Form 10-Q 58
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

previous table, as discussed in Note 2 to the consolidated financial statements in the 2016 Form 10-K, instruments within Trading assets or Trading liabilities are measured at fair value.

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

Three Months Ended June 30,
2017 2016
$ in millions Trading
Revenues
OCI Trading
Revenues
OCI

Short-term and long-term borrowings 1

$ (4 $    (281) $ - $     226

Securities sold under agreements to repurchase 1

- - - (1

Loans and other debt 2

48 - (14 -

Lending commitments 3

- - 2 -
Six Months Ended June 30,
2017 2016
$ in millions Trading
Revenues
OCI Trading
Revenues
OCI

Short-term and long-term borrowings 1

$ (8 $ (267 $ 41 $ 545

Securities sold under agreements to repurchase 1

- (3 - 3

Loans and other debt 2

45 - (114 -

Lending commitments 3

- - 3 -

$ in millions June 30,
2017
December 31,
2016
Cumulative pre-tax DVA gain (loss)
recognized in AOCI
$    (1,191) $ (921

OCI-Other comprehensive income (loss)

1.

Unrealized DVA gains (losses) are recorded in OCI and when such gains (losses) are realized they are recorded in Trading revenues. See Note 2 to the consolidated financial statements in the 2016 Form 10-K and Note 14 for further information.

2.

Loans and other debt instrument-specific credit gains (losses) were determined by excluding the non-credit components of gains and losses, such as those due to changes in interest rates.

3.

Gains (losses) on lending commitments were generally determined based on the difference between estimated expected client yields and contractual yields at each respective period-end.

Short-Term and Long-Term Borrowings Measured at Fair Value on a Recurring Basis

$ in millions

At

June 30,

2017

At

December 31,
2016
Business Unit Responsible for Risk Management

Equity

$             23,605 $ 21,066

Interest rates

18,502 16,051

Foreign exchange

760 1,114

Credit

709 647

Commodities

232 264

Total

$ 43,808 $ 39,142

Net Difference of Contractual Principal Amount Over Fair Value

$ in millions

At

June 30,

2017

At
December 31,
2016

Loans and other debt 1

$             12,986 $ 13,495

Loans 90 or more days past due and/or on nonaccrual status 1

11,337 11,502

Short-term and long-term borrowings 2

621 720

1.

The majority of the difference between principal and fair value amounts for loans and other debt relates to distressed debt positions purchased at amounts well below par.

2.

Short-term and long-term borrowings do not include structured notes where the repayment of the initial principal amount fluctuates based on changes in a reference price or index.

Fair Value Loans on Nonaccrual Status

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

Nonaccrual loans

$ 1,326 $ 1,536

Nonaccrual loans 90 or more days past due

$ 796 $ 787

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

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Current Quarter Gains (Losses)

Three Months
Ended June 30,
$ in millions 2017 1 2016 1

Assets

Loans 2

$ 20 $ (34

Other Assets-Other investments 3

- (38

Other assets-Premises, equipment and software costs 4

(1 (22

Total

$ 19 $ (94

Liabilities

Other liabilities and accrued expenses 2

Lending commitments

$ 21 $ 13

Total

$ 21 $ 13

59 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

Current Year Period Gains (Losses)

Six Months Ended
June 30,
$ in millions 2017 1 2016 1

Assets

Loans 2

$ 44 $ (131

Other Assets-Other investments 3

- (40

Other assets-Premises, equipment and software costs 4

(6 (27

Total

$ 38 $ (198

Liabilities

Other liabilities and accrued expenses 2

Lending commitments

$ 48 $ 24

Total

$ 48 $ 24

1.

Gains and losses for Loans and Other assets-Other investments are classified in Other revenues. For other items, gains and losses are recorded in Other revenues if the item is held for sale, otherwise Other expenses.

2.

Non-recurring changes in the fair value of loans and lending commitments were calculated as follows: for the held for investment category, based on the value of the underlying collateral; and for the held for sale category, based on recently executed transactions, market price quotations, valuation models that incorporate market observable inputs where possible, such as comparable loan or debt prices and credit default swap spread levels adjusted for any basis difference between cash and derivative instruments, or default recovery analysis where such transactions and quotations are unobservable.

3.

Losses related to Other assets-Other investments were determined using techniques that included discounted cash flow models, methodologies that incorporate multiples of certain comparable companies and recently executed transactions.

4.

Losses related to Other assets-Premises, equipment and software costs were determined using techniques that included a default recovery analysis and recently executed transactions.

Carrying and Fair Values

At June 30, 2017
  Fair Value by Level
$ in millions Total Level 2 Level 3 1

Assets

Loans

$     2,632 $ 1,355 $ 1,277

Total assets

$ 2,632 $ 1,355 $ 1,277

Liabilities

Other liabilities and accrued expenses-Lending commitments

$ 212 $ 164 $ 48

Total liabilities

$ 212 $ 164 $ 48
At December 31, 2016
  Fair Value by Level
$ in millions Total Level 2 Level 3 1

Assets

Loans

$     4,913 $ 2,470 $ 2,443

Other assets-Other investments

123 - 123

Other assets-Premises, equipment and software costs

25 22 3

Total assets

$ 5,061 $ 2,492 $ 2,569

Liabilities

Other liabilities and accrued expenses-Lending commitments

$ 226 $ 166 $ 60

Total liabilities

$ 226 $ 166 $ 60

1.

Refer to "Significant Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value Measurements" section herein for details of the significant unobservable inputs used for nonrecurring fair value measurement.

Financial Instruments Not Measured at Fair Value

At June 30, 2017
Carrying Fair Value
$ in millions Value Level 1 Level 2 Level 3 Total

Financial Assets

Cash and due
from banks
$ 25,008 $ 25,008 $ - $ - $ 25,008
Interest bearing
deposits with
banks
19,651 19,651 - - 19,651

Investment securities-HTM

21,088 8,255 12,319 123 20,697
Securities purchased under agreements
to resell
97,306 - 92,537 4,718 97,255

Securities borrowed

126,722 - 126,722 1 126,723

Customer and other receivables 1

49,292 - 45,052 4,110 49,162

Loans 2

97,639 - 20,319 78,579 98,898

Other assets 3

30,171 30,171 - - 30,171

Financial Liabilities

Deposits

$ 144,783 $ - $ 144,783 $ - $ 144,783
Short-term
borrowings
334 - 334 - 334
Securities sold
under agreements
to repurchase
49,959 - 46,452 3,488 49,940

Securities loaned

16,862 - 16,477 401 16,878

Other secured financings

10,911 - 9,961 956 10,917
Customer and
other payables 1
192,973 - 192,973 - 192,973
Long-term
borrowings
140,886 - 145,544 51 145,595

June 2017 Form 10-Q 60
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

At December 31, 2016
Carrying Fair Value
$ in millions Value Level 1 Level 2 Level 3 Total

Financial Assets

Cash and due
from banks
$ 22,017 $ 22,017 $ - $ - $ 22,017
Interest bearing
deposits with
banks
21,364 21,364 - - 21,364

Investment securities-HTM

16,922 5,557 10,896 - 16,453
Securities purchased under agreements
to resell
101,653 - 97,825 3,830 101,655

Securities borrowed

125,236 - 125,093 147 125,240

Customer and other receivables 1

41,679 - 36,962 4,575 41,537

Loans 2

94,248 - 20,906 74,121 95,027

Other assets 3

33,979 33,979 - - 33,979

Financial Liabilities

Deposits

$ 155,800 $ - $ 155,800 $ - $ 155,800
Short-term
borrowings
535 - 535 - 535
Securities sold
under agreements
to repurchase
53,899 - 50,941 2,972 53,913

Securities loaned

15,844 - 15,853 - 15,853

Other secured financings

6,077 - 4,792 1,290 6,082
Customer and
other payables 1
187,497 - 187,497 - 187,497
Long-term
borrowings
126,039 - 129,826 51 129,877

HTM-Held

to maturity

1.

Accrued interest, fees, and dividend receivables and payables where carrying value approximates fair value have been excluded.

2.

Amounts include loans measured at fair value on a non-recurring basis.

3.

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

Lending commitments-Held for investment and Held for sale

Commitment Fair Value
$ in millions amount 1 Total Level 2 Level 3

June 30, 2017

$ 95,090 $ 917 $ 706 $ 211

December 31, 2016

97,409 1,241 973 268

1.

For further discussion on lending commitments, see Note 11.

The previous tables exclude certain financial instruments such as equity method investments and all non-financial assets and liabilities such as the value of the long-term relationships with the Firm's deposit customers. For further discussion of the contents and valuation techniques of financial instruments not measured at fair value, see Note 3 to the consolidated financial statements in the 2016 Form 10-K. During the current quarter there were no significant updates made to the Firm's valuation techniques for financial instruments not measured at fair value.

61 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

4. Derivative Instruments and Hedging Activities

Derivative Fair Values

At June 30, 2017
Assets

$ in millions

Bilateral
OTC
Cleared
OTC 1
Exchange-
Traded
Total

Designated as accounting hedges

Interest rate contracts

$ 1,547 $ 937 $ - $ 2,484

Foreign exchange contracts

48 8 - 56

Total

1,595 945 - 2,540

Not designated as accounting hedges 2

Interest rate contracts

182,333 72,140 193 254,666

Credit contracts

7,282 2,190 - 9,472

Foreign exchange contracts

54,357 544 100 55,001

Equity contracts

24,832 - 20,550 45,382

Commodity and other contracts

10,197 - 2,226 12,423

Total

279,001 74,874 23,069 376,944

Total gross derivatives

$ 280,596 $ 75,819 $ 23,069 $ 379,484

Amounts offset

Counterparty netting

(215,065 (71,178 (20,307 (306,550

Cash collateral netting

(38,973 (3,821 - (42,794

Total in Trading assets

$ 26,558 $ 820 $ 2,762 $ 30,140

Amounts not offset 3

Financial instruments collateral

(11,213 - - (11,213

Other cash collateral

(10 - - (10

Net amounts 4

$ 15,335 $ 820 $ 2,762 $ 18,917
Liabilities

$ in millions

Bilateral
OTC
Cleared
OTC 1
Exchange-
Traded
Total

Designated as accounting hedges

Interest rate contracts

$ 60 $ 757 $ - $ 817

Foreign exchange contracts

138 40 - 178

Total

198 797 - 995

Not designated as accounting hedges 2

Interest rate contracts

166,210 68,206 141 234,557

Credit contracts

8,132 2,273 - 10,405

Foreign exchange contracts

57,314 625 48 57,987

Equity contracts

27,653 - 20,022 47,675

Commodity and other contracts

8,881 - 2,285 11,166

Total

268,190 71,104 22,496 361,790

Total gross derivatives

$ 268,388 $ 71,901 $ 22,496 $ 362,785

Amounts offset

Counterparty netting

(215,065 (71,178 (20,307 (306,550

Cash collateral netting

(29,136 (394 - (29,530

Total in Trading liabilities

$ 24,187 $ 329 $ 2,189 $ 26,705

Amounts not offset 3

Financial instruments collateral

(6,276 - (168 (6,444

Other cash collateral

(26 (58 - (84

Net amounts 4

$ 17,885 $ 271 $ 2,021 $ 20,177
At December 31, 2016
Assets

$ in millions

Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total

Designated as accounting hedges

Interest rate contracts

$ 1,924 $ 1,049 $ - $ 2,973

Foreign exchange contracts

249 18 - 267

Total

2,173 1,067 - 3,240

Not designated as accounting hedges 5

Interest rate contracts

200,336 99,217 384 299,937

Credit contracts

9,837 2,392 - 12,229

Foreign exchange contracts

73,645 1,022 231 74,898

Equity contracts

20,710 - 17,919 38,629

Commodity and other contracts

9,792 - 3,727 13,519

Total

314,320 102,631 22,261 439,212

Total gross derivatives

$ 316,493 $ 103,698 $ 22,261 $ 442,452

Amounts offset

Counterparty netting

(243,488 (100,477 (19,607 (363,572

Cash collateral netting

(45,875 (1,799 - (47,674

Total in Trading assets

$ 27,130 $ 1,422 $ 2,654 $ 31,206

Amounts not offset 3

Financial instruments collateral

(10,293 - - (10,293

Other cash collateral

(124 - - (124

Net amounts 4

$ 16,713 $ 1,422 $ 2,654 $ 20,789
Liabilities

$ in millions

Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total

Designated as accounting hedges

Interest rate contracts

$ 77 $ 647 $ - $ 724

Foreign exchange contracts

15 25 - 40

Total

92 672 - 764

Not designated as accounting hedges 5

Interest rate contracts

183,063 103,392 397 286,852

Credit contracts

11,024 2,401 - 13,425

Foreign exchange contracts

74,575 952 16 75,543

Equity contracts

22,531 - 17,983 40,514

Commodity and other contracts

8,303 - 3,582 11,885

Total

299,496 106,745 21,978 428,219

Total gross derivatives

$ 299,588 $ 107,417 $ 21,978 $ 428,983

Amounts offset

Counterparty netting

(243,488 (100,477 (19,607 (363,572

Cash collateral netting

(30,405 (5,691 - (36,096

Total in Trading liabilities

$ 25,695 $ 1,249 $ 2,371 $ 29,315

Amounts not offset 3

Financial instruments collateral

(7,638 - (585 (8,223

Other cash collateral

(10 (1 - (11

Net amounts 4

$ 18,047 $ 1,248 $ 1,786 $ 21,081

June 2017 Form 10-Q 62
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

Derivative Notionals

At June 30, 2017

Assets

$ in billions

Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total

Designated as accounting hedges

Interest rate contracts

$ 25 $ 36 $ - $ 61

Foreign exchange contracts

4 - - 4

Total

29 36 - 65

Not designated as accounting hedges 2

Interest rate contracts

3,928 7,275 3,184 14,387

Credit contracts

255 105 - 360

Foreign exchange contracts

1,779 60 10 1,849

Equity contracts

388 - 291 679

Commodity and other contracts

69 - 84 153

Total

6,419 7,440 3,569 17,428

Total gross derivatives

$ 6,448 $ 7,476 $ 3,569 $ 17,493
Liabilities

$ in billions

Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total

Designated as accounting hedges

Interest rate contracts

$ 2 $ 95 $ - $ 97

Foreign exchange contracts

5 1 - 6

Total

7 96 - 103

Not designated as accounting hedges 2

Interest rate contracts

3,671 5,901 1,236 10,808

Credit contracts

287 87 - 374

Foreign exchange contracts

1,869 62 23 1,954

Equity contracts

378 - 347 725

Commodity and other contracts

76 - 69 145

Total

6,281 6,050 1,675 14,006

Total gross derivatives

$ 6,288 $ 6,146 $ 1,675 $     14,109

At December 31, 2016

Assets

$ in billions

Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total

Designated as accounting hedges

Interest rate contracts

$ 30 $ 38 $ - $ 68

Foreign exchange contracts

6 - - 6

Total

36 38 - 74

Not designated as accounting hedges 5

Interest rate contracts

3,586 6,224 2,586 12,396

Credit contracts

333 112 - 445

Foreign exchange contracts

1,580 52 13 1,645

Equity contracts

338 - 242 580

Commodity and other contracts

67 - 79 146

Total

5,904 6,388 2,920 15,212

Total gross derivatives

$ 5,940 $ 6,426 $ 2,920 $ 15,286
Liabilities

$ in billions

Bilateral
OTC
Cleared
OTC
Exchange-
Traded
Total

Designated as accounting hedges

Interest rate contracts

$ 2 $ 52 $ - $ 54

Foreign exchange contracts

1 1 - 2

Total

3 53 - 56

Not designated as accounting hedges 5

Interest rate contracts

3,462 6,087 897 10,446

Credit contracts

359 96 - 455

Foreign exchange contracts

1,557 48 14 1,619

Equity contracts

321 - 273 594

Commodity and other contracts

78 - 59 137

Total

5,777 6,231 1,243 13,251

Total gross derivatives

$ 5,780 $ 6,284 $ 1,243 $     13,307

OTC-Over–the-counter

1.

Effective in the first quarter of 2017, the Chicago Mercantile Exchange ("CME") amended its rulebook for cleared OTC derivatives, resulting in the characterization of variation margin transfers as settlement payments as opposed to cash posted as collateral. In the quarter of adoption, the cleared OTC gross derivative assets and liabilities, and related counterparty and cash collateral netting amounts in total decreased by approximately $13 billion and $20 billion, respectively.

2.

Notional amounts include gross notionals related to open long and short futures contracts of $2,765 billion and $732 billion, respectively. The unsettled fair value on these futures contracts (excluded from this table) of $852 million and $425 million is included in Customer and other receivables and Customer and other payables, respectively, in the consolidated balance sheets.

3.

Amounts relate to master netting agreements and collateral agreements that have been determined by the Firm to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance.

63 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

4.

Amounts include transactions that are either not subject to master netting agreements or collateral agreements or are subject to such agreements but the Firm has not determined the agreements to be legally enforceable as follows: $3.3 billion of derivative assets and $3.5 billion of derivative liabilities at June 30, 2017 and $3.7 billion of derivative assets and $3.5 billion of derivative liabilities at December 31, 2016.

5.

Notional amounts include gross notionals related to open long and short futures contracts of $2,088 billion and $332 billion, respectively. The unsettled fair value on these futures contracts (excluded from this table) of $784 million and $174 million is included in Customer and other receivables and Customer and other payables, respectively, in the consolidated balance sheets.

For information related to offsetting of certain collateralized transactions, see Note 6. For a discussion of the Firm's derivative instruments and hedging activities, see Note 4 to the consolidated financial statements in the 2016 Form 10-K.

Gains (Losses) on Fair Value Hedges

Recognized in Interest Expense
Three Months Ended
June 30,
Six Months Ended
June 30,
$ in millions 2017 2016 2017 2016

Derivatives

$   138 $   969 $  (660) $   3,119 

Borrowings

(213 (993 495 (3,282)

Total

$ (75 $ (24 $  (165) $ (163)

Gains (Losses) on Net Investment Hedges

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

Foreign exchange contracts

Effective portion-OCI

$    (47) $ (112 $  (251) $  (336)

Forward points excluded from hedge effectiveness testing-Interest income

$      (9) $ (19 $    (19) $    (39)

Trading Revenues by Product Type

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

Interest rate contracts

$ 451 $ 320 $   1,045 $ 626 

Foreign exchange contracts

197 362 432 599 

Equity security and index contracts 1

  1,818   1,615   3,459   2,945 

Commodity and other contracts

110 20 299 (124)

Credit contracts

355 429 931 765 

Total

$   2,931 $   2,746 $ 6,166 $ 4,811 

1.

Dividend income is included within equity security and index contracts.

The previous table summarizes gains and losses included in Trading revenues in the consolidated income statements from trading activities. These activities include revenues related to derivative and non-derivative financial instruments. The Firm generally utilizes financial instruments across a variety of product types in connection with its market-making and related risk management strategies. Accordingly, the trading revenues presented in the previous table are not representative of the manner in which the Firm manages its business activities and are prepared in a manner similar to the presentation of trading revenues for regulatory reporting purposes.

OTC Derivative Products-Trading Assets

Counterparty Credit Rating and Remaining Maturity of OTC Derivative Assets

Fair Value at June 30, 2017 1
Contractual Years to Maturity Total
Derivative
Assets
$ in millions Less than 1 1-3 3-5 Over 5

Credit Rating 2

AAA

$ 232 $ 308 $ 406 $ 3,168 $ 4,114

AA

1,357 1,913 2,336 10,841 16,447

A

6,487 5,123 4,342 18,625 34,577

BBB

3,417 2,685 2,001 12,737 20,840

Non-investment grade

2,753 2,104 3,070 2,247 10,174

Total

$ 14,246 $   12,133 $   12,155 $   47,618 $ 86,152

Fair Value at June 30, 2017 1
$ in millions Total
Derivative
Assets

Cross-Maturity

and Cash

Collateral

Netting 3

Net Amounts

Post-cash

Collateral

Net Amounts

Post-
collateral 4

Credit Rating 2

AAA

$ 4,114 $ (3,091 $ 1,023 $ 952

AA

16,447 (10,935 5,512 2,756

A

34,577 (25,571 9,006 5,118

BBB

20,840 (14,301 6,539 4,908

Non-investment grade

10,174 (4,886 5,288 2,421

Total

$ 86,152 $ (58,784 $ 27,368 $ 16,155

Fair Value at December 31, 2016 1
Contractual Years to Maturity Total
Derivative
Assets
$ in millions Less than 1 1-3 3-5 Over 5

Credit Rating 2

AAA

$ 150 $ 428 $ 918 $ 2,931 $ 4,427

AA

3,177 2,383 2,942 10,194 18,696

A

9,244 6,676 5,495 21,322 42,737

BBB

4,423 3,085 2,434 13,023 22,965

Non-investment grade

2,283 1,702 1,722 1,794 7,501

Total

$ 19,277 $   14,274 $   13,511 $   49,264 $ 96,326

June 2017 Form 10-Q 64
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

Fair Value at December 31, 2016 1
$ in millions Total
Derivative
Assets

Cross-Maturity

and Cash

Collateral
Netting 3
Net Amounts
Post-cash
Collateral
Net Amounts
Post-
collateral 4

Credit Rating 2

AAA

$ 4,427 $ (3,900 $ 527 $ 485

AA

18,696 (11,813 6,883 4,114

A

42,737 (31,425 11,312 6,769

BBB

22,965 (16,629 6,336 4,852

Non-investment grade

7,501 (4,131 3,370 1,915

Total

$ 96,326 $ (67,898 $ 28,428 $ 18,135

1.

Fair values shown represent the Firm's net exposure to counterparties related to its OTC derivative products.

2.

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

3.

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

4.

Fair value is shown net of collateral received (primarily cash and U.S. government and agency securities).

Credit Risk-Related Contingencies

In connection with certain OTC trading agreements, the Firm may be required to provide additional collateral or immediately settle any outstanding liability balances with certain counterparties in the event of a credit rating downgrade of the Firm.

The following table presents the aggregate fair value of certain derivative contracts that contain credit risk-related contingent features that are in a net liability position for which the Firm has posted collateral in the normal course of business.

Net Derivative Liabilities and Collateral Posted

$ in millions

At June 30,
2017
At December 31,
2016

Net derivative liabilities with credit risk-related contingent features

$ 19,335 $ 22,939

Collateral posted

14,672 17,040

The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by contract and can be based on ratings by either or both of Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Global Ratings ("S&P"). The following table shows the future potential collateral amounts and termination payments that could be called or required by counterparties or exchange and clearing organizations in the event of one-notch or two-notch downgrade scenarios based on the relevant contractual downgrade triggers.

Incremental Collateral or Termination Payments upon Potential Future Ratings Downgrade

$ in millions At June 30, 2017 1

One-notch downgrade

$                        1,042

Two-notch downgrade

401

1.

Amounts include $1,187 million related to bilateral arrangements between the Firm and other parties where upon the downgrade of one party, the downgraded party must deliver collateral to the other party. These bilateral downgrade arrangements are used by the Firm to manage the risk of counterparty downgrades.

Credit Derivatives and Other Credit Contracts

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

For further information on credit derivatives and other credit contracts, see Note 4 to the consolidated financial statements in the 2016 Form 10-K.

Protection Sold and Purchased with Credit Default Swaps

At June 30, 2017
Protection Sold Protection Purchased

$ in millions

Notional
Fair Value
(Asset)/

Liability

Notional
Fair Value
(Asset)/

Liability

Credit default swaps

Single name

$  195,821 $ (1,274  $  207,973 $ 1,613

Index and basket

131,476 (48 126,594 (113

Tranched index and basket

23,519 (408 48,605 1,163

Total

$ 350,816 $ (1,730  $ 383,172 $ 2,663

Single name and non-tranched index and basket with identical underlying reference obligations

$ 323,765 - $ 330,349 -

At December 31, 2016
Protection Sold Protection Purchased

$ in millions

Notional
Fair Value
(Asset)/

Liability

Notional
Fair Value
(Asset)/

Liability

Credit default swaps

Single name

$  266,918   $ (753  $  269,623  $ 826

Index and basket

130,383 374 122,061 (481

Tranched index and basket

32,429 (670 78,505 1,900

Total

$  429,730   $ (1,049  $ 470,189  $ 2,245

Single name and non-tranched index and basket with identical underlying reference obligations

$ 395,536 - $ 389,221 -

65 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

Credit Ratings of Reference Obligation and Maturities of Credit Protection Sold

At June 30, 2017
Maximum Potential Payout/Notional

Fair Value

(Asset)/

Liability 1

Years to Maturity
$ in millions Less than 1 1-3 3-5 Over 5 Total

Single name credit default swaps 2

Investment grade

$ 57,174 $     52,949 $     26,353 $ 9,523 $     145,999 $ (1,397

Non-investment grade

22,379 18,958 7,465 1,020 49,822 123

Total single name credit default swaps

79,553 71,907 33,818 10,543 195,821 (1,274

Index and basket credit default swaps 2

Investment grade

26,972 14,044 48,806 7,914 97,736 (999

Non-investment grade

27,129 7,037 13,807 9,286 57,259 543

Total index and basket credit default swaps

54,101 21,081 62,613 17,200 154,995 (456

Total credit default swaps sold

$ 133,654 $ 92,988 $ 96,431 $     27,743 $ 350,816 $ (1,730

Other credit contracts

27 - 13 129 169 4

Total credit derivatives and other credit contracts

$ 133,681 $ 92,988 $ 96,444 $ 27,872 $ 350,985 $ (1,726

At December 31, 2016
Maximum Potential Payout/Notional

Fair Value

(Asset)/

Liability 1

Years to Maturity
$ in millions Less than 1 1-3 3-5 Over 5 Total

Single name credit default swaps 2

Investment grade

$ 79,449 $ 70,796 $ 34,529 $ 10,293 $ 195,067 $ (1,060

Non-investment grade

34,571 25,820 10,436 1,024 71,851 307

Total single name credit default swaps

$ 114,020 $ 96,616 $ 44,965 $ 11,317 $ 266,918 $ (753

Index and basket credit default swaps 2

Investment grade

$ 26,530 $ 21,388 $ 35,060 $ 9,096 $ 92,074 $ (846

Non-investment grade

26,135 22,983 11,759 9,861 70,738 550

Total index and basket credit default swaps

$ 52,665 $ 44,371 $ 46,819 $ 18,957 $ 162,812 $ (296

Total credit default swaps sold

$ 166,685 $     140,987 $     91,784 $     30,274 $     429,730 $ (1,049

Other credit contracts

49 6 - 215 270 -

Total credit derivatives and other credit contracts

$ 166,734 $ 140,993 $ 91,784 $ 30,489 $ 430,000 $ (1,049

1.

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

2.

In order to provide an indication of the current payment status or performance risk of the CDS, a breakdown of CDS based on the Firm's internal credit ratings by investment grade and non-investment grade is provided. Internal credit ratings serve as the Credit Risk Management Department's assessment of credit risk and the basis for a comprehensive credit limits framework used to control credit risk. The Firm uses quantitative models and judgment to estimate the various risk parameters related to each obligor.

June 2017 Form 10-Q 66
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

5. Investment Securities

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

AFS and HTM Securities

At June 30, 2017

$ in millions Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value

AFS debt securities

U.S. government and agency securities:

U.S. Treasury securities

$ 21,580 $ - $ 417 $ 21,163

U.S. agency securities 1

21,714 36 200 21,550

Total U.S. government and agency securities

43,294 36 617 42,713

Corporate and other debt:

Commercial mortgage-backed securities:

Agency

1,536 2 42 1,496

Non-agency

1,578 11 9 1,580

Corporate bonds

1,586 13 8 1,591

Collateralized loan obligations

560 1 - 561

FFELP student loan asset-backed securities 2

2,549 7 15 2,541
Total corporate and other debt 7,809 34 74 7,769

Total AFS debt securities

51,103 70 691 50,482

AFS equity securities

15 - 9 6

Total AFS securities

51,118 70 700 50,488

HTM securities

U.S. government securities:

U.S. Treasury securities

8,463 9 216 8,256

U.S. agency securities 1

12,501 10 193 12,318

Total U.S. government and agency securities

20,964 19 409 20,574

Corporate and other debt:

Commercial mortgage-backed securities:

Non-agency

124 - 1 123

Total corporate and other debt

124 - 1 123

Total HTM securities

21,088 19 410 20,697

Total Investment securities

$ 72,206 $ 89 $ 1,110 $ 71,185
At December 31, 2016
$ in millions Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value

AFS debt securities

U.S. government and agency securities:

U.S. Treasury securities

$ 28,371 $ 1 $ 545 $     27,827

U.S. agency securities 1

22,348 14 278 22,084

Total U.S. government and agency securities

50,719 15 823 49,911

Corporate and other debt:

Commercial mortgage-backed securities:

Agency

1,850 2 44 1,808

Non-agency

2,250 11 16 2,245

Auto loan asset-backed securities

1,509 1 1 1,509

Corporate bonds

3,836 7 22 3,821

Collateralized loan obligations

540 - 1 539

FFELP student loan asset-backed securities 2

3,387 5 61 3,331

Total corporate and other debt

13,372 26 145 13,253

Total AFS debt securities

64,091 41 968 63,164

AFS equity securities

15 - 9 6

Total AFS securities

64,106 41 977 63,170

HTM securities

U.S. government securities:

U.S. Treasury securities

5,839 1 283 5,557

U.S. agency securities 1

11,083 1 188 10,896

Total HTM securities

16,922 2 471 16,453

Total Investment securities

$ 81,028 $ 43 $ 1,448 $ 79,623

1.

U.S. agency securities consist mainly of agency-issued debt, agency mortgage pass-through pool securities and collateralized mortgage obligations.

2.

FFELP-Federal Family Education Loan Program. Amounts are backed by a guarantee from the U.S. Department of Education of at least 95% of the principal balance and interest on such loans.

67 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

Investment Securities in an Unrealized Loss Position

At June 30, 2017
Less than 12 Months 12 Months or Longer Total
$ in millions Fair Value Gross
Unrealized
Losses
Fair Value Gross
Unrealized
Losses
Fair Value Gross
Unrealized
Losses

AFS debt securities

U.S. government and agency securities:

U.S. Treasury securities

$ 21,163 $ 417 $ - $ - $ 21,163 $ 417

U.S. agency securities

11,890 199 99 1 11,989 200

Total U.S. government and agency securities

33,053 616 99 1 33,152 617

Corporate and other debt:

Commercial mortgage-backed securities:

Agency

1,063 42 - - 1,063 42

Non-agency

370 6 406 3 776 9

Corporate bonds

592 8 - - 592 8

FFELP student loan asset-backed securities

1,580 15 - - 1,580 15

Total corporate and other debt

3,605 71 406 3 4,011 74

Total AFS debt securities

36,658 687 505 4 37,163 691

AFS equity securities

- - 6 9 6 9

Total AFS securities

36,658 687 511 13 37,169 700

HTM securities

U.S. government and agency securities:

U.S. Treasury securities

7,043 216 - - 7,043 216

U.S. agency securities

10,573 193 - - 10,573 193

Total U.S. government and agency securities

17,616 409 - - 17,616 409

Corporate and other debt:

Non-agency

91 1 - - 91 1

Total corporate and other debt

91 1 - - 91 1

Total HTM securities

17,707 410 - - 17,707 410

Total Investment securities

$ 54,365 $ 1,097 $ 511 $ 13 $ 54,876 $ 1,110

June 2017 Form 10-Q 68
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

At December 31, 2016
Less than 12 Months 12 Months or Longer Total
$ in millions Fair Value Gross
Unrealized
Losses
Fair Value Gross
Unrealized
Losses
Fair Value Gross
Unrealized
Losses

AFS debt securities

U.S. government and agency securities:

U.S. Treasury securities

$ 25,323 $ 545 $ - $ - $ 25,323 $ 545

U.S. agency securities

16,760 278 125 - 16,885 278

Total U.S. government and agency securities

42,083 823 125 - 42,208 823

Corporate and other debt:

Commercial mortgage-backed securities:

Agency

1,245 44 - - 1,245 44

Non-agency

763 11 594 5 1,357 16

Auto loan asset-backed securities

659 1 123 - 782 1

Corporate bonds

2,050 21 142 1 2,192 22

Collateralized loan obligations

178 - 239 1 417 1

FFELP student loan asset-backed securities

2,612 61 - - 2,612 61

Total corporate and other debt

7,507 138 1,098 7 8,605 145

Total AFS debt securities

49,590 961 1,223 7 50,813 968

AFS equity securities

6 9 - - 6 9

Total AFS securities

49,596 970 1,223 7 50,819 977

HTM securities

U.S. government and agency securities:

U.S. Treasury securities

5,057 283 - - 5,057 283

U.S. agency securities

10,612 188 - - 10,612 188

Total HTM securities

15,669 471 - - 15,669 471

Total Investment securities

$ 65,265 $ 1,441 $ 1,223 $ 7 $ 66,488 $ 1,448

69 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

As discussed in Note 2 to the consolidated financial statements in the 2016 Form 10-K, AFS and HTM securities with a current fair value less than their amortized cost are analyzed as part of the Firm's ongoing assessment of temporarily versus other-than-temporarily impaired at the individual security level.

The Firm believes there are no securities in an unrealized loss position that are other-than-temporarily-impaired at June 30, 2017 and December 31, 2016 for the reasons discussed herein.

For AFS debt securities, the Firm does not intend to sell the securities and is not likely to be required to sell the securities prior to recovery of amortized cost basis. For AFS and HTM debt securities, the securities have not experienced credit losses as the net unrealized losses reported in the previous table are primarily due to higher interest rates since those securities were purchased.

Additionally, the Firm does not expect to experience a credit loss based on consideration of the relevant information (as discussed in Note 2 to the consolidated financial statements in the 2016 Form 10-K), including for U.S. government and agency securities, the existence of an explicit and implicit guarantee provided by the U.S. government. The risk of credit loss on securities in an unrealized loss position is considered minimal because the Firm's U.S. government and agency securities, as well as asset-backed securities ("ABS"), commercial mortgage-backed securities ("CMBS") and collateralized loan obligations ("CLOs"), are highly rated and because corporate bonds are all investment grade.

For AFS equity securities, the Firm has the intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in market value.

See Note 12 for additional information on securities issued by VIEs, including U.S. agency mortgage-backed securities, non-agency CMBS, auto loan ABS, CLO and FFELP student loan ABS.

Investment Securities by Contractual Maturity

At June 30, 2017

$ in millions

Amortized
Cost
Fair Value Annualized
Average
Yield

AFS debt securities

U.S. government and agency securities:

U.S. Treasury securities:

Due within 1 year

$           3,798 $           3,786 0.9%

After 1 year through 5 years

13,090 12,923 1.2%

After 5 years through 10 years

4,692 4,454 1.4%

Total

21,580 21,163
At June 30, 2017

$ in millions

Amortized
Cost
Fair Value Annualized
Average
Yield

U.S. agency securities:

Due within 1 year

$ 539 $ 539 0.3%

After 1 year through 5 years

3,696 3,693 0.7%

After 5 years through 10 years

760 762 2.0%

After 10 years

16,719 16,556 1.8%

Total

21,714 21,550

Total U.S. government and agency securities

43,294 42,713 1.4%

Corporate and other debt:

Commercial mortgage-backed securities:

Agency:

Due within 1 year

49 49 1.1%

After 1 year through 5 years

241 240 1.5%

After 5 years through 10 years

383 385 1.2%

After 10 years

863 822 1.6%

Total

1,536 1,496

Non-agency:

After 5 years through 10 years

36 35 2.5%

After 10 years

1,542 1,545 2.1%

Total

1,578 1,580

Corporate bonds:

Due within 1 year

36 36 1.2%

After 1 year through 5 years

1,219 1,225 2.4%

After 5 years through 10 years

331 330 2.4%

Total

1,586 1,591

Collateralized loan obligations:

After 5 years through 10 years

362 362 1.5%

After 10 years

198 199 2.4%

Total

560 561

FFELP student loan asset-backed securities:

After 1 year through 5 years

57 56 0.8%

After 5 years through 10 years

536 532 0.8%

After 10 years

1,956 1,953 1.1%

Total

2,549 2,541

Total corporate and other debt

7,809 7,769 1.6%

Total AFS debt securities

51,103 50,482 1.4%

AFS equity securities

15 6 - %

Total AFS securities

51,118 50,488 1.4%

HTM securities

U.S. government securities:

U.S. Treasury securities:

Due within 1 year

300 300 0.7%

After 1 year through 5 years

4,837 4,831 1.5%

After 5 years through 10 years

2,599 2,472 1.6%

After 10 years

727 653 2.3%

Total

8,463 8,256

U.S. agency securities:

After 10 years

12,501 12,318 2.4%

Total

12,501 12,318

Corporate and other debt:

Commercial mortgage-backed securities:

Non-agency:

After 1 year through 5 years

41 41 3.7%

After 5 years through 10 years

83 82 3.8%

Total

124 123

Total HTM securities

21,088 20,697 2.1%

Total Investment securities

$ 72,206 $ 71,185 1.6%

June 2017 Form 10-Q 70
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

Gross Realized Gains and Losses on Sales of AFS Securities

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

Gross realized gains

$ 23 $ 71 $ 27 $ 85

Gross realized (losses)

(9 (1 (11 (3

Total

$ 14 $ 70 $ 16 $ 82

Gross realized gains and losses are recognized in Other revenues in the consolidated income statements.

6. Collateralized Transactions

The Firm enters into securities purchased under agreements to resell, securities sold under agreements to repurchase, securities borrowed and securities loaned transactions to, among other things, acquire securities to cover short positions and settle other securities obligations, to accommodate customers' needs and to finance its inventory positions. For further discussion of the Firm's collateralized transactions, see Note 6 to the consolidated financial statements in the 2016 Form 10-K.

Offsetting of Certain Collateralized Transactions

At June 30, 2017

$ in millions

Gross
Amounts

Amounts

Offset

Net
Amounts
Presented
Amounts
Not Offset 1
Net
Amounts

Assets

Securities purchased under agreements to resell

$ 161,364 $ (63,956 $ 97,408 $ (89,731 $ 7,677

Securities borrowed

140,136 (13,414 126,722 (121,668 5,054

Liabilities

Securities sold under agreements to repurchase

$   114,653 $ (63,956 $ 50,697 $ (44,980 $ 5,717

Securities loaned

30,276 (13,414 16,862 (16,632 230

Not subject to legally enforceable master netting agreements 2

Securities purchased under agreements to resell

$ 7,010

Securities borrowed

1,224

Securities sold under agreements to repurchase

5,222

Securities loaned

183
At December 31, 2016

$ in millions

Gross
Amounts

Amounts

Offset

Net
Amounts
Presented
Amounts
Not Offset 1
Net
Amounts

Assets

Securities purchased under agreements to resell

$   182,888 $     (80,933 $ 101,955 $ (93,365 $ 8,590

Securities borrowed

129,934 (4,698 125,236 (118,974 6,262

Liabilities

Securities sold under agreements to repurchase

$ 135,561 $ (80,933 $ 54,628 $ (47,933 $ 6,695

Securities loaned

20,542 (4,698 15,844 (15,670 174

Not subject to legally enforceable master netting agreements 2

Securities purchased under agreements to resell

$ 7,765

Securities borrowed

2,591

Securities sold under agreements to repurchase

6,500

Securities loaned

154

1.

Amounts relate to master netting agreements that have been determined by the Firm to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance.

2.

Represents amounts within Net Amounts related to transactions that are either not subject to master netting agreements or are subject to such agreements but the Firm has not determined the agreements to be legally enforceable.

For information related to offsetting of derivatives, see Note 4.

Maturities and Collateral Pledged

Gross Secured Financing Balances by Remaining Contractual Maturity

At June 30, 2017

$ in millions

Overnight

and
Open
Less
than

30 Days

30-90
Days

Over

90 Days

Total

Securities sold under agreements to repurchase 1

$   29,403 $   26,884 $   18,896 $   39,470 $   114,653

Securities loaned 1

16,447 1,656 1,833 10,340 30,276

Gross amount of secured financing included in the offsetting disclosure

$ 45,850 $ 28,540 $ 20,729 $ 49,810 $ 144,929

Trading liabilities- Obligation to return securities received as collateral

21,481 - - - 21,481

Total

$ 67,331 $ 28,540 $ 20,729 $ 49,810 $ 166,410

71 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

At December 31, 2016

$ in millions

Overnight

and
Open
Less
than

30 Days

30-90
Days

Over

90 Days

Total

Securities sold under agreements to repurchase 1

$ 41,549 $   36,703 $   24,648 $   32,661 $   135,561

Securities loaned 1

9,487 851 2,863 7,341 20,542

Gross amount of secured financing included in the offsetting disclosure

$ 51,036 $ 37,554 $ 27,511 $ 40,002 $ 156,103

Trading liabilities- Obligation to return securities received as collateral

20,262 - - - 20,262

Total

$ 71,298 $ 37,554 $ 27,511 $ 40,002 $ 176,365

1.

Amounts are presented on a gross basis, prior to netting in the consolidated balance sheets.

Gross Secured Financing Balances by Class of Collateral Pledged

$ in millions

At

June 30,

2017

At

December 31,
2016

Securities sold under agreements to repurchase 1

U.S. government and agency securities

$ 28,512 $ 56,372

State and municipal securities

157 1,363

Other sovereign government obligations

51,498 42,790

Asset-backed securities

1,549 1,918

Corporate and other debt

5,083 9,086

Corporate equities

26,599 23,152

Other

1,255 880

Total securities sold under agreements to repurchase

$ 114,653 $ 135,561

Securities loaned 1

Other sovereign government obligations

13,599 4,762

Corporate and other debt

124 73

Corporate equities

16,375 15,693

Other

178 14

Total securities loaned

$ 30,276 $ 20,542

Gross amount of secured financing included in the offsetting disclosure

$ 144,929 $ 156,103

Trading liabilities-Obligation to return securities received as collateral

Corporate equities

21,472 20,247

Other

9 15

Total Trading liabilities-Obligation to return securities received as collateral

$ 21,481 $ 20,262

Total

$           166,410 $           176,365

1.

Amounts are presented on a gross basis, prior to netting in the consolidated balance sheets.

Assets Pledged

$ in millions

At

June 30,

2017

At

December 31,

2016

Carrying value of trading assets loaned or pledged 1

$ 42,053 $ 41,358

Carrying value of loans pledged (gross of allowance for loan losses) 1

3,876 -  

Total

$             45,929 $             41,358

1.

Counterparties do not have the right to sell or repledge the collateral.

The Firm pledges its trading assets and loans to collateralize securities sold under agreements to repurchase, securities loaned, other secured financings and derivatives. Counterparties may or may not have the right to sell or repledge the collateral.

Pledged financial instruments that can be sold or repledged by the secured party are identified as Trading assets (pledged to various parties) in the consolidated balance sheets. Pledged financial instruments that cannot be sold or repledged by the secured party are shown in the previous table.

Collateral Received

The Firm receives collateral in the form of securities in connection with securities purchased under agreements to resell, securities borrowed, derivative transactions, customer margin loans and securities-based lending. In many cases, the Firm is permitted to sell or repledge these securities held as collateral and use the securities to secure securities sold under agreements to repurchase, to enter into securities lending and derivative transactions or for delivery to counterparties to cover short positions.

The Firm also receives securities as collateral in connection with certain securities-for-securities transactions. In instances where the Firm is the lender and permitted to sell or repledge these securities, it reports the fair value of the collateral received and the related obligation to return the collateral included in Trading assets and Trading liabilities, respectively, in its consolidated balance sheets.

Fair Value of Collateral Received with Right to Sell or Repledge

$ in millions

At

June 30,

2017

At

December 31,

2016

Collateral received with right to sell or repledge

$ 556,203 $ 561,239

Collateral that was sold or repledged

          429,029           430,911

June 2017 Form 10-Q 72
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

Customer Margin Lending and Other

$ in millions

At

June 30,

2017

At

December 31,

2016

Net customer receivables representing margin loans

$ 27,744 $ 24,359

The Firm engages in margin lending to clients that allows the client to borrow against the value of qualifying securities. Margin loans are included within Customer and other receivables in the consolidated balance sheets. Under these agreements and transactions, the Firm receives collateral, including U.S. government and agency securities, other sovereign government obligations, corporate and other debt, and corporate equities. Customer receivables generated from margin lending activities are collateralized by customer-owned securities held by the Firm. The Firm monitors required margin levels and established credit terms daily and, pursuant to such guidelines, requires customers to deposit additional collateral, or reduce positions, when necessary.

For a further discussion of the Firm's margin lending activities, see Note 6 to the consolidated financial statements in the 2016 Form 10-K.

The Firm has additional secured liabilities. For a further discussion of other secured financings, see Note 10.

Cash and Securities Deposited with Clearing Organizations or Segregated

$ in millions

At

June 30,

2017

At

December 31,

2016

Segregated securities 1

$ 20,351 $ 23,756

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

30,171 33,979

Total

$           50,522 $           57,735

1.

Securities segregated under federal regulations for the Firm's U.S. broker-dealers are sourced from Securities purchased under agreements to resell and Trading assets in the consolidated balance sheets.

7. Loans and Allowance for Credit Losses

Loans

The Firm's loans held for investment are recorded at amortized cost, and its loans held for sale are recorded at the lower of cost or fair value in the consolidated balance sheets. For a further description of these loans, refer to Note 7 to the consolidated financial statements in the 2016 Form 10-K. See Note 3 for further information regarding Loans and lending commitments held at fair value.

Loans Held for Investment and Held for Sale by Loan Type

At June 30, 2017
$ in millions Loans
Held for
Investment
Loans
Held for
Sale
Total
Loans

Corporate loans

$ 26,831 $ 9,394 $ 36,225

Consumer loans

26,354 - 26,354

Residential real estate loans

25,646 60 25,706

Wholesale real estate loans

8,482 1,178 9,660

Total loans, gross

87,313 10,632 97,945

Allowance for loan losses

(306 - (306

Total loans, net

$ 87,007 $ 10,632 $ 97,639

At December 31, 2016
$ in millions Loans
Held for
Investment
Loans
Held for
Sale
Total
Loans

Corporate loans

$ 25,025 $ 10,710 $ 35,735

Consumer loans

24,866 - 24,866

Residential real estate loans

24,385 61 24,446

Wholesale real estate loans

7,702 1,773 9,475

Total loans, gross

81,978 12,544 94,522

Allowance for loan losses

(274 - (274

Total loans, net

$ 81,704 $ 12,544 $ 94,248

Loans to Non-U.S. Borrowers

$ in millions

At
June 30,

2017

At
December 31,
2016

Loans, net of allowance

$ 8,725 $ 9,388

Loans by Interest Rate Type

$ in millions

At
June 30,

2017

At
December 31,
2016

Fixed

$ 12,696 $ 11,895

Floating or adjustable

$ 84,943 $ 82,353

Credit Quality

For a further discussion about the Firm's evaluation of credit transactions and monitoring and credit quality indicators, see Note 7 to the consolidated financial statements in the 2016 Form 10-K.

73 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

Loans Held for Investment before Allowance by Credit Quality

At June 30, 2017

$ in millions

Corporate Consumer

Residential

Real
Estate

Wholesale

Real
Estate
Total

Pass

$ 25,321 $ 26,351 $ 25,598 $ 7,975 $ 85,245

Special mention

416 3 - 192 611

Substandard

1,025 - 48 315 1,388

Doubtful

69 - - - 69

Loss

- - - - -

Total

$ 26,831 $ 26,354 $ 25,646 $ 8,482 $ 87,313

At December 31, 2016
$ in millions Corporate Consumer

Residential

Real
Estate

Wholesale

Real
Estate
Total

Pass

$ 23,409 $ 24,853 $ 24,345 $ 7,294 $ 79,901

Special mention

288 13 - 218 519

Substandard

1,259 - 40 190 1,489

Doubtful

69 - - - 69

Loss

- - - - -

Total

$ 25,025 $ 24,866 $ 24,385 $ 7,702 $ 81,978

Allowance for Credit Losses and Impaired Loans

For factors considered by the Firm in determining the allowance for loan losses and impairments, see Notes 2 and 7 to the consolidated financial statements in the 2016 Form 10-K.

Impaired Loans Before Allowance by Product Type

At June 30, 2017
$ in millions Corporate

Residential

Real
Estate
Total

With allowance

$ 141 $ - $ 141

Without allowance 1

122 35 157

Unpaid principal balance 2

273 36 309
At December 31, 2016
$ in millions Corporate

Residential

Real
Estate
Total

With allowance

$ 104 $ - $ 104

Without allowance 1

206 35 241

Unpaid principal balance 2

316 38 354

1.

At June 30, 2017 and December 31, 2016, no allowance was recorded for these loans as the present value of the expected future cash flows (or, alternatively, the observable market price of the loan or the fair value of the collateral held) equaled or exceeded the carrying value.

2.

The impaired loans unpaid principal balance differs from the aggregate amount of impaired loan balances with and without allowance due to various factors, including charge-offs and net deferred loan fees or costs.

Select Loan Information by Region

At June 30, 2017
$ in millions Americas EMEA Asia-
Pacific
Total

Impaired loans

$ 279 $ 9 $ 10 $ 298

Allowance for loan losses

274 30 2 306
At December 31, 2016
$ in millions Americas EMEA Asia-
Pacific
Total

Impaired loans

$ 320 $ 9 $ 16 $ 345

Allowance for loan losses

245 28 1 274

EMEA-Europe, Middle East and Africa

Allowance for Credit Losses on Lending Activities

Loans-Current Year Period

Allowance for Loan Losses Rollforward

$ in millions

Corporate

Consumer

Residential

Real
Estate
Wholesale
Real
Estate
Total

December 31, 2016

$ 195 $ 4 $ 20 $ 55 $ 274

Recoveries

1 - - - 1

Provision for (release of) loan losses 1

14 - 1 14 29

Other

1 - - 1 2

June 30, 2017

$ 211 $ 4 $ 21 $ 70 $ 306

Loan Loss Allowance by Impairment Methodology

At June 30, 2017
$ in
millions
Corporate Consumer

Residential

Real
Estate
Wholesale
Real
Estate
Total

Inherent

$ 142 $ 4 $ 21 $ 70 $ 237

Specific

69 - - - 69

Total

$ 211 $ 4 $ 21 $ 70 $ 306

Loans by Impairment Methodology 2

At June 30, 2017
$ in millions Corporate Consumer

Residential

Real
Estate
Wholesale
Real
Estate
Total

Inherent

$ 26,568 $ 26,354 $ 25,611 $ 8,482 $ 87,015

Specific

263 - 35 - 298

Total

$ 26,831 $ 26,354 $ 25,646 $ 8,482 $ 87,313

1.

The Firm recorded provisions of $7 million for loan losses for the current quarter.

2.

Loan balances are gross of the allowance for loan losses.

June 2017 Form 10-Q 74
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

Loans-Prior Year Period

Allowance for Loan Losses Rollforward

$ in millions

Corporate

Consumer

Residential

Real
Estate
Wholesale
Real
Estate
Total

December 31, 2015

$ 166 $ 5 $ 17 $ 37 $ 225

Provision for (release of) loan losses 1

116 (1 1 12 128

Other 2

(30 - - - (30

June 30, 2016

$ 252 $ 4 $ 18 $ 49 $ 323

Loan Loss Allowance by Impairment Methodology

At June 30, 2016
$ in millions Corporate Consumer

Residential

Real
Estate
Wholesale
Real
Estate
Total

Inherent

$ 147 $ 4 $ 18 $ 49 $ 218

Specific

105 - - - 105

Total

$ 252 $ 4 $ 18 $ 49 $ 323

Loans by Impairment Methodology 3

At June 30, 2016
$ in millions Corporate Consumer

Residential

Real
Estate
Wholesale
Real
Estate
Total

Inherent

$ 23,604 $ 23,337 $ 22,638 $ 7,415 $ 76,994

Specific

582 - 30 - 612

June 30, 2016

$ 24,186 $ 23,337 $ 22,668 $ 7,415 $ 77,606

1.

The Firm recorded provisions of $16 million for loan losses for the prior year quarter.

2.

Amount includes the impact related to the transfer to loans held for sale and foreign currency translation adjustments.

3.

Loan balances are gross of the allowance for loan losses.

Commitments-Current Year Period

Allowance for Lending Commitments Rollforward

$ in millions Corporate Consumer

Residential

Real
Estate
Wholesale
Real
Estate
Total

December 31, 2016

$ 185 $ 1 $ - $ 4 $ 190

Provision for (release of) lending commitments 1

(3 - - (1 (4

June 30, 2017

$ 182 $ 1 $ - $ 3 $ 186

Lending Commitments Allowance by Impairment Methodology

At June 30, 2017
$ in millions Corporate Consumer

Residential

Real
Estate
Wholesale
Real
Estate
Total

Inherent

$ 179 $ 1 $ - $ 3 $ 183

Specific

3 - - - 3

Total

$ 182 $ 1 $ - $ 3 $ 186

Lending Commitments by Impairment Methodology 2

At June 30, 2017
$ in millions Corporate Consumer

Residential

Real
Estate
Wholesale
Real
Estate
Total

Inherent

$ 62,339 $ 6,005 $ 346 $ 409 $ 69,099

Specific

229 - - - 229

Total

$ 62,568 $ 6,005 $ 346 $ 409 $ 69,328

1.

The Firm recorded a release of $7 million for commitments for the current quarter.

2.

Lending commitments are gross of the allowance for lending commitments.

Commitments-Prior Year Period

Allowance for Lending Commitments Rollforward

$ in millions Corporate Consumer

Residential

Real
Estate
Wholesale
Real
Estate
Total

December 31, 2015

$ 180 $ 1 $ - $ 4 $ 185

Provision for lending commitments 1

1 - - 2 3

Other

- (1 - - (1

June 30, 2016

$ 181 $ - $ - $ 6 $ 187

Lending Commitments Allowance by Impairment Methodology

At June 30, 2016
$ in millions Corporate Consumer

Residential

Real
Estate
Wholesale
Real
Estate
Total

Inherent

$ 173 $ - $ - $ 6 $ 179

Specific

8 - - - 8

Total

$ 181 $ - $ - $ 6 $ 187

75 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

Lending Commitments by Impairment Methodology 2

At June 30, 2016
$ in millions Corporate Consumer

Residential

Real
Estate
Wholesale
Real
Estate
Total

Inherent

$ 63,120 $ 5,264 $ 327 $ 496 $ 69,207

Specific

64 - - - 64

Total

$ 63,184 $ 5,264 $ 327 $ 496 $ 69,271

1.

The Firm recorded a release of $13 million for commitments for the prior year quarter.

2.

Lending commitments are gross of the allowance for lending commitments.

Troubled Debt Restructurings    

Impaired loans and lending commitments classified as held for investment within corporate loans include troubled debt restructurings as shown in the following table.

Troubled Debt Restructurings

$ in millions

At June 30,

2017

At December 31,
2016

Loans

$ 58 $ 67

Lending commitments

21 14

Allowance for loan losses

8 -

These restructurings typically include modifications of interest rates, collateral requirements, other loan covenants and payment extensions.

Employee Loans

Employee loans are granted in conjunction with a program established in the Wealth Management business segment to retain and recruit certain employees. These loans are recorded in Customer and other receivables in the consolidated balance sheets. These loans are full recourse, generally require periodic payments and have repayment terms ranging from 1 to 20 years. The Firm establishes an allowance for loan amounts it does not consider recoverable, and the related provision is recorded in Compensation and benefits expense.

Employee Loans

$ in millions

At June 30,

2017

At December 31,
2016

Balance

$ 4,323 $ 4,804

Allowance for loan losses

(83 (89

Balance, net

$ 4,240 $ 4,715

8. Equity Method Investments

Overview

The Firm's investments accounted for under the equity method of accounting (see Note 1 to the consolidated financial statements in the 2016 Form 10-K) are included in Other assets-Other investments in the consolidated balance sheets. Income (loss) from equity method investments is included in Other revenues in the consolidated income statements.

Equity Method Investment Balances

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

Investments

$ 2,760 $ 2,837

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

Income (loss)

$ (9 $ (14 $ - $ 1

Japanese Securities Joint Venture

Included in the equity method investments is the Firm's 40% voting interest ("40% interest") in Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. ("MUMSS"). Mitsubishi UFJ Financial Group, Inc. ("MUFG") holds a 60% voting interest. The Firm accounts for its equity method investment in MUMSS within the Institutional Securities business segment. The Firm records income from its 40% interest in MUMSS within Other revenues in the consolidated income statements.

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

Income from investment in MUMSS

$ 23 $ 23 $ 71 $ 57

In addition to MUMSS, the Firm held other equity method investments that were not individually significant.

9. Deposits

Deposits

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

Savings and demand deposits

$ 141,087 $ 154,559

Time deposits 1

3,826 1,304

Total 2

$ 144,913 $ 155,863

Deposits subject to FDIC insurance

$ 120,991 $ 127,992

Time deposits that equal or exceed the FDIC insurance limit

$ 2 $ 46

June 2017 Form 10-Q 76
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

Interest Bearing Deposit Maturities at June 30, 2017

$ in millions Savings and
Demand Deposits
Time
Deposits 1

Demand

$ 141,047 $ -

2017

- 2,925

2018

- 672

2019

- 105

2021

- 8

Thereafter

- 116

FDIC-Federal

Deposit Insurance Corporation

1.

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

2.

Deposits were primarily held in the U.S.

The vast majority of deposits in Morgan Stanley Bank, N.A. ("MSBNA") and Morgan Stanley Private Bank, National Association ("MSPBNA") (collectively, "U.S. Bank Subsidiaries") are sourced from Wealth Management customer accounts.

10. Long-Term Borrowings and Other Secured Financings

Long-Term Borrowings

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

Senior

$ 173,761 $ 154,472

Subordinated

10,351 10,303

Total

$ 184,112 $ 164,775

Weighted average stated maturity, in years

6.5 5.9

During the current year period and prior year period, the Firm issued notes with a principal amount of approximately $33.5 billion and $20.6 billion, respectively, and approximately $17.8 billion and $15.9 billion, respectively, in aggregate long-term borrowings matured or were retired.

Other Secured Financings

Other secured financings include the liabilities related to transfers of financial assets that are accounted for as financings rather than sales, consolidated VIEs where the Firm is deemed to be the primary beneficiary, pledged commodities, certain equity-linked notes and other secured borrowings. These liabilities are generally payable from the cash flows of the related assets accounted for as Trading assets. See Note 12 for further information on Other secured financings related to VIEs and securitization activities.

Other Secured Financings by Original Maturity and Type

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

Secured Financings

Original maturities:

Greater than one year

$ 11,005 $ 9,404

One year or less

4,996 1,429

Failed sales 1

641 285

Total

$ 16,642 $ 11,118

1.

For more information on failed sales, see Note 12.

11. Commitments, Guarantees and Contingencies

Commitments

The Firm's commitments are summarized in the following table by years to maturity. Since commitments associated with these instruments may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.

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

Lending:

Corporate 1

$ 13,478 $ 28,417 $ 45,187 $ 3,806 $ 90,888

Consumer

5,998 4 - 4 6,006

Residential real estate

35 25 84 238 382

Wholesale real estate

232 266 8 67 573

Forward-starting secured financing receivables 2

70,023 - - - 70,023

Underwriting

1,024 - - - 1,024

Investment activities

569 197 22 259 1,047

Letters of credit and other financial guarantees

156 1 1 41 199

Total

$ 91,515 $ 28,910 $ 45,302 $ 4,415 $ 170,142

1.

Due to the nature of the Firm's obligations under the commitments, these amounts include certain commitments participated to third parties of $6.2 billion.

2.

Represents forward-starting securities purchased under agreements to resell and securities borrowed agreements, of which $59.8 billion settled within three business days.

For a further description of these commitments, refer to Note 12 to the consolidated financial statements in the 2016 Form 10-K.

77 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

Guarantees

Obligations under Guarantee Arrangements at June 30, 2017

Maximum Potential Payout/Notional
Years to Maturity
$ in millions Less
than 1
1-3 3-5 Over 5 Total

Credit derivatives

$ 133,654 $ 92,988 $ 96,431 $ 27,743 $ 350,816

Other credit contracts

27 - 13 129 169

Non-credit derivatives

1,560,514 918,800 331,073 572,502 3,382,889

Standby letters of credit and other financial guarantees issued 1

779 856 1,147 5,153 7,935

Market value guarantees

39 65 70 - 174

Liquidity facilities

3,229 - - - 3,229

Whole loan sales guarantees

- - 2 23,278 23,280

Securitization representations and warranties

- - - 57,547 57,547

General partner guarantees

34 44 313 13 404

$ in millions Carrying
Amount
(Asset)/
Liability
Collateral/
Recourse

Credit derivatives 2

$ (1,730 $ -

Other credit contracts

4 -

Non-credit derivatives 2

45,076 -

Standby letters of credit and other financial guarantees issued 1

(186 6,560

Market value guarantees

1 4

Liquidity facilities

(5 5,503

Whole loan sales guarantees

8 -

Securitization representations and warranties

90 -

General partner guarantees

44 -

1.

These amounts include certain issued standby letters of credit participated to third parties, totaling $0.7 billion of notional and collateral/recourse, due to the nature of the Firm's obligations under these arrangements.

2.

Carrying amounts of derivative contracts are shown on a gross basis prior to cash collateral or counterparty netting. For further information on derivative contracts, see Note 4.

The Firm also has obligations under certain guarantee arrangements, including contracts and indemnification agreements, that contingently require the Firm to make payments to the guaranteed party based on changes in an underlying measure (such as an interest or foreign exchange rate, security or commodity price, an index, or the occurrence or non-occurrence of a specified event) related to an asset, liability or equity security of a guaranteed party. Also included as guarantees are contracts that contingently require the Firm to make payments to the guaranteed party based on another entity's failure to perform under an agreement, as well as indirect guarantees of the indebtedness of others.

For more information on the nature of the obligation and related business activity for market value guarantees, liquidity facilities, whole loan sales guarantees and general partner guarantees related to certain investment management funds, as well as the other products in the previous table, see Note 12 to the consolidated financial statements in the 2016 Form 10-K.

Other Guarantees and Indemnities

In the normal course of business, the Firm provides guarantees and indemnifications in a variety of transactions. These provisions generally are standard contractual terms. Certain of these guarantees and indemnifications related to indemnities, exchange/clearinghouse member guarantees and merger and acquisition guarantees are described in Note 12 to the consolidated financial statements in the 2016 Form 10-K.

In addition, in the ordinary course of business, the Firm guarantees the debt and/or certain trading obligations (including obligations associated with derivatives, foreign exchange contracts and the settlement of physical commodities) of certain subsidiaries. These guarantees generally are entity or product specific and are required by investors or trading counterparties. The activities of the Firm's subsidiaries covered by these guarantees (including any related debt or trading obligations) are included in the consolidated financial statements.

Finance Subsidiary

The Parent Company fully and unconditionally guarantees the securities issued by Morgan Stanley Finance LLC, a 100%-owned finance subsidiary.

Contingencies

Legal .    In the normal course of business, the Firm has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litiga-

June 2017 Form 10-Q 78
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

tion, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or are in financial distress. These actions have included, but are not limited to, residential mortgage and credit-crisis related matters.

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

The Firm contests liability and/or the amount of damages as appropriate in each pending matter. Where available information indicates that it is probable a liability had been incurred at the date of the consolidated financial statements and the Firm can reasonably estimate the amount of that loss, the Firm accrues the estimated loss by a charge to income.

In many proceedings and investigations, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. In addition, even where a loss is possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss contingency, it is not always possible to reasonably estimate the size of the possible loss or range of loss.

For certain legal proceedings and investigations, the Firm cannot reasonably estimate such losses, particularly for proceedings and investigations where the factual record is being developed or contested or where plaintiffs or governmental entities seek substantial or indeterminate damages, restitution, disgorgement or penalties. Numerous issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters, determination of issues related to class certification and the calculation of damages or other relief, and by addressing novel or unsettled legal questions relevant to the proceedings or investigations in question, before a loss or additional loss or range of loss or additional range of loss can be reasonably estimated for a proceeding or investigation.

For certain other legal proceedings and investigations, the Firm can estimate reasonably possible losses, additional losses, ranges of loss or ranges of additional loss in excess of amounts accrued, but does not believe, based on current knowledge and after consultation with counsel, that such losses will have a material adverse effect on the Firm's consolidated financial statements as a whole, other than the matters referred to in the following paragraphs.

On July 15, 2010, China Development Industrial Bank ("CDIB") filed a complaint against the Firm, 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 credit default swap 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 credit default swap with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the credit default swap, rescission of CDIB's obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied the Firm's motion to dismiss the complaint. Based on currently available information, the Firm believes it could incur a loss in this action of up to approximately $240 million plus pre- and post-judgment interest, fees and costs.

On August 8, 2012, U.S. Bank, in its capacity as trustee, filed a complaint on behalf of Morgan Stanley Mortgage Loan Trust 2006-14SL, Mortgage Pass-Through Certificates, Series 2006-14SL, Morgan Stanley Mortgage Loan 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 ., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trusts, which had original principal balances of approximately $354 million and $305 million respectively, breached various representations and warranties. The complaint seeks, among other relief, rescission of the mortgage loan purchase agreements underlying the transactions, specific performance and unspecified damages and interest. On August 16, 2013, the court granted in part and denied in part the Firm's motion to dismiss the complaint. On August 16, 2016, the Firm moved for summary judgment and the plaintiffs moved for partial summary judgment. Based on currently available informa-

79 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

tion, the Firm believes that it could incur a loss in this action of up to approximately $527 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

On 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 $644 million. The complaint alleges causes of action against the Firm for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and seeks, among other things, compensatory and punitive damages. On June 10, 2014, the court granted in part and denied in part the Firm's motion to dismiss the complaint. On June 20, 2017 the Appellate Division, First Department, affirmed the lower court's June 10, 2014 order. On July 28, 2017, the Firm filed a motion for leave to appeal that decision to the New York Court of Appeals. At March 25, 2017, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $237 million, and the certificates had incurred actual losses of approximately $87 million. Based on currently available information, the Firm believes it could incur a loss in this action up to the difference between the $237 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Firm, or upon sale, plus pre- and post-judgment interest, fees and costs. The Firm may be entitled to be indemnified for some of these losses.

On July 8, 2013, U.S. Bank National Association, in its capacity as trustee, filed a complaint against the Firm styled U.S. Bank National Association, solely in its capacity as Trustee of the Morgan Stanley Mortgage Loan Trust 2007-2AX (MSM 2007-2AX) v. Morgan Stanley Mortgage Capital Holdings LLC, as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc. and GreenPoint Mortgage Fundin g, Inc. , pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $650 million, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified damages and interest. On August 22,

2013, the Firm filed a motion to dismiss the complaint, which was granted in part and denied in part on November 24, 2014. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $240 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

On 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 warranties. The complaint seeks, among other relief, unspecified damages, attorneys' fees, interest and costs. On February 28, 2014, the defendants filed a motion to dismiss the complaint, which was granted in part and denied in part on June 14, 2016. The plaintiff filed a notice of appeal of that order on August 17, 2016, and the appeal was fully briefed on May 5, 2017. On July 11, 2017, the Appellate Division, First Department affirmed in part and reversed in part the trial court's order that granted in part the Firm's motion to dismiss. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $152 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus attorney's fees, costs and interest, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

On April 28, 2014, Deutsche Bank National Trust Company, in its capacity as trustee for Morgan Stanley Structured Trust 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. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $735 million, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified compensatory and/or rescissory damages, interest and costs. On April 3, 2015, the court granted in part and denied in part the Firm's motion to dismiss the complaint. On May 8, 2017, the Firm moved for summary judgment. Based on currently available

June 2017 Form 10-Q 80
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Notes to Consolidated Financial Statements

(Unaudited)

information, the Firm believes that it could incur a loss in this action of up to approximately $292 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands that it did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

On September 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 court's order. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $126 million, the unpaid balance of these notes, plus pre- and post-judgment interest, fees and costs, as well as claim payments that FGIC has made and will make in the future.

On September 23, 2014, FGIC filed a complaint against the Firm in the Supreme Court of NY 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 court's order. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $277 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase

demands from a certificate holder and FGIC that the Firm did not repurchase, plus pre- and post-judgment interest, fees and costs, as well as claim payments that FGIC has made and will make in the future. In addition, plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

On January 23, 2015, Deutsche Bank National Trust Company, in its capacity as trustee, filed a complaint against the Firm styled Deutsche Bank National Trust Company solely in its capacity as Trustee of the Morgan Stanley ABS Capital I Inc. Trust 2007-NC4 v. Morgan Stanley Mortgage Capital Holdings LLC as Successor-by-Merger to Morgan Stanley Mortgage Capital Inc., and Morgan Stanley ABS Capital I Inc. , pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $1.05 billion, breached various representations and warranties. The complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, compensatory, consequential, rescissory, equitable and punitive damages, attorneys' fees, costs and other related expenses, and interest. On December 11, 2015, the court granted in part and denied in part the Firm's motion to dismiss the complaint. On February 11, 2016, plaintiff filed a notice of appeal of that order, and the appeal was fully briefed on August 19, 2016. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately $277 million, the total original unpaid balance of the mortgage loans for which the Firm received repurchase demands from a certificate holder and a monoline insurer that the Firm did not repurchase, plus pre- and post-judgment interest, fees and costs, but plaintiff is seeking to expand the number of loans at issue and the possible range of loss could increase.

In matters styled Case number 15/3637 and Case number 15/4353 , the Dutch Tax Authority ("Dutch Authority") is challenging in the Dutch Tax Tribunal in Amsterdam the prior set-off by the Firm of approximately €124 million (plus accrued interest) of withholding tax credits against the Firm's corporation tax liabilities for the tax years 2007 to 2013. The Dutch Authority alleges that the Firm was not entitled to receive the withholding tax credits on the basis, inter alia, that a Firm subsidiary did not hold legal title to certain securities subject to withholding tax on the relevant dates. The Dutch Authority has also alleged that the Firm failed to provide certain information to the Dutch Authority and keep adequate books and records. The Firm does not agree with these allegations. A hearing regarding this matter has been scheduled on September 19, 2017. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately €124 million (plus accrued interest).

81 June 2017 Form 10-Q
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Notes to Consolidated Financial Statements

(Unaudited)

12. Variable Interest Entities and Securitization Activities

Overview

For a discussion of the Firm's VIEs, the determination and structure of VIEs and securitization activities, see Note 13 to the consolidated financial statements in the 2016 Form 10-K.

Consolidated VIEs

Assets and Liabilities by Type of Activity

At June 30, 2017 At December 31, 2016

$ in millions

VIE

Assets

VIE
Liabilities

VIE

Assets

VIE
Liabilities

Credit-linked notes

$ 200 $ - $ 501 $ -

Other structured financings

426 5 602 10

Asset-backed securitizations 1

34 22 397 283

Other 2

1,164 258 910 25

Total

$ 1,824 $ 285 $ 2,410 $ 318

1.

Asset-backed securitizations include transactions backed by residential mortgage loans, commercial mortgage loans and other types of assets, including consumer or commercial assets. The value of assets is determined based on the fair value of the liabilities and the interests owned by the Firm in such VIEs because the fair values for the liabilities and interests owned are more observable.

2.

Other primarily includes certain operating entities, investment funds and structured transactions.

Assets and Liabilities by Balance Sheet Caption

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

Assets

Cash and due from banks

$ 87 $ 74

Trading assets at fair value

785 1,295

Customer and other receivables

12 13

Goodwill

18 18

Intangible assets

166 177

Other assets

756 833

Total

$ 1,824 $ 2,410

Liabilities

Other secured financings at fair value

$ 249 $ 289

Other liabilities and accrued expenses

36 29

Total

$ 285 $ 318

Consolidated VIE assets and liabilities are presented in the previous tables after intercompany eliminations. The assets owned by many consolidated VIEs cannot be removed unilaterally by the Firm and are not generally available to the Firm. The related liabilities issued by many consolidated VIEs are

non-recourse to the Firm. In certain other consolidated VIEs, the Firm either has the unilateral right to remove assets or provides additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.

In general, the Firm's exposure to loss in consolidated VIEs is limited to losses that would be absorbed on the VIE's net assets recognized in its financial statements, net of amounts absorbed by third-party variable interest holders.

Noncontrolling Interests and Additional Maximum Exposure to Losses Related to Consolidated VIEs

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

Noncontrolling interests

$ 206 $ 228

Maximum exposure to losses 1

- 78

1.

Primarily related to certain derivatives, commitments, guarantees and other forms of involvement not recognized in the consolidated financial statements.

Non-consolidated VIEs

The following tables include all VIEs in which the Firm has determined that its maximum exposure to loss is greater than specific thresholds or meets certain other criteria and exclude exposure to loss from liabilities due to immateriality. Most of the VIEs included in the following tables are sponsored by unrelated parties; the Firm's involvement generally is the result of its secondary market-making activities, securities held in its Investment securities portfolio (see Note 5) and certain investments in funds.

Non-consolidated VIE Assets, Maximum and Carrying Value of Exposure to Loss

At June 30, 2017
$ in millions MABS CDO MTOB OSF Other

VIE assets (unpaid principal balance)

$ 78,818 $ 8,598 $ 5,337 $ 3,526 $ 34,823

Maximum exposure to loss

Debt and equity interests

$ 8,482 $ 1,703 $ 52 $ 1,503 $ 5,528

Derivative and other contracts

- - 3,229 - 25

Commitments, guarantees and other

805 1,468 - 174 337

Total

$ 9,287 $ 3,171 $ 3,281 $ 1,677 $ 5,890

Carrying value of exposure to loss-Assets

Debt and equity interests

$ 8,482 $ 1,703 $ 52 $ 1,098 $ 5,528

Derivative and other contracts

- - 5 - 52

Total

$ 8,482 $ 1,703 $ 57 $ 1,098 $ 5,580

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Notes to Consolidated Financial Statements

(Unaudited)

At December 31, 2016
$ in millions MABS CDO MTOB OSF Other

VIE assets (unpaid principal balance)

$ 101,916 $ 11,341 $ 4,857 $ 4,293 $ 39,077

Maximum exposure to loss

Debt and equity interests

$ 11,243 $ 1,245 $ 50 $ 1,570 $ 4,877

Derivative and other contracts

- - 2,812 - 45

Commitments, guarantees and other

684 99 - 187 228

Total

$ 11,927 $ 1,344 $ 2,862 $ 1,757 $ 5,150

Carrying value of exposure to loss-Assets

Debt and equity interests

$ 11,243 $ 1,245 $ 49 $ 1,183 $ 4,877

Derivative and other contracts

- - 5 - 18

Total

$ 11,243 $ 1,245 $ 54 $ 1,183 $ 4,895

MABS-Mortgage- and asset-backed securitizations

CDO-Collateralized debt obligations, including collateralized loan obligations

MTOB-Municipal tender option bonds

OSF-Other structured financings

Non-consolidated VIE Mortgage- and Asset-Backed Securitization Assets

At June 30, 2017 At December 31, 2016
$ in millions Unpaid
Principal
Balance
Debt and
Equity
Interests
Unpaid
Principal
Balance
Debt and
Equity
Interests

Residential mortgages

$ 9,106 $ 524 $ 4,775 $ 458

Commercial mortgages

49,504 2,614 54,021 2,656

U.S. agency collateralized mortgage obligations

13,243 2,745 14,796 2,758

Other consumer or commercial loans

6,965 2,599 28,324 5,371

Total

$     78,818 $      8,482 $     101,916 $      11,243

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

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

Securitization transactions generally involve VIEs. Primarily as a result of its secondary market-making activities, the Firm owned additional VIE assets mainly issued by securitization SPEs for which the maximum exposure to loss is less than specific thresholds. These additional assets totaled $11.9 billion and $11.7 billion at June 30, 2017 and December 31, 2016, respectively.

These assets were either retained in connection with transfers of assets by the Firm, acquired in connection with secondary market-making activities, held as AFS securities in its Investment securities portfolio (see Note 5), or held as investments in funds. At June 30, 2017 and December 31, 2016, these assets consisted of securities backed by residential mortgage loans, commercial mortgage loans or other consumer loans, such as credit card receivables, automobile loans and student loans, CDOs or CLOs, and investment funds.

The Firm's primary risk exposure is to the securities issued by the SPE owned by the Firm, with the highest risk on the most subordinate class of beneficial interests. These assets generally are included in Trading assets-Corporate and other debt, Trading assets-Investments or AFS securities within its Investment securities portfolio and are measured at fair value (see Note 3). The Firm does not provide additional support in these transactions through contractual facilities, such as liquidity facilities, guarantees or similar derivatives. The Firm's maximum exposure to loss generally equals the fair value of the assets owned.

83 June 2017 Form 10-Q
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Notes to Consolidated Financial Statements

(Unaudited)

Transactions with SPEs in which the Firm, acting as principal, transferred financial assets with continuing involvement and received sales treatment are shown in the following tables.

Transfers of Assets with Continuing Involvement

At June 30, 2017
$ in millions
Residential
Mortgage
Loans
Commercial
Mortgage
Loans
U.S. Agency
Collateralized
Mortgage
Obligations
Credit-
Linked
Notes and

Other 1

SPE assets (unpaid principal balance) 2

$ 17,692 $ 53,764 $ 12,337 $ 11,831

Retained interests

Investment grade 3

$ - $ 140 $ 710 $ 5

Non-investment grade (fair value)

3 86 - 643

Total

$ 3 $ 226 $ 710 $ 648

Interests purchased in the secondary market (fair value)

Investment grade

$ 4 $ 92 $ 66 $ -

Non-investment grade

17 71 - -

Total

$ 21 $ 163 $ 66 $ -

Derivative assets (fair value)

$ 1 $ - $ - $ 32

Derivative liabilities (fair value)

- - - 307

At December 31, 2016
$ in millions
Residential
Mortgage
Loans
Commercial
Mortgage
Loans
U.S. Agency
Collateralized
Mortgage
Obligations
Credit-
Linked
Notes and

Other 1

SPE assets (unpaid principal balance) 2

$ 19,381 $ 43,104 $ 11,092 $ 11,613

Retained interests (fair value)

Investment grade

$ - $ 22 $ 375 $ -

Non-investment grade

4 79 - 826

Total

$ 4 $ 101 $ 375 $ 826

Interests purchased in the secondary market (fair value)

Investment grade

$ - $ 30 $ 26 $ -

Non-investment grade

23 75 - -

Total

$ 23 $ 105 $ 26 $ -

Derivative assets (fair value)

$ - $ 261 $ - $ 89

Derivative liabilities (fair value)

- - - 459

1.

Amounts include CLO transactions managed by unrelated third parties.

2.

Amounts include assets transferred by unrelated transferors.

3.

Amounts include $734 million of investment grade retained interests at fair value.

At June 30, 2017
$ in millions Level 2 Level 3 Total

Retained interests (fair value)

Investment grade

$ 729 $ 5 $ 734

Non-investment grade

4 728 732

Total

$ 733 $         733 $     1,466

Interests purchased in the secondary market (fair value)

Investment grade

$ 155 $ 7 $ 162

Non-investment grade

75 13 88

Total

$         230 $ 20 $ 250

Derivative assets (fair value)

$ 33 $ - $ 33

Derivative liabilities (fair value)

131 176 307
At December 31, 2016
$ in millions Level 2 Level 3 Total

Retained interests (fair value)

Investment grade

$ 385 $ 12 $ 397

Non-investment grade

14 895 909

Total

$ 399 $ 907 $ 1,306

Interests purchased in the secondary market (fair value)

Investment grade

$ 56 $ - $ 56

Non-investment grade

84 14 98

Total

$ 140 $ 14 $ 154

Derivative assets (fair value)

$ 348 $ 2 $ 350

Derivative liabilities (fair value)

98 361 459

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

Proceeds from New Securitization Transactions and Sales of Loans

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

New transactions 1

$     4,750 $     4,163 $     10,747 $     6,876

Retained interests

529 502 959 1,133

Sales of corporate loans to CLO SPEs 1,2

239 - 418 31

1.

Net gains on new transactions and sales of corporate loans to CLO entities at the time of the sale were not material for all periods presented.

2.

Sponsored by non-affiliates.

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

June 2017 Form 10-Q 84
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Notes to Consolidated Financial Statements

(Unaudited)

The Firm also enters into transactions in which it sells equity securities and contemporaneously enters into bilateral OTC equity derivatives with the purchasers of the securities, through which it retains the exposure to the securities as shown in the following table.

Carrying and Fair Value of Assets Sold and Retained Interest Exposure

$ in millions

At June 30,

2017

At December 31,
2016

Carrying value of assets derecognized at the time of sale and gross cash proceeds

$ 14,817 $ 11,209

Fair value

Assets sold

14,710 11,301

Derivative assets recognized in the consolidated balance sheets

33 128

Derivative liabilities recognized in the consolidated balance sheets

140 36

Failed Sales

For transfers that fail to meet the accounting criteria for a sale, the Firm continues to recognize the assets in Trading assets at fair value, and the Firm recognizes the associated liabilities in Other secured financings at fair value in the consolidated balance sheets (see Note 10).

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

Carrying Value of Assets and Liabilities Related to Failed Sales

At June 30,

2017

At December 31,
2016
$ in millions Assets Liabilities Assets Liabilities

Failed sales

$         641 $         641 $         285 $         285

13. Regulatory Requirements

Regulatory Capital Framework

For a discussion of the Firm's regulatory capital framework, see Note 14 to the consolidated financial statements in the 2016 Form 10-K.

Regulatory Capital Requirements

The Firm is required to maintain minimum risk-based and leverage capital ratios under the regulatory capital requirements. A summary of the calculations of regulatory capital,

risk-weighted assets ("RWAs") and transition provisions follows.

Regulatory Capital

The Firm's binding risk-based capital ratios for regulatory purposes are the lower of the capital ratios computed under the (i) standardized approaches for calculating credit risk RWAs and market risk RWAs (the "Standardized Approach") and (ii) applicable advanced approaches for calculating credit risk, market risk and operational risk RWAs (the "Advanced Approach").

Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total 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, the Firm will be subject to:

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

The Common Equity Tier 1 global systemically important bank capital surcharge, currently at 3%; and

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

In 2017, the phase-in amount for each of the buffers is 50% of the fully phased-in buffer requirement. Failure to maintain the buffers will result in restrictions on the Firm's ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers.

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

For a further discussion of the Firm's calculation of risk-based capital ratios, see Note 14 to the consolidated financial statements in the 2016 Form 10-K.

85 June 2017 Form 10-Q
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Notes to Consolidated Financial Statements

(Unaudited)

The Firm's Regulatory Capital and Capital Ratios

At June 30, 2017 and December 31, 2016, the Firm's binding ratios are based on the Advanced Approach transitional rules.

Regulatory Capital

At June 30, 2017

$ in millions

Amount Ratio Minimum
Capital
Ratio 1

Common Equity Tier 1 capital

$ 61,604 16.6 7.3%

Tier 1 capital

70,380 19.0 8.8%

Total capital

81,025 21.9 10.8%

Tier 1 leverage 2

- 8.5 4.0%

Total RWAs

$     370,679 N/A N/A

Adjusted average assets 3

828,365 N/A N/A

At December 31, 2016

$ in millions

Amount Ratio Minimum
Capital
Ratio 1

Common Equity Tier 1 capital

$ 60,398 16.9 5.9%

Tier 1 capital

68,097 19.0 7.4%

Total capital

78,642 22.0 9.4%

Tier 1 leverage 2

- 8.4 4.0%

Total RWAs

$     358,141 N/A N/A

Adjusted average assets 3

811,402 N/A N/A

N/A-Not Applicable

1.

Percentages represent minimum regulatory capital ratios under the transitional rules.

2.

Tier 1 leverage ratios are calculated under the Standardized Approach transitional rules.

3.

Adjusted average assets represent the denominator of the Tier 1 leverage ratio and are composed of the average daily balance of consolidated on-balance sheet assets under U.S. GAAP during the calendar quarter ended June 30, 2017 and December 31, 2016, respectively, adjusted for disallowed goodwill, transitional intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other adjustments.

U.S. Bank Subsidiaries' Regulatory Capital and Capital Ratios

The Firm's U.S. Bank Subsidiaries are subject to similar regulatory capital requirements as the Firm. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the U.S. Bank Subsidiaries' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, each of the U.S. Bank Subsidiaries must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.

Each U.S. depository institution subsidiary of the Firm must be well-capitalized in order for the Firm to continue to qualify as a financial holding company and to continue to engage in the broadest range of financial activities permitted

for financial holding companies. Under regulatory capital requirements adopted by the U.S. federal banking agencies, U.S. depository institutions must maintain certain minimum capital ratios in order to be considered well-capitalized. At June 30, 2017 and December 31, 2016, the Firm's U.S. Bank Subsidiaries maintained capital at levels sufficiently in excess of the universally mandated well-capitalized requirements to address any additional capital needs and requirements identified by the U.S. federal banking regulators.

At June 30, 2017 and December 31, 2016, the U.S. Bank Subsidiaries' binding ratios are based on the Standardized Approach transitional rules.

MSBNA's Regulatory Capital

At June 30, 2017

$ in millions

Amount Ratio Minimum
Capital
Ratio 1

Common Equity Tier 1 capital

$     14,526 18.5 6.5%

Tier 1 capital

14,526 18.5 8.0%

Total capital

14,807 18.9 10.0%

Tier 1 leverage

14,526 12.0 5.0%
At December 31, 2016

$ in millions

Amount Ratio Minimum
Capital
Ratio 1

Common Equity Tier 1 capital

$ 13,398 16.9 6.5%

Tier 1 capital

13,398 16.9 8.0%

Total capital

14,858 18.7 10.0%

Tier 1 leverage

13,398 10.5 5.0%

1.

Capital ratios that are required in order to be considered well-capitalized for U.S. regulatory purposes.

MSPBNA's Regulatory Capital

At June 30, 2017

$ in millions

Amount Ratio Minimum
Capital
Ratio 1

Common Equity Tier 1 capital

$ 5,898 24.8 6.5%

Tier 1 capital

5,898 24.8 8.0%

Total capital

5,938 25.0 10.0%

Tier 1 leverage

5,898 10.3 5.0%
At December 31, 2016

$ in millions

Amount Ratio Minimum
Capital
Ratio 1

Common Equity Tier 1 capital

$     5,589 26.1 6.5%

Tier 1 capital

5,589 26.1 8.0%

Total capital

5,626 26.3 10.0%

Tier 1 leverage

5,589 10.6 5.0%

1.

Capital ratios that are required in order to be considered well-capitalized for U.S. regulatory purposes.

June 2017 Form 10-Q 86
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

U.S. Broker-Dealer Regulatory Capital Requirements

MS&Co. Regulatory Capital

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

Net capital

$ 10,388 $ 10,311

Excess net capital

8,312 8,034

Morgan Stanley & Co. LLC ("MS&Co.") is a registered U.S. broker-dealer and registered futures commission merchant and, accordingly, is subject to the minimum net capital requirements of the U.S. Securities and Exchange Commission ("SEC") and the U.S. Commodity Futures Trading Commission ("CFTC"). As an Alternative Net Capital broker-dealer under SEC rules, MS&Co. is subject to minimum net capital requirements, which it exceeded as presented in the previous table. In addition to these requirements, MS&Co. is required to meet capital requirements imposed by Appendix E of Rule 15c3-1, which are presented in the following table. MS&Co. has consistently operated with capital in excess of its regulatory capital requirements.

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

Required tentative net capital 1

$ 1,000 $ 1,000

Required net capital

500 500

1.

MS&Co. is required to notify the SEC in the event that its tentative net capital is less than $5 billion.

At June 30, 2017 and December 31, 2016, MS&Co. had tentative net capital in excess of the minimum and the notification requirements.

MSSB LLC Regulatory Capital

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

Net capital

$ 2,288 $ 3,946

Excess net capital

2,131 3,797

Morgan Stanley Smith Barney LLC ("MSSB LLC") is a registered U.S. broker-dealer and introducing broker for the futures business and, accordingly, is subject to the minimum net capital requirements of the SEC. MSSB LLC has consistently operated with capital in excess of its regulatory capital requirements.

Other Regulated Subsidiaries

Morgan Stanley & Co. International plc ("MSIP"), a London-based broker-dealer subsidiary, is subject to the capital requirements of the Prudential Regulation Authority, and Morgan Stanley MUFG Securities Co., Ltd. ("MSMS"), a Tokyo-based broker-dealer subsidiary, is subject to the capital requirements of the Financial Services Agency. MSIP and MSMS have consistently operated with capital in excess of their respective regulatory capital requirements.

Certain other U.S. and non-U.S. subsidiaries of the Firm are subject to various securities, commodities and banking regulations, and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. These subsidiaries have consistently operated with capital in excess of their local capital adequacy requirements.

14. Total Equity

Dividends and Share Repurchases

The Firm repurchased approximately $500 million of its outstanding common stock as part of the share repurchase program during the current quarter and $1,250 million during the current year period. The Firm repurchased approximately $625 million during the prior year quarter and $1,250 million in the prior year period.

On June 28, 2017, the Board of Governors of the Federal Reserve System (the "Federal Reserve") announced that they did not object to the Firm's 2017 capital plan ("Capital Plan"). The Capital Plan includes the share repurchase of up to $5.0 billion of outstanding common stock for the period beginning July 1, 2017 through June 30, 2018, an increase from $3.5 billion in the 2016 Capital Plan. Additionally, the Capital Plan includes an increase in the quarterly common stock dividend to $0.25 per share from $0.20 per share, beginning with the common stock dividend declared on July 19, 2017.

Preferred Stock

For a description of Series A through Series K preferred stock issuances, see Note 15 to the consolidated financial statements in the 2016 Form 10-K. Dividends declared on the Firm's outstanding preferred stock were $170 million during the current quarter and $156 million during the prior year quarter, and $260 million during the current year period and $234 million during the prior year period. On June 15, 2017, the Firm announced that the Board of Directors (the "Board") declared a quarterly dividend for preferred stock shareholders of record on June 30, 2017 that was paid on July 17, 2017. The Firm is authorized to issue 30 million shares of preferred stock. The preferred stock has a preference over the common stock upon liquidation. The Firm's preferred stock qualifies as Tier 1 capital in accordance with regulatory capital requirements (see Note 13).

Series K Preferred Stock. The Series K Preferred Stock offering (net of related issuance costs) in January 2017 resulted in proceeds of approximately $994 million.

87 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

Preferred Stock Outstanding

$ in millions, except
per share data

Shares
Outstanding
Liquidation
Preference
per Share
Carrying Value
At June 30,
2017
At June 30,
2017
At December 31,
2016

Series

A

44,000 $ 25,000 $ 1,100 $ 1,100

C 1

519,882 1,000 408 408

E

34,500 25,000 862 862

F

34,000 25,000 850 850

G

20,000 25,000 500 500

H

52,000 25,000 1,300 1,300

I

40,000 25,000 1,000 1,000

J

60,000 25,000 1,500 1,500

K

40,000 25,000 1,000 -

Total

$ 8,520 $ 7,520

1.

Series C is composed of the issuance of 1,160,791 shares of Series C Preferred Stock to MUFG for an aggregate purchase price of $911 million, less the redemption of 640,909 shares of Series C Preferred Stock of $503 million, which were converted to common shares of approximately $705 million.

Comprehensive Income (Loss)

Accumulated Other Comprehensive Income (Loss)

$ in millions Foreign
Currency
Translation
Adjustments
AFS
Securities
Pensions,
Postretirement
and Other
DVA Total

March 31, 2017

$ (879 $ (504 $ (474 $ (593 $ (2,450

OCI during the period 1

23 108 4 (173 (38

June 30, 2017

$ (856 $ (396 $ (470 $ (766 $ (2,488

March 31, 2016

$ (831 $ 76 $ (373 $ (110 $ (1,238

OCI during the period 1

52 143 (5 143 333

June 30, 2016

$ (779 $ 219 $ (378 $ 33 $ (905

December 31, 2016

$ (986 $ (588 $ (474 $ (595 $ (2,643

OCI during the period 1

130 192 4 (171 155

June 30, 2017

$ (856 $ (396 $ (470 $ (766 $ (2,488

December 31, 2015

$ (963 $ (319 $ (374 $ - $ (1,656

Cumulative adjustment for accounting change related to DVA 2

- - - (312 (312

OCI during the period 1

184 538 (4 345 1,063

June 30, 2016

$ (779 $ 219 $ (378 $ 33 $ (905)

1.

Amounts net of tax and noncontrolling interests.

2.

In accordance with the early adoption of a provision of the accounting update Recognition and Measurement of Financial Assets and Financial Liabilities , a cumulative catch-up adjustment was recorded as of January 1, 2016 to move the cumulative unrealized DVA amount, net of noncontrolling interests and tax, related to outstanding liabilities under the fair value option election from Retained earnings into AOCI. See Note 2 to the consolidated financial statements in the 2016 Form 10-K for further information.

Period Changes in OCI Components

Three Months Ended

June 30, 2017

$ in millions Pre-tax
gain (loss)
Income tax
benefit
(provision)
After-tax
gain (loss)

Non-

controlling
interests
Net

Foreign currency translation adjustments

OCI activity

$ 1 $ 11 $ 12 $ (11 $ 23

Reclassified to earnings

- - - - -

Net OCI

$ 1 $ 11 $ 12 $ (11 $ 23

Change in net unrealized gains (losses) on AFS securities

OCI activity

$ 185 $ (68 $ 117 $ - $ 117

Reclassified to earnings 1

(14 5 (9 - (9

Net OCI

$ 171 $ (63 $ 108 $ - $ 108

Pension, postretirement and other

OCI activity

$ 3 $ - $ 3 $ - $ 3

Reclassified to earnings 1

1 - 1 - 1

Net OCI

4 - 4 - 4

Change in net DVA

OCI activity

$ (285 $ 99 $ (186 $ (10 $ (176

Reclassified to earnings 1

4 (1 3 - 3

Net OCI

$ (281 $ 98 $ (183 $ (10 $ (173

Three Months Ended

June 30, 2016

$ in millions Pre-tax
gain (loss)
Income tax
benefit
(provision)
After-tax
gain (loss)

Non-

controlling
interests
Net

Foreign currency translation adjustments

OCI activity

$ 72 $ 59 $ 131 $ 79 $ 52

Reclassified to earnings

- - - - -

Net OCI

$ 72 $ 59 $ 131 $ 79 $ 52

Change in net unrealized gains (losses) on AFS securities

OCI activity

$ 298 $ (110 $ 188 $ - $ 188

Reclassified to earnings 1

(70 25 (45 - (45

Net OCI

$ 228 $ (85 $ 143 $ - $ 143

Pension, postretirement and other

OCI activity

$ (5 $ - $ (5 $ - $ (5

Reclassified to earnings 1

(1 1 - - -

Net OCI

$ (6 $ 1 $ (5 $ - $ (5

Change in net DVA

OCI activity

$ 225 $ (80 $ 145 $ 2 $ 143

Reclassified to earnings 1

- - - - -

Net OCI

$ 225 $ (80 $ 145 $ 2 $ 143

June 2017 Form 10-Q 88
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

Six Months Ended

June 30, 2017

$ in millions Pre-tax
gain (loss)
Income tax
benefit
(provision)
After-tax
gain (loss)

Non-

controlling
interests
Net

Foreign currency translation adjustments

OCI activity

$ 44 $ 118 $ 162 $ 32 $ 130

Reclassified to earnings

- - - - -

Net OCI

$ 44 $ 118 $ 162 $ 32 $ 130

Change in net unrealized gains (losses) on AFS securities

OCI activity

$ 322 $ (120 $ 202 $ - $ 202

Reclassified to earnings 1

(16 6 (10 - (10

Net OCI

$ 306 $ (114 $ 192 $ - $ 192

Pension, postretirement and other

OCI activity

$ 3 $ - $ 3 $ - $ 3

Reclassified to earnings 1

1 - 1 - 1

Net OCI

4 - 4 - 4

Change in net DVA

OCI activity

$ (278 $ 98 $ (180 $ (3 $ (177

Reclassified to earnings 1

8 (2 6 - 6

Net OCI

$ (270 $ 96 $ (174 $ (3 $ (171

Six Months Ended

June 30, 2016 2

$ in millions Pre-tax
gain (loss)
Income tax
benefit
(provision)
After-tax
gain (loss)

Non-

controlling
interests
Net

Foreign currency translation adjustments

OCI activity

$ 143 $ 174 $ 317 $ 133 $ 184

Reclassified to earnings

- - - - -

Net OCI

$ 143 $ 174 $ 317 $ 133 $ 184

Change in net unrealized gains (losses) on AFS securities

OCI activity

$ 934 $ (344 $ 590 $ - $ 590

Reclassified to earnings 1

(82 30 (52 - (52

Net OCI

$ 852 $ (314 $ 538 $ - $ 538

Pension, postretirement and other

OCI activity

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

Reclassified to earnings 1

(2 1 (1 - (1

Net OCI

$ (8 $ 4 $ (4 $ - $ (4

Change in net DVA

OCI activity

$ 589 $ (215 $ 374 $ 3 $ 371

Reclassified to earnings 1

(41 15 (26 - (26

Net OCI

$ 548 $ (200 $ 348 $ 3 $ 345

1.

Amounts reclassified to earnings related to: realized gains and losses from sales of AFS securities are classified within Other revenues in the consolidated income statements; Pension, postretirement and other are classified within Compensation and benefits expenses in the consolidated income statements; and realization of DVA are classified within Trading revenues in the consolidated income statements.

2.

Exclusive of 2016 cumulative adjustment for accounting change related to DVA.

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

Noncontrolling interests

$ 1,141 $ 1,127

The increase in noncontrolling interests was primarily due to the increase in net income attributable to noncontrolling interests, partially offset by deconsolidation of certain investment management funds sponsored by the Firm.

15. Earnings per Common Share

Calculation of Basic and Diluted Earnings per Common Share ("EPS")

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

Basic EPS

Income from continuing operations

$ 1,796 $ 1,650 $ 3,789 $ 2,810

Income (loss) from discontinued operations

(5 (4 (27 (7

Net income

1,791 1,646 3,762 2,803

Net income applicable to noncontrolling interests

34 64 75 87

Net income applicable to Morgan Stanley

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

Less: Preferred stock dividends and other

(170 (157 (260 (235

Earnings applicable to Morgan Stanley common shareholders

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

Weighted average common shares outstanding

1,791 1,866 1,796 1,875

Earnings per basic common share

Income from continuing operations

$ 0.89 $ 0.77 $ 1.92 $ 1.33

Income (loss) from discontinued operations

- (0.01 (0.01 (0.01

Earnings per basic common share

$ 0.89 $ 0.76 $ 1.91 $ 1.32

Diluted EPS

Earnings applicable to Morgan Stanley common shareholders

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

Weighted average common shares outstanding

1,791 1,866 1,796 1,875

Effect of dilutive securities:

Stock options and RSUs 1

39 33 40 32

Weighted average common shares outstanding and common stock equivalents

1,830 1,899 1,836 1,907

Earnings per diluted common share

Income from continuing operations

$ 0.87 $ 0.75 $ 1.88 $ 1.30

Income (loss) from discontinued operations

- - (0.01 -

Earnings per diluted common share

$ 0.87 $ 0.75 $ 1.87 $ 1.30

Weighted average antidilutive RSUs and stock options (excluded from the computation of diluted EPS) 1

- 14 - 15

89 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

1.

Restricted stock units ("RSUs") that are considered participating securities are treated as a separate class of securities in the computation of basic EPS, and, therefore, such RSUs are not included as incremental shares in the diluted EPS computations.

16. Interest Income and Interest Expense

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

Interest income 1

Investment securities

$ 304 $ 237 $ 630 $ 473

Loans

798 680 1,546 1,327

Interest bearing deposits with banks

67 52 122 105

Securities purchased under agreements to resell and Securities borrowed 2

29 (120 10 (198

Trading assets, net of Trading liabilities 3

491 526 955 1,109

Customer receivables and Other 4

417 292 808 598

Total interest income

$ 2,106 $ 1,667 $ 4,071 $ 3,414

Interest expense 1

Deposits

$ 14 $ 15 $ 25 $ 37

Short-term and Long-term borrowings

1,067 851 2,088 1,818

Securities sold under agreements to repurchase and Securities loaned 5

339 259 587 513

Customer payables and Other 6

(65 (371 (151 (766

Total interest expense

$ 1,355 $ 754 $ 2,549 $ 1,602

Net interest

$ 751 $ 913 $ 1,522 $ 1,812

1.

Interest income and Interest expense are recorded within the consolidated income statements depending on the nature of the instrument and related market conventions. When interest is included as a component of the instrument's fair value, interest is included within Trading revenues or Investments revenues. Otherwise, it is included within Interest income or Interest expense.

2.

Includes fees paid on Securities borrowed.

3.

Interest expense on Trading liabilities is reported as a reduction to Interest income on Trading assets.

4.

Includes interest from customer receivables and cash deposited with clearing organizations or segregated under federal and other regulations or requirements.

5.

Includes fees received on Securities loaned.

6.

Includes fees received from prime brokerage customers for stock loan transactions incurred to cover customers' short positions.

17. Employee Benefit Plans

The Firm sponsors various retirement plans for the majority of its U.S. and non-U.S. employees. The Firm provides certain other postretirement benefits, primarily health care and life insurance, to eligible U.S. employees.

Components of the Net Periodic Benefit Expense (Income) for Pension and Other Postretirement Plans

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

Service cost, benefits earned during the period

$ 4 $ 4 $ 8 $ 8

Interest cost on projected benefit obligation

38 39 75 77

Expected return on plan assets

(29 (30 (58 (60

Net amortization of prior service credit

(4 (5 (8 (9

Net amortization of actuarial loss

4 3 8 6

Net periodic benefit expense (income)

$ 13 $ 11 $ 25 $ 22

18. Income Taxes

The Firm is under continuous examination by the Internal Revenue Service (the "IRS") and other tax authorities in certain countries, such as Japan and the United Kingdom ("U.K."), and in states in which it has significant business operations, such as New York. The Firm is currently at various levels of field examination with respect to audits by the IRS, as well as New York State and New York City, for tax years 2009-2012 and 2007-2014, respectively. The Firm believes that the resolution of these tax matters will not have a material effect on the annual consolidated financial statements, although a resolution could have a material impact on the consolidated income statements and effective tax rate for any period in which such resolution occurs.

In April 2016, the Firm received a notification from the IRS that the Congressional Joint Committee on Taxation approved the final report of an Appeals Office review of matters from tax years 1999-2005, and the Revenue Agent's Report reflecting agreed closure of the 2006-2008 tax years. In March 2017, the Firm filed claims with the IRS to contest certain items, associated with tax years 1999-2005, the resolution of which is not expected to have a material impact on the annual consolidated financial statements or effective tax rate.

During 2017, the Firm expects to reach a conclusion with the U.K. tax authorities on substantially all issues through tax year 2010, the resolution of which is not expected to have a material impact on the annual consolidated financial statements or effective tax rate.

The Firm has established a liability for unrecognized tax benefits that it believes is adequate in relation to the potential for additional assessments. Once established, the Firm adjusts liabilities for unrecognized tax benefits only when new information is available or when an event occurs necessitating a change.

June 2017 Form 10-Q 90
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

The Firm expects to receive new information related to a multi-year IRS field audit examination that may prompt a decrease in the Firm's recorded unrecognized tax benefits over the next 12 months. The potential change in unrecognized tax benefits is not expected to have a material impact on the Firm's annual consolidated financial statements or effective tax rate, although it could have a material impact on

the Firm's consolidated income statements and effective tax rate for the period in which such development occurs.

See Note 11 regarding the Dutch Tax Authority's challenge, in the Dutch Tax Tribunal in Amsterdam (matters styled Case number 15/3637 and Case number 15/ 4353 ), of the Firm's entitlement to certain withholding tax credits which may impact the balance of unrecognized tax benefits.

19. Segment and Geographic Information

Segment Information

For a discussion about the Firm's business segments, see Note 21 to the consolidated financial statements in the 2016 Form 10-K.

Selected Financial Information by Business Segment

Three Months Ended June 30, 2017
$ in millions IS 1 WM IM 2 I/E Total

Total non-interest revenues 3

$ 5,020 $ 3,142 $ 665 $ (75 $ 8,752

Interest income

1,243 1,114 1 (252 2,106

Interest expense

1,501 105 1 (252 1,355

Net interest

(258 1,009 - - 751

Net revenues

$ 4,762 $ 4,151 $ 665 $ (75 $ 9,503

Income from continuing operations before income taxes

$ 1,443 $ 1,057 $ 142 $ - $ 2,642

Provision for income taxes

413 392 41 - 846

Income from continuing operations

1,030 665 101 - 1,796

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

(5 - - - (5

Net income

1,025 665 101 - 1,791

Net income applicable to noncontrolling interests

33 - 1 - 34

Net income applicable to Morgan Stanley

$ 992 $ 665 $ 100 $ - $ 1,757
Three Months Ended June 30, 2016
$ in millions IS 4 WM 4 IM 2 I/E Total

Total non-interest revenues 3

$ 4,496 $ 2,982 $ 581 $ (63 $ 7,996

Interest income

966 920 3 (222 1,667

Interest expense

884 91 1 (222 754

Net interest

82 829 2 - 913

Net revenues

$ 4,578 $ 3,811 $ 583 $ (63 $ 8,909

Income from continuing operations before income taxes

$ 1,506 $ 859 $ 118 $ - $ 2,483

Provision for income taxes

453 343 37 - 833

Income from continuing operations

1,053 516 81 - 1,650

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

(4 - - - (4

Net income

1,049 516 81 - 1,646

Net income applicable to noncontrolling interests

61 - 3 - 64

Net income applicable to Morgan Stanley

$ 988 $ 516 $ 78 $ - $ 1,582
Six Months Ended June 30, 2017
$ in millions IS 1 WM IM 2 I/E Total

Total non-interest revenues 3

$ 10,399 $ 6,206 $ 1,273 $ (152 $ 17,726

Interest income

2,367 2,193 2 (491 4,071

Interest expense

2,852 190 1 (494 2,549

Net interest

(485 2,003 1 3 1,522

Net revenues

$ 9,914 $ 8,209 $ 1,274 $ (149 $ 19,248

Income from continuing operations before income taxes

$ 3,173 $ 2,030 $ 245 $ 2 $ 5,450

Provision for income taxes

872 718 71 - 1,661

Income from continuing operations

2,301 1,312 174 2 3,789

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

(27 - - - (27

Net income

2,274 1,312 174 2 3,762

Net income applicable to noncontrolling interests

68 - 7 - 75

Net income applicable to Morgan Stanley

$ 2,206 $ 1,312 $ 167 $ 2 $ 3,687
Six Months Ended June 30, 2016
$ in millions IS 4 WM 4 IM 2 I/E Total

Total non-interest revenues 3

$ 8,141 $ 5,819 $ 1,059 $ (130 $ 14,889

Interest income

2,019 1,834 4 (443 3,414

Interest expense

1,868 174 3 (443 1,602

Net interest

151 1,660 1 - 1,812

Net revenues

$ 8,292 $ 7,479 $ 1,060 $ (130 $ 16,701

Income from continuing operations before income taxes

$ 2,414 $ 1,645 $ 162 $ - $ 4,221

Provision for income taxes

728 636 47 - 1,411

Income from continuing operations

1,686 1,009 115 - 2,810

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

(7 - - - (7

Net income

1,679 1,009 115 - 2,803

Net income (loss) applicable to noncontrolling interests

100 - (13 - 87

Net income applicable to Morgan Stanley

$ 1,579 $ 1,009 $ 128 $ - $ 2,716

IS-Institutional Securities

WM-Wealth Management

IM-Investment Management

I/E-Intersegment eliminations

91 June 2017 Form 10-Q
Table of Contents

Notes to Consolidated Financial Statements

(Unaudited)

1.

In the current quarter, the Firm recorded a provision of $86 million for potential additional value-added tax, interest and penalties in relation to certain intercompany service activities provided to our U.K. Group.

2.

The Firm waives a portion of its fees from certain registered money market funds that comply with the requirements of Rule 2a-7 of the Investment Company Act of 1940. These fee waivers resulted in a reduction of fees of approximately $23 million and $12 million for the current quarter and prior year quarter, respectively, and $45 million and $35 million for the current year period and prior year period, respectively.

3.

In certain management fee arrangements, the Firm is entitled to receive performance-based fees (also referred to as incentive fees and includes carried interest) when the return on assets under management exceeds certain benchmark returns or other performance targets. In such arrangements, performance fee revenues are accrued (or reversed) quarterly based on measuring account/fund performance to date versus the performance benchmark stated in the investment management agreement. The Firm's portion of net unrealized cumulative performance-based fees (for which the Firm is not obligated to pay compensation) at risk of reversing if fund performance falls below stated investment management agreement benchmarks was approximately $469 million and $397 million at June 30, 2017 and December 31, 2016, respectively. See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received.

4.

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

Total Assets by Business Segment

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

Institutional Securities

$ 665,603 $ 629,149

Wealth Management

170,735 181,135

Investment Management

4,678 4,665

Total 1

$ 841,016 $ 814,949

1.

Corporate assets have been fully allocated to the business segments.

Geographic Information

For a discussion about the Firm's geographic net revenues, see Note 21 to the consolidated financial statements in the 2016 Form 10-K.

Net Revenues by Region

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

Americas

$ 6,746 $ 6,538 $ 13,834 $ 12,290

EMEA

1,606 1,312 3,095 2,441

Asia-Pacific

1,151 1,059 2,319 1,970

Net revenues

$ 9,503 $ 8,909 $ 19,248 $ 16,701

20. Subsequent Events

The Firm has evaluated subsequent events for adjustment to or disclosure in the consolidated financial statements through the date of this report and has not identified any recordable or disclosable events not otherwise reported in these consolidated financial statements or the notes thereto.

June 2017 Form 10-Q 92
Table of Contents

Financial Data Supplement (Unaudited)

Average Balances and Interest Rates and Net Interest Income

Three Months Ended June 30,
2017 2016
$ in millions

Average

Daily
Balance
Interest

Annualized

Average
Rate

Average

Daily
Balance
Interest Annualized
Average
Rate

Interest earning assets 1

Investment securities 2

$ 74,855 $ 304 1.6 $ 78,233 $ 237 1.2

Loans 2

96,230 798 3.3 89,344 680 3.1

Interest bearing deposits with banks 2

19,555 67 1.4 29,250 52 0.7

Securities purchased under agreements to resell and Securities borrowed 3:

U.S.

129,845 140 0.4 157,223 (64 (0.2

Non-U.S.

90,200 (111 (0.5 82,863 (56 (0.3

Trading assets, net of Trading liabilities 4:

U.S.

60,963 476 3.1 49,914 459 3.7

Non-U.S.

3,409 15 1.8 12,447 67 2.2

Customer receivables and Other 5:

U.S.

48,330 292 2.4 46,144 233 2.0

Non-U.S.

25,863 125 1.9 21,655 59 1.1

Total

$ 549,250 $ 2,106 1.5 $ 567,073 $ 1,667 1.2

Interest bearing liabilities 1

Deposits 2

$ 146,982 $ 14 - $ 154,835 $ 15 -

Short-term and Long-term borrowings 2, 6

180,918 1,067 2.4 164,061 851 2.1

Securities sold under agreements to repurchase and Securities loaned 7:

U.S.

35,066 245 2.8 31,412 141 1.8

Non-U.S.

36,974 94 1.0 31,729 118 1.5

Customer payables and Other 8:

U.S.

130,814 (98 (0.3 126,988 (335 (1.1

Non-U.S.

64,135 33 0.2 65,603 (36 (0.2

Total

$ 594,889 $ 1,355 0.9 $ 574,628 $ 754 0.5

Net interest income and net interest rate spread

$ 751 0.6 $ 913 0.7

93 June 2017 Form 10-Q
Table of Contents

Financial Data Supplement (Unaudited)

Average Balances and Interest Rates and Net Interest Income

Six Months Ended June 30,
2017 2016
$ in millions

Average

Daily
Balance
Interest

Annualized

Average
Rate

Average

Daily
Balance
Interest Annualized
Average
Rate

Interest earning assets 1

Investment securities 2

$ 77,758 $ 630 1.6 $ 76,999 $ 473 1.2

Loans 2

95,799 1,546 3.3 87,979 1,327 3.0

Interest bearing deposits with banks 2

19,928 122 1.2 30,514 105 0.7

Securities purchased under agreements to resell and Securities borrowed 3:

U.S.

128,775 216 0.3 154,488 (126 (0.2

Non-U.S.

92,354 (206 (0.4 84,499 (72 (0.2

Trading assets, net of Trading liabilities 4:

U.S.

58,390 922 3.2 48,827 957 4.0

Non-U.S.

2,630 33 2.5 13,386 152 2.3

Customer receivables and Other 5:

U.S.

48,173 586 2.5 47,400 468 2.0

Non-U.S.

25,664 222 1.7 22,092 130 1.2

Total

$ 549,471 $ 4,071 1.5 $ 566,184 $ 3,414 1.2

Interest bearing liabilities 1

Deposits 2

$ 150,309 $ 25 - $ 156,893 $ 37 -

Short-term and Long-term borrowings 2, 6

175,937 2,088 2.4 162,059 1,818 2.3

Securities sold under agreements to repurchase and Securities loaned 7:

U.S.

35,199 417 2.4 31,635 271 1.7

Non-U.S.

37,654 170 0.9 28,144 242 1.7

Customer payables and Other 8:

U.S.

130,836 (183 (0.3 125,943 (704 (1.1

Non-U.S.

60,160 32 0.1 65,055 (62 (0.2

Total

$ 590,095 $ 2,549 0.9 $ 569,729 $ 1,602 0.6

Net interest income and net interest rate spread

$ 1,522 0.6 $ 1,812 0.6

1.

Certain revisions have been made to prior periods to conform to the current presentation.

2.

Amounts include primarily U.S. balances.

3.

Includes fees paid on Securities borrowed.

4.

Trading assets, net of Trading liabilities exclude non-interest earning assets and non-interest bearing liabilities, such as equity securities.

5.

Includes interest from customer receivables and cash deposited with clearing organizations or segregated under federal and other regulations or requirements.

6.

The Firm also issues structured notes that have coupon or repayment terms linked to the performance of debt or equity securities, indices, currencies or commodities, which are recorded within Trading revenues (see Note 3 to the consolidated financial statements).

7.

Includes fees received on Securities loaned.

8.

Includes fees received from prime brokerage customers for stock loan transactions incurred to cover customers' short positions.

June 2017 Form 10-Q 94
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Financial Data Supplement (Unaudited)

Rate/Volume Analysis

Effect of Volume and Rate Changes on Net Interest Income

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

Increase (decrease)

due to change in:

Increase (decrease)

due to change in:

$ in millions Volume Rate Net Change Volume Rate Net Change

Interest earning assets

Investment securities

$ (10 $ 77 $ 67 $ 5 $ 152 $ 157

Loans

52 66 118 118 101 219

Interest bearing deposits with banks

(17 32 15 (37 54 17

Securities purchased under agreements to resell and Securities borrowed:

U.S.

11 193 204 20 322 342

Non-U.S.

(5 (50 (55 (7 (127 (134

Trading assets, net of Trading liabilities:

U.S.

101 (84 17 186 (221 (35

Non-U.S.

(49 (3 (52 (122 3 (119

Customer receivables and Other:

U.S.

11 48 59 8 110 118

Non-U.S.

11 55 66 21 71 92

Change in interest income

$ 105 $ 334 $ 439 $ 192 $ 465 $ 657

Interest bearing liabilities

Deposits

$ (1 $ - $ (1 $ (2 $ (10 $ (12

Short-term and Long-term borrowings

88 128 216 156 114 270

Securities sold under agreements to repurchase and Securities loaned:

U.S.

16 88 104 31 115 146

Non-U.S.

19 (43 (24 82 (154 (72

Customer payables and Other:

U.S.

(10 247 237 (26 547 521

Non-U.S.

1 68 69 5 89 94

Change in interest expense

$ 113 $ 488 $ 601 $ 246 $ 701 $ 947

Change in net interest income

$ (8 $ (154 $ (162 $ (54 $ (236 $ (290

95 June 2017 Form 10-Q
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Other Information

Legal Proceedings

The following new matters and developments have occurred since previously reporting certain matters in the Firm's Annual Report on Form 10-K for the year ended December 31, 2016 (the "Form 10-K") and the Firm's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017 (the "First Quarter Form 10-Q"). See also the disclosures set forth under "Legal Proceedings" in Part I, Item 3 of the Form 10-K and Part II, Item 1 of the First Quarter Form 10-Q.

Residential Mortgage and Credit Crisis Related Matters

On April 13, 2017, the Appellate Division, First Department, denied plaintiff's motion for leave to appeal to the New York Court of Appeals 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.

On April 13, 2017, the Appellate Division, First Department, denied plaintiff's motion for leave to appeal to the New York Court of Appeals 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 ABS Capital I Inc.

On April 21, 2017 the parties to Morgan Stanley Mortgage Loan Trust 2006-13ARX v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc. reached an agreement in principle to settle the litigation.

On May 8, 2017, the Firm moved for summary judgment in Deutsche Bank National Trust Company v. Morgan Stanley Mortgage Capital Holdings LLC .

On May 12, 2017, plaintiff filed a notice of appeal of the decision and order by the Supreme Court of the State of New York, which granted the Firm's motion to dismiss the amended complaint in Royal Park Investments SA/NV v. Morgan Stanley et al .

On May 30, 2017, the parties in Morgan Stanley Mortgage Loan Trust 2006-4SL, et al. v. Morgan Stanley Mortgage Capital Inc. and Morgan Stanley Mortgage Loan Trust 2006-10SL, et al. v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc. reached an agreement in principle to settle the litigation.

On June 20, 2017, the Appellate Division, First Department, affirmed the order granting in part and denying in part the Firm's motion to dismiss in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al . On July 28, 2017, the Firm filed a motion for leave to appeal that decision to the New York Court of Appeals.

Following the reversal on appeal of the Court's order granting defendants' motion to dismiss on November 17, 2016, on June 15, 2017, plaintiffs in  Phoenix Light SF Limited, et al. v. Morgan Stanley, et al.  filed a second amended complaint. On July 7, 2017, the court so-ordered a stipulation of partial discontinuance dismissing claims relating to certificates having an original face value of approximately $76 million.

On July 11, 2017, the Appellate Division, First Department, affirmed in part and reversed in part, an order granting in part and denying in part the Firm's motion to dismiss in Wilmington Trust Company v. Morgan Stanley Mortgage Capital Holdings LLC et al.

European Matters

On July 17, 2017, the court in Parma, Italy presiding over the criminal trial against certain present and former employees of the Firm related to the bankruptcy of Parmalat in 2003 issued a decision acquitting the present and former employees of all of the charges pending against them.

On May 31, 2017, Land Salzburg received parliamentary approval for the resolution of all claims in the actions styled Land Salzburg v. Morgan Stanley  & Co. International plc and Morgan Stanley Capital Services LLC and Morgan Stanley  & Co. International plc v. Land Salzburg .

On July 3, 2017, the Firm was informed that the public prosecutor for the Court of Accounts for the Republic of Italy filed a claim against the Firm styled Case No. 2012/00406/MNV, which is pending in the Regional Prosecutor's Office at the Judicial Section of the Court of Auditors for Lazio, Italy. The claim relates to certain derivative transactions between the Republic of Italy and the Firm. The transactions were originally entered into between 1999 and 2005, and were terminated in December 2011 and January 2012. The claim alleges, inter alia, that the Firm was acting as an agent of the Republic of Italy, that the derivative transactions were improper and that the termination of the transactions was also improper and asserts claims for damages through an administrative process against the Firm for €2.76 billion. The Firm does not agree with these allegations. 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

June 2017 Form 10-Q 96
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challenging in the Dutch Tax Tribunal in Amsterdam the prior set-off by the Firm of approximately €124 million (plus accrued interest) of withholding tax credits against the Firm's corporation tax liabilities for the tax years 2007 to 2013. The Dutch Authority alleges that the Firm was not entitled to receive the withholding tax credits on the basis, inter alia, that a Firm subsidiary did not hold legal title to certain securities subject to withholding tax on the relevant dates. The Dutch Authority has also alleged that the Firm failed to provide certain information to the Dutch Authority and keep adequate books and records. The Firm does not agree with these allegations. A hearing regarding this matter has been scheduled on September 19, 2017.

Other

Beginning in February of 2016, the Firm was named as a defendant in multiple purported antitrust class actions now consolidated into a single proceeding in the United States District Court for the Southern District of New York 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 United States and

New York state antitrust laws from 2008 through December of 2016 in connection with their alleged efforts to prevent the development of electronic exchange-based platforms for interest rates swaps trading. Complaints were filed both on behalf of a purported class of investors who purchased interest rates swaps from defendants, as well as on behalf of two swap execution facilities that allegedly were thwarted by the defendants in their efforts to develop such platforms. The consolidated complaints seek, among other relief, certification of the investor class of plaintiffs and treble damages. On July 28, 2017, the court granted in part and denied in part the defendants' motion to dismiss the complaints.

On June 2, 2015, the Firm submitted to the Environmental Protection Agency ("EPA") a self-disclosure that certain reformulated blendstock the Firm blended and sold during 2013 and 2014 potentially did not meet the applicable volatile organic compound reduction standards of the EPA's Phase II Reformulated Gasoline standard. On July 7, 2017, the EPA made a settlement demand of approximately $1 million. Further discussions between the parties are ongoing.

97 June 2017 Form 10-Q
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Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth the information with respect to purchases made by or on behalf of the Firm of its common stock during the quarterly period ended June 30, 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 (April 1, 2017-April 30, 2017)

Share Repurchase Program 2

1,050,000 $ 43.04 1,050,000 $ 455

Employee transactions 3

1,049,776 $ 40.86 - -

Month #2 (May 1, 2017-May 31, 2017)

Share Repurchase Program 2

5,728,000 $ 42.89 5,728,000 $ 209

Employee transactions 3

82,728 $ 43.36 - -

Month #3 (June 1, 2017-June 30, 2017)

Share Repurchase Program 2

4,765,281 $ 43.89 4,765,281 $ 5,000

Employee transactions 3

29,687 $ 42.57 - -

Quarter ended at June 30, 2017

Share Repurchase Program 2

11,543,281 $ 43.32 11,543,281 $ 5,000

Employee transactions 3

1,162,191 $ 41.09 - -

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 the Firm deems 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 (the "Share Repurchase Program"). The Share Repurchase Program is a program for capital management purposes that considers, among other things, business segment capital needs, as well as equity-based compensation and benefit plan requirements. The Share Repurchase Program has no set expiration or termination date. Share repurchases by the Firm are subject to regulatory approval. On June 28, 2017, the Board of Governors of the Federal Reserve System (the "Federal Reserve") announced that they did not object to our 2017 capital plan, which included a share repurchase of up to $5.0 billion of the Firm's outstanding common stock during the period beginning July 1, 2017 through June 30, 2018. During the three months ended June 30, 2017, the Firm repurchased approximately $500 million of the Firm's outstanding common stock as part of its Share Repurchase Program. For further information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Capital Management".

3.

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

Exhibits

An exhibit index has been filed as part of this Report on page E-1.

June 2017 Form 10-Q 98
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MORGAN STANLEY

(Registrant)

 By:

/ S / J ONATHAN P RUZAN

Jonathan Pruzan

Executive Vice President and

Chief Financial Officer

 By:

/ S / P AUL C. W IRTH

Paul C. Wirth

Deputy Chief Financial Officer

Date: August 3, 2017

99 June 2017 Form 10-Q
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Exhibit Index

Morgan Stanley

Quarter Ended June 30, 2017

Exhibit No.

Description

12 Statement Re: Computation of Ratio of Earnings to Fixed Charges and Computation of Earnings to Fixed Charges and Preferred Stock Dividends.
15 Letter of awareness from Deloitte & Touche LLP, dated August 3, 2017, concerning unaudited interim financial information.
31.1 Rule 13a-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.
101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Income Statements-Three Months and Six Months Ended June 30, 2017 and 2016, (ii) the Consolidated Comprehensive Income Statements-Three Months and Six Months Ended June 30, 2017 and 2016, (iii) the Consolidated Balance Sheets-June 30, 2017 and December 31, 2016, (iv) the Consolidated Statements of Changes in Total Equity-Six Months Ended June 30, 2017 and 2016, (v) the Consolidated Cash Flow Statements-Six Months Ended June 30, 2017 and 2016, and (vi) Notes to Consolidated Financial Statements (unaudited).

E-1