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, 2018

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, 2018, there were 1,744,789,709 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended June 30, 2018

Table of Contents	Part	Item	Page
Financial Information	I		1
Management’s Discussion and Analysis of Financial Condition and Results of Operations	I	2	1
Introduction			1
Executive Summary			2
Business Segments			7
Supplemental Financial Information and Disclosures			18
Accounting Development Updates			19
Critical Accounting Policies			19
Liquidity and Capital Resources			19
Quantitative and Qualitative Disclosures about Market Risk	I	3	32
Report of Independent Registered Public Accounting Firm			41
Financial Statements	I	1	42
Consolidated Financial Statements and Notes			42
Consolidated Income Statements (Unaudited)			42
Consolidated Comprehensive Income Statements (Unaudited)			43
Consolidated Balance Sheets (Unaudited at June 30, 2018)			44
Consolidated Statements of Changes in Total Equity (Unaudited)			45
Consolidated Cash Flow Statements (Unaudited)			46
Notes to Consolidated Financial Statements (Unaudited)			47
1. Introduction and Basis of Presentation			47
2. Significant Accounting Policies			48
3. Fair Values			50
4. Derivative Instruments and Hedging Activities			61
5. Investment Securities			65
6. Collateralized Transactions			68
7. Loans, Lending Commitments and Allowance for Credit Losses			69
8. Equity Method Investments			71
9. Deposits			72
10.Borrowings and Other Secured Financings			72
11.Commitments, Guarantees and Contingencies			72
12.Variable Interest Entities and Securitization Activities			76
13.Regulatory Requirements			79
14.Total Equity			81
15.Earnings per Common Share			83
16.Interest Income and Interest Expense			84
17.Employee Benefit Plans			84
18.Income Taxes			84
19.Segment, Geographic and Revenue Information			85
20.Subsequent Events			87
Financial Data Supplement (Unaudited)			88
Glossary of Common Acronyms			91
Other Information	II		93
Legal Proceedings	II	1	93
Unregistered Sales of Equity Securities and Use of Proceeds	II	2	94
Controls and Procedures	I	4	95
Exhibits	II	6	95
Exhibit Index			E-1
Signatures			S-1

i

Available Information

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

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

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

• Amended and Restated Certificate of Incorporation;

• Amended and Restated Bylaws;

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

• Corporate Governance Policies;

• Policy Regarding Corporate Political Activities;

• Policy Regarding Shareholder Rights Plan;

• Equity Ownership Commitment;

• Code of Ethics and Business Conduct;

• Code of Conduct;

• Integrity Hotline Information; and

• Environmental and Social Policies.

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

ii

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

Introduction

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

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

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

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

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

The results of operations in the past have been, and in the future may continue to be, materially affected by competition; risk factors; and legislative, legal and regulatory developments; as well as other factors. These factors also may have an adverse impact on our ability to achieve our strategic objectives. Additionally, the discussion of our results of operations herein may contain forward-looking statements. These statements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect our future results, see “Forward-Looking Statements,” “Business—Competition,” “Business—Supervision and Regulation” and “Risk Factors” in the 2017 Form 10-K, and “Liquidity and Capital Resources” herein.

1 June 2018 Form 10-Q

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 Share¹

1. For the calculation of basic and diluted EPS, see Note 15 to the financial statements.

• We reported net revenues of $10,610 million in the quarter ended June 30, 2018 (“current quarter,” or “2Q 2018”), compared with $9,503 million in the quarter ended June 30, 2017 (“prior year quarter,” or “2Q 2017”). For the current quarter, net income applicable to Morgan Stanley was $2,437 million, or $1.30 per diluted common share, compared with $1,757 million, or $0.87 per diluted common share, in the prior year quarter.

• We reported net revenues of $21,687 million in the six months ended June 30, 2018 (“current year period,” or “YTD 2018”), compared with $19,248 million in the six months ended June 30, 2017 (“prior year period,” or “YTD 2017”). For the current year period, net income applicable to Morgan Stanley was $5,105 million, or $2.75 per diluted common share, compared with $3,687 million, or $1.87 per diluted common share, in the prior year period.

June 2018 Form 10-Q 2

Management’s Discussion and Analysis

Non-interest Expenses¹

($ in millions)

1. The percentages on the bars in the charts represent the contribution of compensation expense and non-compensation expense to the total.

• Compensation and benefits expenses of $4,621 million in the current quarter and $9,535 million in the current year period each increased 9% from $4,252 million in the prior year quarter and $8,718 million in the prior year period. These results primarily reflected increases in discretionary incentive compensation mainly driven by higher revenues, as well as salaries, across all business segments, the formulaic payout to Wealth Management representatives, and amortization of deferred cash and equity awards. These increases were partially offset by a decrease in the fair value of investments to which certain deferred compensation plans are referenced.

• Non-compensation expenses were $2,880 million in the current quarter and $5,623 million in the current year period compared with $2,609 million in the prior year quarter and $5,080 million in the prior year period, representing a 10% and an 11% increase, respectively. These increases were primarily a result of higher volume-related expenses and the gross presentation of certain expenses due to the adoption of the accounting update Revenue from Contracts with Customers (see Notes 2 and 19 to the financial statements for further information).

Income Taxes

The current quarter and current year period included intermittent net discrete tax benefits of $88 million primarily associated with new information pertaining to the resolution of multi-jurisdiction tax examinations and other matters. The prior year quarter and prior year period included intermittent tax provisions of $4 million and $18 million, respectively. For further information, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

3 June 2018 Form 10-Q

Management’s Discussion and Analysis

Selected Financial Information and Other Statistical Data

	Three Months Ended June 30,						Six Months Ended June 30,
$ in millions	2018			2017			2018			2017
Income from continuing operations applicable to Morgan Stanley	$	2,439		$	1,762		$	5,109		$	3,714
Income (loss) from discontinued operations applicable to Morgan Stanley		(2	)		(5	)		(4	)		(27	)
Net income applicable to Morgan Stanley		2,437			1,757			5,105			3,687
Preferred stock dividends and other		170			170			263			260
Earnings applicable to Morgan Stanley common shareholders	$	2,267		$	1,587		$	4,842		$	3,427
Expense efficiency ratio1		70.7%			72.2%			69.9%			71.7%
ROE2		13.0%			9.1%			13.9%			9.9%
ROTCE2		14.9%			10.4%			16.0%			11.4%

in millions, except per share and employee data	At June 30, 2018		At December 31, 2017
GLR3	$	226,322	$	192,660
Loans4	$	112,113	$	104,126
Total assets	$	875,875	$	851,733
Deposits	$	172,802	$	159,436
Borrowings	$	192,244	$	192,582
Common shareholders’ equity	$	70,589	$	68,871
Common shares outstanding		1,750		1,788
Book value per common share5	$	40.34	$	38.52
Worldwide employees		58,010		57,633

	At June 30, 2018		At December 31, 2017
Capital ratios6
Common Equity Tier 1 capital ratio		15.8%		16.5%
Tier 1 capital ratio		18.1%		18.9%
Total capital ratio		20.6%		21.7%
Tier 1 leverage ratio		8.2%		8.3%
SLR7		6.4%		6.5%

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

2. Represents a non-GAAP measure. See “Selected Non-GAAP Financial Information” herein.

3. For a discussion of the GLR, see “Liquidity and Capital Resources—Liquidity Risk Management Framework—Global Liquidity Reserve” herein.

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

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

6. Beginning in 2018, our risk based capital ratios are based on the Standardized Approach fully phased-in rules. At December 31, 2017, our risk based capital ratios were based on the Standardized Approach transitional rules. For a discussion of our regulatory capital ratios, see “Liquidity and Capital Resources—Regulatory Requirements” herein.

7. The SLR became effective as a capital standard on January 1, 2018. For a discussion of the SLR, see “Liquidity and Capital Resources—Regulatory Requirements” herein.

Business Segment Results

Net Revenues by Segment^{1, 2} 

($ in millions)

June 2018 Form 10-Q 4

Management’s Discussion and Analysis

Net Income Applicable to Morgan Stanley by Segment^{1, 3}

($ in millions)

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

2. The total amount of Net Revenues by Segment also includes intersegment eliminations of $(120) million and $(75) million in the current quarter and prior year quarter, respectively, and $(235) million and $(149) million in the current year period and prior year period, respectively.

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

• Institutional Securities net revenues of $5,714 million in the current quarter and $11,814 million in the current year period increased 20% from the prior year quarter and 19% from the prior year period primarily reflecting higher sales and trading and Investment banking revenues.

• Wealth Management net revenues of $4,325 million in the current quarter and $8,699 million in the current year period increased 4% from the prior year quarter and 6% from the prior year period primarily reflecting growth in Asset management revenues.

• Investment Management net revenues of $691 million in the current quarter and $1,409 million in the current year period increased 4% from the prior year quarter and 11% from the prior year period primarily reflecting higher revenues from Asset management.

Net Revenues by Region^{1, 2}

($ in millions)

1. For a discussion of how the geographic breakdown for net revenues is determined, see Note 19 to the financial statements.

2. The percentages on the bars in the charts represent the contribution of each region to the total.

5 June 2018 Form 10-Q

Management’s Discussion and Analysis

Selected Non-GAAP Financial Information

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

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

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

$ in millions, except	Three Months Ended June 30,					Six Months Ended June 30,
per share data	2018			2017		2018			2017
Net income applicable to Morgan Stanley	$	2,437		$	1,757	$	5,105		$	3,687
Impact of adjustments		(88	)		4		(88	)		18
Adjusted net income applicable to Morgan Stanley—non-GAAP1	$	2,349			1,761	$	5,017			3,705
Earnings per diluted common share	$	1.30		$	0.87	$	2.75		$	1.87
Impact of adjustments		(0.05	)		—		(0.05	)		0.01
Adjusted earnings per diluted common share —non-GAAP1	$	1.25		$	0.87	$	2.70		$	1.88
Effective income tax rate		20.6%			32.0%		20.7%			30.5%
Impact of adjustments		2.8%			(0.1)%		1.4%			(0.4)%
Adjusted effective income tax rate—non-GAAP1		23.4%			31.9%		22.1%			30.1%

							Average Monthly Balance
	At June 30, 2018			At December 31, 2017			Three Months Ended June 30,						Six Months Ended June 30,
$ in millions							2018			2017			2018			2017
Tangible Equity
U.S. GAAP
Morgan Stanley shareholders’ equity	$	79,109		$	77,391		$	78,432		$	78,436		$	77,960		$	77,836
Less: Goodwill and net intangible assets		(9,022	)		(9,042	)		(9,076	)		(9,194	)		(9,049	)		(9,227	)
Morgan Stanley tangible shareholders’ equity—non-GAAP	$	70,087		$	68,349		$	69,356		$	69,242		$	68,911		$	68,609
U.S. GAAP
Common equity	$	70,589		$	68,871		$	69,912		$	69,916		$	69,440		$	69,459
Less: Goodwill and net intangible assets		(9,022	)		(9,042	)		(9,076	)		(9,194	)		(9,049	)		(9,227	)
Tangible common equity—non-GAAP	$	61,567		$	59,829		$	60,836		$	60,722		$	60,391		$	60,232

Consolidated Non-GAAP Financial Measures

	Three Months Ended June 30,				Six Months Ended June 30,
$ in billions	2018		2017		2018		2017
Average common equity
Unadjusted	$	69.9	$	69.9	$	69.4	$	69.5
Adjusted1		69.9		69.9		69.4		69.5
ROE2
Unadjusted		13.0%		9.1%		13.9%		9.9%
Adjusted1, 3		12.5%		9.1%		13.7%		9.9%
Average tangible common equity
Unadjusted	$	60.8	$	60.7	$	60.4	$	60.2
Adjusted1		60.8		60.7		60.4		60.2
ROTCE2
Unadjusted		14.9%		10.4%		16.0%		11.4%
Adjusted1, 3		14.3%		10.5%		15.7%		11.4%

	At June 30, 2018		At December 31, 2017
Tangible book value per common share4	$	35.19	$	33.46

June 2018 Form 10-Q 6

Management’s Discussion and Analysis

Non-GAAP Financial Measures by Business Segment

	Three Months Ended June 30,				Six Months Ended June 30,
$ in billions	2018		2017		2018		2017
Pre-tax profit margin5
Institutional Securities		32%		30%		33%		32%
Wealth Management		27%		25%		27%		25%
Investment Management		20%		21%		20%		19%
Consolidated		29%		28%		30%		28%
Average common equity6
Institutional Securities	$	40.8	$	40.2	$	40.8	$	40.2
Wealth Management		16.8		17.2		16.8		17.2
Investment Management		2.6		2.4		2.6		2.4
Parent Company		9.7		10.1		9.2		9.7
Consolidated average common equity	$	69.9	$	69.9	$	69.4	$	69.5
Average tangible common equity6
Institutional Securities	$	40.1	$	39.6	$	40.1	$	39.6
Wealth Management		9.2		9.3		9.2		9.3
Investment Management		1.7		1.6		1.7		1.6
Parent Company		9.8		10.2		9.4		9.7
Consolidated average tangible common equity	$	60.8	$	60.7	$	60.4	$	60.2
ROE2, 7
Institutional Securities		13.0%		8.5%		14.1%		9.9%
Wealth Management		20.0%		14.6%		20.7%		14.6%
Investment Management		15.7%		16.3%		17.5%		13.7%
Consolidated		13.0%		9.1%		13.9%		9.9%
ROTCE2, 7
Institutional Securities		13.2%		8.7%		14.3%		10.1%
Wealth Management		36.6%		27.0%		37.8%		27.0%
Investment Management		24.5%		24.1%		27.4%		20.2%
Consolidated		14.9%		10.4%		16.0%		11.4%

1. Adjusted amounts exclude intermittent net discrete tax provisions (benefits). Income tax consequences associated with employee share-based awards are recognized in Provision for income taxes in the income statements but are excluded from the intermittent net discrete tax provisions (benefits) adjustment as we anticipate conversion activity each quarter. For further information on the net discrete tax provisions (benefits), see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

2. ROE and ROTCE equal annualized net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity and average tangible common equity, on a consolidated basis as indicated. When excluding intermittent net discrete tax provisions (benefits), both the numerator and denominator are adjusted.

3. The calculations used in determining the Firm’s “ROE and ROTCE Targets” referred to below are the Adjusted ROE and Adjusted ROTCE amounts shown in this table.

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

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

6. Average common equity and average tangible common equity for each business segment are determined using our Required Capital framework (see “Liquidity and Capital Resources—Regulatory Requirements—Attribution of Average Common Equity According to the Required Capital Framework” herein).

7. The calculation of the ROE and ROTCE by segment uses the annualized net income applicable to Morgan Stanley by segment less preferred dividends allocated to each segment as a percentage of average common equity and average tangible common equity, respectively, allocated to each segment.

Return on Equity and Tangible Common Equity Targets

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

Our ROE and ROTCE Targets are forward-looking statements that may be materially affected by many factors, including, among other things: macroeconomic and market conditions; legislative and regulatory developments; industry trading and investment banking volumes; equity market levels; interest rate environment; outsize legal expenses or penalties and the ability to maintain a reduced level of expenses; and capital levels. For further information on our ROE and ROTCE Targets and related assumptions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—Return on Equity and Tangible Common Equity Targets” in the 2017 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 an overview of the components of our net revenues, compensation expense and income taxes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments” in the 2017 Form 10-K.

7 June 2018 Form 10-Q

Management’s Discussion and Analysis

Institutional Securities

Income Statement Information

	Three Months Ended June 30,
$ in millions	2018			2017			% Change
Revenues
Investment banking	$	1,699		$	1,413			20%
Trading		3,128			2,725			15%
Investments		89			37			141%
Commissions and fees		674			630			7%
Asset management		102			89			15%
Other		168			126			33%
Total non-interest revenues		5,860			5,020			17%
Interest income		2,195			1,243			77%
Interest expense		2,341			1,501			56%
Net interest		(146	)		(258	)		43%
Net revenues		5,714			4,762			20%
Compensation and benefits		1,993			1,667			20%
Non-compensation expenses		1,909			1,652			16%
Total non-interest expenses		3,902			3,319			18%
Income from continuing operations before income taxes		1,812			1,443			26%
Provision for income taxes		323			413			(22)%
Income from continuing operations		1,489			1,030			45%
Income (loss) from discontinued operations, net of income taxes		(2	)		(5	)		60%
Net income		1,487			1,025			45%
Net income applicable to noncontrolling interests		30			33			(9)%
Net income applicable to Morgan Stanley	$	1,457		$	992			47%

	Six Months Ended June 30,
$ in millions	2018			2017			% Change
Revenues
Investment banking	$	3,212		$	2,830			13%
Trading		6,771			5,737			18%
Investments		138			103			34%
Commissions and fees		1,418			1,250			13%
Asset management		212			180			18%
Other		304			299			2%
Total non-interest revenues		12,055			10,399			16%
Interest income		3,999			2,367			69%
Interest expense		4,240			2,852			49%
Net interest		(241	)		(485	)		50%
Net revenues		11,814			9,914			19%
Compensation and benefits		4,153			3,537			17%
Non-compensation expenses		3,737			3,204			17%
Total non-interest expenses		7,890			6,741			17%
Income from continuing operations before income taxes		3,924			3,173			24%
Provision for income taxes		772			872			(11)%
Income from continuing operations		3,152			2,301			37%
Income (loss) from discontinued operations, net of income taxes		(4	)		(27	)		85%
Net income		3,148			2,274			38%
Net income applicable to noncontrolling interests		64			68			(6)%
Net income applicable to Morgan Stanley	$	3,084		$	2,206			40%

June 2018 Form 10-Q 8

Management’s Discussion and Analysis

Investment Banking

Investment Banking Revenues

	Three Months Ended June 30,
$ in millions	2018		2017		% Change
Advisory	$	618	$	504		23%
Underwriting:
Equity		541		405		34%
Fixed income		540		504		7%
Total underwriting		1,081		909		19%
Total investment banking	$	1,699	$	1,413		20%

	Six Months Ended June 30,
$ in millions	2018		2017		% Change
Advisory	$	1,192	$	1,000		19%
Underwriting:
Equity		962		795		21%
Fixed income		1,058		1,035		2%
Total underwriting		2,020		1,830		10%
Total investment banking	$	3,212	$	2,830		13%

Investment Banking Volumes

	Three Months Ended June 30,				Six Months Ended June 30,
$ in billions	2018		2017		2018		2017
Completed mergers and acquisitions1	$	325	$	212	$	488	$	375
Equity and equity-related offerings2, 3		16		20		37		30
Fixed income offerings2, 4		61		70		116		145

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

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

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

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

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

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 $1,699 million in the current quarter and $3,212 million in the current year period increased 20% and 13% from the comparable prior year periods. The adoption of the accounting update Revenue from Contracts with Customers had the effect of increasing the revenues reported in investment banking by approximately $101 million in the current quarter and $161 million in the current year period compared with the prior year periods (see Notes 2 and 19 to the financial statements for further information). The drivers of the increase in our Investment banking revenues, other than the effect of the above accounting update, were:

• Advisory revenues increased in the current quarter and current year period primarily reflecting higher volumes of completed M&A activity (see Investment Banking Volumes table), partially offset by lower fee realizations.

• Equity underwriting revenues increased in the current quarter primarily as a result of higher fee realizations in initial public offerings and convertibles. In the current year period, equity underwriting revenues increased due to higher equity market volumes (see Investment Banking Volumes table).

• Fixed income underwriting revenues increased in the current quarter primarily due to higher non-investment grade loan fees. Fixed income underwriting revenues in the current year period were relatively unchanged from the prior year period.

Sales and Trading Net Revenues

By Income Statement Line Item

	Three Months Ended June 30,
$ in millions	2018			2017			% Change
Trading	$	3,128		$	2,725			15%
Commissions and fees		674			630			7%
Asset management		102			89			15%
Net interest		(146	)		(258	)		43%
Total	$	3,758		$	3,186			18%

	Six Months Ended June 30,
$ in millions	2018			2017			% Change
Trading	$	6,771		$	5,737			18%
Commissions and fees		1,418			1,250			13%
Asset management		212			180			18%
Net interest		(241	)		(485	)		50%
Total	$	8,160		$	6,682			22%

9 June 2018 Form 10-Q

Management’s Discussion and Analysis

By Business

	Three Months Ended June 30,
$ in millions	2018			2017			% Change
Equity	$	2,470		$	2,155			15%
Fixed income		1,389			1,239			12%
Other		(101	)		(208	)		51%
Total	$	3,758		$	3,186			18%

	Six Months Ended June 30,
$ in millions	2018			2017			% Change
Equity	$	5,028		$	4,171			21%
Fixed income		3,262			2,953			10%
Other		(130	)		(442	)		71%
Total	$	8,160		$	6,682			22%

Sales and Trading Revenues—Equity and Fixed Income

	Three Months Ended June 30, 2018
$ in millions	Trading		Fees1		Net Interest2			Total
Financing	$	1,373	$	89	$	(192	)	$	1,270
Execution services		661		605		(66	)		1,200
Total Equity	$	2,034	$	694	$	(258	)	$	2,470
Total Fixed Income	$	1,299	$	83	$	7		$	1,389

	Three Months Ended June 30, 2017
$ in millions	Trading		Fees1		Net Interest2			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

	Six Months Ended June 30, 2018
$ in millions	Trading		Fees1		Net Interest2			Total
Financing	$	2,607	$	196	$	(338	)	$	2,465
Execution services		1,452		1,269		(158	)		2,563
Total Equity	$	4,059	$	1,465	$	(496	)	$	5,028
Total Fixed Income	$	3,014	$	166	$	82		$	3,262

	Six Months Ended June 30, 2017
$ in millions	Trading		Fees1		Net Interest2			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

1. Includes Commissions and fees and Asset management revenues.

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

As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Segments—Net Revenues by Segment” in the 2017 Form 10-K, we manage each of the sales and trading businesses based on its aggregate net revenues. We provide qualitative commentary in the discussion of results that follow on the key drivers of period over period variances, as the quantitative impact of the various market dynamics typically cannot be disaggregated.

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

Sales and Trading Net Revenues during the Current Quarter

Equity

Equity sales and trading net revenues of $2,470 million in the current quarter increased 15% from the prior year quarter, reflecting higher results in both our financing businesses and execution services.

• Financing revenues increased from the prior year quarter, primarily due to higher average client balances and changes in funding mix which resulted in increased Trading and Net interest revenues.

• Execution services increased from the prior year quarter, primarily reflecting higher Trading revenues driven by effective inventory management in derivative products. In addition, Commissions and fees increased from higher client activity in cash equities products.

Fixed Income

Fixed income net revenues of $1,389 million in the current quarter were 12% higher than the prior year quarter, driven by higher results in commodities products and other and credit products, partially offset by lower results in global macro products.

• Global macro products revenues decreased as higher client activity was more than offset by unfavorable inventory management results in foreign exchange and emerging markets products.

• Credit products Trading and Net interest revenues increased primarily as a result of increased client activity in lending products, partially offset by the impact of credit spread widening on inventory.

• Commodities products and Other increased primarily due to increased client trading activity across commodities products and higher Trading revenues principally from a reduction in counterparty credit risk.

June 2018 Form 10-Q 10

Management’s Discussion and Analysis

Other

Other sales and trading net losses of $101 million in the current quarter decreased from the prior year quarter, primarily reflecting higher revenues on economic hedges related to our long-term debt and corporate loan activity.

Sales and Trading Net Revenues during the Current Year Period

Equity

Equity sales and trading net revenues of $5,028 million in the current year period increased 21% from the prior year period, reflecting higher results in both our financing businesses and execution services.

• Financing revenues increased from the prior year period, primarily due to higher average client balances and changes in funding mix which resulted in increased Trading and Net interest revenues.

• Execution services increased from the prior year period, primarily reflecting higher Trading revenues driven by effective inventory management and higher client activity in derivative products. In addition, Commissions and fees increased from higher client activity in cash equities products.

Fixed Income

Fixed income net revenues of $3,262 million in the current year period were 10% higher than the prior year period, primarily driven by higher results in commodities products and other.

• Global macro and Credit products revenues remained relatively unchanged from the prior year period.

• Commodities products and Other increased primarily due to increased Commodities structured transactions and client flow and higher Trading revenues principally from a reduction in counterparty credit risk.

Other

Other sales and trading net losses of $130 million in the current year period decreased from the prior year period, primarily reflecting higher revenues on economic hedges related to our long-term debt and lower losses associated with corporate loan hedging activity.

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

Investments

• Net investment gains of $89 million in the current quarter and $138 million in the current year period increased from the prior year periods, primarily as a result of higher gains on business-related investments, partially offset by lower results from real estate limited partnership investments.

Other Revenues

• Other revenues of $168 million in the current quarter and $304 million in the current year period increased from the prior year periods, reflecting the recovery of a previously charged off energy industry related loan and improved results from other equity method investments. These results were partially offset by losses associated with held-for-sale corporate loans compared with gains in the respective prior year periods.

Non-interest Expenses

Non-interest expenses of $3,902 million in the current quarter increased from the prior year quarter, reflecting a 20% increase in Compensation and benefits expenses and a 16% increase in Non-compensation expenses. Non-interest expenses of $7,890 million in the current year period increased from the prior year period reflecting a 17% increase in both Compensation and benefits expenses and 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 by higher revenues, as well as amortization of deferred cash and equity awards and salaries, partially offset by a decrease in 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 volume-related expenses and the gross presentation of certain expenses due to the adoption of the accounting update Revenue from Contracts with Customers (see Notes 2 and 19 to the financial statements for further information). In addition, in the current year period, the results were partially offset by the reversal of a portion of previously recorded provisions related to U.K. VAT matters.

11 June 2018 Form 10-Q

Management’s Discussion and Analysis

Income Tax Items

The effective tax rate in the current quarter and current year period is lower compared with the prior year periods primarily as a result of the enactment of the U.S. Tax Cuts and Jobs Act (“Tax Act”). For a discussion of the Tax Act, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

In both the current quarter and current year period, we recognized in Provision for income taxes an intermittent net discrete tax benefit of $97 million, primarily associated with new information pertaining to the resolution of multi-jurisdiction tax examinations and other matters.

June 2018 Form 10-Q 12

Management’s Discussion and Analysis

Wealth Management

Income Statement Information

	Three Months Ended June 30,
$ in millions	2018		2017		% Change
Revenues
Investment banking	$	114	$	135		(16)%
Trading		135		207		(35)%
Investments		3		1		200%
Commissions and fees		442		424		4%
Asset management		2,514		2,302		9%
Other		74		73		1%
Total non-interest revenues		3,282		3,142		4%
Interest income		1,320		1,114		18%
Interest expense		277		105		164%
Net interest		1,043		1,009		3%
Net revenues		4,325		4,151		4%
Compensation and benefits		2,356		2,297		3%
Non-compensation expenses		812		797		2%
Total non-interest expenses		3,168		3,094		2%
Income from continuing operations before income taxes		1,157		1,057		9%
Provision for income taxes		281		392		(28)%
Net income applicable to Morgan Stanley	$	876	$	665		32%

	Six Months Ended June 30,
$ in millions	2018		2017		% Change
Revenues
Investment banking	$	254	$	280		(9)%
Trading		244		445		(45)%
Investments		3		2		50%
Commissions and fees		940		864		9%
Asset management		5,009		4,486		12%
Other		137		129		6%
Total non-interest revenues		6,587		6,206		6%
Interest income		2,600		2,193		19%
Interest expense		488		190		157%
Net interest		2,112		2,003		5%
Net revenues		8,699		8,209		6%
Compensation and benefits		4,806		4,614		4%
Non-compensation expenses		1,576		1,565		1%
Total non-interest expenses		6,382		6,179		3%
Income from continuing operations before income taxes		2,317		2,030		14%
Provision for income taxes		527		718		(27)%
Net income applicable to Morgan Stanley	$	1,790	$	1,312		36%

Financial Information and Statistical Data

$ in billions	At June 30,         2018		At December 31, 2017
Client assets	$	2,411	$	2,373
Fee-based client assets1	$	1,084	$	1,045
Fee-based client assets as a percentage of total client assets		45%		44%
Client liabilities2	$	82	$	80
Investment securities portfolio	$	59.7	$	59.2
Loans and lending commitments	$	80.7	$	77.3
Wealth Management representatives		15,632		15,712

	Three Months Ended June 30,
	2018		2017
Per representative:
Annualized revenues ($ in thousands)3	$	1,105	$	1,052
Client assets ($ in millions)4	$	154	$	142
Fee-based asset flows ($ in billions)5	$	15.3	$	19.9
	Six Months Ended June 30,
	2018		2017
Per representative:
Annualized revenues ($ in thousands)3	$	1,110	$	1,041
Client assets ($ in millions)4	$	154	$	142
Fee-based asset flows ($ in billions)5	$	33.5	$	38.7

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 2018 Form 10-Q

Management’s Discussion and Analysis

Transactional Revenues

	Three Months Ended June 30,
$ in millions	2018		2017		% Change
Investment banking	$	114	$	135		(16)%
Trading		135		207		(35)%
Commissions and fees		442		424		4%
Total	$	691	$	766		(10)%
Transactional revenues as a % of Net revenues		16%		18%

	Six Months Ended June 30,
$ in millions	2018		2017		% Change
Investment banking	$	254	$	280		(9)%
Trading		244		445		(45)%
Commissions and fees		940		864		9%
Total	$	1,438	$	1,589		(10)%
Transactional revenues as a % of Net revenues		17%		19%

Net Revenues

Transactional Revenues

Transactional revenues of $691 million in the current quarter and $1,438 million in the current year period decreased 10% from the respective prior year periods primarily as a result of lower Trading and Investment banking revenues, partially offset by higher Commissions and fees.

• Investment banking revenues decreased in the current quarter and current year period primarily due to lower revenues from equity and structured products issuances.

• Trading revenues decreased in the current quarter and current year period primarily as a result of lower gains related to investments associated with certain employee deferred compensation plans and lower fixed income revenue driven by product mix.

• Commissions and fees increased in the current quarter and current year period primarily as a result of increased client transactions in alternative products, and options and futures.

Asset Management

Asset management revenues of $2,514 million in the current quarter and $5,009 million in the current year period increased 9% and 12%, respectively, primarily due to the effect of market appreciation and net positive flows on the respective beginning of period fee-based client assets balances on which billings are generally based.

See “Fee-Based Client Assets Rollforwards” herein.

Net Interest

Net interest of $1,043 million in the current quarter and $2,112 million in the current year period increased 3% and 5%, respectively, primarily as a result of higher Loan balances. In the current quarter and current year period, the effect of higher interest rates on Loans and Investment securities was essentially offset by higher average interest rates on Deposits, due to changes in our deposit mix.

Non-interest Expenses

Non-interest expenses of $3,168 million in the current quarter and $6,382 million in the current year period increased 2% and 3%, respectively, primarily as a result of higher Compensation and benefits expenses.

• Compensation and benefits expenses increased in the current quarter and current year period primarily due to the formulaic payout to Wealth Management representatives linked to higher revenues and increases in salaries, partially offset by decreases in the fair value of investments to which certain deferred compensation plans are referenced.

• Non-compensation expenses were relatively unchanged in both the current quarter and current year period.

Income Tax Items

The effective tax rate in the current quarter and current year period is lower compared with the prior year periods primarily as a result of the enactment of the Tax Act. For a discussion of the Tax Act, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

June 2018 Form 10-Q 14

Management’s Discussion and Analysis

Fee-Based Client Assets

For a description of fee-based client assets, including descriptions of 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” in the 2017 Form 10-K.

Fee-Based Client Assets Rollforwards

$ in billions	At March 31, 2018		Inflows		Outflows		Market Impact		At June 30, 2018
Separately managed1	$	260	$	9	$	(5)	$	3	$	267
Unified managed		254		12		(8)		1		259
Mutual fund advisory		20		—		(1)		1		20
Advisor		147		8		(8)		2		149
Portfolio manager		356		20		(12)		3		367
Subtotal	$	1,037	$	49	$	(34)	$	10	$	1,062
Cash management		21		6		(5)		—		22
Total fee-based client assets	$	1,058	$	55	$	(39)	$	10	$	1,084

$ in billions	At March 31, 2017		Inflows		Outflows		Market Impact		At June 30, 2017
Separately managed1	$	230	$	8	$	(7)	$	6	$	237
Unified managed		217		13		(7)		5		228
Mutual fund advisory		21		—		(1)		1		21
Advisor		133		10		(8)		3		138
Portfolio manager		305		23		(11)		4		321
Subtotal	$	906	$	54	$	(34)	$	19	$	945
Cash management		21		2		(6)		—		17
Total fee-based client assets	$	927	$	56	$	(40)	$	19	$	962

$ in billions	At December 31, 2017		Inflows		Outflows		Market Impact		At June 30, 2018
Separately managed1	$	252	$	18	$	(10)	$	7	$	267
Unified managed		250		25		(16)		—		259
Mutual fund advisory		21		1		(2)		—		20
Advisor		149		16		(16)		—		149
Portfolio manager		353		39		(22)		(3)		367
Subtotal	$	1,025	$	99	$	(66)	$	4	$	1,062
Cash management		20		11		(9)		—		22
Total fee-based client assets	$	1,045	$	110	$	(75)	$	4	$	1,084

$ in billions	At December 31, 2016		Inflows		Outflows		Market Impact		At June 30, 2017
Separately managed1	$	222	$	16	$	(11)	$	10	$	237
Unified managed		204		25		(15)		14		228
Mutual fund advisory		21		1		(3)		2		21
Advisor		125		19		(14)		8		138
Portfolio manager		285		42		(21)		15		321
Subtotal	$	857	$	103	$	(64)	$	49	$	945
Cash management		20		5		(8)		—		17
Total fee-based client assets	$	877	$	108	$	(72)	$	49	$	962

Average Fee Rates

	Three Months Ended June 30,				Six Months Ended June 30,
Fee rate in bps	2018		2017		2018		2017
Separately managed		16		17		16		16
Unified managed		97		98		98		98
Mutual fund advisory		120		118		120		118
Advisor		84		84		85		85
Portfolio manager		96		96		96		97
Subtotal		77		77		76		76
Cash management		6		6		6		6
Total fee-based client assets		75		75		75		75

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

15 June 2018 Form 10-Q

Management’s Discussion and Analysis

Investment Management

Income Statement Information

	Three Months Ended June 30,
$ in millions	2018		2017			% Change
Revenues
Trading	$	16	$	(3	)		N/M
Investments		55		125			(56)%
Asset management		610		539			13%
Other		3		4			(25)%
Total non-interest revenues		684		665			3%
Interest income		17		1			N/M
Interest expense		10		1			N/M
Net interest		7		—			N/M
Net revenues		691		665			4%
Compensation and benefits		272		288			(6)%
Non-compensation expenses		279		235			19%
Total non-interest expenses		551		523			5%
Income from continuing operations before income taxes		140		142			(1)%
Provision for income taxes		36		41			(12)%
Net income		104		101			3%
Net income (loss) applicable to noncontrolling interests		—		1			N/M
Net income applicable to Morgan Stanley	$	104	$	100			4%

	Six Months Ended June 30,
$ in millions	2018		2017			% Change
Revenues
Trading	$	21	$	(14	)		N/M
Investments		132		223			(41)%
Asset management		1,236		1,056			17%
Other		13		8			63%
Total non-interest revenues		1,402		1,273			10%
Interest income		18		2			N/M
Interest expense		11		1			N/M
Net interest		7		1			N/M
Net revenues		1,409		1,274			11%
Compensation and benefits		576		567			2%
Non-compensation expenses		545		462			18%
Total non-interest expenses		1,121		1,029			9%
Income from continuing operations before income taxes		288		245			18%
Provision for income taxes		55		71			(23)%
Net income		233		174			34%
Net income (loss) applicable to noncontrolling interests		2		7			(71)%
Net income applicable to Morgan Stanley	$	231	$	167			38%

Net Revenues

Investments

Investments gains of $55 million in the current quarter and $132 million in the current year period compared with $125 million in the prior year quarter and $223 million in the prior year period, respectively. These decreases reflect the absence of realized investment gains in an infrastructure fund, as well as the reversal of previously accrued carried interest in certain Asia private equity funds, primarily due to losses associated with weakening Asia-Pacific currencies.

Asset Management

Asset management revenues of $610 million in the current quarter and $1,236 million in the current year period increased 13% and 17%, respectively, primarily as a result of higher average AUM across all asset classes. See “AUM Rollforwards” herein.

The adoption of the accounting update Revenue from Contracts with Customers had the effect of increasing Asset management revenues due to the gross presentation of distribution fees. This increase (approximately $44 million in the current year period) was partially offset by the delayed recognition of certain performance fees not in the form of carried interest until they are no longer probable of reversing. For 2018, the recognition of a greater portion of these revenues is expected to occur in the fourth quarter based on current fee arrangements. See Notes 2 and 19 to the financial statements for further details.

Non-interest Expenses

Non-interest expenses of $551 million in the current quarter and $1,121 million in the current year period increased 5% and 9%, respectively, primarily due to higher Non-compensation expenses.

• Compensation and benefits expenses decreased in the current quarter due to decreases in deferred compensation associated with carried interest and the fair value of investments to which certain deferred compensation plans are referenced. Compensation and benefits expenses were relatively unchanged in the current year period.

• Non-compensation expenses increased in the current quarter and current year period primarily as a result of the gross presentation of distribution fees due to the adoption of the accounting update Revenue from Contracts with Customers along with higher fee sharing on increased AUM balances. See “Asset Management” above.

June 2018 Form 10-Q 16

Management’s Discussion and Analysis

Income Tax Items

The effective tax rate in the current quarter and current year period is lower compared with the prior year periods primarily as a result of the enactment of the Tax Act. For a discussion of the Tax Act, see “Supplemental Financial Information and Disclosures—Income Tax Matters” herein.

Assets Under Management or Supervision

For a description of the asset classes and 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 the 2017 Form 10-K.

AUM Rollforwards

$ in billions	At March 31, 2018		Inflows		Outflows			Market Impact			Other1			At June 30, 2018
Equity	$	109	$	10	$	(7	)	$	3		$	(1	)	$	114
Fixed income		72		7		(7	)		(1	)		(2	)		69
Alternative/Other		131		6		(4	)		1			(2	)		132
Long-term AUM subtotal		312		23		(18	)		3			(5	)		315
Liquidity		157		375		(373	)		1			(1	)		159
Total AUM	$	469	$	398	$	(391	)	$	4		$	(6	)	$	474
Shares of minority stake assets		7													7
$ in billions	At March 31, 2017		Inflows		Outflows			Market Impact			Other1			At June 30, 2017
Equity	$	87	$	6	$	(5	)	$	5		$	1		$	94
Fixed income		62		8		(6	)		1			1			66
Alternative/Other		119		6		(6	)		3			(1	)		121
Long-term AUM subtotal		268		20		(17	)		9			1			281
Liquidity		153		308		(308	)		—			1			154
Total AUM	$	421	$	328	$	(325	)	$	9		$	2		$	435
Shares of minority stake assets		7													8

$ in billions	At December 31, 2017		Inflows		Outflows			Market Impact			Other1			At June 30, 2018
Equity	$	105	$	20	$	(14	)	$	3		$	—		$	114
Fixed income		73		14		(16	)		(1	)		(1	)		69
Alternative/Other		128		11		(9	)		1			1			132
Long-term AUM subtotal		306		45		(39	)		3			—			315
Liquidity		176		700		(717	)		1			(1	)		159
Total AUM	$	482	$	745	$	(756	)	$	4		$	(1	)	$	474
Shares of minority stake assets		7													7
$ in billions	At December 31, 2016		Inflows		Outflows			Market Impact			Other1			At June 30, 2017
Equity	$	79	$	11	$	(10	)	$	13		$	1		$	94
Fixed income		60		13		(11	)		2			2			66
Alternative/Other		115		13		(10	)		4			(1	)		121
Long-term AUM subtotal		254		37		(31	)		19			2			281
Liquidity		163		636		(646	)		—			1			154
Total AUM	$	417	$	673	$	(677	)	$	19		$	3		$	435
Shares of minority stake assets		8													8

1. Includes distributions and foreign currency impact for all periods and the impact of the Mesa West Capital, LLC acquisition in the current year period.

Average AUM

	Three Months Ended June 30,				Six Months Ended June 30,
$ in billions	2018		2017		2018		2017
Equity	$	111	$	91	$	110	$	87
Fixed income		71		64		72		63
Alternative/Other		131		120		130		119
Long-term AUM subtotal		313		275		312		269
Liquidity		161		153		163		155
Total AUM	$	474	$	428	$	475	$	424
Shares of minority stake assets		7		8		7		8

Average Fee Rate

	Three Months Ended June 30,				Six Months Ended June 30,
Fee rate in bps	2018		2017		2018		2017
Equity		77		73		76		74
Fixed income		33		33		34		33
Alternative/Other		67		70		67		70
Long-term AUM		63		62		63		63
Liquidity		18		17		18		18
Total AUM		47		46		47		46

17 June 2018 Form 10-Q

Management’s Discussion and Analysis

Supplemental Financial Information and Disclosures

Income Tax Matters

Effective Tax Rate from Continuing Operations

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
U.S. GAAP		20.6%		32.0%		20.7%		30.5%
Adjusted effective income tax rate—non-GAAP1		23.4%		31.9%		22.1%		30.1%

1. Adjusted amounts exclude intermittent net discrete tax provisions (benefits). Income tax consequences associated with employee share-based awards are recognized in Provision for income taxes in the income statements but are excluded from the intermittent net discrete tax provisions (benefits) adjustment as we anticipate conversion activity each quarter. For further information on non-GAAP measures, see “Selected Non-GAAP Financial Information” herein.

Adjusted amounts exclude an intermittent net discrete tax benefit of $88 million in the current quarter and current year period, primarily associated with new information pertaining to the resolution of multi-jurisdiction tax examinations and other matters. Intermittent net discrete tax provisions were $4 million and $18 million in the prior year quarter and prior year period, respectively.

The effective tax rates include recurring-type discrete tax benefits associated with employee share-based payments of $17 million and $16 million in the current quarter and prior year quarter, respectively. The effective tax rates include recurring-type discrete tax benefits associated with employee share-based payments of $164 million and $128 million in the current year period and prior year period, respectively.

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

Our income tax estimates may change as additional clarification and implementation guidance continue to be received from the U.S. Treasury Department and as the interpretation of the Tax Act evolves over time. Taking into account continuing developments related to provisions of the Tax Act

such as the modified territorial tax system and GILTI, we expect our effective tax rate from continuing operations for 2018 to be approximately 22% to 25% (see “Forward-Looking Statements” in the 2017 Form 10-K).

U.S. Bank Subsidiaries

Our U.S. bank subsidiaries, Morgan Stanley Bank N.A. (“MSBNA”) and Morgan Stanley Private Bank, National Association (“MSPBNA”) (collectively, “U.S. Bank Subsidiaries”) accept deposit accounts, provide loans to a variety of customers, from large corporate and institutional clients to high net worth individuals, and invest in securities. The lending activities in the Institutional Securities business segment primarily include loans and lending commitments to corporate clients. The lending activities in the Wealth Management business segment primarily include: securities-based lending, which allows clients to borrow money against the value of qualifying securities; and residential real estate loans.

We expect our lending activities to continue to grow through further market penetration of the client base. For a further discussion of our credit risks, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk.” For further discussion about loans and lending commitments, see Notes 7 and 11 to the financial statements.

U.S. Bank Subsidiaries’ Supplemental Financial Information¹

$ in billions	At     June 30,     2018		At   December 31,   2017
Assets	$	200.5	$	185.3
Investment securities portfolio:
Investment securities—AFS		41.3		42.0
Investment securities—HTM		18.8		17.5
Total investment securities	$	60.1	$	59.5
Deposits2	$	172.6	$	159.1
Wealth Management
Securities-based lending and other loans3	$	43.6	$	41.2
Residential real estate loans		26.4		26.7
Total	$	70.0	$	67.9
Institutional Securities
Corporate loans	$	26.7	$	24.2
Wholesale real estate loans		14.5		12.2
Total	$	41.2	$	36.4

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

2. For further information on deposits, see “Liquidity and Capital Resources—Funding Management—Unsecured Financing” herein.

3. Other loans primarily include tailored lending.

June 2018 Form 10-Q 18

Management’s Discussion and Analysis

Accounting Development Updates

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

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

• Leases. This accounting update requires lessees to recognize in the balance sheet all leases with terms exceeding one year, which results in the recognition of a right of use asset and corresponding lease liability, including for those leases that we currently classify as operating leases. The accounting for leases where we are the lessor is largely unchanged.

The right of use asset and lease liability will initially be measured using the present value of the remaining rental payments. This change to the accounting for leases where we are lessee requires modifications to our lease accounting systems and determining the present value of the remaining rental payments. Key aspects of the latter include concluding upon the discount rate and determining whether to include non-lease components in rental payments. Currently, we plan to adopt this accounting update as of the effective date, January 1, 2019. Based upon our current population of leases, we expect the right of use asset and corresponding lease liability to be less than 1% of our total assets.

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

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

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

Overall, the amendments in this update are expected to accelerate the recognition of credit losses for portfolios

where the CECL models will be applied. This update is effective as of January 1, 2020 with early adoption permitted as of January 1, 2019.

Critical Accounting Policies

Our financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions (see Note 1 to the financial statements). We believe that of our significant accounting policies (see Note 2 to the financial statements in the 2017 Form 10-K and Note 2 to the 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 the 2017 Form 10-K.

Liquidity and Capital Resources

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

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.

19 June 2018 Form 10-Q

Management’s Discussion and Analysis

Total Assets by Business Segment

	At June 30, 2018
$ in millions	IS		WM		IM		Total
Assets
Cash and cash equivalents1	$	66,624	$	14,891	$	74	$	81,589
Trading assets at fair value		262,743		78		3,617		266,438
Investment securities		22,204		59,744		—		81,948
Securities purchased under agreements to resell		79,509		14,419		—		93,928
Securities borrowed		153,062		186		—		153,248
Customer and other receivables		43,664		17,467		583		61,714
Loans, net of allowance2		42,071		70,037		5		112,113
Other assets3		14,011		9,227		1,659		24,897
Total assets	$	683,888	$	186,049	$	5,938	$	875,875
	At December 31, 2017
$ in millions	IS		WM		IM		Total
Assets
Cash and cash equivalents1	$	63,597	$	16,733	$	65	$	80,395
Trading assets at fair value		295,678		59		2,545		298,282
Investment securities		19,556		59,246		—		78,802
Securities purchased under agreements to resell		74,732		9,526		—		84,258
Securities borrowed		123,776		234		—		124,010
Customer and other receivables		36,803		18,763		621		56,187
Loans, net of allowance2		36,269		67,852		5		104,126
Other assets3		14,563		9,596		1,514		25,673
Total assets	$	664,974	$	182,009	$	4,750	$	851,733

IS—Institutional Securities

WM—Wealth Management

IM—Investment Management

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

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

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

A substantial portion of total assets consists of liquid marketable securities and short-term receivables arising principally from sales and trading activities in the Institutional Securities business segment. Total assets increased to $875.9 billion at June 30, 2018 from $851.7 billion at December 31, 2017, primarily driven by increases to support client activity in Securities borrowed in the Institutional Securities business segment and Loans across all segments. Trading assets within the Institutional Securities business segment declined due to reductions in Equities inventory to support increased demand and changes in client positioning. The decrease in Trading assets resulted in greater liquidity, as reflected by increases in GLR-eligible Securities purchased under agreements to resell, Investment securities and Cash and cash equivalents. For further information regarding our GLR, see “Global Liquidity Reserve” herein.

Collateralized Financing Transactions

$ in millions	At June 30, 2018		At December 31, 2017
Securities purchased under agreements to resell and Securities borrowed	$	247,176	$	208,268
Securities sold under agreements to repurchase and Securities loaned	$	63,370	$	70,016
Securities received as collateral1	$	8,209	$	13,749
	Average Daily Balance Three Months Ended
$ in millions	June 30, 2018		December 31, 2017
Securities purchased under agreements to resell and Securities borrowed	$	227,527	$	214,343
Securities sold under agreements to repurchase and Securities loaned	$	64,404	$	66,879

1. Included in Trading assets in the balance sheets.

See Note 2 to the financial statements in the 2017 Form 10-K and Note 6 to the financial statements for more details on collateralized financing transactions.

In addition to the collateralized financing transactions shown in the previous table, we also engage in financing transactions collateralized by customer-owned securities, which are segregated in accordance with regulatory requirements. Receivables under these financing transactions, primarily margin loans, are included in Customer and other receivables in the balance sheets, and payables under these financing transactions, primarily to prime brokerage customers, are included in Customer and other payables in the balance sheets. Our risk exposure on these transactions is mitigated by collateral maintenance policies 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 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 the 2017 Form 10-K.

June 2018 Form 10-Q 20

Management’s Discussion and Analysis

At June 30, 2018 and December 31, 2017, 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 the 2017 Form 10-K.

GLR by Type of Investment

$ in millions	At June 30, 2018		At December 31, 2017
Cash deposits with banks1	$	10,345	$	7,167
Cash deposits with central banks1		33,948		33,791
Unencumbered highly liquid securities:
U.S. government obligations		88,979		73,422
U.S. agency and agency mortgage-backed securities		59,143		55,750
Non-U.S. sovereign obligations2		31,157		19,424
Other investment grade securities		2,750		3,106
Total	$	226,322	$	192,660

1. Primarily included in Cash and due from banks and Interest bearing deposits with banks in the balance sheets.

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

GLR Managed by Bank and Non-Bank Legal Entities

	At June 30, 2018		At December 31, 2017		Average Daily Balance Three Months Ended
$ in millions					June 30, 2018
Bank legal entities
Domestic	$	76,667	$	70,364	$	70,962
Foreign		4,365		4,756		4,144
Total Bank legal entities		81,032		75,120		75,106
Non-Bank legal entities
Domestic:
Parent Company		63,401		41,642		55,887
Non-Parent Company		31,652		35,264		32,307
Total Domestic		95,053		76,906		88,194
Foreign		50,237		40,634		50,650
Total Non-Bank legal entities		145,290		117,540		138,844
Total	$	226,322	$	192,660	$	213,950

Regulatory Liquidity Framework

Liquidity Coverage Ratio

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

The Firm’s calculations are based on our current understanding of the LCR and other factors, which may be subject to change as we receive additional clarification and implementation guidance from regulators relating to the LCR, and as the interpretation of the LCR evolves over time.

HQLA by Type of Asset and LCR

	Average Daily Balance Three Months Ended
$ in millions	June 30, 2018		March 31, 2018
HQLA
Cash deposits with central banks	$	38,456	$	33,350
Securities1		128,268		125,015
Total	$	166,724	$	158,365
LCR		128%		121%

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

The increase in the LCR in the current quarter is due to increased HQLA resulting from changes in the composition of assets within the Institutional Securities business segment.

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

Net Stable Funding Ratio

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

21 June 2018 Form 10-Q

Management’s Discussion and Analysis

The Basel Committee on Banking Supervision (“Basel Committee”) has previously finalized the NSFR framework. In May 2016, the U.S. banking agencies issued a proposal to implement the NSFR in the U.S., which would apply to us and our U.S. Bank Subsidiaries. Our preliminary estimates, based on the current proposal, indicate that actions will be necessary to meet the requirement, which we would expect to accomplish by the effective date of any final rule. Our preliminary estimates are subject to risks and uncertainties that may cause actual results based on the final rule to differ materially from estimates. For an additional discussion of the 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 the 2017 Form 10-K.

Funding Management

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

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

Secured Financing

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 the 2017 Form 10-K.

At June 30, 2018 and December 31, 2017, 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 Financial Condition and Results of Operations—Liquidity and Capital Resources—Funding Management—Unsecured Financing” in the 2017 Form 10-K.

Deposits

$ in millions	At June 30, 2018		At December 31, 2017
Savings and demand deposits:
Brokerage sweep deposits1	$	130,698	$	135,946
Savings and other		9,038		8,541
Total Savings and demand deposits		139,736		144,487
Time deposits2		33,066		14,949
Total	$	172,802	$	159,436

1. Represents balances swept from client brokerage accounts.

2. Certain time deposit accounts are carried at fair value under the fair value option (see Note 3 to the financial statements).

Deposits are primarily sourced from our Wealth Management clients and are considered to have stable, low-cost funding characteristics. Total deposits at June 30, 2018 increased compared with December 31, 2017, primarily driven by increases in Time deposits and Savings and other deposits, partially offset by a reduction in Brokerage sweep deposits due to client deployment of cash into investments and typical seasonal client tax payments. In the current quarter we initiated a redesign of our Brokerage sweep deposit program, resulting in approximately $10 billion in incremental deposits in higher balance accounts, which partially offset the reductions noted since December 31, 2017. As we make additional adjustments in the third quarter of 2018, we anticipate a similar amount of incremental deposits.

Borrowings

We believe that accessing debt investors through multiple distribution channels helps provide consistent access to the unsecured markets. In addition, the issuance of borrowings with original maturities greater than one year allows us to reduce reliance on short-term credit sensitive instruments. Borrowings with original maturities greater than one year are generally managed to achieve staggered maturities, thereby mitigating refinancing risk, and to maximize investor diversification through sales to global institutional and retail clients across regions, currencies and product types.

The availability and cost of financing to us can vary depending on market conditions, the volume of certain trading and lending activities, our credit ratings and the overall availability of credit. We also engage in, and may continue to engage in, repurchases of our borrowings in the ordinary course of business.

June 2018 Form 10-Q 22

Management’s Discussion and Analysis

Borrowings by Remaining Maturity at June 30, 2018¹

$ in millions	Parent Company		Subsidiaries		Total
Original maturities of one year or less	$	—	$	2,329	$	2,329
Original maturities greater than one year
2018	$	3,652	$	2,436	$	6,088
2019		21,497		4,095		25,592
2020		18,781		2,400		21,181
2021		21,294		2,984		24,278
2022		14,969		1,874		16,843
Thereafter		80,964		14,969		95,933
Total	$	161,157	$	28,758	$	189,915
Total Borrowings	$	161,157	$	31,087	$	192,244
Maturities over next 12 months2					$	17,330

1. Original maturity in the table is generally based on contractual final maturity. For borrowings with put options, remaining maturity represents the earliest put date.

2. Includes only borrowings with original maturities greater than one year.

Borrowings of $192,244 million as of June 30, 2018 remained relatively unchanged compared with $192,582 million at December 31, 2017.

For further information on Borrowings, see Note 10 to the financial statements.

Credit Ratings

We rely on external sources to finance a significant portion of our daily operations. The cost and availability of financing generally are impacted by our credit ratings, among other things. In addition, our credit ratings can have an impact on certain trading revenues, particularly in those businesses where longer-term counterparty performance is a key consideration, such as OTC derivative transactions, including credit derivatives and interest rate swaps. When determining credit ratings, rating agencies consider company-specific factors, other industry factors such as regulatory or legislative changes, and the macroeconomic environment, among other things.

Our credit ratings do not include any uplift from perceived government support from any rating agency given the significant progress of U.S. financial reform legislation and regulations. Some rating agencies have stated that they currently incorporate various degrees of credit rating uplift from non-governmental third-party sources of potential support.

Parent Company and MSBNA Senior Unsecured Ratings at July 31, 2018
	Parent Company
	Short-Term Debt	Long-Term Debt	Rating Outlook
DBRS, Inc.	R-1 (middle)	A (high)		Stable
Fitch Ratings, Inc.	F1	A		Stable
Moody’s Investors Service, Inc.	P-2	A3		Stable
Rating and Investment Information, Inc.	a-1	A-		Stable
S&P Global Ratings	A-2	BBB+		Stable
	MSBNA
	Short-Term Debt	Long-Term Debt	Rating Outlook
Fitch Ratings, Inc.	F1	A+		Stable
Moody’s Investors Service, Inc.	P-1	A1		Stable
S&P Global Ratings	A-1	A+		Stable

In connection with certain OTC trading agreements and certain other agreements where we are a liquidity provider to certain financing vehicles associated with the Institutional Securities business segment, we may be required to provide additional collateral, immediately settle any outstanding liability balances with certain counterparties or pledge additional collateral to certain clearing organizations in the event of a future credit rating downgrade irrespective of whether we are in a net asset or net liability position.

The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by contract and can be based on ratings by either or both of Moody’s Investors Service, Inc. (“Moody’s”) and S&P Global Ratings. The following table shows the future potential collateral amounts and termination payments that could be called or required by counterparties and clearing organizations in the event of one-notch or two-notch downgrade scenarios, from the lowest of Moody’s ratings or S&P Global Ratings, based on the relevant contractual downgrade triggers.

Incremental Collateral or Terminating Payments upon Potential Future Rating Downgrade

$ in millions	At June 30, 2018		At December 31, 2017
One-notch downgrade	$	828	$	822
Two-notch downgrade		596		596

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

23 June 2018 Form 10-Q

Management’s Discussion and Analysis

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

	Three Months Ended June 30,				Six Months Ended June 30,
$ in millions		2018		2017		2018		2017
Repurchases of common stock under our share repurchase program	$	1,250	$	500	$	2,500	$	1,250

From time to time we repurchase our outstanding common stock, including as part of our share repurchase program. On April 18, 2018, we entered into a sales plan with Mitsubishi UFJ Financial Group, Inc. (“MUFG”) whereby MUFG sells shares of the Firm’s common stock to us, as part of our share repurchase program. The sales plan, which began to be executed in the current quarter, is only intended to maintain MUFG’s ownership percentage below 24.9% in order to comply with MUFG’s passivity commitments to the Board of Governors of the Federal Reserve System (“Federal Reserve”) and will have no impact on the strategic alliance between MUFG and us, including the joint ventures in Japan. For a description of our share repurchase program, see “Unregistered Sales of Equity Securities and Use of Proceeds.”

For a description of our capital plan, see “Liquidity and Capital Resources—Regulatory Requirements—Capital Plans and Stress Tests.”

Common Stock Dividend Announcement

Announcement date	July 18, 2018
Amount per share	$0.30
Date to be paid	August 15, 2018
Shareholders of record as of	July 31, 2018

Preferred Stock

Preferred Stock Dividend Announcement

Announcement date	June 15, 2018
Date paid	July 16, 2018
Shareholders of record as of	June 29, 2018

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

Regulatory Requirements

Regulatory Capital Framework

We are a financial holding company (“FHC”) under the Bank Holding Company Act of 1956, as amended (“BHC Act”), and are subject to the regulation and oversight of the Federal Reserve. The Federal Reserve establishes capital requirements for us, including “well-capitalized” standards, and evaluates our compliance with such capital requirements. The OCC establishes similar capital requirements and standards for our U.S. Bank Subsidiaries. For us to remain an FHC, we must remain well-capitalized in accordance with standards established by the Federal Reserve and our U.S. Bank Subsidiaries must remain well-capitalized in accordance with standards established by the OCC. For additional information on regulatory capital requirements for our U.S. Bank Subsidiaries, see Note 13 to the financial statements.

Regulatory capital requirements established by the Federal Reserve are largely based on the Basel III capital standards established by the Basel Committee and also implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).

Regulatory Capital Requirements

We are required to maintain minimum risk-based and leverage-based capital ratios under the regulatory capital requirements. For more information on our regulatory capital requirements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Regulatory Capital Requirements” in the 2017 Form 10-K.

Risk-based Regulatory Capital.    Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital (which includes Tier 2 capital). 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.

June 2018 Form 10-Q 24

Management’s Discussion and Analysis

In addition to the minimum risk-based capital ratio requirements, by 2019 we will be subject to the following buffers:

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

• The Common Equity Tier 1 G-SIB capital surcharge, currently at 3%; and

• Up to a 2.5% Common Equity Tier 1 CCyB, currently set by U.S. banking agencies at zero.

In 2017 and 2018, each of the buffers is 50% and 75%, respectively, of the 2019 requirement noted above. 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 the 2017 Form 10-K.

Our risk-based capital ratios for purposes of determining regulatory compliance are the lower of the capital ratios computed under (i) the standardized approaches for calculating credit risk and market risk RWA (“Standardized Approach”) and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWA (“Advanced Approach”). At June 30, 2018 and December 31, 2017, our ratios are based on the Standardized Approach rules.

Effective January 1, 2019, Common Equity Tier 1 capital, Tier 1 capital and Total capital requirements, inclusive of buffers, will increase to 10.0%, 11.5%, and 13.5%, respectively.

See “Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements” herein for additional capital requirements effective January 1, 2019.

Leverage-based Regulatory Capital. Minimum leverage-based capital requirements include a Tier 1 leverage ratio and an SLR. The SLR became effective as a capital standard on January 1, 2018. We are required to maintain a Tier 1 SLR of 3% as well as an enhanced SLR capital buffer of at least 2% (for a total of at least 5%) in order to avoid potential limitations on capital distributions, including dividends and stock repurchases, and discretionary bonus payments to executive officers.

Regulatory Capital Ratios

	At June 30, 2018
			Fully Phased-In
$ in millions	Required Ratio		Standardized		Advanced
Risk-based capital
Common Equity Tier 1 capital			$	61,352	$	61,352
Tier 1 capital				70,017		70,017
Total capital				79,681		79,425
Total RWA				387,414		369,383
Common Equity Tier 1 capital ratio		8.6%		15.8%		16.6%
Tier 1 capital ratio		10.1%		18.1%		19.0%
Total capital ratio		12.1%		20.6%		21.5%
Leverage-based capital
Adjusted average assets1			$	852,726		N/A
Tier 1 leverage ratio		4.0%		8.2%		N/A
Supplementary leverage exposure2				N/A		1,096,953
SLR		5.0%		N/A		6.4%

	At December 31, 2017
			Transitional3				Pro Forma Fully Phased-In
$ in millions	Required Ratio		Standardized		Advanced		Standardized		Advanced
Risk-based capital
Common Equity
Tier 1 capital			$	61,134	$	61,134	$	60,564	$	60,564
Tier 1 capital				69,938		69,938		69,120		69,120
Total capital				80,275		80,046		79,470		79,240
Total RWA				369,578		350,212		377,241		358,324
Common Equity Tier 1 capital ratio		7.3%		16.5%		17.5%		16.1%		16.9%
Tier 1 capital ratio		8.8%		18.9%		20.0%		18.3%		19.3%
Total capital ratio		10.8%		21.7%		22.9%		21.1%		22.1%
Leverage-based capital
Adjusted average assets1			$	842,270		N/A	$	841,756		N/A
Tier 1 leverage ratio		4.0%		8.3%		N/A		8.2%		N/A
Supplementary leverage exposure2				N/A		1,082,683		N/A		1,082,170
Pro forma SLR		5.0%		N/A		6.5%		N/A		6.4%

1. Adjusted average assets represents the denominator of the Tier 1 leverage ratio and is composed of the average daily balance of consolidated on-balance sheet assets under U.S. GAAP during the current quarter and the quarter ended December 31, 2017, adjusted for disallowed goodwill, intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other capital deductions.

2. Supplementary leverage exposure is the sum of Adjusted average assets used in the Tier 1 leverage ratio and other adjustments, primarily (i) potential future exposure for derivative exposures, gross-up for cash collateral netting where qualifying criteria are not met, and the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) the counterparty credit risk for repo-style transactions; and (iii) the credit equivalent amount for off-balance sheet exposures.

3. Regulatory compliance was determined based on capital ratios calculated under transitional rules until December 31, 2017.

At December 31, 2017, the pro forma fully phased-in estimated amounts and the pro forma estimated SLR utilized fully phased-in Tier 1 capital, including the fully phased-in Tier 1 capital deductions that applied beginning January 1, 2018. These pro forma fully phased-in estimates were

25 June 2018 Form 10-Q

Management’s Discussion and Analysis

non-GAAP financial measures as the related capital rules were not yet effective at December 31, 2017. These estimates were based on our understanding of the capital rules and other factors at the time.

Regulatory compliance was determined based on capital ratios including regulatory capital and RWA calculated under the transitional rules until December 31, 2017. The regulatory capital analyses in the following tables are presented using pro forma fully phased-in estimates as of December 31, 2017, which are equivalent to amounts calculated as of June 30, 2018.

Fully Phased-In Regulatory Capital

$ in millions	At June 30, 2018			At December 31, 20171
Common Equity Tier 1 capital
Common stock and surplus	$	11,824		$	14,354
Retained earnings		61,835			57,577
AOCI		(3,070	)		(3,060	)
Regulatory adjustments and deductions:
Net goodwill		(6,682	)		(6,599	)
Net intangible assets (other than goodwill and mortgage servicing assets)		(2,329	)		(2,446	)
Other adjustments and deductions2		(226	)		738
Total Common Equity Tier 1 capital	$	61,352		$	60,564
Additional Tier 1 capital
Preferred stock	$	8,520		$	8,520
Noncontrolling interests		501			415
Other adjustments and deductions		(1	)		(23	)
Additional Tier 1 capital	$	9,020		$	8,912
Deduction for investments in covered funds		(355	)		(356	)
Total Tier 1 capital	$	70,017		$	69,120
Standardized Tier 2 capital
Subordinated debt	$	9,141		$	9,839
Noncontrolling interests		118			98
Eligible allowance for credit losses		444			423
Other adjustments and deductions		(39	)		(10	)
Total Standardized Tier 2 capital	$	9,664		$	10,350
Total Standardized capital	$	79,681		$	79,470
Advanced Tier 2 capital
Subordinated debt	$	9,141		$	9,839
Noncontrolling interests		118			98
Eligible credit reserves		188			193
Other adjustments and deductions		(39	)		(10	)
Total Advanced Tier 2 capital	$	9,408		$	10,120
Total Advanced capital	$	79,425		$	79,240

Fully Phased-In Regulatory Capital Rollforward

$ in millions	Six Months Ended June 30, 2018
Common Equity Tier 1 capital
Common Equity Tier 1 capital at December 31, 20171	$	60,564
Change related to the following items:
Value of shareholders’ common equity		1,718
Net goodwill		(83	)
Net intangible assets (other than goodwill and mortgage servicing assets)		117
Other adjustments and deductions2		(964	)
Common Equity Tier 1 capital at June 30, 2018	$	61,352
Additional Tier 1 capital
Additional Tier 1 capital at December 31, 20171	$	8,912
Change related to the following items:
Noncontrolling interests		86
Other adjustments and deductions		22
Additional Tier 1 capital at June 30, 2018		9,020
Deduction for investments in covered funds at December 31, 20171		(356	)
Change in deduction for investments in covered funds		1
Deduction for investments in covered funds at June 30, 2018		(355	)
Tier 1 capital at June 30, 2018	$	70,017
Standardized Tier 2 capital
Tier 2 capital at December 31, 20171	$	10,350
Change related to the following items:
Eligible allowance for credit losses		21
Other changes, adjustments and deductions3		(707	)
Standardized Tier 2 capital at June 30, 2018	$	9,664
Total Standardized capital at June 30, 2018	$	79,681
Advanced Tier 2 capital
Tier 2 capital at December 31, 20171	$	10,120
Change related to the following items:
Eligible credit reserves		(5	)
Other changes, adjustments and deductions3		(707	)
Advanced Tier 2 capital at June 30, 2018	$	9,408
Total Advanced capital at June 30, 2018	$	79,425

1. The pro forma fully phased-in estimates as of December 31, 2017 are non-GAAP financial measures as the related capital rules were not yet effective at December 31, 2017.

2. 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.

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.

June 2018 Form 10-Q 26

Management’s Discussion and Analysis

Fully Phased-In RWA Rollforward

	Six Months Ended June 30, 20181
$ in millions	Standardized			Advanced
Credit risk RWA
Balance at December 31, 20172	$	301,946		$	170,754
Change related to the following items:
Derivatives		(1,584	)		2,153
Securities financing transactions		2,558			1,120
Securitizations		(599	)		(2,103	)
Investment securities		(435	)		384
Commitments, guarantees and loans		16,870			19,132
Cash		783			420
Equity investments		1,824			1,933
Other credit risk3		685			901
Total change in credit risk RWA	$	20,102		$	23,940
Balance at June 30, 2018	$	322,048		$	194,694
Market risk RWA
Balance at December 31, 20172	$	75,295		$	74,907
Change related to the following items:
Regulatory VaR		435			435
Regulatory stressed VaR		(2,634	)		(2,634	)
Incremental risk charge		1,986			1,986
Comprehensive risk measure		(2,035	)		(1,752	)
Specific risk:
Non-securitizations		(3,018	)		(3,018	)
Securitizations		(4,663	)		(4,663	)
Total change in market risk RWA	$	(9,929	)	$	(9,646	)
Balance at June 30, 2018	$	65,366		$	65,261
Operational risk RWA
Balance at December 31, 20172	$	N/A		$	112,663
Change in operational risk RWA		N/A			(3,235	)
Balance at June 30, 2018	$	N/A		$	109,428
Total RWA	$	387,414		$	369,383

Regulatory VaR—VaR for regulatory capital requirements

1. The RWA for each category in the table reflects both on- and off-balance sheet exposures, where appropriate.

2. The pro forma fully phased-in estimates as of December 31, 2017 are non-GAAP financial measures as the related capital rules were not yet effective at December 31, 2017.

3. Amount reflects assets not in a defined category, non-material portfolios of exposures and unsettled transactions, as applicable.

Credit risk RWA increased in the current year period under the Standardized and Advanced Approaches primarily due to increased exposures in corporate lending within the Institutional Securities business segment.

Market risk RWA decreased in the current year period under the Standardized and Advanced Approaches primarily due to decreases in both securitization and non-securitization standardized specific risk charges driven by reduced exposures in residential mortgage-backed securities and equity derivatives, respectively.

The decrease in operational risk RWA under the Advanced Approach in the current year period reflects a continued reduction in the frequency and magnitude of internal losses related to transactional execution and litigation utilized in the operational risk capital model.

Total Loss-Absorbing Capacity, Long-Term Debt and Clean Holding Company Requirements

On December 15, 2016, the Federal Reserve adopted a final rule for top-tier BHCs of U.S. G-SIB (“covered BHC”), including the Parent Company, that establishes external TLAC, long-term debt (“LTD”) and clean holding company requirements. The final rule contains various definitions and restrictions, such as requiring eligible LTD to be issued by the covered BHC and be unsecured, have a maturity of one year or more from the date of issuance and not have certain derivative-linked features typically associated with certain types of structured notes. We expect to be in compliance with all requirements of the rule by January 1, 2019, the date that compliance is required.

The Federal Reserve’s proposed modifications to the enhanced SLR would also make corresponding changes to the calibration of the TLAC leverage-based requirements, as well as certain other technical changes to the TLAC rule. For a further discussion of the enhanced SLR, see “Regulatory Developments—Proposed Modifications to the Enhanced SLR and to the SLR Applicable to Our U.S. Bank Subsidiaries” herein.

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 the 2017 Form 10-K. For discussions about the interaction between the SPOE resolution strategy and the TLAC and LTD requirements, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning” and “Risk Factors—Legal, Regulatory and Compliance Risk” in the 2017 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 BHCs, including us, which form part of the Federal Reserve’s annual CCAR framework.

We submitted our 2018 Capital Plan (“Capital Plan”) and company-run stress test results to the Federal Reserve on April 5, 2018. On June 21, 2018, the Federal Reserve published summary results of the Dodd-Frank Act supervisory stress tests of each large BHC, including us.

27 June 2018 Form 10-Q

Management’s Discussion and Analysis

On June 28, 2018, the Federal Reserve published summary results of CCAR and we received a conditional non-objection to our Capital Plan, where the only condition was that our capital distributions not exceed the greater of the actual distributions we made over the previous four calendar quarters or the annualized average of actual distributions over the previous eight calendar quarters. Our 2018 Capital Plan includes the repurchase of up to $4.7 billion of outstanding common stock for the period beginning July 1, 2018 through June 30, 2019, and an increase in our quarterly common stock dividend to $0.30 per share from the current $0.25 per share, beginning with the common stock dividend announced on July 18, 2018. The total amount of expected 2018 capital distributions is consistent with the $6.8 billion of actual dividends and gross share repurchases included in our 2017 Capital Plan. We disclosed a summary of the results of our company-run stress tests on June 21, 2018 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, 2018 and disclose a summary of the results between October 5, 2018 and November 4, 2018.

The Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), which was enacted on May 24, 2018, modifies certain aspects of the stress-testing process applicable to BHCs, including us. The Federal Reserve has not yet taken actions to modify its stress-testing rules applicable to us in response to EGRRCPA, which becomes effective, in relevant part, in November 2019.

Each of our U.S. Bank Subsidiaries is also currently required to conduct an annual stress test. MSBNA and MSPBNA submitted their 2018 annual company-run stress tests to the OCC on April 5, 2018 and published a summary of their stress test results on June 21, 2018.

EGRRCPA also eliminates the statutory requirement for banks with less than $250 billion of total assets, which includes both of our U.S. Bank Subsidiaries, to conduct stress-testing, effective November 2019. The OCC provided guidance in July 2018 that MSPBNA, as a national bank with less than $100 billion of total consolidated assets, would be immediately exempted from company-run stress-testing requirements.

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 the 2017 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 under the Required Capital framework, as well as each business segment’s relative contribution to our total Required Capital.

The Required Capital framework is a risk-based and leverage use-of-capital measure, which is compared with our regulatory capital to ensure that we maintain an amount of going concern capital after absorbing potential losses from stress events, where applicable, at a point in time. We define the difference between our total average common equity and the sum of the average common equity amounts allocated to our business segments as Parent Company common equity. We generally hold Parent Company common equity for prospective regulatory requirements, organic growth, acquisitions and other capital needs.

The estimation and attribution of common equity to the business segments are based on the fully phased-in regulatory capital rules. The amount of capital allocated to the business segments is generally set at the beginning of each year and remains fixed throughout the year until the next annual reset unless a significant business change occurs (e.g., acquisition or disposition). Differences between available and Required Capital are attributed to Parent Company common equity during the year.

The Required Capital framework is expected to evolve over time in response to changes in the business and regulatory environment, for example, to incorporate changes in stress testing or enhancements to modeling techniques. We will continue to evaluate the framework with respect to the impact of future regulatory requirements, as appropriate.

Average Common Equity Attribution¹

	Three Months Ended June 30,				Six Months Ended June 30,
$ in billions	2018		2017		2018		2017
Institutional Securities	$	40.8	$	40.2	$	40.8	$	40.2
Wealth Management		16.8		17.2		16.8		17.2
Investment Management		2.6		2.4		2.6		2.4
Parent Company		9.7		10.1		9.2		9.7
Total	$	69.9	$	69.9	$	69.4	$	69.5

1. Average common equity is a non-GAAP financial measure. See “Selected Non-GAAP Financial Information” herein.

Resolution and Recovery Planning

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

June 2018 Form 10-Q 28

Management’s Discussion and Analysis

Our preferred resolution strategy, which is set out in our 2017 resolution plan, is an SPOE strategy. The Parent Company has amended and restated its support agreement with its material entities, as defined in our 2017 resolution plan. Under the secured amended and restated support agreement, upon the occurrence of a resolution scenario, the Parent Company would be obligated to contribute or loan on a subordinated basis all of its contributable material assets, other than shares in subsidiaries of the Parent Company and certain intercompany receivables, to provide capital and liquidity, as applicable, to our material entities.

The obligations of the Parent Company under the secured amended and restated support agreement are in most cases secured on a senior basis by the assets of the Parent Company (other than shares in subsidiaries of the Parent Company). As a result, claims of our material entities against the assets of the Parent Company (other than shares in subsidiaries of the Parent Company) are effectively senior to unsecured obligations of the Parent Company.

In addition, on July 1, 2018, MSBNA and MSPBNA each submitted to the FDIC a resolution plan that describes its strategy for a rapid and orderly resolution in the event of its material financial distress or failure.

For more information about resolution and recovery planning requirements and our activities in these areas, including the implications of such activities in a resolution scenario, see “Business—Supervision and Regulation—Financial Holding Company—Resolution and Recovery Planning” and “Risk Factors—Legal, Regulatory and Compliance Risk” in the 2017 Form 10-K.

Regulatory Developments

Single-Counterparty Credit Limits

On June 14, 2018, the Federal Reserve finalized rules that establish single-counterparty credit limits (“SCCL”) for large banking organizations. U.S. G-SIBs, including us, are subject to a limit of 15% of Tier 1 capital for aggregate net credit exposures to any “major counterparty” (defined to include other U.S. G-SIBs, foreign G-SIBs, and nonbank systemically important financial institutions supervised by the Federal Reserve). In addition, we are subject to a limit of 25% of Tier 1 capital for aggregate net credit exposures to any other unaffiliated counterparty. We must comply with the final SCCL rules beginning on January 1, 2020.

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 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.

On June 5, 2018, the Federal Reserve and the other federal financial regulatory agencies responsible for the Volcker Rule’s implementing regulations released an interagency proposal that would revise certain elements of the Volcker Rule regulations. The proposed changes focus on proprietary trading, including the metrics reporting requirements and certain requirements imposed in connection with permitted market making, underwriting and risk-mitigating hedging activities, including market-making in and underwriting of covered funds. The impact of this proposal on us will not be known with certainty until final rules are issued. For more information about the Volcker Rule, see “Business—Supervision and Regulation—Activities Restrictions under the Volcker Rule” in the 2017 Form 10-K.

Proposed Stress Buffer Requirements

On April 10, 2018, the Federal Reserve issued a proposal to integrate its annual capital planning and stress testing requirements with certain ongoing regulatory capital requirements. The proposal, which would apply to certain BHCs, including us, would introduce a stress capital buffer and a stress leverage buffer (collectively, “Stress Buffer Requirements”) and related changes to the capital planning and stress testing processes. Under the proposal, Stress Buffer Requirements would apply only with respect to the Standardized Approach and Tier 1 leverage regulatory capital requirements and would generally be effective on October 1, 2019.

In the Standardized Approach, the stress capital buffer would replace the existing Common Equity Tier 1 capital conservation buffer, which will be 2.5% as of January 1, 2019. The Standardized Approach stress capital buffer would equal the greater of (i) the maximum decline in our Common Equity Tier 1 capital ratio under the severely adverse scenario over the supervisory stress test measurement period, plus the sum of the ratios of the dollar amount of our planned common stock dividends to our projected RWA for each of the fourth through seventh quarters of the supervisory stress test projection period, and (ii) 2.5%. Regulatory capital requirements under the Standardized Approach would include the stress capital buffer, as summarized above, as well as our Common Equity Tier 1 G-SIB capital surcharge and any applicable Common Equity Tier 1 CCyB.

Like the stress capital buffer, the stress leverage buffer would be calculated based on the results of our annual supervisory stress tests. The stress leverage buffer would equal the maximum decline in our Tier 1 leverage ratio under the severely adverse scenario, plus the sum of the ratios of the

29 June 2018 Form 10-Q

Management’s Discussion and Analysis

dollar amount of our planned common stock dividends to our projected leverage ratio denominator for each of the fourth through seventh quarters of the supervisory stress test projection period. No floor would be established for the stress leverage buffer, which would apply in addition to the current minimum Tier 1 leverage ratio of 4%.

The proposal would make related changes to capital planning and stress testing processes for BHCs subject to the Stress Buffer Requirements. In particular, the proposal would limit projected capital actions to planned common stock dividends in the fourth through seventh quarters of the supervisory stress test projection period and would assume that BHCs maintain a constant level of assets and RWA throughout the supervisory stress test projection period.

The proposal does not change regulatory capital requirements under the Advanced Approach or the SLR, although the Federal Reserve and the OCC have separately proposed to modify the enhanced SLR requirements, as summarized below. If the proposal is adopted in its current form, limitations on capital distributions and discretionary bonus payments to executive officers would be determined by the most stringent limitation, if any, as determined under the Standardized Approach or the Tier 1 leverage ratio, inclusive of Stress Buffer Requirements, or the Advanced Approach or SLR or TLAC requirements, inclusive of applicable buffers.

Proposed Modifications to the Enhanced SLR and to the SLR Applicable to Our U.S. Bank Subsidiaries

On April 11, 2018, the Federal Reserve proposed modifications to the enhanced SLR that would replace the current 2% enhanced SLR buffer applicable to U.S. G-SIBs, including us, with a leverage buffer equal to 50% of our Common Equity Tier 1 G-SIB capital surcharge, which is currently 3%. Under the proposal, our enhanced SLR buffer would become 1.5%, for a total enhanced SLR requirement of 4.5%, assuming that our G-SIB capital surcharge remains the same when the proposal becomes effective, which may be as early as 2018 under the proposal.

As part of the same proposal, the Federal Reserve and the OCC also proposed to align the well-capitalized SLR standard applicable to our U.S. Bank Subsidiaries with the proposed enhanced SLR buffer applicable to us. Under the proposal, the well-capitalized SLR requirement for our U.S. Bank Subsidiaries would change from the current 6% to 3% plus 50% of our current Common Equity Tier 1 G-SIB capital surcharge, for a total well-capitalized SLR requirement of 4.5%, assuming that our G-SIB capital surcharge remains the same when the proposal becomes effective.

Proposed Regulatory Capital Adjustments Related to Implementation of the Current Expected Credit Losses Methodology

On April 17, 2018, the U.S. banking agencies issued a proposal to revise the regulatory capital framework applicable to banking organizations, including us and our U.S. Bank Subsidiaries, to address the new accounting standard for credit losses, known as a CECL methodology. For a further discussion of CECL, see “Accounting Development Updates—Financial Instruments—Credit Losses” herein.

The proposal modifies the regulatory capital rules to identify which credit loss allowances under the new accounting standard are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in, over a three-year period, the adverse effects on regulatory capital that may result from the adoption of the new accounting standard. The proposal requires a banking organization that has adopted a CECL methodology to include the provision for credit losses beginning in the 2020 stress test cycle.

U.S. Department of Labor Conflict of Interest Rule and SEC Standards of Conduct for Investment Professionals

The U.S. DOL’s final Conflict of Interest Rule under ERISA went into effect on June 9, 2017. On March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit vacated the Conflict of Interest Rule and accompanying exemptions in their entirety. On June 22, 2018, the Court issued the mandate that makes effective its decision to vacate the rule.

On April 18, 2018, the SEC released for public comment a package of proposed rulemaking on the standards of conduct and required disclosures for broker-dealers and investment advisers. One of the proposals, entitled “Regulation Best Interest,” would require broker-dealers to act in the “best interest” of retail customers at the time a recommendation is made without placing the financial or other interests of the broker-dealer ahead of the interest of the retail customer. Additionally, the SEC proposed a new requirement for both broker-dealers and investment advisers to provide a brief relationship summary to retail investors with information intended to clarify the relationship between the parties. Finally, the SEC issued a proposed interpretation regarding the fiduciary duty that investment advisers owe their clients.

U.K. Withdrawal from the E.U.

Following the U.K. electorate vote to leave the E.U., the U.K. invoked Article 50 of the Lisbon Treaty on March 29, 2017, which triggered a two-year period, subject to extension (which would need the unanimous approval of the E.U. Member States), during which the U.K. government has been

June 2018 Form 10-Q 30

Management’s Discussion and Analysis

negotiating its withdrawal agreement with the E.U. For further discussion of the potential impact of the U.K.’s withdrawal from the E.U. on our operations, see “Risk Factors—International Risk” in the 2017 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.”

Expected Replacement of London Interbank Offered Rate

Central banks around the world, including the Federal Reserve, have commissioned working groups of market participants and official sector representatives with the goal of finding suitable replacements for LIBOR based on observable market transactions. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next few years. The U.K. Financial Conduct Authority (“FCA”), which regulates LIBOR, has announced that it has commitments from panel banks to continue to contribute to LIBOR through the end of 2021, but that it will not use its powers to compel contributions beyond such date. Accordingly, there is considerable uncertainty regarding the publication of such rates beyond 2021.

On April 3, 2018, the Federal Reserve Bank of New York commenced publication of three reference rates based on overnight U.S. Treasury repurchase agreement transactions, including the Secured Overnight Financing Rate (“SOFR”), which has been recommended as an alternative to U.S. dollar LIBOR by the Alternative Reference Rates Committee. Further, the Bank of England has commenced publication of a reformed Sterling Overnight Index Average (“reformed SONIA”), comprised of a broader set of overnight Sterling money market transactions, as of April 23, 2018. Reformed SONIA has been recommended as the alternative to Sterling LIBOR by the Working Group on Sterling Risk-Free Reference Rates.

Although the full impact of such reforms and actions, together with any transition away from LIBOR, including the potential or actual discontinuance of LIBOR publication, remains unclear, these changes may have an adverse impact on the value of, return on and trading markets for a broad array of financial products, including any LIBOR-based securities, loans and derivatives that are included in our

financial assets and liabilities. Such reforms and actions may also require extensive changes to the contracts that govern these LIBOR-based products, as well as our systems and processes.

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 the 2017 Form 10-K.

Off-Balance Sheet Arrangements and Contractual Obligations

Off-Balance Sheet Arrangements

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

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

For information on our commitments, obligations under certain guarantee arrangements and indemnities, see Note 11 to the financial statements. For further information on our lending commitments, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk—Lending Activities Included in Loans and Trading Assets.”

Contractual Obligations

For a discussion about our contractual obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations” in the 2017 Form 10-K.

31 June 2018 Form 10-Q

Quantitative and Qualitative Disclosures about Market Risk

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 the 2017 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, volatilities, correlations or other market factors, such as market liquidity, will result in losses for a position or portfolio. Generally, we incur market risk as a result of trading, investing and client facilitation activities, principally within the Institutional Securities business segment where the substantial majority of our VaR for market risk exposures is generated. In addition, we incur market risk within the Wealth Management and Investment Management business segments. The Wealth Management business segment primarily incurs non-trading market risk from lending and deposit-taking activities. The Investment Management business segment primarily incurs non-trading market risk from capital investments in alternative and other funds. For a further discussion of market risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk” in the 2017 Form 10-K.

Value-at-Risk

The statistical technique known as VaR is one of the tools we use to measure, monitor and review the market risk exposures of our trading portfolios. The Market Risk Department 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 the 2017 Form 10-K.

We utilize the same VaR model for risk management purposes and for regulatory capital calculations. Our regulators have approved our VaR model for use in regulatory calculations.

The portfolio of positions used for 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 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. 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

	Three Months Ended June 30, 2018
$ in millions	Period     End			Average			High			Low
Interest rate and credit spread	$	32		$	35		$	43		$	29
Equity price		13			14			17			12
Foreign exchange rate		11			9			12			7
Commodity price		8			9			12			7
Less: Diversification benefit1, 2		(25	)		(26	)		N/	A		N/	A
Primary Risk Categories	$	39		$	41		$	51		$	35
Credit Portfolio		14			11			14			9
Less: Diversification benefit1, 2		(10	)		(8	)		N/	A		N/	A
Total Management VaR	$	43		$	44		$	54		$	38
	Three Months Ended March 31, 2018
$ in millions	Period End			Average			High			Low
Interest rate and credit spread	$	41		$	35		$	46		$	30
Equity price		16			14			17			11
Foreign exchange rate		10			9			13			7
Commodity price		10			9			11			7
Less: Diversification benefit1, 2		(27	)		(25	)		N/	A		N/	A
Primary Risk Categories	$	50		$	42		$	51		$	36
Credit Portfolio		11			10			11			9
Less: Diversification benefit1, 2		(7	)		(6	)		N/	A		N/	A
Total Management VaR	$	54		$	46		$	55		$	40

1. Diversification benefit equals the difference between the total Management VaR and the sum of the component VaRs. This benefit arises because the simulated one-day losses for each of the components occur on different days; similar diversification benefits also are taken into account within each component.

2. The high and low VaR values for the total Management VaR and each of the component VaRs might have occurred on different days during the quarter, and therefore, the diversification benefit is not an applicable measure.

Average total Management VaR and average Management VaR for the Primary Risk Categories of $44 million and $41 million, respectively, decreased from the three-months ended March 31, 2018, primarily as a result of lower market volatility and increased diversification benefit.

June 2018 Form 10-Q 32

Risk Disclosures

Distribution of VaR Statistics and Net Revenues.    One method of evaluating the reasonableness of our VaR model as a measure of our potential volatility of net revenues is to compare VaR with corresponding actual trading revenues. Assuming no intraday trading, for a 95%/one-day VaR, the expected number of times that trading losses should exceed VaR during the year is 13, and, in general, if trading losses were to exceed VaR more than 21 times in a year, the adequacy of the VaR model would be questioned.

We evaluate the reasonableness of our VaR model by comparing the potential declines in portfolio values generated by the model with corresponding actual trading results for the Firm, as well as individual business units. For days where losses exceed the VaR statistic, we examine the drivers of trading losses to evaluate the VaR model’s accuracy relative to realized trading results. There were no days in the current year period on which trading losses exceeded VaR.

The distribution of VaR statistics and net revenues is presented in the following histograms for the Total Trading populations.

Total Trading.    As shown in the 95%/One-Day Management VaR table, the average 95%/one-day total Management VaR for the current quarter was $44 million. The following histogram presents the distribution of the daily 95%/one-day total Management VaR for the current quarter.

Daily 95%/One-Day Total Management VaR for the Current Quarter

($ in millions)

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.

Daily Net Trading Revenues for the Current Quarter

($ in millions)

Non-Trading Risks

We believe that sensitivity analysis is an appropriate representation of our non-trading risks. The following sensitivity analyses cover substantially all of the non-trading risk in our portfolio.

Exposure Related to Our Own Credit Spread.

Credit Spread Risk Sensitivity¹

$ in millions	At June 30, 2018		At March 31, 2018
Derivatives	$	6	$	6
Funding liabilities2		32		31

1. Amounts represent the increase in value for each 1 bps widening of our credit spread.

2. Relates to structured note liabilities carried at fair value.

Interest Rate Risk Sensitivity.    The following table presents an analysis of selected instantaneous upward and downward parallel interest rate shocks on net interest income over the next 12 months for our U.S. Bank Subsidiaries. These shocks are applied to our 12-month forecast for our U.S. Bank Subsidiaries, which incorporates market expectations of interest rates and our forecasted business activity, including our deposit deployment strategy and asset-liability management hedges.

33 June 2018 Form 10-Q

Risk Disclosures

U.S. Bank Subsidiaries’ Net Interest Income Sensitivity Analysis

$ in millions	At June 30, 2018			At March 31, 2018
Basis point change
+200	$	531		$	438
+100		273			226
-100		(489	)		(464	)

We do not manage to any single rate scenario but rather manage net interest income in our U.S. Bank Subsidiaries to optimize across a range of possible outcomes, including non-parallel rate change scenarios. The sensitivity analysis assumes that we take no action in response to these scenarios, assumes there are no changes in other macroeconomic variables normally correlated with changes in interest rates, and includes subjective assumptions regarding customer and market re-pricing behavior and other factors. The change in sensitivity to interest rates between June 30, 2018 and March 31, 2018 is related to overall changes in our asset-liability profile and higher market rates.

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

Investments Sensitivity, Including Related Performance Fees

	Loss from 10% Decline
$ in millions	At June 30, 2018		At March 31, 2018
Investments related to Investment
Management activities	$	301	$	321
Other investments:
MUMSS		164		172
Other Firm investments		181		187

MUMSS—Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.

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 the 2017 Form 10-K. Also, see Notes 7 and 11 to the financial statements for additional information about our loans and lending commitments, respectively.

Lending Activities Included in Loans and Trading Assets

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

Loans and Lending Commitments

	At June 30, 2018
$ in millions	IS			WM			IM1		Total
Corporate loans	$	16,689		$	15,688		$	5	$	32,382
Consumer loans		—			27,954			—		27,954
Residential real estate loans		—			26,405			—		26,405
Wholesale real estate loans		9,866			—			—		9,866
Loans held for investment, gross of allowance		26,555			70,047			5		96,607
Allowance for loan losses		(202	)		(39	)		—		(241	)
Loans held for investment, net of allowance		26,353			70,008			5		96,366
Corporate loans		13,366			—			—		13,366
Residential real estate loans		1			29			—		30
Wholesale real estate loans		2,351			—			—		2,351
Loans held for sale		15,718			29			—		15,747
Corporate loans		8,730			—			22		8,752
Residential real estate loans		1,334			—			—		1,334
Wholesale real estate loans		2,703			—			1,130		3,833
Loans held at fair value		12,767			—			1,152		13,919
Total loans		54,838			70,037			1,157		126,032
Lending commitments2, 3		112,833			10,706			173		123,712
Total loans and lending commitments2, 3	$	167,671		$	80,743		$	1,330	$	249,744

June 2018 Form 10-Q 34

Risk Disclosures

	At December 31, 2017
$ in millions	IS			WM			IM		Total
Corporate loans	$	15,332		$	14,417		$	5	$	29,754
Consumer loans		—			26,808			—		26,808
Residential real estate loans		—			26,635			—		26,635
Wholesale real estate loans		9,980			—			—		9,980
Loans held for investment, gross of allowance		25,312			67,860			5		93,177
Allowance for loan losses		(182	)		(42	)		—		(224	)
Loans held for investment, net of allowance		25,130			67,818			5		92,953
Corporate loans		9,456			—			—		9,456
Residential real estate loans		1			34			—		35
Wholesale real estate loans		1,682			—			—		1,682
Loans held for sale		11,139			34			—		11,173
Corporate loans		8,336			—			22		8,358
Residential real estate loans		799			—			—		799
Wholesale real estate loans		1,579			—			—		1,579
Loans held at fair value		10,714			—			22		10,736
Total loans		46,983			67,852			27		114,862
Lending commitments2, 3		92,588			9,481			—		102,069
Total loans and lending commitments2, 3	$	139,571		$	77,333		$	27	$	216,931

1. Investment Management business segment loans are entered into in conjunction with certain investment advisory activities. The increase in fair value loans in the current year period is a result of the consolidation of a fund managed by Mesa West Capital, LLC that primarily invests in commercial real estate loans with remaining maturities of less than 5 years.

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

3. For syndications led by us, any lending commitments accepted by the borrower but not yet closed are net of amounts syndicated. For syndications that we participate in and do not lead, any lending commitments accepted by the borrower but not yet closed include only the amount that we expect will be allocated from the lead syndicate bank. Due to the nature of our obligations under the commitments, these amounts include certain commitments participated to third parties.

Total loans and lending commitments increased by approximately $33 billion in the current year period, primarily due to increases in corporate loan commitments within the Institutional Securities business segment.

Our credit exposure from our loans and lending commitments is measured in accordance with our internal risk management standards. Risk factors considered in determining the aggregate allowance for loan and commitment losses include the borrower’s financial strength, seniority of the loan, collateral type, volatility of collateral value, debt cushion, loan-to-value ratio, debt service ratio, covenants and counterparty type. Qualitative and environmental factors such as economic and business conditions, nature and volume of the portfolio and lending terms, and volume and severity of past due loans may also be considered.

Allowance for Loans and Lending Commitments Held for Investment

$ in millions	At June 30, 2018		At December 31, 2017
Loans	$	241	$	224
Lending commitments		202		198
Total allowance for loans and lending commitments	$	443	$	422

The aggregate allowance for loans and lending commitment losses increased during the current year period, primarily due to overall portfolio changes and qualitative and environmental factors impacting the inherent allowance within the Institutional Securities business segment. See Note 7 to the financial statements for further information.

Status of Loans Held for Investment

	At June 30, 2018				At December 31, 2017
	IS		WM		IS		WM
Current		99.6 %		99.9 %		99.5 %		99.9 %
Nonaccrual1		0.4 %		0.1 %		0.5 %		0.1 %

1. These loans are on nonaccrual status because the loans were past due for a period of 90 days or more or payment of principal or interest was in doubt.

Institutional Securities 

In connection with certain Institutional Securities business segment activities, we provide loans and lending commitments to a diverse group of corporate and other institutional clients. These activities include originating and purchasing corporate loans, commercial and residential mortgage lending, asset-backed lending and financing extended to equities and commodities customers and 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, corporate loans and secured lines of revolving credit. Credit risk with respect to these loans and lending commitments arises from the failure of a borrower to perform according to the terms of the loan agreement or a decline in the underlying collateral value. See Note 12 to the financial statements for information about our securitization activities. In addition, the Firm monitors collateral levels against requirements and oversees the administration of the collateral function. See Note 6 to the financial statements for additional information about our collateralized transactions.

35 June 2018 Form 10-Q

Risk Disclosures

Institutional Securities Loans and Lending Commitments¹

	At June 30, 2018
	Years to Maturity
$ in millions	Less than 1		1-3		3-5		Over 5		Total
Loans
AA	$	—	$	472	$	—	$	20	$	492
A		712		2,465		1,313		412		4,902
BBB		3,465		6,811		4,690		1,257		16,223
NIG		6,996		11,124		8,824		3,526		30,470
Unrated2		140		124		133		2,354		2,751
Total loans		11,313		20,996		14,960		7,569		54,838
Lending commitments
AAA		—		165		—		—		165
AA		3,293		1,037		2,950		350		7,630
A		4,243		17,434		8,165		765		30,607
BBB		2,150		16,094		17,867		728		36,839
NIG		1,691		10,865		14,057		10,928		37,541
Unrated2		1		—		21		29		51
Total lending commitments		11,378		45,595		43,060		12,800		112,833
Total exposure	$	22,691	$	66,591	$	58,020	$	20,369	$	167,671

	At December 31, 2017
	Years to Maturity
$ in millions	Less than 1		1-3		3-5		Over 5		Total
Loans
AA	$	14	$	503	$	30	$	5	$	552
A		1,608		1,710		1,235		693		5,246
BBB		2,791		6,558		3,752		646		13,747
NIG		4,760		12,311		4,480		3,245		24,796
Unrated2		243		291		621		1,487		2,642
Total loans		9,416		21,373		10,118		6,076		46,983
Lending commitments
AAA		—		165		—		—		165
AA		3,745		1,108		3,002		—		7,855
A		3,769		5,533		11,774		197		21,273
BBB		3,987		12,345		16,818		1,095		34,245
NIG		4,159		9,776		12,279		2,698		28,912
Unrated2		9		40		42		47		138
Total lending commitments		15,669		28,967		43,915		4,037		92,588
Total exposure	$	25,085	$	50,340	$	54,033	$	10,113	$	139,571

NIG–Non-investment grade

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—Market Risk” herein.

Institutional Securities Loans and Lending Commitments by Industry

$ in millions	At June 30, 2018		At December 31, 2017
Industry
Financials	$	30,994	$	22,112
Real estate		28,729		28,426
Industrials		15,256		11,090
Consumer discretionary		14,252		11,555
Information technology		13,645		11,862
Consumer Staples		10,924		8,315
Healthcare		10,909		9,956
Utilities		10,187		9,592
Insurance		9,888		4,739
Energy		9,720		10,233
Telecommunications services		5,767		4,172
Materials		5,398		5,069
Other		2,002		2,450
Total	$	167,671	$	139,571

Institutional Securities business segment loans and lending commitments are mainly related to relationship-based and event-driven lending to select corporate clients. Relationship-based loans and lending commitments are used for general corporate purposes, working capital and liquidity purposes by our investment banking clients and typically consist of revolving lines of credit, letter of credit facilities and term loans. In connection with the relationship-based lending activities, we enter into hedges, as detailed below.

Relationship-based Lending Hedges—Notional Amounts

$ in billions	At June 30, 2018		At December 31, 2017
Single-name and index CDS	$	13.5	$	16.6

Event-Driven Loans and Lending Commitments

	At June 30, 2018
	Years to Maturity
$ in millions	Less than 1		1-3		3-5		Over 5		Total
Loans	$	1,773	$	838	$	1,803	$	1,867	$	6,281
Lending commitments		613		14,514		2,737		5,018		22,882
Total loans and lending commitments	$	2,386	$	15,352	$	4,540	$	6,885	$	29,163

	At December 31, 2017
	Years to Maturity
$ in millions	Less than 1		1-3		3-5		Over 5		Total
Loans	$	1,458	$	1,058	$	639	$	2,012	$	5,167
Lending commitments		1,272		3,206		2,091		1,874		8,443
Total loans and lending commitments	$	2,730	$	4,264	$	2,730	$	3,886	$	13,610

June 2018 Form 10-Q 36

Risk Disclosures

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. The increase in event-driven lending commitments in the current year period is primarily due to an increase in held-for-sale commitments driven by client M&A transactions.

Wealth Management

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

Securities-based lending provided to our retail clients is primarily conducted through our Liquidity Access Line platform. 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 the 2017 Form 10-K.

Wealth Management Loans and Lending Commitments

	At June 30, 2018
	Contractual Years to Maturity
$ in millions	Less than 1		1-3		3-5		Over 5		Total
Securities-based lending and other loans1	$	36,299	$	4,485	$	1,642	$	1,195	$	43,621
Residential real estate loans		—		27		6		26,383		26,416
Total loans	$	36,299	$	4,512	$	1,648	$	27,578	$	70,037
Lending commitments		8,596		1,735		99		276		10,706
Total loans and lending commitments	$	44,895	$	6,247	$	1,747	$	27,854	$	80,743

	At December 31, 2017
	Contractual Years to Maturity
$ in millions	Less than 1		1-3		3-5		Over 5		Total
Securities-based lending and other loans1	$	34,389	$	3,687	$	1,899	$	1,231	$	41,206
Residential real estate loans		—		24		15		26,607		26,646
Total loans	$	34,389	$	3,711	$	1,914	$	27,838	$	67,852
Lending commitments		7,253		1,827		120		281		9,481
Total loans and lending commitments	$	41,642	$	5,538	$	2,034	$	28,119	$	77,333

1. The Liquidity Access Line platform had an outstanding loan balance of $33.4 billion and $32.2 billion at June 30, 2018 and December 31, 2017, respectively.

For the current year period, loans and lending commitments associated with the Wealth Management business segment lending activities increased by approximately 4%, primarily due to growth in securities-based lending and other loans.

Lending Activities Included in Customer and Other Receivables

Margin Loans

	At June 30, 2018
$ in millions	IS		WM		Total
Net customer receivables representing margin loans	$	21,026	$	11,785	$	32,811

	At December 31, 2017
$ in millions	IS		WM		Total
Net customer receivables representing margin loans	$	19,977	$	12,135	$	32,112

The Institutional Securities and Wealth Management business segments provide margin lending arrangements which allow customers to borrow against the value of qualifying securities. Margin lending activities generally have minimal credit risk due to the value of collateral held and their short-term nature.

Employee Loans

$ in millions	At June 30, 2018			At December 31, 2017
Employee loans:
Balance	$	3,564		$	4,185
Allowance for loan losses		(74	)		(77	)
Balance, net	$	3,490		$	4,108
Repayment term range, in years		1 to 20			1 to 20

Employee loans are generally granted to retain and recruit certain employees, are full recourse and generally require periodic repayments. We establish an allowance for loan amounts to terminated employees that we do not consider recoverable, which is recorded in Compensation and benefits expense. See Note 7 to the financial statements for a further description of our employee loans.

Credit Exposure—Derivatives

We incur credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instruments arises from the possibility that a counterparty may fail to perform according to the terms of the contract. In connection with our OTC derivative activities, we generally enter into master netting agreements and collateral arrangements with counterparties. These agreements provide us with the ability to demand collateral, as well as to liquidate collateral and offset receivables and payables covered under the same master netting agreement in the event of counterparty default.

We manage our trading positions by employing a variety of risk mitigation strategies. These strategies include diversification of risk exposures and hedging. Hedging activities consist

37 June 2018 Form 10-Q

Risk Disclosures

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 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 the 2017 Form 10-K.

Fair values as shown below represent the Firm’s net exposure to counterparties related to its OTC derivative products. Obligor credit ratings are determined internally by the Credit Risk Management department.

Counterparty Credit Rating and Remaining Contractual Maturity of OTC Derivative Assets at Fair Value

	Credit Rating
$ in millions	AAA			AA			A			BBB			NIG			Total
At June 30, 2018
< 1 year	$	599		$	7,435		$	40,004		$	14,284		$	7,828		$	70,150
1-3 years		739			3,785			23,108			8,246			6,507			42,385
3-5 years		760			2,579			14,910			4,951			2,638			25,838
Over 5 years		4,461			10,459			73,771			35,558			11,509			135,758
Total, gross	$	6,559		$	24,258		$	151,793		$	63,039		$	28,482		$	274,131
Counterparty Netting		(3,328	)		(15,944	)		(124,298	)		(44,666	)		(15,405	)		(203,641	)
Cash and Securities collateral		(2,918	)		(6,066	)		(23,179	)		(12,924	)		(9,401	)		(54,488	)
Total, net	$	313		$	2,248		$	4,316		$	5,449		$	3,676		$	16,002

	Credit Rating1
$ in millions	AAA			AA			A			BBB			NIG			Total
At December 31, 2017
< 1 year	$	356		$	5,302		$	36,001		$	11,577		$	5,904		$	59,140
1-3 years		558			4,118			23,137			8,887			4,827			41,527
3-5 years		702			3,183			15,577			5,489			4,879			29,830
Over 5 years		5,470			11,667			78,779			37,286			12,079			145,281
Total, gross	$	7,086		$	24,270		$	153,494		$	63,239		$	27,689		$	275,778
Counterparty Netting		(3,018	)		(15,261	)		(125,378	)		(45,421	)		(15,828	)		(204,906	)
Cash and Securities collateral		(3,188	)		(6,785	)		(23,257	)		(12,844	)		(9,123	)		(55,197	)
Total, net	$	880		$	2,224		$	4,859		$	4,974		$	2,738		$	15,675

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

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

$ in millions	At June 30, 2018		At December 31, 2017
Industry
Utilities	$	4,670	$	4,382
Financials		4,078		3,330
Energy		1,040		646
Industrials		965		1,124
Regional governments		899		1,005
Healthcare		733		882
Information technology		631		715
Not-for-profit organizations		553		703
Sovereign governments		548		1,084
Consumer discretionary		461		464
Real estate		320		374
Materials		303		329
Insurance		254		206
Consumer staples		228		161
Other		319		270
Total	$	16,002	$	15,675

For additional information on derivative instruments, including credit derivatives, see Note 4 to the financial statements.

Country Risk Exposure

Country risk exposure is the risk that events in, or that affect, a foreign country (any country other than the U.S.) might adversely affect us. We actively manage country risk exposure through a comprehensive risk management framework that combines credit and market fundamentals and allows us to effectively identify, monitor and limit country risk. Country risk exposure before and after hedging is monitored and managed. For a further discussion of our country risk exposure see, “Quantitative and Qualitative Disclosures about Market Risk–Risk Management–Country Risk Exposure” in the 2017 Form 10-K.

Our sovereign exposures consist of financial instruments entered into with sovereign and local governments. Our non-sovereign exposures consist of financial instruments entered into primarily with corporations and financial institutions. The following table shows our 10 largest non-U.S. country risk net exposures at June 30, 2018. 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

June 2018 Form 10-Q 38

Risk Disclosures

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.

Top Ten Country Exposures at June 30, 2018

United Kingdom
$ in millions	Sovereigns			Non-sovereigns			Total
Net Inventory1	$	562		$	1,087		$	1,649
Net Counterparty Exposure2		110			10,174			10,284
Loans		—			2,476			2,476
Lending Commitments		—			6,191			6,191
Exposure before Hedges		672			19,928			20,600
Hedges3		(356	)		(1,619	)		(1,975	)
Net Exposure	$	316		$	18,309		$	18,625
Japan
$ in millions	Sovereigns			Non-sovereigns			Total
Net Inventory1	$	4,868		$	301		$	5,169
Net Counterparty Exposure2		77			3,575			3,652
Loans		—			—			—
Lending Commitments		—			—			—
Exposure before Hedges		4,945			3,876			8,821
Hedges3		(118	)		(115	)		(233	)
Net Exposure	$	4,827		$	3,761		$	8,588
Spain
$ in millions	Sovereigns			Non-sovereigns			Total
Net Inventory1	$	(1,225	)	$	(98	)	$	(1,323	)
Net Counterparty Exposure2		—			110			110
Loans		—			2,704			2,704
Lending Commitments		—			5,679			5,679
Exposure before Hedges		(1,225	)		8,395			7,170
Hedges3		—			(189	)		(189	)
Net Exposure	$	(1,225	)	$	8,206		$	6,981
Germany
$ in millions	Sovereigns			Non-sovereigns			Total
Net Inventory1	$	61		$	439		$	500
Net Counterparty Exposure2		519			1,941			2,460
Loans		—			1,310			1,310
Lending Commitments		—			3,629			3,629
Exposure before Hedges		580			7,319			7,899
Hedges3		(509	)		(1,098	)		(1,607	)
Net Exposure	$	71		$	6,221		$	6,292
Brazil
$ in millions	Sovereigns			Non-sovereigns			Total
Net Inventory1	$	4,275		$	85		$	4,360
Net Counterparty Exposure2		—			312			312
Loans		—			73			73
Lending Commitments		—			320			320
Exposure before Hedges		4,275			790			5,065
Hedges3		(11	)		(19	)		(30	)
Net Exposure	$	4,264		$	771		$	5,035

Netherlands
$ in millions	Sovereigns			Non-sovereigns			Total
Net Inventory1	$	(293	)	$	104		$	(189	)
Net Counterparty Exposure2		—			712			712
Loans		—			1,852			1,852
Lending Commitments		—			1,641			1,641
Exposure before Hedges		(293	)		4,309			4,016
Hedges3		(20	)		(264	)		(284	)
Net Exposure	$	(313	)	$	4,045		$	3,732
China
$ in millions	Sovereigns			Non-sovereigns			Total
Net Inventory1	$	432		$	765		$	1,197
Net Counterparty Exposure2		203			147			350
Loans		—			1,241			1,241
Lending Commitments		—			657			657
Exposure before Hedges		635			2,810			3,445
Hedges3		(49	)		(10	)		(59	)
Net Exposure	$	586		$	2,800		$	3,386
France
$ in millions	Sovereigns			Non-sovereigns			Total
Net Inventory1	$	(220	)	$	(115	)	$	(335	)
Net Counterparty Exposure2		—			2,034			2,034
Loans		—			186			186
Lending Commitments		—			2,092			2,092
Exposure before Hedges		(220	)		4,197			3,977
Hedges3		(50	)		(671	)		(721	)
Net Exposure	$	(270	)	$	3,526		$	3,256
Canada
$ in millions	Sovereigns			Non-sovereigns			Total
Net Inventory1	$	(500	)	$	214		$	(286	)
Net Counterparty Exposure2		32			1,869			1,901
Loans		—			58			58
Lending Commitments		—			1,433			1,433
Exposure before Hedges		(468	)		3,574			3,106
Hedges3		—			(262	)		(262	)
Net Exposure	$	(468	)	$	3,312		$	2,844
Italy
$ in millions	Sovereigns			Non-sovereigns			Total
Net Inventory1	$	1,286		$	374		$	1,660
Net Counterparty Exposure2		(8	)		451			443
Loans		—			125			125
Lending Commitments		—			418			418
Exposure before Hedges		1,278			1,368			2,646
Hedges3		7			(76	)		(69	)
Net Exposure	$	1,285		$	1,292		$	2,577

1. Net inventory represents exposure to both long and short single-name and index positions (i.e., bonds and equities at fair value and CDS based on a notional amount assuming zero recovery adjusted for any fair value receivable or payable).

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

3. 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 2018 Form 10-Q

Risk Disclosures

As a market maker, we may transact in CDS positions to facilitate client trading. Exposures related to single-name and index credit derivatives for those countries shown in the previous table were as follows:

Credit Derivatives Included in Net Inventory

$ in millions	At June 30, 2018
Gross purchased protection	$	(78,476	)
Gross written protection		76,933
Net exposure	$	(1,543	)

Net counterparty exposure shown in the Top Ten Country Exposures table above are net of the benefit of collateral received, which is typically composed of cash and government obligations.

Benefit of Collateral Received against Counterparty Credit Exposure

$ in millions		At June 30, 2018
Counterparty credit exposure	Collateral1
Germany	Belgium and Germany	$	9,409
United Kingdom	U.K., U.S. and Japan		9,039
Other	Japan, France and Spain		15,213

1. Collateral primarily consists of cash and government obligations.

Country Risk Exposures Related to the U.K. At June 30, 2018, our country risk exposures in the U.K. included net exposures of $18,625 million as shown in the Top Ten Country Exposures table, and overnight deposits of $6,236 million. The $18,309 million of exposures to non-sovereigns were diversified across both names and sectors. Of these exposures, $5,743 million were to U.K.-focused counterparties that generate more than one-third of their revenues in the U.K., $5,076 million were to geographically diversified counterparties, and $6,454 million were to exchanges and clearinghouses.

Country Risk Exposures Related to Brazil. At June 30, 2018, our country risk exposures in Brazil included net exposures of $5,035 million as shown in the Top Ten Country Exposures table. Our sovereign net exposures in Brazil were principally in the form of local currency government bonds held onshore to support client activity. The $771 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, from human factors or from external events (e.g., fraud, theft, legal and compliance risks, cyber attacks or

damage to physical assets). We may incur operational risk across the full scope of our business activities, including revenue-generating activities (e.g., sales and trading) and support and control groups (e.g., information technology and trade processing). For a further discussion about our operational risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Operational Risk” in the 2017 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 strategy. For a further discussion about our model risk, see “Quantitative and Qualitative Disclosures about Market Risk–Risk Management–Model Risk” in the 2017 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 the 2017 Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Legal and Compliance Risk

Legal and compliance risk includes the risk of legal or regulatory sanctions, material financial loss, including fines, penalties, judgments, damages and/or settlements, or loss to reputation that we may suffer as a result of failure to comply with laws, regulations, rules, related self-regulatory organization standards and codes of conduct applicable to our business activities. This risk also includes contractual and commercial risk, such as the risk that a counterparty’s performance obligations will be unenforceable. It also includes compliance with AML 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 the 2017 Form 10-K.

June 2018 Form 10-Q 40

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Morgan Stanley:

Results of Review of Interim Financial Information

We have reviewed the accompanying condensed consolidated balance sheet of Morgan Stanley and subsidiaries (the “Firm”) as of June 30, 2018, and the related condensed consolidated income statements and comprehensive income statements for the three-month and six-month periods ended June 30, 2018 and 2017, and the cash flow statements and statements of changes in total equity for the six-month periods ended June 30, 2018 and 2017, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it 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) (PCAOB), the consolidated balance sheet of the Firm as of December 31, 2017, and the related 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, 2018, 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, 2017 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

This interim financial information is the responsibility of the Firm’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Firm in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with the standards of the PCAOB. 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 PCAOB, 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.

/s/ Deloitte & Touche LLP

New York, New York

August 3, 2018

41 June 2018 Form 10-Q

Consolidated Income Statements (Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
in millions, except per share data	2018			2017			2018			2017
Revenues
Investment banking	$	1,793		$	1,530		$	3,427		$	3,075
Trading		3,293			2,931			7,063			6,166
Investments		147			163			273			328
Commissions and fees		1,039			1,027			2,212			2,060
Asset management		3,189			2,902			6,381			5,669
Other		243			199			450			428
Total non-interest revenues		9,704			8,752			19,806			17,726
Interest income		3,294			2,106			6,154			4,071
Interest expense		2,388			1,355			4,273			2,549
Net interest		906			751			1,881			1,522
Net revenues		10,610			9,503			21,687			19,248
Non-interest expenses
Compensation and benefits		4,621			4,252			9,535			8,718
Occupancy and equipment		346			333			682			660
Brokerage, clearing and exchange fees		609			525			1,236			1,034
Information processing and communications		496			433			974			861
Marketing and business development		179			155			319			291
Professional services		580			561			1,090			1,088
Other		670			602			1,322			1,146
Total non-interest expenses		7,501			6,861			15,158			13,798
Income from continuing operations before income taxes		3,109			2,642			6,529			5,450
Provision for income taxes		640			846			1,354			1,661
Income from continuing operations		2,469			1,796			5,175			3,789
Income (loss) from discontinued operations, net of income taxes		(2	)		(5	)		(4	)		(27	)
Net income	$	2,467		$	1,791		$	5,171		$	3,762
Net income applicable to noncontrolling interests		30			34			66			75
Net income applicable to Morgan Stanley	$	2,437		$	1,757		$	5,105		$	3,687
Preferred stock dividends and other		170			170			263			260
Earnings applicable to Morgan Stanley common shareholders	$	2,267		$	1,587		$	4,842		$	3,427
Earnings per basic common share
Income from continuing operations	$	1.32		$	0.89		$	2.80		$	1.92
Income (loss) from discontinued operations		—			—			—			(0.01	)
Earnings per basic common share	$	1.32		$	0.89		$	2.80		$	1.91
Earnings per diluted common share
Income from continuing operations	$	1.30		$	0.87		$	2.75		$	1.88
Income (loss) from discontinued operations		—			—			—			(0.01	)
Earnings per diluted common share	$	1.30		$	0.87		$	2.75		$	1.87
Dividends declared per common share	$	0.25		$	0.20		$	0.50		$	0.40
Average common shares outstanding
Basic		1,720			1,791			1,730			1,796
Diluted		1,748			1,830			1,760			1,836

June 2018 Form 10-Q 42 See Notes to Consolidated Financial Statements

Consolidated Comprehensive Income Statements (Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
$ in millions	2018			2017			2018			2017
Net income	$	2,467		$	1,791		$	5,171		$	3,762
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	$	(192	)	$	12		$	(75	)	$	162
Change in net unrealized gains (losses) on available-for-sale securities		(126	)		108			(536	)		192
Pension, postretirement and other		6			4			11			4
Change in net debt valuation adjustment		639			(183	)		1,090			(174	)
Total other comprehensive income (loss)	$	327		$	(59	)	$	490		$	184
Comprehensive income	$	2,794		$	1,732		$	5,661		$	3,946
Net income applicable to noncontrolling interests		30			34			66			75
Other comprehensive income (loss) applicable to noncontrolling interests		(9	)		(21	)		63			29
Comprehensive income applicable to Morgan Stanley	$	2,773		$	1,719		$	5,532		$	3,842

See Notes to Consolidated Financial Statements 43 June 2018 Form 10-Q

Consolidated Balance Sheets

$ in millions, except share data	(Unaudited) At June 30, 2018			At December 31, 2017
Assets
Cash and cash equivalents:
Cash and due from banks	$	30,176		$	24,816
Interest bearing deposits with banks		18,707			21,348
Restricted cash		32,706			34,231
Trading assets at fair value ($168,810 and $169,735 were pledged to various parties)		266,438			298,282
Investment securities (includes $56,704 and $55,203 at fair value)		81,948			78,802
Securities purchased under agreements to resell		93,928			84,258
Securities borrowed		153,248			124,010
Customer and other receivables		61,714			56,187
Loans:
Held for investment (net of allowance of $241 and $224)		96,366			92,953
Held for sale		15,747			11,173
Goodwill		6,692			6,597
Intangible assets (net of accumulated amortization of $2,909 and $2,730)		2,332			2,448
Other assets		15,873			16,628
Total assets	$	875,875		$	851,733
Liabilities
Deposits (includes $285 and $204 at fair value)	$	172,802		$	159,436
Trading liabilities at fair value		139,359			131,295
Securities sold under agreements to repurchase (includes $788 and $800 at fair value)		50,650			56,424
Securities loaned		12,720			13,592
Other secured financings (includes $3,606 and $3,863 at fair value)		9,890			11,271
Customer and other payables		201,737			191,510
Other liabilities and accrued expenses		15,967			17,157
Borrowings (includes $50,350 and $46,912 at fair value)		192,244			192,582
Total liabilities		795,369			773,267
Commitments and contingent liabilities (see Note 11)
Equity
Morgan Stanley shareholders’ equity:
Preferred stock		8,520			8,520
Common stock, $0.01 par value:
Shares authorized: 3,500,000,000; Shares issued: 2,038,893,979; Shares outstanding: 1,749,653,071 and 1,788,086,805		20			20
Additional paid-in capital		23,454			23,545
Retained earnings		61,835			57,577
Employee stock trusts		2,829			2,907
Accumulated other comprehensive income (loss)		(3,070	)		(3,060	)
Common stock held in treasury at cost, $0.01 par value (289,240,908 and 250,807,174 shares)		(11,650	)		(9,211	)
Common stock issued to employee stock trusts		(2,829	)		(2,907	)
Total Morgan Stanley shareholders’ equity		79,109			77,391
Noncontrolling interests		1,397			1,075
Total equity		80,506			78,466
Total liabilities and equity	$	875,875		$	851,733

June 2018 Form 10-Q 44 See Notes to Consolidated Financial Statements

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, 2017	$	8,520	$	20	$	23,545		$	57,577		$	2,907		$	(3,060	)	$	(9,211	)	$	(2,907	)	$	1,075		$	78,466
Cumulative adjustment for accounting changes1		—		—		—			306			—			(437	)		—			—			—			(131	)
Net income applicable to Morgan Stanley		—		—		—			5,105			—			—			—			—			—			5,105
Net income applicable to noncontrolling interests		—		—		—			—			—			—			—			—			66			66
Dividends		—		—		—			(1,153	)		—			—			—			—			—			(1,153	)
Shares issued under employee plans		—		—		(91	)		—			(78	)		—			734			78			—			643
Repurchases of common stock and employee tax withholdings		—		—		—			—			—			—			(3,173	)		—			—			(3,173	)
Net change in Accumulated other comprehensive income (loss)		—		—		—			—			—			427			—			—			63			490
Other net increases		—		—		—			—			—			—			—			—			193			193
Balance at June 30, 2018	$	8,520	$	20	$	23,454		$	61,835		$	2,829		$	(3,070	)	$	(11,650	)	$	(2,829	)	$	1,397		$	80,506
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 changes1		—		—		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

1. The cumulative adjustments relate to the adoption of certain accounting updates during the current and prior year periods. See Notes 2 and 14 for further information.

See Notes to Consolidated Financial Statements 45 June 2018 Form 10-Q

Consolidated Cash Flow Statements (Unaudited)

	Six Months Ended June 30,
$ in millions	2018			2017
Cash flows from operating activities
Net income	$	5,171		$	3,762
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
(Income) loss from equity method investments		(54	)		—
Stock-based compensation expense		526			518
Depreciation and amortization		907			889
(Release of) Provision for credit losses on lending activities		(29	)		25
Other operating adjustments		72			(158	)
Changes in assets and liabilities:
Trading assets, net of Trading liabilities		39,106			(18,797	)
Securities borrowed		(29,238	)		(1,486	)
Securities loaned		(872	)		1,018
Customer and other receivables and other assets		(9,279	)		(6,144	)
Customer and other payables and other liabilities		9,053			5,598
Securities purchased under agreements to resell		(9,670	)		4,547
Securities sold under agreements to repurchase		(5,774	)		(3,931	)
Net cash provided by (used for) operating activities		(81	)		(14,159	)
Cash flows from investing activities
Proceeds from (payments for):
Other assets—Premises, equipment and software, net		(908	)		(723	)
Changes in loans, net		(4,560	)		(5,326	)
Investment securities:
Purchases		(12,388	)		(8,418	)
Proceeds from sales		2,231			13,533
Proceeds from paydowns and maturities		6,469			3,668
Other investing activities		(147	)		(39	)
Net cash provided by (used for) investing activities		(9,303	)		2,695
Cash flows from financing activities
Net proceeds from (payments for):
Noncontrolling interests		(85	)		(35	)
Other secured financings		(2,275	)		4,272
Deposits		13,366			(10,950	)
Proceeds from:
Derivatives financing activities		—			73
Issuance of preferred stock, net of issuance costs		—			994
Issuance of Borrowings		28,234			33,522
Payments for:
Borrowings		(22,981	)		(17,821	)
Derivatives financing activities		—			(48	)
Repurchases of common stock and employee tax withholdings		(3,173	)		(1,709	)
Cash dividends		(1,115	)		(954	)
Other financing activities		(145	)		21
Net cash provided by (used for) financing activities		11,826			7,365
Effect of exchange rate changes on cash and cash equivalents		(1,248	)		1,569
Net increase (decrease) in cash and cash equivalents		1,194			(2,530	)
Cash and cash equivalents, at beginning of period		80,395			77,360
Cash and cash equivalents, at end of period	$	81,589		$	74,830
Cash and cash equivalents:
Cash and due from banks	$	30,176		$	25,008
Interest bearing deposits with banks		18,707			19,651
Restricted cash		32,706			30,171
Cash and cash equivalents, at end of period	$	81,589		$	74,830
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest	$	3,934		$	1,922
Income taxes, net of refunds		790			732

June 2018 Form 10-Q 46 See Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

1. Introduction and Basis of Presentation

The Firm

Morgan Stanley is a global financial services firm that maintains significant market positions in each of its business segments—Institutional Securities, Wealth Management and Investment Management. Morgan Stanley, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, 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. See the “Glossary of Common Acronyms” for definitions of certain acronyms used throughout this Form 10-Q.

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

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

Wealth Management provides a comprehensive array of financial services and solutions to individual investors and small to medium-sized businesses and institutions covering brokerage and investment advisory services, financial and wealth planning services, 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.

Basis of Financial Information

The unaudited consolidated financial statements (“financial statements”) are prepared in accordance with U.S. GAAP, which requires the Firm to make estimates and assumptions regarding the valuations of certain financial instruments, the 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 financial statements and related disclosures. The Firm believes that the estimates utilized in the preparation of its financial statements are prudent and reasonable. Actual results could differ materially from these estimates. Intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior periods to conform to the current presentation.

The accompanying financial statements should be read in conjunction with the Firm’s financial statements and notes thereto included in the 2017 Form 10-K. Certain footnote disclosures included in the 2017 Form 10-K have been condensed or omitted from these financial statements as they are not required for interim reporting under U.S. GAAP. The 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 financial statements include the accounts of the Firm, its wholly owned subsidiaries and other entities in which the Firm has a controlling financial interest, including certain VIEs (see Note 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 (“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 (“balance sheets”).

47 June 2018 Form 10-Q

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 financial statements in the 2017 Form  10-K.

2. Significant Accounting Policies

For a detailed discussion about the Firm’s significant accounting policies, see Note 2 to the financial statements in the 2017 Form 10-K.

During the six months ended June 30, 2018 (“current year period”), there were no significant revisions to the Firm’s significant accounting policies, other than for Carried Interest and the accounting updates adopted.

Carried Interest

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. Beginning January 1, 2018, when the Firm earns carried interest from funds as specified performance thresholds are met, that carried interest and any related general or limited partner interest is accounted for under the equity method of accounting and measured based on the Firm’s claim on the NAV of the fund at the reporting date, taking into account the distribution terms applicable to the interest held. Performance-based fees in the form of carried interest considered equity method investments are therefore outside the scope of the policies for revenue from contracts with customers discussed below. See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received.

Accounting Updates Adopted

The Firm adopted the following accounting updates in the current year period. Prior period results are presented under previous policies. See Note 14 for a summary of the Retained earnings impacts of these and other minor adoptions effective in the current year period.

Revenue from Contracts with Customers

On January 1, 2018, we adopted Revenue from Contracts with Customers using the modified retrospective method, which resulted in a net decrease to Retained earnings of $32 million, net of tax. Prior period amounts were not restated.

Our revised accounting policy in accordance with this adoption is effective January 1, 2018, and is discussed below.

Revenue Recognition

Revenues are recognized when the promised goods or services are delivered to our customers, in an amount that is based on the consideration the Firm expects to receive in exchange for those goods or services when such amounts are not probable of significant reversal.

• Investment Banking

Revenue from investment banking activities consists of revenues earned from underwriting primarily equity and fixed income securities and advisory fees for mergers, acquisitions, restructuring and advisory assignments.

Underwriting revenues are generally recognized on trade date if there is no uncertainty or contingency related to the amount to be paid. Underwriting costs are deferred and recognized in the relevant non-interest expenses line items when the related underwriting revenues are recorded.

Advisory fees are recognized as advice is provided to the client, based on the estimated progress of work and when the revenue is not probable of a significant reversal. Advisory costs are recognized as incurred in the relevant non-interest expenses line items, including when reimbursed.

• Commissions and Fees

Commission and fee revenues result from transaction-based arrangements in which the client is charged a fee for the execution of transactions. Such revenues primarily arise from transactions in equity securities; services related to sales and trading activities; and sales of mutual funds, alternative funds, futures, insurance products and options. Commission and fee revenues are recognized on trade date when the performance obligation is satisfied.

• Asset Management Revenues

Asset management, distribution and administration fees are generally based on related asset levels being managed, such as the AUM of a customer’s account, or the net asset value of a fund. These fees are generally recognized when services are performed and the fees become known. Management fees are reduced by estimated fee waivers and expense caps, if any, provided to the customer.

June 2018 Form 10-Q 48

Notes to Consolidated Financial Statements (Unaudited)

Performance-based fees not in the form of carried interest are recorded when the annual performance target is met and the revenue is not probable of a significant reversal. Performance-based fees in the form of carried interest are considered equity method investments and are therefore outside the scope of these policies for revenue from contracts with customers.

Sales commissions paid by the Firm in connection with the sale of certain classes of shares of its open-end mutual fund products are accounted for as deferred commission assets and amortized to expense over the expected life of the contract. The Firm periodically tests deferred commission assets for recoverability based on cash flows expected to be received in future periods. Other asset management and distribution costs are recognized as incurred in the relevant non-interest expenses line items.

• Other Items

Revenue from commodities-related contracts is recognized as the promised goods or services are delivered to the customer.

Receivables from contracts with customers are recognized in Customer and other receivables in the balance sheets when the underlying performance obligations have been satisfied and the Firm has the right per the contract to bill the customer. Contract assets are recognized in Other assets when the Firm has satisfied its performance obligations, but customer payment is conditional. Contract liabilities are recognized in Other liabilities when the Firm has collected payment from a customer based on the terms of the contract, but the underlying performance obligations are not yet satisfied.

For contracts with a term less than one year, incremental costs to obtain the contract are expensed as incurred. Revenues are not discounted when payment is expected within one year.

The Firm presents, net within revenues, all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Firm from a customer.

Derivatives and Hedging–Targeted Improvements to Accounting for Hedging Activities

This accounting update aims to better align the hedge accounting requirements with an entity’s risk management

strategies and improve the financial reporting of hedging relationships. It also results in simplification of the application of hedge accounting related to the assessment of hedge effectiveness.

The Firm early adopted this accounting update in the first quarter of 2018. Upon adoption, the Firm recorded a cumulative catch-up adjustment, decreasing Retained earnings by $99 million, net of tax. This adjustment represents the cumulative effect of applying the new rules from the inception of certain fair value hedges of the interest rate risk of our borrowings, in particular the provision allowing only the benchmark rate component of coupon cash flows to be hedged.

Effective January 1, 2018, in accordance with this adoption, the Firm has updated its accounting policies to permit the hedged item in a fair value hedge of interest rate risk to be defined as including only the benchmark rate component of contractual coupon cash flows, and to allow for hedging part of the contractual term of the hedged instrument. The accounting policy also requires the entire gain or loss from revaluing hedges of net investments in foreign operations at the spot rate to be reported within AOCI.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

This accounting update, which the Firm elected to early adopt as of January 1, 2018, allows companies to reclassify from AOCI to Retained earnings the stranded tax effects associated with enactment of the Tax Act on December 22, 2017. These stranded tax effects resulted from the requirement to reflect the total amount of the remeasurement of and other adjustments to deferred tax assets and liabilities in 2017 income from continuing operations, regardless of whether the deferred taxes were originally recorded in AOCI. Accordingly, as of January 1, 2018, the Firm recorded a net increase to Retained earnings as a result of the reclassification of $443 million of such stranded tax effects previously recorded in AOCI, which were primarily the result of the remeasurement of deferred tax assets and liabilities associated with the change in tax rates.

Aside from the above treatment related to the Tax Act, the Firm releases stranded tax effects from AOCI into earnings once the related category of instruments or transactions giving rise to these effects no longer exists. For further detail on the tax effects reclassified, refer to Note 14 to the financial statements.

49 June 2018 Form 10-Q

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, 2018
$ in millions	Level 1			Level 2			Level 3			Netting1			Total
Assets at fair value
Trading assets:
U.S. Treasury and agency securities	$	25,629		$	24,986		$	—		$	—		$	50,615
Other sovereign government obligations		24,899			6,680			5			—			31,584
State and municipal securities		—			3,602			2			—			3,604
MABS		—			1,913			327			—			2,240
Loans and lending commitments2		—			6,996			6,923			—			13,919
Corporate and other debt		—			19,335			701			—			20,036
Corporate equities3		106,657			512			171			—			107,340
Derivative and other contracts:
Interest rate		953			166,598			1,118			—			168,669
Credit		—			5,414			406			—			5,820
Foreign exchange		88			65,440			67			—			65,595
Equity		862			44,608			1,177			—			46,647
Commodity and other		278			6,795			4,652			—			11,725
Netting1		(1,302	)		(215,518	)		(1,693	)		(47,389	)		(265,902	)
Total derivative and other contracts		879			73,337			5,727			(47,389	)		32,554
Investments4		519			411			941			—			1,871
Physical commodities		—			255			—			—			255
Total trading assets4		158,583			138,027			14,797			(47,389	)		264,018
Investment securities—AFS		31,601			25,103			—			—			56,704
Intangible assets		—			3			—			—			3
Total assets at fair value	$	190,184		$	163,133		$	14,797		$	(47,389	)	$	320,725

	At June 30, 2018
$ in millions	Level 1			Level 2			Level 3			Netting1			Total
Liabilities at fair value
Deposits	$	—		$	248		$	37		$	—		$	285
Trading liabilities:
U.S. Treasury and agency securities		15,625			26			—			—			15,651
Other sovereign government obligations		22,059			2,796			—			—			24,855
Corporate and other debt		—			8,370			1			—			8,371
Corporate equities3		62,807			809			24			—			63,640
Derivative and other contracts:
Interest rate		1,105			152,302			551			—			153,958
Credit		—			5,735			408			—			6,143
Foreign exchange		15			61,612			93			—			61,720
Equity		831			44,460			2,712			—			48,003
Commodity and other		614			7,580			2,620			—			10,814
Netting1		(1,302	)		(215,518	)		(1,693	)		(35,283	)		(253,796	)
Total derivative and other contracts		1,263			56,171			4,691			(35,283	)		26,842
Total trading liabilities		101,754			68,172			4,716			(35,283	)		139,359
Securities sold under agreements to repurchase		—			788			—			—			788
Other secured financings		—			3,436			170			—			3,606
Borrowings		—			47,055			3,295			—			50,350
Total liabilities at fair value	$	101,754		$	119,699		$	8,218		$	(35,283	)	$	194,388

June 2018 Form 10-Q 50

Notes to Consolidated Financial Statements (Unaudited)

	At December 31, 2017
$ in millions	Level 1			Level 2			Level 3			Netting1			Total
Assets at fair value
Trading assets:
U.S. Treasury and agency securities	$	22,077		$	26,888		$	—		$	—		$	48,965
Other sovereign government obligations		20,234			7,825			1			—			28,060
State and municipal securities		—			3,592			8			—			3,600
MABS		—			2,364			423			—			2,787
Loans and lending commitments2		—			4,791			5,945			—			10,736
Corporate and other debt		—			16,837			701			—			17,538
Corporate equities3		149,697			492			166			—			150,355
Derivative and other contracts:
Interest rate		472			178,704			1,763			—			180,939
Credit		—			7,602			420			—			8,022
Foreign exchange		58			53,724			15			—			53,797
Equity		1,101			40,359			3,530			—			44,990
Commodity and other		1,126			5,390			4,147			—			10,663
Netting1		(2,088	)		(216,764	)		(1,575	)		(47,171	)		(267,598	)
Total derivative and other contracts		669			69,015			8,300			(47,171	)		30,813
Investments4		297			523			1,020			—			1,840
Physical commodities		—			1,024			—			—			1,024
Total trading assets4		192,974			133,351			16,564			(47,171	)		295,718
Investment securities—AFS		27,522			27,681			—			—			55,203
Intangible assets		—			3			—			—			3
Total assets at fair value	$	220,496		$	161,035		$	16,564		$	(47,171)		$	350,924

	At December 31, 2017
$ in millions	Level 1			Level 2			Level 3			Netting1			Total
Liabilities at fair value
Deposits	$	—		$	157		$	47		$	—		$	204
Trading liabilities:
U.S. Treasury and agency securities		17,802			24			—			—			17,826
Other sovereign government obligations		24,857			2,016			—			—			26,873
Corporate and other debt		—			7,141			3			—			7,144
Corporate equities3		52,653			82			22			—			52,757
Derivative and other contracts:
Interest rate		364			162,239			545			—			163,148
Credit		—			8,166			379			—			8,545
Foreign exchange		23			55,118			127			—			55,268
Equity		1,001			44,666			2,322			—			47,989
Commodity and other		1,032			5,156			2,701			—			8,889
Netting1		(2,088	)		(216,764	)		(1,575	)		(36,717	)		(257,144	)
Total derivative and other contracts		332			58,581			4,499			(36,717	)		26,695
Total trading liabilities		95,644			67,844			4,524			(36,717	)		131,295
Securities sold under agreements to repurchase		—			650			150			—			800
Other secured financings		—			3,624			239			—			3,863
Borrowings		—			43,928			2,984			—			46,912
Total liabilities at fair value	$	95,644		$	116,203		$	7,944		$	(36,717	)	$	183,074

MABS—Mortgage- and asset-backed securities

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

2. For a further breakdown by type, see the following Loans and Lending Commitments at Fair Value table.

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

4. Amounts exclude certain investments that are measured based on NAV per share, which are not classified in the fair value hierarchy. For additional disclosure about such investments, see “Measured Based on Net Asset Value” herein.

Loans and Lending Commitments at Fair Value

$ in millions	At June 30, 2018		At December 31, 2017
Corporate	$	8,752	$	8,358
Residential real estate		1,334		799
Wholesale real estate		3,833		1,579
Total	$	13,919	$	10,736

51 June 2018 Form 10-Q

Notes to Consolidated Financial Statements (Unaudited)

Unsettled Fair Value of Futures Contracts¹

$ in millions	At June 30, 2018		At December 31, 2017
Customer and other receivables, net	$	958	$	831

1. These contracts are primarily Level 1, actively traded, valued based on quoted prices from the exchange and are excluded from the previous recurring fair value tables.

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 financial statements in the 2017 Form 10-K. During the current year period, there were no significant revisions 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 quarter ended June 30, 2018 (“current quarter”) and June 30, 2017 (“prior year quarter”), the current year period and the six months ended June 30, 2017 (“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, 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 income statements.

Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Current Quarter

$ in millions	Beginning Balance at March 31, 2018			Realized and Unrealized Gains (Losses)			Purchases1			Sales and Issuances2			Settlements1			Net Transfers			Ending Balance at June 30, 2018			Unrealized Gains (Losses)
Assets at Fair Value
Trading assets:
Other sovereign government obligations	$	7		$	(3	)	$	2		$	(1	)	$	—		$	—		$	5		$	—
State and municipal securities		2			—			1			(1	)		—			—			2			—
MABS		342			—			35			(88	)		(7	)		45			327			(6	)
Loans and lending commitments		8,128			(62	)		1,726			(615	)		(1,781	)		(473	)		6,923			(78	)
Corporate and other debt		814			37			166			(194	)		(3	)		(119	)		701			5
Corporate equities		233			(4	)		21			(25	)		—			(54	)		171			(3	)
Net derivative and other contracts3:
Interest rate		670			(75	)		61			(24	)		(45	)		(20	)		567			(99	)
Credit		(30	)		111			15			(41	)		(57	)		—			(2	)		115
Foreign exchange		(33	)		37			—			(19	)		(3	)		(8	)		(26	)		43
Equity4		1,015			51			29			(191	)		185			(2,624	)		(1,535	)		(14	)
Commodity and other		1,660			170			1			(3	)		122			82			2,032			107
Total net derivative and other contracts		3,282			294			106			(278	)		202			(2,570	)		1,036			152
Investments		1,012			(8	)		17			(28	)		—			(52	)		941			2
Liabilities at Fair Value
Deposits	$	44		$	1		$	—		$	5		$	—		$	(11	)	$	37		$	1
Trading liabilities:
Other sovereign government obligations		3			—			(3	)		—			—			—			—			—
Corporate and other debt		4			—			(6	)		4			—			(1	)		1			—
Corporate equities		32			3			(8	)		3			—			—			24			2
Other secured financings		220			5			—			4			(8	)		(41	)		170			5
Borrowings		3,626			130			—			306			(141	)		(366	)		3,295			133

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, Other secured financings and 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. Amounts are presented before counterparty netting.

4. During the current quarter, the Firm transferred from Level 3 to Level 2 $2.6 billion of Equity Derivatives due to a reduction in the significance of the unobservable inputs relating to volatility.

June 2018 Form 10-Q 52

Notes to Consolidated Financial Statements (Unaudited)

Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Prior Year Quarter

$ in millions	Beginning Balance at March 31, 2017			Realized and Unrealized Gains (Losses)			Purchases1			Sales and Issuances2			Settlements1			Net Transfers			Ending Balance at June 30, 2017			Unrealized Gains (Losses)
Assets at Fair Value
Trading assets:
U.S. Treasury and agency securities	$	42		$	—		$	—		$	—		$	—		$	(42	)	$	—		$	—
Other sovereign government obligations		65			—			87			(52	)		—			—			100			—
State and municipal securities		55			3			3			(52	)		—			—			9			—
MABS		216			36			32			(44	)		(5	)		29			264			8
Loans and lending commitments		4,479			27			1,242			(417	)		(581	)		114			4,864			11
Corporate and other debt		717			33			206			(292	)		(1	)		30			693			26
Corporate equities		310			8			101			(60	)		—			141			500			9
Net derivative and other contracts3:
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		36			—			(135	)		124			—			(10	)		15			(1	)
Corporate equities		2			(12	)		(36	)		45			—			5			28			(11	)
Securities sold under agreements to repurchase		148			—			—			—			—			—			148			—
Other secured financings		203			(4	)		—			38			(1	)		—			244			(4	)
Borrowings		2,092			(45	)		—			694			(145	)		(40	)		2,646			(49	)

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, Other secured financings and 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. Amounts are presented before counterparty netting.

53 June 2018 Form 10-Q

Notes to Consolidated Financial Statements (Unaudited)

Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Current Year Period

$ in millions	Beginning Balance at December 31, 2017			Realized and Unrealized Gains (Losses)			Purchases1			Sales and Issuances2			Settlements1			Net Transfers			Ending Balance at June 30, 2018			Unrealized Gains (Losses)
Assets at fair value
Trading assets:
Other sovereign government obligations	$	1		$	—		$	4		$	—		$	—		$	—		$	5		$	—
State and municipal securities		8			—			1			(7	)		—			—			2			—
MABS		423			76			74			(282	)		(12	)		48			327			—
Loans and lending commitments		5,945			(6	)		3,841			(913	)		(1,531	)		(413	)		6,923			(61	)
Corporate and other debt		701			43			366			(165	)		(1	)		(243	)		701			6
Corporate equities		166			2			43			(49	)		—			9			171			(7	)
Net derivative and other contracts3:
Interest rate		1,218			(1	)		69			(51	)		(131	)		(537	)		567			(13	)
Credit		41			(22	)		4			(40	)		17			(2	)		(2	)		(28	)
Foreign exchange		(112	)		96			—			(46	)		46			(10	)		(26	)		28
Equity4		1,208			163			94			(930	)		294			(2,364	)		(1,535	)		135
Commodity and other		1,446			392			35			(6	)		7			158			2,032			230
Total net derivative and other contracts		3,801			628			202			(1,073	)		233			(2,755	)		1,036			352
Investments		1,020			23			64			(133	)		—			(33	)		941			7
Liabilities at fair value
Deposits	$	47		$	1		$	—		$	10		$	(1	)	$	(18	)	$	37		$	1
Trading liabilities:
Corporate and other debt		3			—			(9	)		7			—			—			1			—
Corporate equities		22			6			(10	)		15			—			3			24			4
Securities sold under agreements to repurchase		150			—			—			—			—			(150	)		—			—
Other secured financings		239			17			—			7			(18	)		(41	)		170			17
Borrowings		2,984			201			—			825			(195	)		(118	)		3,295			199

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 derivative and other contracts, Deposits, Other secured financings and 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. Amounts are presented before counterparty netting.

4. During the current year period, the Firm transferred from Level 3 to Level 2 $2.4 billion of Equity Derivatives due to a reduction in the significance of the unobservable inputs relating to volatility.

June 2018 Form 10-Q 54

Notes to Consolidated Financial Statements (Unaudited)

Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Prior Year Period

$ in millions	Beginning Balance at December 31, 2016			Realized and Unrealized Gains (Losses)			Purchases1			Sales and Issuances2			Settlements1			Net Transfers			Ending Balance at June 30, 2017			Unrealized Gains (Losses)
Assets at fair value
Trading assets:
U.S. Treasury and agency securities	$	74		$	(1	)	$	—		$	(240	)	$	—		$	167		$	—		$	—
Other sovereign government obligations		6			—			98			(4	)		—			—			100			—
State and municipal securities		250			3			3			(77	)		—			(170	)		9			—
MABS		217			44			78			(83	)		(16	)		24			264			27
Loans and lending commitments		5,122			89			1,596			(1,002	)		(1,146	)		205			4,864			41
Corporate and other debt		475			31			290			(225	)		(2	)		124			693			30
Corporate equities		446			10			97			(159	)		—			106			500			15
Net derivative and other contracts3:
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	)
Trading liabilities:
Corporate and other debt		36			—			(164	)		129			—			14			15			—
Corporate equities		35			—			(63	)		5			—			51			28			—
Securities sold under agreements to repurchase		149			1			—			—			—			—			148			1
Other secured financings		434			(23	)		—			52			(221	)		(44	)		244			(16	)
Borrowings		2,014			(104	)		—			981			(288	)		(165	)		2,646			(95	)

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 derivative and other contracts, Deposits, Other secured financings and 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. Amounts are presented before counterparty netting.

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 financial statements in the 2017 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).

55 June 2018 Form 10-Q

Notes to Consolidated Financial Statements (Unaudited)

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 Average or Simple Average/Median)1
$ in millions, except inputs		At June 30, 2018	At December 31, 2017
Recurring Fair Value Measurement
Assets at fair value
MABS ($327 and $423)
Comparable pricing:	Comparable bond price	0 to 100 points (44 points)	0 to 95 points (26 points)
Loans and lending commitments ($6,923 and $5,945)
Margin loan model:	Discount rate	1% to 5% (2%)	0% to 3% (1%)
	Volatility skew	15% to 55% (24%)	7% to 41% (22%)
Comparable pricing:	Comparable loan price	55 to 101 points (94 points)	55 to 102 points (95 points)
Corporate and other debt ($701 and $701)
Comparable pricing:	Comparable bond price	0 to 101 points (74 points)	3 to 134 points (59 points)
Discounted cash flow:	Recovery rate	18%	6% to 36% (27%)
	Discount rate	8% to 20% (15%)	7% to 20% (14%)
Option model:	At the money volatility	15% to 51% (38%)	17% to 52% (52%)
Corporate equities ($171 and $166)
Comparable pricing:	Comparable equity price	100%	100%
Net derivative and other contracts2:
Interest rate ($567 and $1,218)
Option model:	Interest rate volatility skew	28% to 94% (39% / 43%)	31% to 97% (41% / 47%)
	Inflation volatility	26% to 66% (46% / 43%)	23% to 63% (44% / 41%)
	Interest rate curve	2%	2%
Credit ($(2) and $41)
Comparable pricing:	Cash synthetic basis	9 to 10 points (9 points)	12 to 13 points (12 points)
	Comparable bond price	0 to 75 points (28 points)	0 to 75 points (25 points)
Correlation model:	Credit correlation	36% to 63% (48%)	38% to 100% (48%)
Foreign exchange3 ($(26) and $(112))
Option model:	Interest rate - Foreign exchange correlation	53% to 56% (55% / 55%)	54% to 57% (56% / 56%)
	Interest rate volatility skew	28% to 94% (39% / 43%)	31% to 97% (41% / 47%)
	Contingency probability	95% to 99% (97% / 97%)	95% to 100% (96% / 95%)
Equity3 ($(1,535) and $1,208)
Option model:	At the money volatility	15% to 56% (34%)	7% to 54% (32%)
	Volatility skew	-3% to 0% (-1%)	-5% to 0% (-1%)
	Equity - Equity correlation	5% to 99% (80%)	5% to 99% (76%)
	Equity - Foreign exchange correlation	-60% to 55% (-55%)	-55% to 40% (36%)
	Equity - Interest rate correlation	-7% to 47% (15% / 10%)	-7% to 49% (18% / 20%)
Commodity and other ($2,032 and $1,446)
Option model:	Forward power price	$6 to $133 ($30) per MWh	$4 to $102 ($31) per MWh
	Commodity volatility	5% to 219% (14%)	7% to 205% (17%)
	Cross-commodity correlation	5% to 99% (91%)	5% to 99% (92%)
Investments ($941 and $1,020)
Discounted cash flow:	WACC	8% to 15% (9%)	8% to 15% (9%)
	Exit multiple	8 to 10 times (10 times)	8 to 11 times (10 times)
Market approach:	EBITDA multiple	3 to 24 times (13 times)	6 to 25 times (11 times)
Comparable pricing:	Comparable equity price	35% to 100% (93%)	45% to 100% (92%)

June 2018 Form 10-Q 56

Notes to Consolidated Financial Statements (Unaudited)

	Predominant Valuation Techniques/ Significant Unobservable Inputs	Range (Weighted Average or Simple Average/Median)1
$ in millions, except inputs		At June 30, 2018	At December 31, 2017
Liabilities at Fair Value
Securities sold under agreements to repurchase ($— and $150)
Discounted cash flow:	Funding spread	N/A	107 to 126 bps (120 bps)
Other secured financings ($170 and $239)
Discounted cash flow:	Funding spread	25 to 73 bps (49 bps)	39 to 76 bps (57 bps)
Option model:	Volatility skew	N/A	-1%
	At the money volatility	10% to 40% (27%)	10% to 40% (26%)
Borrowings ($3,295 and $2,984)
Option model:	At the money volatility	6% to 35% (23%)	5% to 35% (22%)
	Volatility skew	-2% to 0% (0%)	-2% to 0% (0%)
	Equity - Equity correlation	45% to 95% (84%)	39% to 95% (86%)
	Equity - Foreign exchange correlation	-51% to 30% (-27%)	-55% to 10% (-18%)
Nonrecurring Fair Value Measurement
Assets at fair value
Loans ($1,058 and $924)
Corporate loan model:	Credit spread	95 to 427 bps (166 bps)	93 to 563 bps (239 bps)
Expected recovery:	Asset coverage	N/M	95% to 99% (95%)

Points—Percentage of par

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

2. CVA and FVA are included in the balance but excluded from the Valuation Technique(s) and Significant Unobservable Inputs. 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).

For a description of the Firm’s significant unobservable inputs and related sensitivity, see Note 3 to the financial statements in the 2017 Form 10-K. During the current year period, there were no significant revisions made to the Firm’s significant unobservable inputs.

Measured Based on Net Asset Value

For a description of the Firm’s investments in private equity funds, real estate funds and hedge funds, which are measured based on NAV, see Note 3 to the financial statements in the 2017 Form 10-K.

	At June 30, 2018				At December 31, 2017
$ in millions	Carrying Value		Commitment		Carrying Value		Commitment
Private equity	$	1,571	$	289	$	1,674	$	308
Real estate		753		174		800		183
Hedge1		96		4		90		4
Total	$	2,420	$	467	$	2,564	$	495

1. Investments in hedge funds may be subject to initial period lock-up or gate provisions, which restrict an investor from withdrawing from the fund during a certain initial period or restrict the redemption amount on any redemption date, respectively.

Amounts in the previous table represent the Firm’s carrying value of general and limited partnership interests in fund investments, as well as any related performance fees in the form of carried interest. The carrying amounts are measured

based on the NAV of the fund taking into account the distribution terms applicable to the interest held. This same measurement applies whether investments are accounted for under the equity method or fair value.

See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received. See Note 19 for information regarding related performance fees at risk of reversal, including performance fees in the form of carried interest.

Nonredeemable Funds by Contractual Maturity

	Carrying Value at June 30, 2018
$ in millions	Private Equity		Real Estate
Less than 5 years	$	481	$	53
5-10 years		886		483
Over 10 years		204		217
Total	$	1,571	$	753

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.

57 June 2018 Form 10-Q

Notes to Consolidated Financial Statements (Unaudited)

Earnings Impact of Borrowings under the Fair Value Option

	Three Months Ended June 30,						Six Months Ended June 30,
$ in millions	2018			2017			2018			2017
Trading revenues	$	859		$	(895	)	$	885		$	(2,520	)
Interest income (expense)		(73	)		(112	)		(175	)		(231	)
Net revenues	$	786		$	(1,007	)	$	710		$	(2,751	)

Gains (losses) are mainly attributable to changes in foreign currency rates or interest rates, or movements in the reference price or index.

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

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

	Three Months Ended June 30,
	2018					2017
$ in millions	Trading Revenues			OCI		Trading Revenues			OCI
Borrowings	$	(3	)	$	842	$	(4	)	$	(281	)
Loans and other debt1		63			—		48			—
Lending commitments2		1			—		—			—
	Six Months Ended June 30,
	2018					2017
$ in millions	Trading Revenues			OCI		Trading Revenues			OCI
Borrowings	$	(18	)	$	1,435	$	(8	)	$	(267	)
Securities sold under agreements to repurchase		—			2		—			(3	)
Loans and other debt1		144			—		45			—
Lending commitments2		3			—		—			—

$ in millions	At June 30, 2018			At December 31, 2017
Cumulative pre-tax DVA gain (loss) recognized in AOCI	$	(392	)	$	(1,831	)

1. Loans and other debt instrument-specific credit gains (losses) were determined by excluding the non-credit components of gains and losses.

2. 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.

Borrowings Measured at Fair Value on a Recurring Basis

$ in millions	At June 30, 2018		At December 31, 2017
Business Unit Responsible for Risk Management
Equity	$	26,139	$	25,903
Interest rates		20,541		19,230
Foreign exchange		822		666
Credit		845		815
Commodities		2,003		298
Total	$	50,350	$	46,912

Excess of Contractual Principal Amount Over Fair Value

$ in millions	At June 30, 2018		At December 31, 2017
Loans and other debt1	$	13,748	$	13,481
Loans 90 or more days past due and/or on nonaccrual status1		10,977		11,253
Borrowings2		1,830		71

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. Borrowings in this table 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, 2018		At December 31, 2017
Nonaccrual loans	$	1,705	$	1,240
Nonaccrual loans 90 or more days past due	$	965	$	779

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.

Measured at Fair Value on a Nonrecurring Basis

Carrying and Fair Values

	At June 30, 2018
	Fair Value
$ in millions	Level 2		Level 31		Total
Assets
Loans	$	1,481	$	1,058	$	2,539
Other assets—Other investments		17		36		53
Other assets—Premises, equipment and software		—		—		—
Total	$	1,498	$	1,094	$	2,592
Liabilities
Other liabilities and accrued expenses—Lending commitments	$	210	$	42	$	252
Total	$	210	$	42	$	252

June 2018 Form 10-Q 58

Notes to Consolidated Financial Statements (Unaudited)

	At December 31, 2017
	Fair Value
$ in millions	Level 2		Level 31		Total
Assets
Loans	$	1,394	$	924	$	2,318
Other assets—Other investments		—		144		144
Total	$	1,394	$	1,068	$	2,462
Liabilities
Other liabilities and accrued expenses—Lending commitments	$	158	$	38	$	196
Total	$	158	$	38	$	196

1. For significant Level 3 balances, refer to “Significant Unobservable Inputs Used in Recurring and Nonrecurring Level 3 Fair Value Measurements” section herein for details of the significant unobservable inputs used for nonrecurring fair value measurement.

Gains (Losses) from Fair Value Remeasurements¹

	Three Months Ended June 30,						Six Months Ended June 30,
$ in millions	2018			2017			2018			2017
Assets
Loans2	$	(1	)	$	20		$	8		$	44
Other assets—Other investments3		(7	)		—			(7	)		—
Other assets—Premises, equipment and software4		(2	)		(1	)		(10	)		(6	)
Total	$	(10	)	$	19		$	(9	)	$	38
Liabilities
Other liabilities and accrued expenses— Lending commitments2	$	(30	)	$	21		$	(12	)	$	48
Total	$	(30	)	$	21		$	(12	)	$	48

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 in Other expenses.

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

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

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

Financial Instruments Not Measured at Fair Value

	At June 30, 2018
	Carrying		Fair Value
$ in millions	Value		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents:
Cash and due from banks	$	30,176	$	30,176	$	—	$	—	$	30,176
Interest bearing deposits with banks		18,707		18,707		—		—		18,707
Restricted cash		32,706		32,706		—		—		32,706
Investment securities—HTM		25,244		12,656		11,188		331		24,175
Securities purchased under agreements to resell		93,928		—		93,844		—		93,844
Securities borrowed		153,248		—		153,193		—		153,193
Customer and other receivables1		55,598		—		52,108		3,305		55,413
Loans2		112,113		—		24,963		86,827		111,790
Other assets		427		—		427		—		427
Financial Liabilities
Deposits	$	172,517	$	—	$	172,488	$	—	$	172,488
Securities sold under agreements to repurchase		49,862		—		49,398		404		49,802
Securities loaned		12,720		—		12,611		175		12,786
Other secured financings		6,284		—		4,621		1,674		6,295
Customer and other payables1		198,236		—		198,236		—		198,236
Borrowings		141,894		—		145,351		30		145,381

	At December 31, 2017
	Carrying		Fair Value
$ in millions	Value		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents:
Cash and due from banks	$	24,816	$	24,816	$	—	$	—	$	24,816
Interest bearing deposits with banks		21,348		21,348		—		—		21,348
Restricted cash		34,231		34,231		—		—		34,231
Investment securities—HTM		23,599		11,119		11,673		289		23,081
Securities purchased under agreements to resell		84,258		—		78,239		5,978		84,217
Securities borrowed		124,010		—		124,018		1		124,019
Customer and other receivables1		51,269		—		47,159		3,984		51,143
Loans2		104,126		—		21,290		82,928		104,218
Other assets		433		—		433		—		433
Financial Liabilities
Deposits	$	159,232	$	—	$	159,232	$	—	$	159,232
Securities sold under agreements to repurchase		55,624		—		51,752		3,867		55,619
Securities loaned		13,592		—		13,191		401		13,592
Other secured financings		7,408		—		5,987		1,431		7,418
Customer and other payables1		188,464		—		188,464		—		188,464
Borrowings		145,670		—		151,692		30		151,722

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

2. Amounts include loans measured at fair value on a nonrecurring basis.

59 June 2018 Form 10-Q

Notes to Consolidated Financial Statements (Unaudited)

Commitments—Held for Investment and Held for Sale

	Commitment Amount1		Fair Value
$ in millions			Level 2		Level 3		Total
June 30, 2018	$	122,253	$	820	$	200	$	1,020
December 31, 2017		100,151		620		174		794

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. During the current year period, there were no significant updates made to the Firm’s valuation techniques for financial instruments not measured at fair value.

June 2018 Form 10-Q 60

Notes to Consolidated Financial Statements (Unaudited)

4. Derivative Instruments and Hedging Activities

Derivative Fair Values
At June 30, 2018
	Assets
$ in millions	Bilateral OTC			Cleared OTC			Exchange- Traded			Total
Designated as accounting hedges
Interest rate contracts	$	638		$	1		$	—		$	639
Foreign exchange contracts		174			61			—			235
Total		812			62			—			874
Not designated as accounting hedges
Interest rate contracts		165,607			1,795			628			168,030
Credit contracts		4,389			1,431			—			5,820
Foreign exchange contracts		63,383			1,740			237			65,360
Equity contracts		24,804			—			21,843			46,647
Commodity and other contracts		10,108			—			1,617			11,725
Total		268,291			4,966			24,325			297,582
Total gross derivatives	$	269,103		$	5,028		$	24,325		$	298,456
Amounts offset
Counterparty netting		(199,543	)		(4,098	)		(20,669	)		(224,310	)
Cash collateral netting		(41,007	)		(585	)		—			(41,592	)
Total in Trading assets	$	28,553		$	345		$	3,656		$	32,554
Amounts not offset1
Financial instruments collateral		(12,869	)		—			—			(12,869	)
Other cash collateral		(27	)		—			—			(27	)
Net amounts	$	15,657		$	345		$	3,656		$	19,658
Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable										$	4,484

	Liabilities
$ in millions	Bilateral OTC			Cleared OTC			Exchange- Traded			Total
Designated as accounting hedges
Interest rate contracts	$	209		$	4		$	—		$	213
Foreign exchange contracts		18			1			—			19
Total		227			5			—			232
Not designated as accounting hedges
Interest rate contracts		151,813			1,275			657			153,745
Credit contracts		4,395			1,748			—			6,143
Foreign exchange contracts		59,766			1,802			133			61,701
Equity contracts		26,776			—			21,227			48,003
Commodity and other contracts		9,106			—			1,708			10,814
Total		251,856			4,825			23,725			280,406
Total gross derivatives	$	252,083		$	4,830		$	23,725		$	280,638
Amounts offset
Counterparty netting		(199,543	)		(4,098	)		(20,669	)		(224,310	)
Cash collateral netting		(29,119	)		(367	)		—			(29,486	)
Total in Trading liabilities	$	23,421		$	365		$	3,056		$	26,842
Amounts not offset1
Financial instruments collateral		(4,599	)		—			(364	)		(4,963	)
Other cash collateral		(31	)		—			—			(31	)
Net amounts	$	18,791		$	365		$	2,692		$	21,848
Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable										$	4,980

At December 31, 2017
	Assets
$ in millions	Bilateral OTC			Cleared OTC			Exchange- Traded			Total
Designated as accounting hedges
Interest rate contracts	$	1,057		$	—		$	—		$	1,057
Foreign exchange contracts		57			6			—			63
Total		1,114			6			—			1,120
Not designated as accounting hedges
Interest rate contracts		177,948			1,700			234			179,882
Credit contracts		5,740			2,282			—			8,022
Foreign exchange contracts		52,878			798			58			53,734
Equity contracts		24,452			—			20,538			44,990
Commodity and other contracts		8,861			—			1,802			10,663
Total		269,879			4,780			22,632			297,291
Total gross derivatives	$	270,993		$	4,786		$	22,632		$	298,411
Amounts offset
Counterparty netting		(201,051	)		(3,856	)		(19,861	)		(224,768	)
Cash collateral netting		(42,141	)		(689	)		—			(42,830	)
Total in Trading assets	$	27,801		$	241		$	2,771		$	30,813
Amounts not offset1
Financial instruments collateral		(12,363	)		—			—			(12,363	)
Other cash collateral		(4	)		—			—			(4	)
Net amounts	$	15,434		$	241		$	2,771		$	18,446
Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable										$	3,154

	Liabilities
$ in millions	Bilateral OTC			Cleared OTC			Exchange- Traded			Total
Designated as accounting hedges
Interest rate contracts	$	67		$	1		$	—		$	68
Foreign exchange contracts		72			57			—			129
Total		139			58			—			197
Not designated as accounting hedges
Interest rate contracts		161,758			1,178			144			163,080
Credit contracts		6,273			2,272			—			8,545
Foreign exchange contracts		54,191			925			23			55,139
Equity contracts		27,993			—			19,996			47,989
Commodity and other contracts		7,117			—			1,772			8,889
Total		257,332			4,375			21,935			283,642
Total gross derivatives	$	257,471		$	4,433		$	21,935		$	283,839
Amounts offset
Counterparty netting		(201,051	)		(3,856	)		(19,861	)		(224,768	)
Cash collateral netting		(31,892	)		(484	)		—			(32,376	)
Total in Trading liabilities	$	24,528		$	93		$	2,074		$	26,695
Amounts not offset1
Financial instruments collateral		(5,523	)		—			(412	)		(5,935	)
Other cash collateral		(18	)		(14	)		—			(32	)
Net amounts	$	18,987		$	79		$	1,662		$	20,728
Net amounts for which master netting or collateral agreements are not in place or may not be legally enforceable										$	3,751

1. Amounts relate to master netting agreements and collateral agreements that have been determined by the Firm to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance.

61 June 2018 Form 10-Q

Notes to Consolidated Financial Statements (Unaudited)

See Note 3 for information related to the unsettled fair value of futures contracts not designated as accounting hedges, which are excluded from the tables above.

Derivative Notionals

At June 30, 2018
	Assets
$ in billions	Bilateral OTC		Cleared OTC		Exchange- Traded		Total
Designated as accounting hedges
Interest rate contracts	$	16	$	32	$	—	$	48
Foreign exchange contracts		7		2		—		9
Total		23		34		—		57
Not designated as accounting hedges
Interest rate contracts		4,739		8,012		3,181		15,932
Credit contracts		143		68		—		211
Foreign exchange contracts		2,402		88		18		2,508
Equity contracts		417		—		378		795
Commodity and other contracts		90		—		60		150
Total		7,791		8,168		3,637		19,596
Total gross derivatives	$	7,814	$	8,202	$	3,637	$	19,653

	Liabilities
$ in billions	Bilateral OTC		Cleared OTC		Exchange- Traded		Total
Designated as accounting hedges
Interest rate contracts	$	2	$	130	$	—	$	132
Foreign exchange contracts		2		—		—		2
Total		4		130		—		134
Not designated as accounting hedges
Interest rate contracts		5,030		7,184		1,246		13,460
Credit contracts		146		75		—		221
Foreign exchange contracts		2,278		86		10		2,374
Equity contracts		414		—		467		881
Commodity and other contracts		83		—		53		136
Total		7,951		7,345		1,776		17,072
Total gross derivatives	$	7,955	$	7,475	$	1,776	$	17,206

At December 31, 2017
	Assets
$ in billions	Bilateral OTC		Cleared OTC		Exchange- Traded		Total
Designated as accounting hedges
Interest rate contracts	$	20	$	46	$	—	$	66
Foreign exchange contracts		4		—		—		4
Total		24		46		—		70
Not designated as accounting hedges
Interest rate contracts		3,999		6,458		2,714		13,171
Credit contracts		194		100		—		294
Foreign exchange contracts		1,960		67		9		2,036
Equity contracts		397		—		334		731
Commodity and other contracts		86		—		72		158
Total		6,636		6,625		3,129		16,390
Total gross derivatives	$	6,660	$	6,671	$	3,129	$	16,460

	Liabilities
$ in billions	Bilateral OTC		Cleared OTC		Exchange- Traded		Total
Designated as accounting hedges
Interest rate contracts	$	2	$	102	$	—	$	104
Foreign exchange contracts		4		2		—		6
Total		6		104		—		110
Not designated as accounting hedges
Interest rate contracts		4,199		6,325		1,089		11,613
Credit contracts		226		80		—		306
Foreign exchange contracts		2,014		78		51		2,143
Equity contracts		394		—		405		799
Commodity and other contracts		68		—		61		129
Total		6,901		6,483		1,606		14,990
Total gross derivatives	$	6,907	$	6,587	$	1,606	$	15,100

The Firm believes that the notional amounts of derivative contracts generally overstate its exposure.

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 financial statements in the 2017 Form 10-K.

Gains (Losses) on Accounting Hedges

	Three Months Ended						Six Months Ended
	June 30,						June 30,
$ in millions	2018			2017			2018			2017
Fair Value Hedges—Recognized in Interest Expense
Interest rate contracts	$	(619	)	$	138		$	(2,460	)	$	(660	)
Borrowings		587			(213	)		2,439		$	495
Net Investment Hedges—Foreign exchange contracts
Recognized in OCI	$	395		$	(47	)	$	247		$	(251	)
Forward points excluded from hedge effectiveness testing—Recognized in Interest income	$	24		$	(9	)	$	31		$	(19	)

Borrowings under Fair Value Hedges

$ in millions	At June 30, 2018
Carrying amount of Borrowings currently or previously hedged	$	104,509
Basis adjustments included in carrying amount	$	(2,624	)

Hedge accounting basis adjustments for Borrowings are primarily related to outstanding hedges.

June 2018 Form 10-Q 62

Notes to Consolidated Financial Statements (Unaudited)

Trading Revenues by Product Type

	Three Months Ended				Six Months Ended
	June 30,				June 30,
$ in millions	2018		2017		2018		2017
Interest rate contracts	$	781	$	451	$	1,652	$	1,045
Foreign exchange contracts		138		197		399		432
Equity security and index contracts1		1,785		1,818		3,661		3,459
Commodity and other contracts		358		110		794		299
Credit contracts		231		355		557		931
Total	$	3,293	$	2,931	$	7,063	$	6,166

1. Dividend income is included within equity security and index contracts.

The previous table summarizes gains and losses included in Trading revenues in the income statements. These activities include revenues related to derivative and non-derivative financial instruments. The Firm generally utilizes financial instruments across a variety of product types in connection with its market-making and related risk management strategies. The trading revenues presented in the table are not representative of the manner in which the Firm manages its business activities and are prepared in a manner similar to the presentation of trading revenues for regulatory reporting purposes.

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.

Net Derivative Liabilities and Collateral Posted

$ in millions	At June 30, 2018		At December 31, 2017
Net derivative liabilities with credit risk-related contingent features	$	17,026	$	20,675
Collateral posted		14,494		16,642

The previous table presents the aggregate fair value of certain derivative contracts that contain credit risk-related contingent features that are in a net liability position for which the Firm has posted collateral in the normal course of business.

Incremental Collateral or Termination Payments upon Potential Future Ratings Downgrade

$ in millions	At June 30, 2018
One-notch downgrade	$	647
Two-notch downgrade		367
Bilateral downgrade agreements included in the amounts above1	$	881

1. Amount represents arrangements between the Firm and other parties where upon the downgrade of one party, the downgraded party must deliver collateral to the other party. These bilateral downgrade arrangements are used by the Firm to manage the risk of counterparty downgrades.

The additional collateral or termination payments that may be called in the event of a future credit rating downgrade vary by contract and can be based on ratings by either or both of Moody’s Investors Service, Inc. (“Moody’s”) and S&P Global Ratings. The previous table shows the future potential collateral amounts and termination payments that could be called or required by counterparties or exchange and clearing organizations in the event of one-notch or two-notch downgrade scenarios based on the relevant contractual downgrade triggers.

Credit Derivatives and Other Credit Contracts

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

For further information on credit derivatives and other credit contracts, see Note 4 to the financial statements in the 2017 Form 10-K.

Protection Sold and Purchased with CDS

	At June 30, 2018
	Fair Value (Asset)/Liability						Notional
	Protection			Protection			Protection		Protection
$ in millions	Sold			Purchased			Sold		Purchased
Single name	$	(517	)	$	688		$	119,286	$	133,926
Index and basket		456			(501	)		74,089		86,016
Tranched index and basket		(146	)		343			6,072		12,347
Total	$	(207	)	$	530		$	199,447	$	232,289
Single name and non-tranched index and basket with identical underlying reference obligations							$	193,224	$	219,407

	At December 31, 2017
	Fair Value (Asset)/Liability					Notional
	Protection			Protection		Protection		Protection
$ in millions	Sold			Purchased		Sold		Purchased
Single name	$	(1,277	)	$	1,658	$	146,948	$	164,773
Index and basket		(341	)		209		131,073		120,348
Tranched index and basket		(342	)		616		11,864		24,498
Total	$	(1,960	)	$	2,483	$	289,885	$	309,619
Single name and non-tranched index and basket with identical underlying reference obligations						$	274,473	$	281,162

63 June 2018 Form 10-Q

Notes to Consolidated Financial Statements (Unaudited)

Credit Ratings of Reference Obligation and Maturities of Credit Protection Sold

	At June 30, 2018
	Maximum Potential Payout/Notional										Fair Value (Asset)/ Liability
	Years to Maturity
$ in millions	Less than 1		1-3		3-5		Over 5		Total
Single name CDS
Investment grade	$	28,320	$	31,006	$	18,746	$	8,410	$	86,482	$	(425	)
Non-investment grade		11,423		12,571		8,019		791		32,804		(92	)
Total single name CDS	$	39,743	$	43,577	$	26,765	$	9,201	$	119,286	$	(517	)
Index and basket CDS
Investment grade	$	6,604	$	8,565	$	17,286	$	8,006	$	40,461	$	(474	)
Non-investment grade		3,808		7,521		18,934		9,437		39,700		784
Total index and basket CDS	$	10,412	$	16,086	$	36,220	$	17,443	$	80,161	$	310
Total CDS sold	$	50,155	$	59,663	$	62,985	$	26,644	$	199,447	$	(207	)
Other credit contracts		—		—		—		119		119		11
Total credit derivatives and other credit contracts	$	50,155	$	59,663	$	62,985	$	26,763	$	199,566	$	(196	)

	At December 31, 2017
	Maximum Potential Payout/Notional										Fair Value (Asset)/ Liability
	Years to Maturity
$ in millions	Less than 1		1-3		3-5		Over 5		Total
Single name CDS
Investment grade	$	39,721	$	42,591	$	18,157	$	8,872	$	109,341	$	(1,167	)
Non-investment grade		14,213		16,293		6,193		908		37,607		(110	)
Total single name CDS	$	53,934	$	58,884	$	24,350	$	9,780	$	146,948	$	(1,277	)
Index and basket CDS
Investment grade	$	29,046	$	15,418	$	37,343	$	6,807	$	88,614	$	(1,091	)
Non-investment grade		5,246		7,371		32,417		9,289		54,323		408
Total index and basket CDS	$	34,292	$	22,789	$	69,760	$	16,096	$	142,937	$	(683	)
Total CDS sold	$	88,226	$	81,673	$	94,110	$	25,876	$	289,885	$	(1,960	)
Other credit contracts		2		—		—		134		136		16
Total credit derivatives and other credit contracts	$	88,228	$	81,673	$	94,110	$	26,010	$	290,021	$	(1,944	)

The fair value amounts as shown in the previous table are on a gross basis prior to cash collateral or counterparty netting. 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 2018 Form 10-Q 64

Notes to Consolidated Financial Statements (Unaudited)

5. Investment Securities

AFS and HTM Securities

	At June 30, 2018
$ in millions	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
AFS securities
U.S. government and agency securities:
U.S. Treasury securities	$	31,725	$	2	$	906	$	30,821
U.S. agency securities1		20,808		20		571		20,257
Total U.S. government and agency securities		52,533		22		1,477		51,078
Corporate and other debt:
Agency CMBS		1,233		1		67		1,167
Non-agency CMBS		757		1		17		741
Corporate bonds		1,329		—		33		1,296
CLO		313		1		—		314
FFELP student loan ABS2		2,098		16		6		2,108
Total corporate and other debt		5,730		19		123		5,626
Total AFS securities		58,263		41		1,600		56,704
HTM securities
U.S. government and agency securities:
U.S. Treasury securities		13,188		1		533		12,656
U.S. agency securities1		11,716		—		528		11,188
Total U.S. government and agency securities		24,904		1		1,061		23,844
Corporate and other debt:
Non-agency CMBS		340		—		9		331
Total HTM securities		25,244		1		1,070		24,175
Total investment securities	$	83,507	$	42	$	2,670	$	80,879

	At December 31, 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	$	26,842	$	—	$	589	$	26,253
U.S. agency securities1		22,803		28		247		22,584
Total U.S. government and agency securities		49,645		28		836		48,837
Corporate and other debt:
Agency CMBS		1,370		2		49		1,323
Non-agency CMBS		1,102		—		8		1,094
Corporate bonds		1,379		5		12		1,372
CLO		398		1		—		399
FFELP student loan ABS2		2,165		15		7		2,173
Total corporate and other debt		6,414		23		76		6,361
Total AFS debt securities		56,059		51		912		55,198
AFS equity securities		15		—		10		5
Total AFS securities		56,074		51		922		55,203
HTM securities
U.S. government and agency securities:
U.S. Treasury securities		11,424		—		305		11,119
U.S. agency securities1		11,886		7		220		11,673
Total U.S. government and agency securities		23,310		7		525		22,792
Corporate and other debt:
Non-agency CMBS		289		1		1		289
Total HTM securities		23,599		8		526		23,081
Total investment securities	$	79,673	$	59	$	1,448	$	78,284

1. U.S. agency securities consist mainly of agency-issued debt, agency mortgage pass-through pool securities and CMOs.

2. 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.

65 June 2018 Form 10-Q

Notes to Consolidated Financial Statements (Unaudited)

Investment Securities in an Unrealized Loss Position

	At June 30, 2018
	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 securities
U.S. government and agency securities:
U.S. Treasury securities	$	24,282	$	779	$	4,591	$	127	$	28,873	$	906
U.S. agency securities		13,684		459		2,381		112		16,065		571
Total U.S. government and agency securities		37,966		1,238		6,972		239		44,938		1,477
Corporate and other debt:
Agency CMBS		852		67		—		—		852		67
Non-agency CMBS		338		6		211		11		549		17
Corporate bonds		858		16		380		17		1,238		33
FFELP student loan ABS		892		6		—		—		892		6
Total corporate and other debt		2,940		95		591		28		3,531		123
Total AFS securities		40,906		1,333		7,563		267		48,469		1,600
HTM securities
U.S. government and agency securities:
U.S. Treasury securities		5,866		197		5,614		336		11,480		533
U.S. agency securities		4,566		140		6,622		388		11,188		528
Total U.S. government and agency securities		10,432		337		12,236		724		22,668		1,061
Corporate and other debt:
Non-agency CMBS		209		7		41		2		250		9
Total HTM securities		10,641		344		12,277		726		22,918		1,070
Total investment securities	$	51,547	$	1,677	$	19,840	$	993	$	71,387	$	2,670
	At December 31, 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	$	21,941	$	495	$	4,287	$	94	$	26,228	$	589
U.S. agency securities		12,673		192		2,513		55		15,186		247
Total U.S. government and agency securities		34,614		687		6,800		149		41,414		836
Corporate and other debt:
Agency CMBS		930		49		—		—		930		49
Non-agency CMBS		257		1		559		7		816		8
Corporate bonds		316		3		389		9		705		12
FFELP student loan ABS		984		7		—		—		984		7
Total corporate and other debt		2,487		60		948		16		3,435		76
Total AFS debt securities		37,101		747		7,748		165		44,849		912
AFS equity securities		—		—		5		10		5		10
Total AFS securities		37,101		747		7,753		175		44,854		922
HTM securities
U.S. government and agency securities:
U.S. Treasury securities		6,608		86		4,512		219		11,120		305
U.S. agency securities		2,879		24		7,298		196		10,177		220
Total U.S. government and agency securities		9,487		110		11,810		415		21,297		525
Corporate and other debt:
Non-agency CMBS		124		1		—		—		124		1
Total HTM securities		9,611		111		11,810		415		21,421		526
Total investment securities	$	46,712	$	858	$	19,563	$	590	$	66,275	$	1,448

June 2018 Form 10-Q 66

Notes to Consolidated Financial Statements (Unaudited)

The Firm believes there are no securities in an unrealized loss position that are other-than-temporarily impaired after performing the analysis described in Note 2 to the financial statements in the 2017 Form 10-K. 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. Furthermore, 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.

See Note 12 for additional information on securities issued by VIEs, including U.S. agency mortgage-backed securities, non-agency CMBS, CLO and FFELP student loan ABS.

Investment Securities by Contractual Maturity

	At June 30, 2018
$ in millions	Amortized Cost		Fair Value		Annualized Average Yield
AFS securities
U.S. government and agency securities:
U.S. Treasury securities:
Due within 1 year	$	3,554	$	3,539		1.0%
After 1 year through 5 years		24,707		24,102		1.8%
After 5 years through 10 years		3,464		3,180		1.5%
Total		31,725		30,821
U.S. agency securities:
Due within 1 year		94		93		1.1%
After 1 year through 5 years		1,222		1,200		1.1%
After 5 years through 10 years		1,780		1,712		1.8%
After 10 years		17,712		17,252		2.0%
Total		20,808		20,257
Total U.S. government and agency securities		52,533		51,078		1.8%
Corporate and other debt:
Agency CMBS:
Due within 1 year		4		4		1.3%
After 1 year through 5 years		403		401		1.3%
After 5 years through 10 years		44		44		1.2%
After 10 years		782		718		1.6%
Total		1,233		1,167
Non-agency CMBS:
After 5 years through 10 years		36		34		2.5%
After 10 years		721		707		1.9%
Total		757		741
Corporate bonds:
Due within 1 year		81		81		1.6%
After 1 year through 5 years		1,209		1,178		2.4%
After 5 years through 10 years		39		37		2.6%
Total		1,329		1,296
CLO:
After 5 years through 10 years		115		115		1.4%
After 10 years		198		199		2.4%
Total		313		314

	At June 30, 2018
$ in millions	Amortized Cost		Fair Value		Annualized Average Yield
FFELP student loan ABS:
After 1 year through 5 years	$	88	$	87		0.8%
After 5 years through 10 years		332		330		0.8%
After 10 years		1,678		1,691		1.1%
Total		2,098		2,108
Total corporate and other debt		5,730		5,626		1.6%
Total AFS securities		58,263		56,704		1.8%
HTM securities
U.S. government securities:
U.S. Treasury securities:
Due within 1 year		2,127		2,114		1.2%
After 1 year through 5 years		5,223		5,129		2.0%
After 5 years through 10 years		5,112		4,777		1.9%
After 10 years		726		636		2.3%
Total		13,188		12,656
U.S. agency securities:
After 5 years through 10 years		33		32		1.9%
After 10 years		11,683		11,156		2.6%
Total		11,716		11,188
Total U.S. government and agency
securities		24,904		23,844		2.2%
Corporate and other debt:
Non-agency CMBS:
Due within 1 year		23		23		3.7%
After 1 year through 5 years		63		63		3.7%
After 5 years through 10 years		235		227		3.9%
After 10 years		19		18		4.1%
Total corporate and other debt		340		331		3.9%
Total HTM securities		25,244		24,175		2.2%
Total investment securities	$	83,507	$	80,879		1.9%

Gross Realized Gains and Losses on Sales of AFS Securities

	Three Months Ended June 30,						Six Months Ended June 30,
$ in millions	2018			2017			2018			2017
Gross realized gains	$	6		$	23		$	7		$	27
Gross realized (losses)		(3	)		(9	)		(4	)		(11	)
Total1	$	3		$	14		$	3		$	16

1. Gross realized gains and losses are recognized in Other revenues in the income statements.

67 June 2018 Form 10-Q

Notes to Consolidated Financial Statements (Unaudited)

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 financial statements in the 2017 Form 10-K.

Offsetting of Certain Collateralized Transactions

	At June 30, 2018
$ in millions	Gross Amounts		Amounts Offset		Net Amounts Presented		Amounts Not Offset1		Net Amounts
Assets
Securities purchased under agreements to resell	$	226,847	$	(132,919)	$	93,928	$	(88,769)	$	5,159
Securities borrowed		169,491		(16,243)		153,248		(147,966)		5,282
Liabilities
Securities sold under agreements to repurchase	$	183,569	$	(132,919)	$	50,650	$	(43,738)	$	6,912
Securities loaned		28,963		(16,243)		12,720		(12,672)		48
Net amounts for which master netting agreements are not in place or may not be legally enforceable
Securities purchased under agreements to resell									$	4,974
Securities borrowed										998
Securities sold under agreements to repurchase										5,693
Securities loaned										19

	At December 31, 2017
$ in millions	Gross Amounts		Amounts Offset		Net Amounts Presented		Amounts Not Offset1		Net Amounts
Assets
Securities purchased under agreements to resell	$	199,044	$	(114,786)	$	84,258	$	(78,009)	$	6,249
Securities borrowed		133,431		(9,421)		124,010		(119,358)		4,652
Liabilities
Securities sold under agreements to repurchase	$	171,210	$	(114,786)	$	56,424	$	(48,067)	$	8,357
Securities loaned		23,014		(9,422)		13,592		(13,271)		321
Net amounts for which master netting agreements are not in place or may not be legally enforceable
Securities purchased under agreements to resell									$	5,687
Securities borrowed										572
Securities sold under agreements to repurchase										6,945
Securities loaned										307

1. Amounts relate to master netting agreements that have been determined by the Firm to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance.

For information related to offsetting of derivatives, see Note 4.

Maturities and Collateral Pledged

Gross Secured Financing Balances by Remaining Contractual Maturity

	At June 30, 2018
$ in millions	Overnight and Open		Less than 30 Days		30-90 Days		Over 90 Days		Total
Securities sold under agreements to repurchase	$	44,577	$	67,770	$	30,336	$	40,886	$	183,569
Securities loaned		17,693		2,430		2,228		6,612		28,963
Total included in the offsetting disclosure	$	62,270	$	70,200	$	32,564	$	47,498	$	212,532
Trading liabilities— Obligation to return securities received as collateral		19,646		—		—		—		19,646
Total	$	81,916	$	70,200	$	32,564	$	47,498	$	232,178

	At December 31, 2017
$ in millions	Overnight and Open		Less than 30 Days		30-90 Days		Over 90 Days		Total
Securities sold under agreements to repurchase	$	41,332	$	66,593	$	28,682	$	34,603	$	171,210
Securities loaned		12,130		873		1,577		8,434		23,014
Total included in the offsetting disclosure	$	53,462	$	67,466	$	30,259	$	43,037	$	194,224
Trading liabilities— Obligation to return securities received as collateral		22,555		—		—		—		22,555
Total	$	76,017	$	67,466	$	30,259	$	43,037	$	216,779

Gross Secured Financing Balances by Class of Collateral Pledged

$ in millions	At June 30, 2018		At December 31, 2017
Securities sold under agreements to repurchase
U.S. Treasury and agency securities	$	40,728	$	43,346
State and municipal securities		1,432		2,451
Other sovereign government obligations		109,893		87,141
ABS		2,088		1,130
Corporate and other debt		8,286		7,737
Corporate equities		20,348		28,497
Other		794		908
Total	$	183,569	$	171,210
Securities loaned
U.S. Treasury and agency securities	$	1	$	81
Other sovereign government obligations		16,530		9,489
Corporate and other debt		18		14
Corporate equities		12,048		13,174
Other		366		256
Total	$	28,963	$	23,014
Total included in the offsetting disclosure	$	212,532	$	194,224
Trading liabilities—Obligation to return securities received as collateral
Corporate equities	$	19,646	$	22,555
Total	$	232,178	$	216,779

June 2018 Form 10-Q 68

Notes to Consolidated Financial Statements (Unaudited)

Assets Pledged

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 balance sheets.

Carrying Value of Assets Loaned or Pledged without Counterparty Right to Sell or Repledge
$ in millions	At June 30, 2018		At December 31, 2017
Trading assets	$	32,682	$	31,324
Loans (gross of allowance for loan losses)		—		228
Total	$	32,682	$	31,552

Collateral Received

The Firm receives collateral in the form of securities in connection with securities purchased under agreements to resell, securities borrowed, securities-for-securities transactions, derivative transactions, customer margin loans and securities-based lending. In many cases, the Firm is permitted to sell or repledge 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.

Fair Value of Collateral Received with Right to Sell or Repledge
$ in millions	At June 30, 2018		At December 31, 2017
Collateral received with right to sell or repledge	$	668,906	$	599,244
Collateral that was sold or repledged		528,660		475,113

Customer Margin Lending and Other

$ in millions	At June 30, 2018		At December 31, 2017
Net customer receivables representing margin loans	$	32,811	$	32,112

The Firm provides margin lending arrangements which allow customers to borrow against the value of qualifying securities. Customer receivables representing margin loans are included within Customer and other receivables in the 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 financial statements in the 2017 Form 10-K.

The Firm has additional secured liabilities. For a further discussion of other secured financings, see Note 10.

Restricted Cash and Segregated Securities
$ in millions	At June 30, 2018		At December 31, 2017
Restricted cash	$	32,706	$	34,231
Segregated securities1		25,974		20,549
Total	$	58,680	$	54,780

1. Securities segregated under federal regulations for the Firm’s U.S. broker-dealers are sourced from Securities purchased under agreements to resell and Trading assets in the balance sheets.

7. Loans, Lending Commitments 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 balance sheets. For a further description of these loans, refer to Note 7 to the financial statements in the 2017 Form 10-K. See Note 3 for further information regarding Loans and lending commitments held at fair value. See Note 11 for details of current commitments to lend in the future.

Loans by Type
	At June 30, 2018
$ in millions	Loans Held   for Investment			Loans Held for Sale		Total Loans
Corporate loans	$	32,382		$	13,366	$	45,748
Consumer loans		27,954			—		27,954
Residential real estate loans		26,405			30		26,435
Wholesale real estate loans		9,866			2,351		12,217
Total loans, gross		96,607			15,747		112,354
Allowance for loan losses		(241	)		—		(241	)
Total loans, net	$	96,366		$	15,747	$	112,113
Fixed rate loans, net						$	14,593
Floating or adjustable rate loans, net							97,520
Loans to non-U.S. borrowers, net							15,417

69 June 2018 Form 10-Q

Notes to Consolidated Financial Statements (Unaudited)

	At December 31, 2017
$ in millions	Loans Held   for Investment			Loans Held for Sale		Total Loans
Corporate loans	$	29,754		$	9,456	$	39,210
Consumer loans		26,808			—		26,808
Residential real estate loans		26,635			35		26,670
Wholesale real estate loans		9,980			1,682		11,662
Total loans, gross		93,177			11,173		104,350
Allowance for loan losses		(224	)		—		(224	)
Total loans, net	$	92,953		$	11,173	$	104,126
Fixed rate loans, net						$	13,339
Floating or adjustable rate loans, net							90,787
Loans to non-U.S. borrowers, net							9,977

Credit Quality

For a further discussion about the Firm’s evaluation of credit transactions and monitoring and credit quality indicators, as well as factors considered by the Firm in determining the allowance for loan losses and impairments, see Notes 2 and 7 to the financial statements in the 2017 Form 10-K.

Loans Held for Investment before Allowance by Credit Quality

	At June 30, 2018
$ in millions	Corporate		Consumer		Residential Real Estate		Wholesale Real Estate		Total
Pass	$	31,829	$	27,949	$	26,333	$	8,794	$	94,905
Special mention		187		5		—		555		747
Substandard		361		—		72		517		950
Doubtful		5		—		—		—		5
Loss		—		—		—		—		—
Total	$	32,382	$	27,954	$	26,405	$	9,866	$	96,607

	At December 31, 2017
$ in millions	Corporate		Consumer		Residential Real Estate		Wholesale Real Estate		Total
Pass	$	29,166	$	26,802	$	26,562	$	9,480	$	92,010
Special mention		188		6		—		200		394
Substandard		393		—		73		300		766
Doubtful		7		—		—		—		7
Loss		—		—		—		—		—
Total	$	29,754	$	26,808	$	26,635	$	9,980	$	93,177

The following loans and lending commitments have been evaluated for a specific allowance. All remaining loans and lending commitments are assessed under the inherent allowance methodology.

Impaired Loans and Lending Commitments before Allowance

	At June 30, 2018
$ in millions	Corporate		Residential Real Estate		Total
Loans
With allowance	$	17	$	—	$	17
Without allowance1		80		46		126
Total impaired loans	$	97	$	46	$	143
UPB		106		46		152
Lending Commitments
With allowance	$	9	$	—	$	9
Without allowance1	$	193	$	—	$	193
	At December 31, 2017
$ in millions	Corporate		Residential Real Estate		Total
Loans
With allowance	$	16	$	—	$	16
Without allowance1		118		45		163
Total impaired loans	$	134	$	45	$	179
UPB		146		46		192
Lending Commitments
Without allowance1	$	199	$	—	$	199

1. At June 30, 2018 and December 31, 2017, no allowance was recorded for these loans and lending commitments as the present value of the expected future cash flows (or, alternatively, the observable market price of the instrument or the fair value of the collateral held) equaled or exceeded the carrying value.

Impaired Loans and Total Allowance by Region
	At June 30, 2018
$ in millions	Americas		EMEA		Asia		Total
Impaired loans	$	139	$	—	$	4	$	143
Total Allowance for loan losses		201		39		1		241
	At December 31, 2017
$ in millions	Americas		EMEA		Asia		Total
Impaired loans	$	160	$	9	$	10	$	179
Total Allowance for loan losses		194		27		3		224

Troubled Debt Restructurings
$ in millions	At June 30, 2018		At December 31, 2017
Loans	$	65	$	51
Lending commitments		20		28
Allowance for loan losses and lending commitments		4		10

Impaired loans and lending commitments classified as held for investment within corporate loans include TDRs as shown in the previous table. These restructurings typically include modifications of interest rates, collateral requirements, other loan covenants and payment extensions.

June 2018 Form 10-Q 70

Notes to Consolidated Financial Statements (Unaudited)

Allowance for Loan Losses Rollforward
$ in millions	Corporate			Consumer		Residential Real Estate			Wholesale Real Estate		Total
December 31, 2017	$	126		$	4	$	24		$	70	$	224
Gross charge-offs		(1	)		—		—			—		(1	)
Recoveries1		54			—		—			—		54
Net recoveries (charge-offs)		53			—		—			—		53
Provision (release)1, 2		(51	)		1		(5	)		21		(34	)
Other		(1	)		—		(1	)		—		(2	)
June 30, 2018	$	127		$	5	$	18		$	91	$	241
Inherent	$	123		$	5	$	18		$	91	$	237
Specific		4			—		—			—		4
$ in millions	Corporate			Consumer		Residential Real Estate			Wholesale Real Estate		Total
December 31, 2016	$	195		$	4	$	20		$	55	$	274
Recoveries		1			—		—			—		1
Provision (release)2		14			—		1			14		29
Other		1			—		—			1		2
June 30, 2017	$	211		$	4	$	21		$	70	$	306
Inherent	$	142		$	4	$	21		$	70	$	237
Specific		69			—		—			—		69

1. The current quarter release was primarily due to the recovery of a previously charged off energy industry related loan.

2. The Firm recorded a release of $53 million, and a provision of $7 million for loan losses in the current quarter and prior year quarter, respectively.

Allowance for Lending Commitments Rollforward
$ in millions	Corporate			Consumer		Residential Real Estate		Wholesale Real Estate			Total
December 31, 2017	$	194		$	1	$	—	$	3		$	198
Provision (release)1		5			—		—		—			5
Other		—			—		—		(1	)		(1	)
June 30, 2018	$	199		$	1	$	—	$	2		$	202
Inherent	$	195		$	1	$	—	$	2		$	198
Specific		4			—		—		—			4
$ in millions	Corporate			Consumer		Residential Real Estate		Wholesale Real Estate			Total
December 31, 2016	$	185		$	1	$	—	$	4		$	190
Provision (release)1		(3	)		—		—		(1	)		(4	)
June 30, 2017	$	182		$	1	$	—	$	3		$	186
Inherent	$	179		$	1	$	—	$	3		$	183
Specific		3			—		—		—			3

1. The Firm recorded a release of $2 million, and $7 million for lending commitments in the current quarter and prior year quarter, respectively.

Employee Loans
$ in millions	At June 30, 2018			At December 31, 2017
Balance	$	3,564		$	4,185
Allowance for loan losses		(74	)		(77	)
Balance, net	$	3,490		$	4,108
Repayment term range, in years		1 to 20			1 to 20

Employee loans are granted in conjunction with a program established to retain and recruit certain employees, are full recourse and generally require periodic repayments. These loans are recorded in Customer and other receivables in the balance sheets. The Firm establishes an allowance for loan amounts it does not consider recoverable, and the related provision is recorded in Compensation and benefits expense.

8. Equity Method Investments

Overview

Equity method investments other than certain investments in funds are summarized below and included in Other assets in the balance sheets with related income or loss included in Other revenues in the income statements. See the Measured Based on Net Asset Value table in Note 3 for the carrying value of the Firm’s fund interests, which are comprised of general and limited partnership interests, as well as any related performance-based fees in the form of carried interest.

Equity Method Investment Balances

$ in millions	At June 30, 2018		At December 31, 2017
Investments	$	2,491	$	2,623

	Three Months Ended June 30,					Six Months Ended June 30,
$ in millions	2018		2017			2018		2017
Income (loss)	$	4	$	(9	)	$	54	$	—

Japanese Securities Joint Venture

Included in the equity method investments is the Firm’s 40% voting 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.

	Three Months Ended June 30,				Six Months Ended June 30,
$ in millions	2018		2017		2018		2017
Income from investment in MUMSS	$	26	$	23	$	82	$	71

71 June 2018 Form 10-Q

Notes to Consolidated Financial Statements (Unaudited)

9. Deposits

Deposits

$ in millions	At June 30,     2018		At December 31,   2017
Savings and demand deposits	$	139,736	$	144,487
Time deposits		33,066		14,949
Total	$	172,802	$	159,436
Deposits subject to FDIC insurance	$	135,229	$	127,017
Time deposits that equal or exceed the FDIC insurance limit	$	11	$	38

Time Deposit Maturities

$ in millions	At   June 30, 2018
2018	$	15,493
2019		8,840
2020		5,452
2021		1,466
2022		667
Thereafter		1,148

10. Borrowings and Other Secured Financings

Borrowings

$ in millions	At   June 30,   2018		At   December 31,   2017
Original maturities of one year or less	$	2,329	$	1,519
Original maturities greater than one year
Senior	$	180,008	$	180,835
Subordinated		9,907		10,228
Total	$	189,915	$	191,063
Total borrowings	$	192,244	$	192,582
Weighted average stated maturity, in years1		6.7		6.6

1. Includes only borrowings with original maturities greater than one year.

Other Secured Financings

Other secured financings include the liabilities related to certain ELNs, transfers of financial assets that are accounted for as financings rather than sales, pledged commodities, consolidated VIEs where the Firm is deemed to be the primary beneficiary and other secured borrowings. These liabilities are generally payable from the cash flows of the related assets accounted for as Trading assets. See Note 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, 2018		At   December 31,   2017
Original maturities:
Greater than one year	$	8,439	$	8,685
One year or less		745		2,034
Failed sales		706		552
Total	$	9,890	$	11,271

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 balance sheets.

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.

11. Commitments, Guarantees and Contingencies

Commitments

	Years to Maturity at June 30, 2018
$ in millions	Less than 1		1-3		3-5		Over 5		Total
Lending:
Corporate	$	12,850	$	47,036	$	43,123	$	12,723	$	115,732
Consumer		6,895		—		11		—		6,906
Residential real estate		5		69		25		253		352
Wholesale real estate		268		337		17		100		722
Forward-starting secured financing receivables		84,321		—		—		1,177		85,498
Investment activities		489		77		42		253		861
Letters of credit and other financial guarantees		186		1		—		39		226
Total	$	105,014	$	47,520	$	43,218	$	14,545	$	210,297
Corporate lending commitments participated to third parties									$	7,183
Forward-starting secured financing receivables settled within three business days									$	80,137

June 2018 Form 10-Q 72

Notes to Consolidated Financial Statements (Unaudited)

Since commitments associated with these instruments may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.

For a further description of these commitments, refer to Note 12 to the financial statements in the 2017 Form 10-K.

Guarantees

Obligations under Guarantee Arrangements at June 30, 2018

	Maximum Potential Payout/Notional
	Years to Maturity
$ in millions	Less than 1		1-3		3-5		Over 5		Total
Credit derivatives	$	50,155	$	59,663	$	62,985	$	26,644	$	199,447
Other credit contracts		—		—		—		119		119
Non-credit derivatives		2,166,063		1,346,622		414,569		643,110		4,570,364
Standby letters of credit and other financial guarantees issued1		897		1,062		1,304		5,053		8,316
Market value guarantees		16		110		24		—		150
Liquidity facilities		3,585		—		—		—		3,585
Whole loan sales guarantees		—		1		—		23,230		23,231
Securitization representations and warranties		—		—		—		62,081		62,081
General partner guarantees		4		51		342		30		427

$ in millions	Carrying   Amount   (Asset)/   Liability			Collateral/   Recourse
Credit derivatives2	$	(207	)	$	—
Other credit contracts		11			—
Non-credit derivatives2		43,962			—
Standby letters of credit and other financial guarantees issued1		(241	)		6,777
Market value guarantees		—			3
Liquidity facilities		(5	)		5,770
Whole loan sales guarantees		9			—
Securitization representations and warranties		71			—
General partner guarantees		66			—

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.

In certain situations, collateral may be held by the Firm for those contracts that meet the definition of a guarantee. Generally, the Firm sets collateral requirements by counterparty so that the collateral covers various transactions and products and is not allocated specifically to individual contracts. Also, the Firm may recover amounts related to the underlying asset delivered to the Firm under the derivative contract.

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 financial statements in the 2017 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 financial statements in the 2017 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 financial statements.

Finance Subsidiary

The Parent Company fully and unconditionally guarantees the securities issued by Morgan Stanley Finance LLC, a 100%-owned finance subsidiary.

73 June 2018 Form 10-Q

Notes to Consolidated Financial Statements (Unaudited)

Contingencies

Legal. In addition to the matters described below, in the normal course of business, the Firm has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or are in financial distress. These actions have included, but are not limited to, residential mortgage and credit crisis-related matters.

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 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 government entities seek substantial or indeterminate damages, restitution, disgorgement or penalties. Numerous issues may need to be resolved, including through potentially lengthy

discovery and determination of important factual matters, determination of issues related to class certification and the calculation of damages or other relief, and by addressing novel or unsettled legal questions relevant to the proceedings or investigations in question, before a loss or additional loss or range of loss or additional 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 financial statements as a whole, other than the matters referred to in the following paragraphs.

On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against the Firm, styled China Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al., which is pending in the Supreme Court of the State of New York, New York County (“Supreme Court of NY”). The complaint relates to a $275 million CDS referencing the super senior portion of the STACK 2006-1 CDO. The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges that the Firm misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that the Firm knew that the assets backing the CDO were of poor quality when it entered into the CDS with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the CDS, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied the Firm’s motion to dismiss the complaint. On June 27, 2018, the Firm filed a motion for summary judgment and spoliation sanctions against CDIB. Based on currently available information, the Firm believes it could incur a loss in this action of up to approximately $240 million plus pre- and post-judgment interest, fees and costs.

On July 8, 2013, U.S. Bank National Association, in its capacity as trustee, filed a complaint against the Firm styled U.S. Bank National Association, solely in its capacity as Trustee of the Morgan Stanley Mortgage Loan Trust 2007-2AX (MSM 2007-2AX) v. Morgan Stanley Mortgage Capital Holdings LLC, Successor-by-Merger to Morgan Stanley Mortgage Capital Inc. and GreenPoint Mortgage Funding, Inc., pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $650 million, breached various representations and warranties. The

June 2018 Form 10-Q 74

Notes to Consolidated Financial Statements (Unaudited)

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 September 19, 2014, Financial Guaranty Insurance Company (“FGIC”) filed a complaint against the Firm in the Supreme Court of NY, styled Financial Guaranty Insurance Company v. Morgan Stanley ABS Capital I Inc. et al. relating to a securitization issued by Basket of Aggregated Residential NIMS 2007-1 Ltd. The complaint asserts claims for breach of contract and alleges, among other things, that the net interest margin securities (“NIMS”) in the trust breached various representations and warranties. FGIC issued a financial guaranty policy with respect to certain notes that had an original balance of approximately $475 million. The complaint seeks, among other relief, specific performance of the NIMS breach remedy procedures in the transaction documents, unspecified damages, reimbursement of certain payments made pursuant to the transaction documents, attorneys’ fees and interest. On November 24, 2014, the Firm filed a motion to dismiss the complaint, which the court denied on January 19, 2017. On February 24, 2017, the Firm filed a notice of appeal of the denial of its motion to dismiss the complaint and perfected its appeal on November 22, 2017. 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 and perfected its appeal on November 22, 2017. 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 District Court in Amsterdam, the prior set-off by the Firm of approximately €124 million (approximately $145 million) plus accrued interest of withholding tax

75 June 2018 Form 10-Q

Notes to Consolidated Financial Statements (Unaudited)

credits against the Firm’s corporation tax liabilities for the tax years 2007 to 2013. The Dutch Authority alleges that the Firm was not entitled to receive the withholding tax credits on the basis, inter alia, that a Firm subsidiary did not hold legal title to certain securities subject to withholding tax on the relevant dates. The Dutch Authority has also alleged that the Firm failed to provide certain information to the Dutch Authority and keep adequate books and records. A hearing took place in this matter on September 19, 2017. On April 26, 2018, the District Court in Amsterdam issued a decision dismissing the Dutch Authority’s claims. On June 6, 2018, the Dutch Authority filed an appeal against the decision issued by the District Court in Amsterdam. Based on currently available information, the Firm believes that it could incur a loss in this action of up to approximately €124 million (approximately $145 million) plus accrued interest.

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 financial statements in the 2017 Form 10-K.

Consolidated VIEs

Assets and Liabilities by Type of Activity
	At June 30, 2018				At December 31, 2017
$ in millions	VIE Assets		VIE Liabilities		VIE Assets		VIE Liabilities
OSF	$	282	$	1	$	378	$	3
MABS1		73		52		249		210
Other2		2,545		1,030		1,174		250
Total	$	2,900	$	1,083	$	1,801	$	463

OSF—Other structured financings

1. Amounts include transactions backed by residential mortgage loans, commercial mortgage loans and other types of assets, including consumer or commercial assets. The value of assets is determined based on the fair value of the liabilities and the interests owned by the Firm in such VIEs as the fair values for the liabilities and interests owned are more observable.

2. Other primarily includes investment funds, certain operating entities, CLOs and structured transactions. At June 30, 2018, Other includes the consolidation of a fund managed by Mesa West Capital, LLC, which was acquired in the first quarter of 2018.

Assets and Liabilities by Balance Sheet Caption

	At June 30,		At December 31,
$ in millions	2018		2017
Assets
Cash and cash equivalents:
Cash and due from banks	$	93	$	69
Restricted cash		169		222
Trading assets at fair value		2,032		833
Customer and other receivables		21		19
Goodwill		18		18
Intangible assets		140		155
Other assets		427		485
Total	$	2,900	$	1,801
Liabilities
Other secured financings	$	1,049	$	438
Other liabilities and accrued expenses		34		25
Total	$	1,083	$	463
Noncontrolling interests	$	441	$	189

Consolidated VIE assets and liabilities are presented in the previous tables after intercompany eliminations. Most assets owned by consolidated VIEs cannot be removed unilaterally by the Firm and are not generally available to the Firm. Most related liabilities issued by 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 net assets recognized in its financial statements, net of amounts absorbed by third-party variable interest holders.

Non-consolidated VIEs

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.

June 2018 Form 10-Q 76

Notes to Consolidated Financial Statements (Unaudited)

Non-consolidated VIEs
	At June 30, 2018
$ in millions	MABS		CDO		MTOB		OSF		Other
VIE assets (UPB)	$	66,680	$	11,274	$	5,618	$	3,277	$	20,153
Maximum exposure to loss
Debt and equity interests	$	8,013	$	1,289	$	1	$	1,566	$	4,388
Derivative and other contracts		—		—		3,585		—		2,627
Commitments, guarantees and other		762		427		—		150		327
Total	$	8,775	$	1,716	$	3,586	$	1,716	$	7,342
Carrying value of exposure to loss—Assets
Debt and equity interests	$	8,013	$	1,289	$	1	$	1,157	$	4,388
Derivative and other contracts		—		—		5		—		122
Total	$	8,013	$	1,289	$	6	$	1,157	$	4,510
Additional VIE assets owned1									$	12,173
	At December 31, 2017
$ in millions	MABS		CDO		MTOB		OSF		Other
VIE assets (UPB)	$	89,288	$	9,807	$	5,306	$	3,322	$	31,934
Maximum exposure to loss
Debt and equity interests	$	10,657	$	1,384	$	80	$	1,628	$	4,730
Derivative and other contracts		—		—		3,333		—		1,686
Commitments, guarantees and other		1,214		668		—		164		433
Total	$	11,871	$	2,052	$	3,413	$	1,792	$	6,849
Carrying value of exposure to loss—Assets
Debt and equity interests	$	10,657	$	1,384	$	43	$	1,202	$	4,730
Derivative and other contracts		—		—		5		—		184
Total	$	10,657	$	1,384	$	48	$	1,202	$	4,914
Additional VIE assets owned1									$	11,318

MTOB—Municipal tender option bonds

1. Additional VIE Assets owned represents the carrying value of total exposure to non-consolidated VIEs that does not meet the criteria for detailed breakout in the previous table, primarily interests issued by securitization SPEs for which the maximum exposure to loss is less than specific thresholds.

The Firm’s maximum exposure to loss presented in the previous table is dependent on the nature of the Firm’s variable interest in the VIE and is limited to:

• notional amounts of certain liquidity facilities;

• other credit support;

• total return swaps;

• written put options; and

• fair value of certain other derivatives and investments the Firm has made in the VIE.

Where notional amounts are utilized in quantifying the maximum exposure related to derivatives, such amounts do not reflect changes in fair value recorded by the Firm.

The Firm’s maximum exposure to loss presented in the previous table does not include:

• offsetting benefit of any financial instruments that the Firm may utilize to hedge these risks associated with its variable interests; and

• any reductions associated with the amount of collateral held as part of a transaction with the VIE or any party to the VIE directly against a specific exposure to loss.

Liabilities issued by VIEs generally are non-recourse to the Firm.

The Firm’s primary risk exposure related to additional VIE assets owned is to the most subordinate class of beneficial interest, which are typically acquired by the Firm in the secondary market and generally issued by SPEs sponsored by unrelated parties. These assets, which generally consist of MABS, CDO, MTOB and other exposure, are primarily 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.

Mortgage- and Asset-Backed Securitization Assets

	At June 30, 2018				At December 31, 2017
$ in millions	UPB		Debt and Equity Interests		UPB		Debt and Equity Interests
Residential mortgages	$	11,611	$	813	$	15,636	$	1,272
Commercial mortgages		31,713		1,218		46,464		2,331
U.S. agency collateralized mortgage obligations		13,610		2,578		16,223		3,439
Other consumer or commercial loans		9,746		3,404		10,965		3,615
Total	$	66,680	$	8,013	$	89,288	$	10,657

77 June 2018 Form 10-Q

Notes to Consolidated Financial Statements (Unaudited)

Transfers of Assets with Continuing Involvement

		At June 30, 2018
$ in millions	RML		CML		U.S. Agency CMO		CLN and   Other1
SPE assets (UPB)2	$	14,383	$	64,392	$	14,904	$	15,867
Retained interests
Investment grade	$	—	$	418	$	619	$	3
Non-investment grade (fair value)		1		57		—		296
Total	$	1	$	475	$	619	$	299
Interests purchased in the secondary market (fair value)
Investment grade	$	—	$	158	$	40	$	—
Non-investment grade		16		18		—		—
Total	$	16	$	176	$	40	$	—
Derivative assets (fair value)	$	—	$	—	$	—	$	222
Derivative liabilities (fair value)		—		—		—		164
		At December 31, 2017
$ in millions	RML		CML		U.S. Agency   CMO		CLN and   Other1
SPE assets(UPB)2	$	15,555	$	62,744	$	11,612	$	17,060
Retained interests
Investment grade	$	—	$	293	$	407	$	4
Non-investment grade (fair value)		1		98		—		478
Total	$	1	$	391	$	407	$	482
Interests purchased in the secondary market (fair value)
Investment grade	$	—	$	94	$	439	$	—
Non-investment grade		16		66		—		4
Total	$	16	$	160	$	439	$	4
Derivative assets (fair value)	$	1	$	—	$	—	$	226
Derivative liabilities (fair value)		—		—		—		85

RML—Residential mortgage loans

CML—Commercial mortgage loans

1. Amounts include CLO transactions managed by unrelated third parties.

2. Amounts include assets transferred by unrelated transferors.

		Fair Value at June 30, 2018
$ in millions	Level 2		Level 3		Total
Retained interests
Investment grade	$	624	$	56	$	680
Non-investment grade		10		344		354
Total	$	634	$	400	$	1,034
Interests purchased in the secondary market
Investment grade	$	183	$	15	$	198
Non-investment grade		21		13		34
Total	$	204	$	28	$	232
Derivative assets	$	97	$	125	$	222
Derivative liabilities		157		7		164

		Fair Value at December 31, 2017
$ in millions	Level 2		Level 3		Total
Retained interests
Investment grade	$	407	$	4	$	411
Non-investment grade		22		555		577
Total	$	429	$	559	$	988
Interests purchased in the secondary market
Investment grade	$	531	$	2	$	533
Non-investment grade		57		29		86
Total	$	588	$	31	$	619
Derivative assets	$	78	$	149	$	227
Derivative liabilities		81		4		85

The previous tables include transactions with SPEs in which the Firm, acting as principal, transferred financial assets with continuing involvement and received sales treatment.

Transferred assets are carried at fair value prior to securitization, and any changes in fair value are recognized in the income statements. The Firm may act as underwriter of the beneficial interests issued by these securitization vehicles, for which Investment banking underwriting net revenues are recognized. The Firm may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are generally carried at fair value in the balance sheets with changes in fair value recognized in the income statements.

Proceeds from New Securitization Transactions and Sales of Loans

	Three Months Ended June 30,				Six Months Ended June 30,
$ in millions	2018		2017		2018		2017
New transactions1	$	5,624	$	4,750	$	11,758	$	10,747
Retained interests		1,156		529		1,637		959
Sales of corporate loans to CLO SPEs1, 2		142		239		236		418

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 2018 Form 10-Q 78

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.

Assets Sold with Retained Exposure

$ in millions	At June 30, 2018		At December 31, 2017
Carrying value of assets derecognized at the time of sale and gross cash proceeds	$	32,433	$	19,115
Fair value
Assets sold	$	32,089	$	19,138
Derivative assets recognized in the balance sheets		204		176
Derivative liabilities recognized in the balance sheets		548		153

13. Regulatory Requirements

Regulatory Capital Framework and Requirements

For a discussion of the Firm’s regulatory capital framework, see Note 14 to the financial statements in the 2017 Form 10-K.

The Firm is required to maintain minimum risk-based and leverage-based capital ratios under the regulatory capital requirements. A summary of the calculations of regulatory capital, RWA and transition provisions follows.

The Firm’s risk-based capital ratios for purposes of determining regulatory compliance are the lower of the capital ratios computed under (i) the standardized approaches for calculating credit risk and market risk RWA (“Standardized Approach”) and (ii) the applicable advanced approaches for calculating credit risk, market risk and operational risk RWA (“Advanced Approach”).

Minimum risk-based capital ratio requirements apply to Common Equity Tier 1 capital, Tier 1 capital and Total capital (which includes Tier 2 capital). Certain adjustments to and deductions from capital are required for purposes of determining these ratios, such as goodwill, intangible assets, certain deferred tax assets, other amounts in AOCI and investments in the capital instruments of unconsolidated financial institutions.

In addition to the minimum risk-based capital ratio requirements, by 2019 the Firm will be subject to the following buffers:

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

• The Common Equity Tier 1 G-SIB capital surcharge, currently at 3%; and

• Up to a 2.5% Common Equity Tier 1 CCyB, currently set by U.S. banking agencies at zero.

In 2017 and 2018, each of the buffers is 50% and 75%, respectively, of the 2019 requirement noted above. Failure to maintain the buffers would result in restrictions on the Firm’s ability to make capital distributions, including the payment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers.

For a further discussion of the Firm’s calculation of risk-based capital ratios, see Note 14 to the financial statements in the 2017 Form 10-K.

The Firm’s Regulatory Capital and Capital Ratios

At June 30, 2018 and December 31, 2017, the Firm’s risk-based capital ratios are based on the Standardized Approach rules.

Regulatory Capital

		At June 30, 2018
$ in millions	Required Ratio1		Amount		Ratio
Risk-based capital
Common Equity Tier 1 capital		8.6%	$	61,352		15.8%
Tier 1 capital		10.1%		70,017		18.1%
Total capital		12.1%		79,681		20.6%
Total RWA		N/A		387,414		N/A
Leverage-based capital
Tier 1 leverage		4.0%		70,017		8.2%
Adjusted average assets2		N/A		852,726		N/A
SLR3		5.0%		70,017		6.4%
Supplementary leverage exposure4		N/A		1,096,953		N/A
		At December 31, 2017
$ in millions	Required Ratio1		Amount		Ratio
Risk-based capital
Common Equity Tier 1 capital		7.3%	$	61,134		16.5%
Tier 1 capital		8.8%		69,938		18.9%
Total capital		10.8%		80,275		21.7%
Total RWA		N/A		369,578		N/A
Leverage-based capital
Tier 1 leverage		4.0%		69,938		8.3%
Adjusted average assets2		N/A		842,270		N/A

1. Percentages represent minimum required regulatory capital ratios—for risk-based capital the ratios are under the transitional rules. For risk- and leverage-based capital, regulatory compliance was determined based on capital ratios calculated under the transitional rules until December 31, 2017.

2. Adjusted average assets represents the denominator of the Tier 1 leverage ratio and is composed of the average daily balance of consolidated on-balance sheet assets under U.S. GAAP during the current quarter and the quarter ended December 31, 2017, respectively, adjusted for disallowed goodwill, intangible assets, certain deferred tax assets, certain investments in the capital instruments of unconsolidated financial institutions and other adjustments.

79 June 2018 Form 10-Q

Notes to Consolidated Financial Statements (Unaudited)

3. The SLR became effective as a capital standard on January 1, 2018.

4. Supplementary Leverage exposure is the sum of Adjusted average assets used in the Tier 1 leverage ratio and other adjustments, primarily (i) potential future exposure for derivative exposures, gross-up for cash collateral netting where qualifying criteria are not met, and the effective notional principal amount of sold credit protection offset by qualifying purchased credit protection; (ii) the counterparty credit risk for repo-style transactions; and (iii) the credit equivalent amount for off-balance sheet exposures.

U.S. Bank Subsidiaries’ Regulatory Capital and Capital Ratios

The OCC establishes capital requirements for our U.S. Bank Subsidiaries and evaluates their compliance with such capital requirements. Regulatory capital requirements for our U.S. Bank Subsidiaries are calculated in a similar manner to the Firm’s regulatory capital requirements, although G-SIB capital surcharge requirements do not apply to our U.S. Bank Subsidiaries.

The OCC’s regulatory capital framework includes Prompt Corrective Action (“PCA”) standards, including “well capitalized” PCA standards that are based on specified regulatory capital ratio minimums. For us to remain an FHC, our U.S. Bank Subsidiaries must remain well capitalized in accordance with the OCC’s PCA standards. In addition, failure by our U.S. Bank Subsidiaries to meet minimum capital requirements may result in certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the U.S. Bank Subsidiaries’ and the Firm’s financial statements.

At June 30, 2018 and December 31, 2017, the U.S. Bank Subsidiaries’ risk-based capital ratios are based on the Standardized Approach rules and exceeded well capitalized requirements.

MSBNA’s Regulatory Capital

		At June 30, 2018
$ in millions	Required Ratio1			Amount		Ratio
Risk-based capital
Common Equity Tier 1 capital		6.5	%	$	15,065		18.7%
Tier 1 capital		8.0	%		15,065		18.7%
Total capital		10.0	%		15,327		19.1%
Leverage-based capital
Tier 1 leverage		5.0	%		15,065		11.0%
SLR2		6.0	%		15,065		8.4%
		At December 31, 2017
$ in millions	Required Ratio1			Amount		Ratio
Risk-based capital
Common Equity Tier 1 capital		6.5	%	$	15,196		20.5%
Tier 1 capital		8.0	%		15,196		20.5%
Total capital		10.0	%		15,454		20.8%
Leverage-based capital
Tier 1 leverage		5.0	%		15,196		11.8%

MSPBNA’s Regulatory Capital
		At June 30, 2018
$ in millions	Required Ratio1			Amount		Ratio
Risk-based capital
Common Equity Tier 1 capital		6.5	%	$	6,608		24.6%
Tier 1 capital		8.0	%		6,608		24.6%
Total capital		10.0	%		6,649		24.8%
Leverage-based capital
Tier 1 leverage		5.0	%		6,608		9.8%
SLR2		6.0	%		6,608		9.4%
		At December 31, 2017
$ in millions	Required Ratio1			Amount		Ratio
Risk-based capital
Common Equity Tier 1 capital		6.5	%	$	6,215		24.4%
Tier 1 capital		8.0	%		6,215		24.4%
Total capital		10.0	%		6,258		24.6%
Leverage-based capital
Tier 1 leverage		5.0	%		6,215		9.7%

1. Ratios that are required in order to be considered well-capitalized for U.S. regulatory purposes. Regulatory compliance was determined based on capital ratios calculated under the transitional rules until December 31, 2017.

2. The SLR became effective as a capital standard on January 1, 2018.

U.S. Broker-Dealer Regulatory Capital Requirements

MS&Co. Regulatory Capital

$ in millions	At June 30, 2018		At December 31, 2017
Net capital	$	13,056	$	10,142
Excess net capital		10,661		8,018

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 SEC and the CFTC. MS&Co. has consistently operated with capital in excess of its regulatory capital requirements.

As an Alternative Net Capital broker-dealer, and in accordance with the market and credit risk standards of Appendix E of SEC Rule 15c3-1, MS&Co. is subject to minimum net capital and tentative net capital requirements. In addition, MS&Co. must notify the SEC if its tentative net capital falls below certain levels. At June 30, 2018 and December 31, 2017, MS&Co. has exceeded its net capital requirement and has tentative net capital in excess of the minimum and notification requirements.

June 2018 Form 10-Q 80

Notes to Consolidated Financial Statements (Unaudited)

MSSB LLC Regulatory Capital

$ in millions	At June 30, 2018		At December 31, 2017
Net capital	$	2,710	$	2,567
Excess net capital		2,556		2,400

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

MSIP, a London-based broker-dealer subsidiary, is subject to the capital requirements of the PRA, and MSMS, a Tokyo-based broker-dealer subsidiary, is subject to the capital requirements of the Financial Services Agency. MSIP and MSMS have consistently operated with capital in excess of their respective regulatory capital requirements.

Certain other U.S. and non-U.S. subsidiaries of the Firm are subject to various securities, commodities and banking regulations, and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. These subsidiaries have consistently operated with capital in excess of their local capital adequacy requirements.

14. Total Equity

Share Repurchases

	Three Months Ended June 30,				Six Months Ended June 30,
$ in millions	2018		2017		2018		2017
Repurchases of common stock under the Firm’s share repurchase program	$	1,250	$	500	$	2,500	$	1,250

The Firm’s 2018 Capital Plan (“Capital Plan”) includes the share repurchase of up to $4.7 billion of outstanding common stock for the period beginning July 1, 2018 through June 30, 2019. Additionally, the Capital Plan includes quarterly common stock dividends of up to $0.30 per share.

On April 18, 2018, the Firm entered into a sales plan with MUFG whereby MUFG sells shares of the Firm’s common stock to the Firm, as part of the Firm’s share repurchase program. The sales plan, which began to be executed in the current quarter, is only intended to maintain MUFG’s ownership percentage below 24.9% in order to comply with MUFG’s passivity commitments to the Board of Governors of the Federal Reserve System and will have no impact on the strategic alliance between MUFG and the Firm, including the joint ventures in Japan.

Preferred Stock

	Three Months Ended June 30,				Six Months Ended June 30,
$ in millions	2018		2017		2018		2017
Dividends declared	$	170	$	170	$	263	$	260

For a description of Series A through Series K preferred stock issuances, see Note 15 to the financial statements in the 2017 Form 10-K. 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).

Preferred Stock Outstanding

	Shares Outstanding				Carrying Value
$ in millions, except per share data	At June 30, 2018		Liquidation Preference per Share		At June 30, 2018		At December 31, 2017
Series
A		44,000	$	25,000	$	1,100	$	1,100
C1		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		1,000
Total					$	8,520	$	8,520

1. Series C is composed of the issuance of 1,160,791 shares of Series C Preferred Stock to MUFG for an aggregate purchase price of $911 million, less the redemption of 640,909 shares of Series C Preferred Stock of $503 million, which were converted to common shares of approximately $705 million.

81 June 2018 Form 10-Q

Notes to Consolidated Financial Statements (Unaudited)

Comprehensive Income (Loss)

Accumulated Other Comprehensive Income (Loss)¹

$ in millions	Foreign Currency Translation Adjustments			AFS Securities			Pension, Postretirement and Other			DVA			Total
March 31, 2018	$	(715	)	$	(1,068	)	$	(710	)	$	(913	)	$	(3,406	)
OCI during the period		(149	)		(126	)		6			605			336
June 30, 2018	$	(864	)	$	(1,194	)	$	(704	)	$	(308	)	$	(3,070	)
March 31, 2017	$	(879	)	$	(504	)	$	(474	)	$	(593	)	$	(2,450	)
OCI during the period		23			108			4			(173	)		(38	)
June 30, 2017	$	(856	)	$	(396	)	$	(470	)	$	(766	)	$	(2,488	)
December 31, 2017	$	(767	)	$	(547	)	$	(591	)	$	(1,155	)	$	(3,060	)
Cumulative adjustment for accounting changes2		(8	)		(111	)		(124	)		(194	)		(437	)
OCI during the period		(89	)		(536	)		11			1,041			427
June 30, 2018	$	(864	)	$	(1,194	)	$	(704	)	$	(308	)	$	(3,070	)
December 31, 2016	$	(986	)	$	(588	)	$	(474	)	$	(595	)	$	(2,643	)
OCI during the period		130			192			4			(171	)		155
June 30, 2017	$	(856	)	$	(396	)	$	(470	)	$	(766	)	$	(2,488	)

1. Amounts net of tax and noncontrolling interests.

2. The cumulative adjustment for accounting changes is primarily the effect of the adoption of the accounting update Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This adjustment was recorded as of January 1, 2018 to reclassify certain income tax effects related to enactment of the Tax Act from AOCI to Retained earnings, primarily related to the remeasurement of deferred tax assets and liabilities resulting from the reduction in corporate income tax rate to 21%. See Note 2 for further information.

Components of Period Changes in OCI

	Three Months Ended June 30, 2018
$ in millions	Pre-tax Gain (Loss)			Income Tax Benefit (Provision)			After-tax Gain (Loss)			Non-controlling Interests			Net
Foreign currency translation adjustments
OCI activity	$	(86	)	$	(106	)	$	(192	)	$	(43	)	$	(149	)
Reclassified to earnings		—			—			—			—			—
Net OCI	$	(86	)	$	(106	)	$	(192	)	$	(43	)	$	(149	)
Change in net unrealized gains (losses) on AFS securities
OCI activity	$	(162	)	$	39		$	(123	)	$	—		$	(123	)
Reclassified to earnings		(3	)		—			(3	)		—			(3	)
Net OCI	$	(165	)	$	39		$	(126	)	$	—		$	(126	)
Pension, postretirement and other
OCI activity	$	2		$	—		$	2		$	—		$	2
Reclassified to earnings		6			(2	)		4			—			4
Net OCI	$	8		$	(2	)	$	6		$	—		$	6
Change in net DVA
OCI activity	$	841		$	(205	)	$	636		$	34		$	602
Reclassified to earnings		3			—			3			—			3
Net OCI	$	844		$	(205	)	$	639		$	34		$	605

	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		(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
Net OCI	$	4		$	—		$	4		$	—		$	4
Change in net DVA
OCI activity	$	(285	)	$	99		$	(186	)	$	(10	)	$	(176	)
Reclassified to earnings		4			(1	)		3			—			3
Net OCI	$	(281	)	$	98		$	(183	)	$	(10	)	$	(173	)

	Six Months Ended June 30, 20181
$ in millions	Pre-tax Gain (Loss)			Income Tax Benefit (Provision)			After-tax Gain (Loss)			Non-controlling Interests		Net
Foreign currency translation adjustments
OCI activity	$	(8	)	$	(67	)	$	(75	)	$	14	$	(89	)
Reclassified to earnings		—			—			—			—		—
Net OCI	$	(8	)	$	(67	)	$	(75	)	$	14	$	(89	)
Change in net unrealized gains (losses) on AFS securities
OCI activity	$	(697	)	$	164		$	(533	)	$	—	$	(533	)
Reclassified to earnings		(3	)		—			(3	)		—		(3	)
Net OCI	$	(700	)	$	164		$	(536	)	$	—	$	(536	)
Pension, postretirement and other
OCI activity	$	2		$	—		$	2		$	—	$	2
Reclassified to earnings		12			(3	)		9			—		9
Net OCI	$	14		$	(3	)	$	11		$	—	$	11
Change in net DVA
OCI activity	$	1,421		$	(345	)	$	1,076		$	49	$	1,027
Reclassified to earnings		18			(4	)		14			—		14
Net OCI	$	1,439		$	(349	)	$	1,090		$	49	$	1,041

June 2018 Form 10-Q 82

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		(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
Net OCI	$	4		$	—		$	4		$	—		$	4
Change in net DVA
OCI activity	$	(278	)	$	98		$	(180	)	$	(3	)	$	(177	)
Reclassified to earnings		8			(2	)		6			—			6
Net OCI	$	(270	)	$	96		$	(174	)	$	(3	)	$	(171	)

1. Exclusive of 2018 cumulative adjustments related to the adoption of certain accounting updates in the current year period. Refer to the table below and Note 2 for further information.

Cumulative Adjustments to Retained Earnings Related to Adoption of Accounting Updates

$ in millions	Six Months Ended June 30, 2018
Revenue from contracts with customers	$	(32	)
Derivatives and hedging–targeted improvements to accounting for hedging activities		(99	)
Reclassification of certain tax effects from AOCI		443
Other1		(6	)
Total	$	306
$ in millions	Six Months Ended June 30, 2017
Improvements to employee share-based payment accounting2		(30	)
Intra-entity transfers of assets other than inventory		(5	)
Total	$	(35	)

1. Other includes the adoption of accounting updates related to Recognition and Measurement of Financial Assets and Financial Liabilities (other than the provision around presenting unrealized DVA in OCI which we early adopted in 2016) and Derecognition of Nonfinancial Assets. The impact of these adoptions on Retained earnings was not significant.

2. See Note 2 to the 2017 Form 10-K for further information.

15. Earnings per Common Share

Calculation of Basic and Diluted EPS

	Three Months Ended June 30,						Six Months Ended June 30,
in millions, except for per share data	2018			2017			2018			2017
Basic EPS
Income from continuing operations	$	2,469		$	1,796		$	5,175		$	3,789
Income (loss) from discontinued operations		(2	)		(5	)		(4	)		(27	)
Net income		2,467			1,791			5,171			3,762
Net income applicable to noncontrolling interests		30			34			66			75
Net income applicable to Morgan Stanley		2,437			1,757			5,105			3,687
Preferred stock dividends and other		170			170			263			260
Earnings applicable to Morgan Stanley common shareholders	$	2,267		$	1,587		$	4,842		$	3,427
Weighted average common shares outstanding		1,720			1,791			1,730			1,796
Earnings per basic common share
Income from continuing operations	$	1.32		$	0.89		$	2.80		$	1.92
Income (loss) from discontinued operations		—			—			—			(0.01	)
Earnings per basic common share	$	1.32		$	0.89		$	2.80		$	1.91
Diluted EPS
Earnings applicable to Morgan Stanley common shareholders	$	2,267		$	1,587		$	4,842		$	3,427
Weighted average common shares outstanding		1,720			1,791			1,730			1,796
Effect of dilutive securities: Stock options and RSUs1		28			39			30			40
Weighted average common shares outstanding and common stock equivalents		1,748			1,830			1,760			1,836
Earnings per diluted common share
Income from continuing operations	$	1.30		$	0.87		$	2.75		$	1.88
Income (loss) from discontinued operations		—			—			—			(0.01	)
Earnings per diluted common share	$	1.30		$	0.87		$	2.75		$	1.87
Weighted average antidilutive RSUs and stock options (excluded from the computation of diluted EPS)1		1			—			1			—

1. 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 computation.

83 June 2018 Form 10-Q

Notes to Consolidated Financial Statements (Unaudited)

16. Interest Income and Interest Expense

Interest income and Interest expense are classified in the income statements based on the nature of the instrument and related market conventions. When included as a component of the instrument’s fair value, interest is included within Trading revenues or Investments revenues. Otherwise, it is included within Interest income or Interest expense.

	Three Months Ended June 30,					Six Months Ended June 30,
$ in millions	2018		2017			2018		2017
Interest income
Investment securities	$	417	$	304		$	841	$	630
Loans		1,074		798			2,012		1,546
Securities purchased under agreements to resell and Securities borrowed1		366		29			581		10
Trading assets, net of Trading liabilities		576		491			1,116		955
Customer receivables and Other2		861		484			1,604		930
Total interest income	$	3,294	$	2,106		$	6,154	$	4,071
Interest expense
Deposits	$	273	$	14		$	432	$	25
Borrowings		1,258		1,067			2,396		2,088
Securities sold under agreements to repurchase and Securities loaned3		446		339			848		587
Customer payables and Other4		411		(65	)		597		(151	)
Total interest expense	$	2,388	$	1,355		$	4,273	$	2,549
Net interest	$	906	$	751		$	1,881	$	1,522

1. Includes fees paid on Securities borrowed.

2. Includes interest from Customer receivables and Cash and cash equivalents.

3. Includes fees received on Securities loaned.

4. 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. employees. The Firm provides certain other postretirement benefits, primarily health care and life insurance, to eligible U.S. employees.

Components of Net Periodic Benefit Expense (Income) for Pension and Other Postretirement Plans

	Three Months Ended June 30,						Six Months Ended June 30,
$ in millions	2018			2017			2018			2017
Service cost, benefits earned during the period	$	4		$	4		$	8		$	8
Interest cost on projected benefit obligation		35			38			69			75
Expected return on plan assets		(28	)		(29	)		(56	)		(58	)
Net amortization of prior service credit		—			(4	)		—			(8	)
Net amortization of actuarial loss		6			4			12			8
Net periodic benefit expense (income)	$	17		$	13		$	33		$	25

18. Income Taxes

The Firm is under continuous examination by the IRS and other tax authorities in certain countries, such as Japan and the U.K., and in states in which it has significant business operations, such as New York. The Firm has established a liability for unrecognized tax benefits, and associated interest, if applicable (“tax liabilities”), that it believes is adequate in relation to the potential for additional assessments. Once established, the Firm adjusts such tax liabilities only when new information is available or when an event occurs necessitating a change.

The Firm 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 2009-2016 and 2007-2014, respectively.

The Firm believes that the resolution of the above tax matters will not have a material effect on the annual financial statements, although a resolution could have a material impact in the income statements and effective tax rate for any period in which such resolution occurs.

Furthermore, by the end of the first quarter of 2018, the Firm reached a conclusion with the U.K. tax authorities on certain issues through tax year 2010, the resolution of which did not have a material impact on the financial statements or effective tax rate.

See Note 11 regarding the Dutch Tax Authority’s challenge, in the District Court in Amsterdam (matters styled Case number 15/3637 and Case number 15/4353), of the Firm’s entitlement to certain withholding tax credits which may impact the balance of unrecognized tax benefits.

June 2018 Form 10-Q 84

Notes to Consolidated Financial Statements (Unaudited)

It is reasonably possible that significant changes in the balance of unrecognized tax benefits occur within the next 12 months. At this time, however, it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits and the impact on the Firm’s effective tax rate over the next 12 months.

The Firm’s effective tax rate for the current quarter and current year period included recurring-type discrete tax benefits associated with employee share-based payments of $17 million and $164 million, respectively. Additionally, as a result of new information pertaining to the resolution of multi-jurisdiction tax examinations and other matters the Firm’s effective tax rate for the current quarter and current year period included intermittent net discrete tax benefits of $88 million with a corresponding reduction in the total amount of gross unrecognized tax benefits (excluding federal benefit of state items, competent authority and foreign tax credit offsets) of approximately $430 million.

19. Segment, Geographic and Revenue Information

Segment Information

For a discussion about the Firm’s business segments, see Note 21 to the financial statements in the 2017 Form 10-K.

Selected Financial Information by Business Segment

	Three Months Ended June 30, 2018
$ in millions	IS			WM		IM		I/E			Total
Investment banking1, 2	$	1,699		$	114	$	—	$	(20	)	$	1,793
Trading		3,128			135		16		14			3,293
Investments		89			3		55		—			147
Commissions and fees1		674			442		—		(77	)		1,039
Asset management1		102			2,514		610		(37	)		3,189
Other		168			74		3		(2	)		243
Total non-interest revenues3, 4		5,860			3,282		684		(122	)		9,704
Interest income		2,195			1,320		17		(238	)		3,294
Interest expense		2,341			277		10		(240	)		2,388
Net interest		(146	)		1,043		7		2			906
Net revenues	$	5,714		$	4,325	$	691	$	(120	)	$	10,610
Income from continuing operations before income taxes	$	1,812		$	1,157	$	140	$	—		$	3,109
Provision for income taxes		323			281		36		—			640
Income from continuing operations		1,489			876		104		—			2,469
Income (loss) from discontinued operations, net of income taxes		(2	)		—		—		—			(2	)
Net income		1,487			876		104		—			2,467
Net income applicable to noncontrolling interests		30			—		—		—			30
Net income applicable to Morgan Stanley	$	1,457		$	876	$	104	$	—		$	2,437

	Three Months Ended June 30, 2017
$ in millions	IS			WM		IM			I/E			Total
Investment banking	$	1,413		$	135	$	—		$	(18	)	$	1,530
Trading		2,725			207		(3	)		2			2,931
Investments		37			1		125			—			163
Commissions and fees		630			424		—			(27	)		1,027
Asset management		89			2,302		539			(28	)		2,902
Other		126			73		4			(4	)		199
Total non-interest revenues		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
	Six Months Ended June 30, 2018
$ in millions	IS			WM		IM			I/E			Total
Investment banking1, 2	$	3,212		$	254	$	—		$	(39	)	$	3,427
Trading		6,771			244		21			27			7,063
Investments		138			3		132			—			273
Commissions and fees1		1,418			940		—			(146	)		2,212
Asset management1		212			5,009		1,236			(76	)		6,381
Other		304			137		13			(4	)		450
Total non-interest revenues3, 4		12,055			6,587		1,402			(238	)		19,806
Interest income		3,999			2,600		18			(463	)		6,154
Interest expense		4,240			488		11			(466	)		4,273
Net interest		(241	)		2,112		7			3			1,881
Net revenues	$	11,814		$	8,699	$	1,409		$	(235	)	$	21,687
Income from continuing operations before income taxes	$	3,924		$	2,317	$	288		$	—		$	6,529
Provision for income taxes		772			527		55			—			1,354
Income from continuing operations		3,152			1,790		233			—			5,175
Income (loss) from discontinued operations, net of income taxes		(4	)		—		—			—			(4	)
Net income		3,148			1,790		233			—			5,171
Net income applicable to noncontrolling interests		64			—		2			—			66
Net income applicable to Morgan Stanley	$	3,084		$	1,790	$	231		$	—		$	5,105

85 June 2018 Form 10-Q

Notes to Consolidated Financial Statements (Unaudited)

	Six Months Ended June 30, 2017
$ in millions	IS			WM		IM			I/E			Total
Investment banking	$	2,830		$	280	$	—		$	(35	)	$	3,075
Trading		5,737			445		(14	)		(2	)		6,166
Investments		103			2		223			—			328
Commissions and fees		1,250			864		—			(54	)		2,060
Asset management		180			4,486		1,056			(53	)		5,669
Other		299			129		8			(8	)		428
Total non-interest revenues		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

I/E–Intersegment Eliminations

1. Approximately 85% of Investment banking revenues and substantially all of Commissions and fees and Asset management revenues in the current quarter and current year period were determined under the Revenues from Contracts with Customers accounting update.

2. Current quarter Institutional Securities Investment banking revenues are composed of $618 million of Advisory and $1,081 million of Underwriting revenues. Current year period Institutional Securities Investment banking revenues are composed of $1,192 million of Advisory and $2,020 million of Underwriting revenues.

3. The Firm enters into certain contracts which contain a current obligation to perform services in the future. Excluding contracts where billing is commensurate with the value of the services performed at each stage of the contract, contracts with variable consideration that is subject to reversal, and contracts with less than one year duration, we expect to record the following approximate annual revenues in the future: $100 million per year over the next three years; between $10 million and $50 million per year thereafter through 2035. These revenues are primarily related to certain commodities contracts with customers.

4. Includes $862 million and $1,628 million in revenue recognized in the current quarter and current year period, respectively, where some or all services were performed in prior periods. This amount is primarily composed of investment banking advisory fees, and distribution fees.

Total Assets by Business Segment

$ in millions	At June 30, 2018		At December 31, 2017
Institutional Securities	$	683,888	$	664,974
Wealth Management		186,049		182,009
Investment Management		5,938		4,750
Total1	$	875,875	$	851,733

1. Parent assets have been fully allocated to the business segments.

Additional Information – Investment Management

Net Unrealized Performance-based Fees

$ in millions	At June 30, 2018		At December 31, 2017
Net cumulative unrealized performance-based fees at risk of reversing	$	426	$	442

The Firm’s portion of net cumulative unrealized performance-based fees (for which the Firm is not obligated to pay compensation) are at risk of reversing if the fund performance falls below the stated investment management agreement benchmarks. See Note 11 for information regarding general partner guarantees, which include potential obligations to return performance fee distributions previously received.

Reduction of Fees due to Fee Waivers

	Three Months Ended June 30,				Six Months Ended June 30,
$ in millions	2018		2017		2018		2017
Fee waivers	$	16	$	23	$	34	$	45

The Firm waives a portion of its fees in the Investment Management business segment from certain registered money market funds that comply with the requirements of Rule 2a-7 of the Investment Company Act of 1940.

Geographic Information

For a discussion about the Firm’s geographic net revenues, see Note 21 to the financial statements in the 2017 Form 10-K.

June 2018 Form 10-Q 86

Notes to Consolidated Financial Statements (Unaudited)

Net Revenues by Region

	Three Months Ended June 30,				Six Months Ended June 30,
$ in millions	2018		2017		2018		2017
Americas	$	7,614	$	6,746	$	15,632	$	13,834
EMEA		1,829		1,606		3,537		3,095
Asia		1,167		1,151		2,518		2,319
Total	$	10,610	$	9,503	$	21,687	$	19,248

Additional Information—Revenues from Contracts with Customers

Change in Revenue as a Result of Application of the New
Revenue Recognition Standard
$ in millions	Three Months Ended June 30, 2018			Six Months Ended June 30, 2018
Gross presentation impact
Investment banking—
Advisory	$	29		$	44
Underwriting		57			102
Asset management		7			14
Other		15			27
Subtotal		108			187
Timing impact
Investment banking—
Advisory		15			15
Asset management		(18	)		(16	)
Other		3			5
Subtotal		—			4
Total change	$	108		$	191

As a result of adopting the accounting update Revenue from Contracts with Customers, the accounting for certain transactions has changed (see Note 2 for further details). As summarized in the previous table, the change is composed of transactions which are now presented on a gross basis within both Non-interest revenues and Non-interest expenses as well as transactions where revenues are recognized with different timing compared to the previous GAAP. For example, timing impacts shown as negative amounts in the previous table represent revenues for which recognition has been deferred to future periods under the new standard.

Receivables from Contracts with Customers

$ in millions	At         June 30,         2018		At         January 1,         2018
Customer and other receivables	$	2,462	$	2,805

Receivables from contracts with customers, which are included within Customer and other receivables in the balance sheets, arise when the Firm has both recorded revenues and has the right per the contract to bill customers.

20. Subsequent Events

The Firm has evaluated subsequent events for adjustment to or disclosure in the financial statements through the date of this report and has not identified any recordable or disclosable events not otherwise reported in these financial statements or the notes thereto.

87 June 2018 Form 10-Q

Financial Data Supplement (Unaudited) Average Balances and Interest Rates and Net Interest Income

	Three Months Ended June 30,
	2018								2017
$ in millions	Average Daily Balance		Interest			Annualized Average Rate			Average Daily Balance		Interest			Annualized Average Rate
Interest earning assets1
Investment securities2	$	79,502	$	417			2.1	%	$	74,855	$	304			1.6	%
Loans2		111,939		1,074			3.8			96,230		798			3.3
Securities purchased under agreements to resell and Securities borrowed3:
U.S.		137,413		463			1.4			129,845		140			0.4
Non-U.S.		90,114		(97	)		(0.4	)		90,200		(111	)		(0.5	)
Trading assets, net of Trading liabilities4:
U.S.		56,327		525			3.7			60,963		476			3.1
Non-U.S.		7,926		51			2.6			3,409		15			1.8
Customer receivables and Other5:
U.S.		66,954		623			3.7			65,736		344			2.1
Non-U.S.		33,722		238			2.8			28,012		140			2.0
Total	$	583,897	$	3,294			2.3	%	$	549,250	$	2,106			1.5	%
Interest bearing liabilities
Deposits2	$	165,251	$	273			0.7	%	$	146,982	$	14			—	%
Borrowings2, 6		192,122		1,258			2.6			180,918		1,067			2.4
Securities sold under agreements to repurchase and Securities loaned7:
U.S.		24,868		321			5.2			35,066		245			2.8
Non-U.S.		39,536		125			1.3			36,974		94			1.0
Customer payables and Other8:
U.S.		121,968		208			0.7			130,814		(98	)		(0.3	)
Non-U.S.		72,915		203			1.1			64,135		33			0.2
Total	$	616,660	$	2,388			1.6	%	$	594,889	$	1,355			0.9	%
Net interest income and net interest rate spread			$	906			0.7	%			$	751			0.6	%

June 2018 Form 10-Q 88

Financial Data Supplement (Unaudited) Average Balances and Interest Rates and Net Interest Income

	Six Months Ended June 30,
	2018								2017
$ in millions	Average Daily Balance		Interest			Annualized Average Rate			Average Daily Balance		Interest			Annualized Average Rate
Interest earning assets1
Investment securities2	$	80,016	$	841			2.1	%	$	77,758	$	630			1.6	%
Loans2		108,193		2,012			3.8			95,799		1,546			3.3
Securities purchased under agreements to resell and Securities borrowed3:
U.S.		130,611		772			1.2			128,775		216			0.3
Non-U.S.		89,074		(191	)		(0.4	)		92,354		(206	)		(0.4	)
Trading assets, net of Trading liabilities4:
U.S.		55,089		1,012			3.7			58,390		922			3.2
Non-U.S.		6,051		104			3.5			2,630		33			2.5
Customer receivables and Other5:
U.S.		69,003		1,165			3.4			66,143		681			2.1
Non-U.S.		34,126		439			2.6			27,622		249			1.8
Total	$	572,163	$	6,154			2.2	%	$	549,471	$	4,071			1.5	%
Interest bearing liabilities
Deposits2	$	162,607	$	432			0.5	%	$	150,309	$	25			—	%
Borrowings2, 6		193,323		2,396			2.5			175,937		2,088			2.4
Securities sold under agreements to repurchase and Securities loaned7:
U.S.		24,948		607			4.9			35,199		417			2.4
Non-U.S.		40,091		241			1.2			37,654		170			0.9
Customer payables and Other8:
U.S.		121,798		257			0.4			130,836		(183	)		(0.3	)
Non-U.S.		71,210		340			1.0			60,160		32			0.1
Total	$	613,977	$	4,273			1.4	%	$	590,095	$	2,549			0.9	%
Net interest income and net interest rate spread			$	1,881			0.8	%			$	1,522			0.6	%

1. Prior period amounts have been revised 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 and cash equivalents.

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 Notes 3 and 11 to the financial statements in the 2017 Form 10-K).

7. Includes fees received on Securities loaned. The annualized average rate was calculated using (a) interest expense incurred on all securities sold under agreements to repurchase and securities loaned transactions, whether or not such transactions were reported in the balance sheets and (b) net average on-balance sheet balances, which exclude certain securities-for-securities transactions.

8. Includes fees received from prime brokerage customers for stock loan transactions incurred to cover customers’ short positions.

89 June 2018 Form 10-Q

Financial Data Supplement (Unaudited) Effect of Volume and Rate Changes on Net Interest Income

	Current Quarter versus Prior Year Quarter								Current Year Period versus Prior Year Period
	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	$	19		$	94		$	113	$	18		$	193	$	211
Loans		130			146			276		201			265		466
Securities purchased under agreements to resell and Securities borrowed:
U.S.		8			315			323		8			548		556
Non-U.S.		—			14			14		10			5		15
Trading assets, net of Trading liabilities:
U.S.		(36	)		85			49		(44	)		134		90
Non-U.S.		20			16			36		30			41		71
Customer receivables and Other:
U.S.		6			273			279		18			466		484
Non-U.S.		29			69			98		70			120		190
Change in interest income	$	176		$	1,012		$	1,188	$	311		$	1,772	$	2,083
Interest bearing liabilities
Deposits	$	2		$	257		$	259	$	2		$	405	$	407
Borrowings		66			125			191		207			101		308
Securities sold under agreements to repurchase and Securities loaned:
U.S.		(71	)		147			76		(116	)		306		190
Non-U.S.		7			24			31		9			62		71
Customer payables and Other:
U.S.		7			299			306		7			433		440
Non-U.S.		5			165			170		5			303		308
Change in interest expense	$	16		$	1,017		$	1,033	$	114		$	1,610	$	1,724
Change in net interest income	$	160		$	(5	)	$	155	$	197		$	162	$	359

June 2018 Form 10-Q 90

Glossary of Common Acronyms

2017 Form 10-K—Annual Report on Form 10-K for year ended December 31, 2017 filed with the SEC

ABS—Asset-backed securities

AFS—Available-for-sale

AML—Anti-money laundering

AOCI—Accumulated other comprehensive income (loss)

AUM—Assets under management or supervision

BHC—Bank holding company

bps—Basis points; one basis point equals 1/100th of 1%

CCAR—Comprehensive Capital Analysis and Review

CCyB—Countercyclical capital buffer

CDO—Collateralized debt obligations, including collateralized loan obligations

CDS—Credit default swaps

CECL—Current expected credit loss

CFTC—U.S. Commodity Futures Trading Commission

CLN—Credit-linked notes

CLO—Collateralized loan obligations

CMBS—Commercial mortgage-backed securities

CMO—Collateralized mortgage obligations

CVA—Credit valuation adjustment

DVA—Debt valuation adjustment

EBITDA—Earnings before interest, taxes, depreciation and amortization

ELN—Equity-linked notes

EMEA—Europe, Middle East and Africa

EPS—Earnings per common share

ERISA—Employee Retirement Income Security Act of 1974

E.U.—European Union

FDIC—Federal Deposit Insurance Corporation

FFELP—Family Education Loan Program

FVA—Funding valuation adjustment

GLR—Global liquidity reserve

G-SIB—Global systemically important banks

HQLA—High-quality liquid assets

HTM—Held-to-maturity

I/E—Intersegment eliminations

IM—Investment Management

IRS—Internal Revenue Service

IS—Institutional Securities

LCR—Liquidity coverage ratio, as adopted by the U.S. banking agencies

LIBOR—London Interbank Offered Rate

M&A—Merger, acquisition and restructuring transaction

MSBNA—Morgan Stanley Bank, N.A.

MS&Co.—Morgan Stanley & Co. LLC

MSIP—Morgan Stanley & Co. International plc

MSMS—Morgan Stanley MUFG Securities Co., Ltd.

MSPBNA—Morgan Stanley Private Bank, National Association

MSSB LLC—Morgan Stanley Smith Barney LLC

MUFG—Mitsubishi UFJ Financial Group, Inc.

MUMSS—Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.

MWh—Megawatt hour

N/A—Not Applicable

91 June 2018 Form 10-Q

Glossary of Common Acronyms

NAV—Net asset value

N/M—Not Meaningful

Non-GAAP—Non-generally accepted accounting principles

NSFR—Net stable funding ratio, as proposed by the U.S. banking agencies

OCC—Office of the Comptroller of the Currency

OCI—Other comprehensive income (loss)

OTC—Over-the-counter

PRA—Prudential Regulation Authority

RMBS—Residential mortgage-backed securities

ROE—Return on average common equity

ROTCE—Return on average tangible common equity

RSU—Restricted stock units

RWA—Risk-weighted assets

SEC—U.S. Securities and Exchange Commission

SLR—Supplementary leverage ratio

S&P—Standard & Poor’s

SPE—Special purpose entity

SPOE—Single point of entry

TDR—Troubled debt restructuring

TLAC—Total loss-absorbing capacity

U.K.—United Kingdom

UPB—Unpaid principal balance

U.S.—United States of America

U.S. DOL—U.S. Department of Labor

U.S. GAAP—Accounting principles generally accepted in the United States of America

VaR—Value-at-Risk

VAT—Value-added tax

VIE—Variable interest entities

WACC—Implied weighted average cost of capital

WM—Wealth Management

June 2018 Form 10-Q 92

Other Information

Legal Proceedings

The following new matters and developments have occurred since previously reporting certain matters in the Firm’s 2017 Form 10-K and the Firm’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018 (the “First Quarter Form 10-Q”). See also the disclosures set forth under “Legal Proceedings” in the 2017 Form 10-K and Part II, Item 1 of the First Quarter Form 10-Q.

Residential Mortgage and Credit Crisis Related Matters

On June 27, 2018, the Firm in China Development Industrial Bank (“CDIB”) v. Morgan Stanley & Co. Incorporated et al. filed a motion for summary judgment and spoliation sanctions against CDIB.

On June 8, 2018, the parties in Wilmington Trust Company v. Morgan Stanley Mortgage Capital Holdings LLC et al. reached an agreement in principle to settle the litigation.

On June 26, 2018, the parties in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. entered into an agreement to settle the litigation.

European Matters

On May 17, 2018, the hearing for the parties’ final submissions was held in the case styled Banco Popolare Societá Cooperativa v. Morgan Stanley & Co. International plc & others.

On June 6, 2018, the Dutch Tax Authority filed an appeal against the decision issued by the District Court in Amsterdam in matters styled Case number 15/3637 and Case number 15/4353.

On June 8, 2018, the City Court of Copenhagen, Denmark ordered that the matters styled Case number BS 99-6998/2017 and Case number B-2073-16 be heard together before the High Court of Eastern Denmark. On June 29, 2018, the Firm filed its defense to the matter styled Case number B-2073-16.

On June 15, 2018, the Court of Accounts for the Republic of Italy in the matter styled Case number 2012/00406/MNV issued a decision declining jurisdiction and dismissing the claim against the Firm. On July 24, 2018, the Firm was served with an appeal by the public prosecutor.

Currency Related Matters

On June 13, 2018, the Firm entered into an agreement to settle a proceeding before Brazil’s Council for Economic Defense related to alleged anticompetitive activity in the foreign exchange market related to the Brazilian Real.

Other Litigation

On June 22, 2018, the parties in Genesee County Employees’ Retirement System v. Bank of America Corporation et al. entered into an agreement to settle the litigation. The court granted preliminary approval of the settlement on June 26, 2018.

93 June 2018 Form 10-Q

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 current quarter ended June 30, 2018.

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 Programs1		Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
Month #1 (April 1, 2018—April 30, 2018)
Share Repurchase Program2		3,291,200	$	53.42		3,291,200	$	1,074
Employee transactions3		991,956	$	53.04		—		—
Month #2 (May 1, 2018—May 31, 2018)
Share Repurchase Program2		8,301,300	$	53.32		8,301,300	$	632
Employee transactions3		33,887	$	51.73		—		—
Month #3 (June 1, 2018—June 30, 2018)
Share Repurchase Program2		12,246,810	$	51.57		12,246,810	$	—
Employee transactions3		17,641	$	50.60		—		—
Quarter ended at June 30, 2018
Share Repurchase Program2		23,839,310	$	52.43		23,839,310	$	—
Employee transactions3		1,043,484	$	52.96		—		—

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. On April 18, 2018, the Firm entered into a sales plan with Mitsubishi UFJ Financial Group, Inc. (“MUFG”) and Morgan Stanley & Co. LLC (“MS&Co.”) whereby MUFG will sell shares of the Firm’s common stock to the Firm, through its agent MS&Co., as part of the Company’s share repurchase program (as defined below). The sales plan is only intended to maintain MUFG’s ownership percentage below 24.9% in order to comply with MUFG’s passivity commitments to the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and will have no impact on the strategic alliance between MUFG and the Firm, including the joint venture in Japan.

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, 2018, the Federal Reserve published summary results of CCAR and the Firm received a conditional non-objection to its 2018 Capital Plan, where the only condition was that the Firm’s capital distributions not exceed the greater of the actual distributions it made over the previous four calendar quarters or the annualized average of actual distributions over the previous eight calendar quarters. As a result, the Firm’s 2018 Capital Plan includes a share repurchase of up to $4.7 billion of its outstanding common stock during the period beginning July 1, 2018 through June 30, 2019. During the quarter ended June 30, 2018, the Firm repurchased approximately $1.25 billion of the Firm’s outstanding common stock as part of its Share Repurchase Program. For further information, see “Liquidity and Capital Resources—Capital Management.”

3. Includes shares acquired by the Firm in satisfaction of the tax withholding obligations on stock-based awards granted under the Firm’s stock-based compensation plans.

June 2018 Form 10-Q 94

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.

Exhibits

An exhibit index has been filed as part of this Report on page E-1.

95 June 2018 Form 10-Q

Exhibit Index

Morgan Stanley

Quarter Ended June 30, 2018

Exhibit No.	Description
12	Statement Re: Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (unaudited).
15	Letter of awareness from Deloitte & Touche LLP, dated August  3, 2018, 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 (unaudited): (i) the Consolidated Income Statements—Three Months and Six Months Ended June 30, 2018 and 2017, (ii) the Consolidated Comprehensive Income Statements—Three Months and Six Months Ended June 30, 2018 and 2017, (iii) the Consolidated Balance Sheets—at June 30, 2018 and December 31, 2017, (iv) the Consolidated Statements of Changes in Total Equity—Six Months Ended June 30, 2018 and 2017, (v) the Consolidated Cash Flow Statements—Six Months Ended June 30, 2018 and 2017, and (vi) Notes to Consolidated Financial Statements.

E-1

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/ JONATHAN PRUZAN

Jonathan Pruzan

Executive Vice President and

Chief Financial Officer

By:                        /s/  PAUL C. WIRTH

Paul C. Wirth

Deputy Chief Financial Officer

Date: August 3, 2018

S-1