united states securities and exchange commission form 10-k · 2020-06-20 · united states...

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-KAnnual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the year ended December 31, 2013Commission File Number 1-11758

(Exact name of Registrant as specified in its charter)

Delaware(State or other jurisdiction ofincorporation or organization)

1585 BroadwayNew 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)

Title of each className of exchange onwhich registered

Securities registered pursuant to Section 12(b) of the Act:Common Stock, $0.01 par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New York Stock ExchangeDepositary Shares, each representing 1/1,000th interest in a share of Floating Rate Non-Cumulative Preferred Stock,

Series A, $0.01 par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New York Stock ExchangeDepositary Shares, each representing 1/1,000th interest in a share of Fixed-to-Floating Rate Non-Cumulative Preferred

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

Stock, Series F, $0.01 par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New York Stock Exchange61/4% Capital Securities of Morgan Stanley Capital Trust III (and Registrant’s guaranty with respect thereto) . . . . . . . . . New York Stock Exchange61/4% Capital Securities of Morgan Stanley Capital Trust IV (and Registrant’s guaranty with respect thereto) . . . . . . . . New York Stock Exchange53/4% Capital Securities of Morgan Stanley Capital Trust V (and Registrant’s guaranty with respect thereto) . . . . . . . . . New York Stock Exchange6.60% Capital Securities of Morgan Stanley Capital Trust VI (and Registrant’s guaranty with respect thereto) . . . . . . . . New York Stock Exchange6.60% Capital Securities of Morgan Stanley Capital Trust VII (and Registrant’s guaranty with respect thereto) . . . . . . . New York Stock Exchange6.45% Capital Securities of Morgan Stanley Capital Trust VIII (and Registrant’s guaranty with respect thereto) . . . . . . New York Stock ExchangeMarket Vectors ETNs due March 31, 2020 (2 issuances); Market Vectors ETNs due April 30, 2020 (2 issuances) . . . . . NYSE Arca, Inc.Morgan Stanley Cushing® MLP High Income Index ETNs due March 21, 2031 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NYSE Arca, Inc.Morgan Stanley S&P 500 Crude Oil Linked ETNs due July 1, 2031 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NYSE Arca, Inc.

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

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

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

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

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

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

Large Accelerated Filer È

Non-Accelerated Filer ‘

(Do not check if a smaller reporting company)

Accelerated Filer ‘

Smaller reporting company ‘

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

As of June 28, 2013, the aggregate market value of the common stock of Registrant held by non-affiliates of Registrant was approximately$45,831,657,254. This calculation does not reflect a determination that persons are affiliates for any other purposes.

As of January 31, 2014, there were 1,975,673,438 shares of Registrant’s common stock, $0.01 par value, outstanding.

Documents Incorporated by Reference: Portions of Registrant’s definitive proxy statement for its 2014 annual meeting of shareholders areincorporated by reference in Part III of this Form 10-K.

ANNUAL REPORT ON FORM 10-Kfor the year ended December 31, 2013

Table of Contents Page

Part IItem 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Business Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Institutional Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Wealth Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Investment Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Supervision and Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Executive Officers of Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Part IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . 52

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54Business Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63Accounting Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85Critical Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . 136Consolidated Statements of Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140Consolidated Statements of Changes in Total Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

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Table of Contents Page

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142Financial Data Supplement (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . 293

Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293

Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295

Part IIIItem 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296

Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related StockholderMatters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297

Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . 298

Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298

Part IVItem 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1

Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1

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Forward-Looking Statements

We have included in or incorporated by reference into this report, and from time to time may make in our publicfilings, press releases or other public statements, certain statements, including (without limitation) those under“Legal Proceedings” in Part I, Item 3, “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in Part II, Item 7 and “Quantitative and Qualitative Disclosures about Market Risk” inPart II, Item 7A, that may constitute “forward-looking statements” within the meaning of the safe harborprovisions of the Private Securities Litigation Reform Act of 1995. In addition, our management may makeforward-looking statements to analysts, investors, representatives of the media and others. These forward-lookingstatements are not historical facts and represent only our beliefs regarding future events, many of which, by theirnature, are inherently uncertain and beyond our control.

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

• the effect of economic and political conditions and geopolitical events;

• the effect of market conditions, particularly in the global equity, fixed income, credit and commoditiesmarkets, including corporate and mortgage (commercial and residential) lending and commercial realestate markets;

• the impact of current, pending and future legislation (including the Dodd-Frank Wall Street Reform andConsumer Protection Act (the “Dodd-Frank Act”)), regulation (including capital, leverage and liquidityrequirements), policies (including fiscal and monetary) and legal and regulatory actions in the UnitedStates (“U.S.”) and worldwide;

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

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

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

• the performance of our acquisitions, divestitures, joint ventures, strategic alliances or other strategicarrangements;

• our reputation;

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

• the actions and initiatives of current and potential competitors as well as governments, regulators andself-regulatory organizations;

• the effectiveness of our risk management policies;

• technological changes and risks, including cybersecurity risks; and

• other risks and uncertainties detailed under “Business—Competition” and “Business—Supervision andRegulation” in Part I, Item 1, “Risk Factors” in Part I, Item 1A and elsewhere throughout this report.

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

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Part I

Item 1. Business.

Overview.

Morgan Stanley is a global financial services firm that, through its subsidiaries and affiliates, provides itsproducts and services to a large and diversified group of clients and customers, including corporations,governments, financial institutions and individuals. Morgan Stanley was originally incorporated under the lawsof the State of Delaware in 1981, and its predecessor companies date back to 1924. The Company is a financialholding company regulated by the Board of Governors of the Federal Reserve System (the “Federal Reserve”)under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The Company conducts itsbusiness from its headquarters in and around New York City, its regional offices and branches throughout theU.S. and its principal offices in London, Tokyo, Hong Kong and other world financial centers. At December 31,2013, the Company had 55,794 employees worldwide. Unless the context otherwise requires, the terms “MorganStanley,” the “Company,” “we,” “us” and “our” mean Morgan Stanley together with its consolidatedsubsidiaries.

Financial information concerning the Company, its business segments and geographic regions for each of the12 months ended December 31, 2013 (“2013”), December 31, 2012 (“2012”) and December 31, 2011 (“2011”) isincluded in the consolidated financial statements and the notes thereto in “Financial Statements andSupplementary Data” in Part II, Item 8.

Available Information.

The Company files annual, quarterly and current reports, proxy statements and other information with theSecurities and Exchange Commission (the “SEC”). You may read and copy any document the Company fileswith the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Please call theSEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site thatcontains annual, quarterly and current reports, proxy and information statements and other information thatissuers (including the Company) file electronically with the SEC. The Company’s electronic SEC filings areavailable to the public at the SEC’s internet site, www.sec.gov.

The Company’s internet site is www.morganstanley.com. You can access the Company’s Investor Relationswebpage at www.morganstanley.com/about/ir. The Company makes available free of charge, on or through itsInvestor Relations webpage, its proxy statements, Annual Reports on Form 10-K, Quarterly Reports onForm 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after suchmaterial is electronically filed with, or furnished to, the SEC. The Company also makes available, through itsInvestor Relations webpage, via a link to the SEC’s internet site, statements of beneficial ownership of theCompany’s equity securities filed by its directors, officers, 10% or greater shareholders and others underSection 16 of the Exchange Act.

You can access information about the Company’s corporate governance atwww.morganstanley.com/about/company/governance. The Company’s Corporate Governance webpage includesthe Company’s Amended and Restated Certificate of Incorporation; Amended and Restated Bylaws; charters forits Audit Committee; Compensation, Management Development and Succession Committee; Nominating andGovernance Committee; Operations and Technology Committee; and Risk Committee; Corporate GovernancePolicies; Policy Regarding Communication with the Board of Directors; Policy Regarding Director CandidatesRecommended by Shareholders; Policy Regarding Corporate Political Activities; Policy Regarding ShareholderRights Plan; Code of Ethics and Business Conduct; Code of Conduct; and Integrity Hotline information.

Morgan Stanley’s Code of Ethics and Business Conduct applies to all directors, officers and employees,including its Chief Executive Officer, Chief Financial Officer and Deputy Chief Financial Officer. The Company

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will post any amendments to the Code of Ethics and Business Conduct and any waivers that are required to bedisclosed by the rules of either the SEC or the New York Stock Exchange LLC (“NYSE”) on its internet site.You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, 1585Broadway, New York, NY 10036 (212-761-4000). The information on the Company’s internet site is notincorporated by reference into this report.

Business Segments.

The Company is a global financial services firm that maintains significant market positions in each of itsbusiness segments—Institutional Securities, Wealth Management and Investment Management.

Institutional Securities.

The Company provides financial advisory and capital-raising services to a diverse group of corporate and otherinstitutional clients globally, primarily through wholly owned subsidiaries that include Morgan Stanley & Co.LLC (“MS&Co.”), Morgan Stanley & Co. International plc and Morgan Stanley Asia Limited, and certain jointventure entities that include Morgan Stanley MUFG Securities Co., Ltd. (“MSMS”) and Mitsubishi UFJ MorganStanley Securities Co., Ltd. (“MUMSS”). The Company, primarily through these entities, also conducts sales andtrading activities worldwide, as principal and agent, and provides related financing services on behalf ofinstitutional investors.

Investment Banking and Corporate Lending Activities.

Capital Raising. The Company manages and participates in public offerings and private placements of debt,equity and other securities worldwide. The Company is a leading underwriter of common stock, preferred stockand other equity-related securities, including convertible securities and American Depositary Receipts (“ADRs”).The Company is also a leading underwriter of fixed income securities, including investment grade debt, non-investment grade instruments, mortgage-related and other asset-backed securities, tax-exempt securities andcommercial paper and other short-term securities.

Financial Advisory Services. The Company provides corporate and other institutional clients globally withadvisory services on key strategic matters, such as mergers and acquisitions, divestitures, joint ventures,corporate restructurings, recapitalizations, spin-offs, exchange offers and leveraged buyouts and takeoverdefenses as well as shareholder relations. The Company also provides advice and services concerning rightsofferings, dividend policy, valuations, foreign exchange exposure, financial risk management strategies andfinancial planning. In addition, the Company furnishes advice and services regarding project financings andprovides advisory services in connection with the purchase, sale, leasing and financing of real estate.

Corporate Lending. The Company provides loans or lending commitments, including bridge financing, toselect corporate clients through its subsidiaries, including Morgan Stanley Bank, N.A (“MSBNA”). These loansand lending commitments have varying terms; may be senior or subordinated; may be secured or unsecured; aregenerally contingent upon representations, warranties and contractual conditions applicable to the borrower; andmay be syndicated, traded or hedged by the Company. The borrowers may be rated investment grade or non-investment grade.

Sales and Trading Activities.

The Company conducts sales, trading, financing and market-making activities on securities, swaps and futures,both on exchanges and in over-the-counter (“OTC”), markets around the world. The Company’s InstitutionalSecurities sales and trading activities comprise Institutional Equity; Fixed Income and Commodities; Research;and Investments.

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Institutional Equity. The Company acts as agent and principal (including as a market-maker) in executingtransactions globally in cash equity and equity-related products, including common stock, ADRs, globaldepositary receipts and exchange-traded funds.

The Company acts as agent and principal (including as a market-maker) in executing transactions globally inequity derivatives and equity-linked or related products, including options, equity swaps, warrants, structurednotes and futures on individual securities, indices and baskets of securities and other equity-related products. TheCompany offers prime brokerage services to clients, including consolidated clearance, settlement, custody,financing and portfolio reporting. In addition, the Company provides wealth management services to ultra-highnet worth and high net worth clients in select regions outside the U.S.

Fixed Income and Commodities. The Company trades, invests and makes markets in fixed income securitiesand related products globally, including, among other products, investment and non-investment grade corporatedebt; distressed debt; bank loans; U.S. and other sovereign securities; emerging market bonds and loans;convertible bonds; collateralized debt obligations; credit, currency, interest rate and other fixed income-linkednotes; securities issued by structured investment vehicles; mortgage-related and other asset-backed securities andreal estate-loan products; municipal securities; preferred stock and commercial paper; and money-market andother short-term securities. The Company is a primary dealer of U.S. federal government securities and amember of the selling groups that distribute various U.S. agency and other debt securities. The Company is also aprimary dealer or market-maker of government securities in numerous European, Asian and emerging marketcountries, as well as Canada.

The Company trades, invests and makes markets globally in listed swaps and futures and OTC cleared anduncleared swaps, forwards, options and other derivatives referencing, among other things, interest rates,currencies, investment grade and non-investment grade corporate credits, loans, bonds, U.S. and other sovereignsecurities, emerging market bonds and loans, credit indexes, asset-backed security indexes, property indexes,mortgage-related and other asset-backed securities and real estate loan products.

The Company trades, invests and makes markets in major foreign currencies, such as the British pound, Canadiandollar, euro, Japanese yen and Swiss franc, as well as in emerging markets currencies. The Company trades thesecurrencies on a principal basis in the spot, forward, option and futures markets.

Through the use of repurchase and reverse repurchase agreements, the Company acts as an intermediary betweenborrowers and lenders of short-term funds and provides funding for various inventory positions. The Companyalso provides financing to customers for commercial and residential real estate loan products and othersecuritizable asset classes, and distributes such securitized assets to investors. In addition, the Company engagesin principal securities lending with clients, institutional lenders and other broker-dealers.

The Company advises on investment and liability strategies and assists corporations in their debt repurchases andplanning. The Company structures debt securities, derivatives and other instruments with risk/return factorsdesigned to suit client objectives, including using repackaged asset and other structured vehicles through whichclients can restructure asset portfolios to provide liquidity or reconfigure risk profiles.

The Company trades, invests and makes markets in the spot, forward, OTC cleared and uncleared swaps, optionsand futures markets in several commodities, including metals (base and precious), agricultural products, crudeoil, oil products, natural gas, electric power, emission credits, coal, freight, liquefied natural gas and relatedproducts and indices. The Company offers counterparties hedging programs relating to production, consumption,reserve/inventory management and structured transactions, including energy-contract securitizations andmonetization. The Company is an electricity power marketer in the U.S. and owns electricity-generating facilitiesin the U.S.

The Company owns TransMontaigne Inc. and its subsidiaries, a group of companies operating in the refinedpetroleum products marketing and distribution business, and owns a minority interest in Heidmar Holdings LLC,

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which owns a group of companies that provide international marine transportation and U.S. marine logisticsservices. On December 20, 2013, the Company and a subsidiary of Rosneft Oil Company (“Rosneft”) enteredinto a Purchase Agreement pursuant to which the Company will sell the global oil merchanting unit of itscommodities division to Rosneft. The transaction includes the sale of the Company’s minority interest inHeidmar Holdings LLC. The transaction is subject to regulatory approvals and other customary conditions and isexpected to close in the second half of 2014. Also on December 20, 2013, the Company announced it isexploring strategic options for its stake in TransMontaigne Inc. and its subsidiaries.

Research. The Company’s research department (“Research”) coordinates globally across all of the Company’sbusinesses and consists of economists, strategists and industry analysts who engage in equity and fixed incomeresearch activities and produce reports and studies on the U.S. and global economy, financial markets, portfoliostrategy, technical market analyses, individual companies and industry developments. Research examinesworldwide trends covering numerous industries and individual companies, the majority of which are locatedoutside the U.S.; provides analysis and forecasts relating to economic and monetary developments that affectmatters such as interest rates, foreign currencies, securities, derivatives and economic trends; and providesanalytical support and publishes reports on asset-backed securities and the markets in which such securities aretraded and data are disseminated to investors through third-party distributors, proprietary internet sites such asClient Linksm and Matrixsm, and the Company’s global representatives.

Investments. The Company from time to time makes investments that represent business facilitation or otherinvesting activities. Such investments are typically strategic investments undertaken by the Company to facilitatecore business activities. From time to time, the Company may also make investments and capital commitments topublic and private companies, funds and other entities.

The Company sponsors and manages investment vehicles and separate accounts for clients seeking exposure toprivate equity, infrastructure, mezzanine lending and real estate-related and other alternative investments. TheCompany may also invest in and provide capital to such investment vehicles. See also “Investment Management”herein.

Operations and Information Technology.

The Company’s Operations and Information Technology departments provide the process and technologyplatform required to support Institutional Securities sales and trading activity, including post-execution tradeprocessing and related internal controls over activity from trade entry through settlement and custody, such asasset servicing. This support is provided for listed and OTC transactions in commodities, equity and fixedincome securities, including both primary and secondary trading, as well as listed, OTC and structuredderivatives in markets around the world. This activity is undertaken through the Company’s own facilities,through membership in various clearing and settlement organizations, and through agreements with unaffiliatedthird parties.

Wealth Management.

The Company’s Wealth Management business segment provides comprehensive financial services to clientsthrough a network of more than 16,700 global representatives in 649 locations at year-end. As of December 31,2013, Wealth Management had $1,909 billion in client assets.

Clients.

Wealth Management professionals serve individual investors and small-to-medium sized businesses andinstitutions with an emphasis on ultra-high net worth, high net worth and affluent investors. Wealth Managementrepresentatives are located in branches across the U.S. and provide solutions designed to accommodate theindividual investment objectives, risk tolerance and liquidity needs of investors residing in and outside the U.S.Call centers are available to meet the needs of emerging affluent clients.

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Products and Services.

Wealth Management provides clients with a comprehensive array of financial solutions, including products andservices from the Company and third-party providers, such as other financial institutions, insurance companiesand mutual fund families. Wealth Management provides brokerage and investment advisory services coveringvarious types of investments, including equities, options, futures, foreign currencies, precious metals, fixedincome securities, mutual funds, structured products, alternative investments, unit investment trusts, managedfutures, separately managed accounts and mutual fund asset allocation programs. Wealth Management alsoengages in fixed income principal trading, which primarily facilitates clients’ trading or investments in suchsecurities. In addition, Wealth Management offers education savings programs, financial and wealth planningservices, and annuity and other insurance products.

In addition, Wealth Management offers its clients access to several cash management services through variousbanks and other third parties, including deposits, debit cards, electronic bill payments and check writing, as wellas lending products through affiliates such as MSBNA and Morgan Stanley Private Bank, National Association(“MSPNA” and, together with MSBNA, the “Subsidiary Banks”), including securities-based lending, mortgageloans and home equity lines of credit. Wealth Management also offers access to trust and fiduciary services,offers access to cash management and commercial credit solutions to qualified small- and medium-sizedbusinesses in the U.S., and provides individual and corporate retirement solutions, including individualretirement accounts and 401(k) plans and U.S. and global stock plan services to corporate executives andbusinesses.

Wealth Management provides clients a variety of ways to establish a relationship and conduct business, includingbrokerage accounts with transaction-based pricing and investment advisory accounts with asset-based feepricing.


The Operations and Information Technology departments provide the process and technology platform to supportthe Wealth Management business segment, including core securities processing, capital markets operations,product services, and alternative investments, margin, payments and related internal controls over activity fromtrade entry through settlement and custody. This activity is undertaken through the Company’s own facilities,through membership in various clearing and settlement organizations, and through agreements with affiliates andunaffiliated third parties.

Investment Management.

The Company’s Investment Management business segment, consisting of Traditional Asset Management,Merchant Banking and Real Estate Investing activities, is one of the largest global investment managementorganizations of any full-service financial services firm and offers clients a broad array of equity, fixed incomeand alternative investments and merchant banking strategies. Portfolio managers located in the U.S., Europe andAsia manage investment products ranging from money market funds to equity and fixed income strategies,alternative investment and merchant banking products in developed and emerging markets across geographiesand market cap ranges.

Institutional Investors.

The Company provides investment management strategies and products to institutional investors worldwide,including corporations, pension plans, endowments, foundations, sovereign wealth funds, insurance companiesand banks through a broad range of pooled vehicles and separate accounts. Additionally, the Company providessub-advisory services to various unaffiliated financial institutions and intermediaries. A Global Sales and ClientService team is engaged in business development and relationship management for consultants to help serveinstitutional clients.

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Intermediary Clients and Individual Investors.

The Company offers open-end and alternative investment funds and separately managed accounts to individualinvestors through affiliated and unaffiliated broker-dealers, banks, insurance companies, financial planners andother intermediaries. Closed-end funds managed by the Company are available to individual investors throughaffiliated and unaffiliated broker-dealers. The Company also distributes mutual funds through numerousretirement plan platforms. Internationally, the Company distributes traditional investment products to individualsoutside the U.S. through non-proprietary distributors and distributes alternative investment products throughaffiliated broker-dealers and banks.

Merchant Banking and Real Estate Investing.

The Company offers a range of alternative investment, real estate investing and merchant banking products forinstitutional investors and high net worth individuals. The Company’s alternative investments platform includesfunds of hedge funds, funds of private equity and real estate funds and portable alpha strategies. The Company’salternative investments platform also includes minority stakes in Lansdowne Partners and Avenue Capital Group.The Company’s real estate and merchant banking businesses include its real estate investing business, privateequity funds, corporate mezzanine debt investing group and infrastructure investing group. The Companytypically acts as general partner of, and investment adviser to, its alternative investment, real estate and merchantbanking funds and typically commits to invest a minority of the capital of such funds with subscribing investorscontributing the majority.


The Company’s Operations and Information Technology departments provide or oversee the process andtechnology platform required to support its Investment Management business segment, including transfer agency,mutual fund accounting and administration, transaction processing and certain fiduciary services on behalf ofinstitutional, intermediary and high net worth clients. This activity is undertaken through the Company’s ownfacilities, through membership in various clearing and settlement organizations, and through agreements withunaffiliated third parties.

Competition.All aspects of the Company’s businesses are highly competitive, and the Company expects them to remain so.The Company competes in the U.S. and globally for clients, market share and human talent in all aspects of itsbusiness segments. The Company’s competitive position depends on its reputation and the quality andconsistency of its long-term investment performance. The Company’s ability to sustain or improve itscompetitive position also depends substantially on its ability to continue to attract and retain highly qualifiedemployees while managing compensation and other costs. The Company competes with commercial banks,brokerage firms, insurance companies, electronic trading and clearing platforms, financial data repositories,sponsors of mutual funds, hedge funds, energy companies and other companies offering financial or ancillaryservices in the U.S., globally and through the internet. Over time, certain sectors of the financial services industryhave become more concentrated, as institutions involved in a broad range of financial services have leftbusinesses, been acquired by or merged into other firms or have declared bankruptcy. Such changes could resultin the Company’s remaining competitors gaining greater capital and other resources, such as the ability to offer abroader range of products and services and geographic diversity, or new competitors may emerge. See also “—Supervision and Regulation” below and “Risk Factors” in Part I, Item 1A herein.

Institutional Securities and Wealth Management.

The Company’s competitive position for its Institutional Securities and Wealth Management business segmentsdepends on innovation, execution capability and relative pricing. The Company competes directly in the U.S. andglobally with other securities and financial services firms and broker-dealers and with others on a regional orproduct basis.

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The Company’s ability to access capital at competitive rates (which is generally impacted by the Company’scredit ratings) and to commit capital efficiently, particularly in its capital-intensive underwriting and sales,trading, financing and market-making activities, also affects its competitive position. Corporate clients mayrequest that the Company provide loans or lending commitments in connection with certain investment bankingactivities and such requests are expected to increase in the future.

It is possible that competition may become even more intense as the Company continues to compete withfinancial institutions that may be larger, or better capitalized, or may have a stronger local presence and longeroperating history in certain areas. Many of these firms have the ability to offer a wide range of products andservices that may enhance their competitive position and could result in pricing pressure in its businesses. Thecomplementary trends in the financial services industry of consolidation and globalization present, among otherthings, technological, risk management, regulatory and other infrastructure challenges that require effectiveresource allocation in order for the Company to remain competitive. In addition, the Company’s business issubject to increased regulation in the U.S. and abroad, while certain of its competitors may be subject to lessstringent legal and regulatory regimes than the Company, thereby putting the Company at a competitivedisadvantage.

The Company has experienced intense price competition in some of its businesses in recent years. In particular,the ability to execute securities trades electronically on exchanges and through other automated trading marketshas increased the pressure on trading commissions and comparable fees. The trend toward direct access toautomated, electronic markets will likely increase as additional markets move to more automated tradingplatforms. It is possible that the Company will experience competitive pressures in these and other areas in thefuture as some of its competitors may seek to obtain market share by reducing prices (in the form of commissionsor pricing).


Competition in the asset management industry is affected by several factors, including the Company’s reputation,investment objectives, quality of investment professionals, performance of investment strategies or productofferings relative to peers and an appropriate benchmark index, advertising and sales promotion efforts, feelevels, the effectiveness of and access to distribution channels and investment pipelines, and the types and qualityof products offered. The Company’s alternative investment products, such as private equity funds, real estate andhedge funds, compete with similar products offered by both alternative and traditional asset managers, who maybe subject to less stringent legal and regulatory regimes than the Company.

Supervision and Regulation.

As a major financial services firm, the Company is subject to extensive regulation by U.S. federal and stateregulatory agencies and securities exchanges and by regulators and exchanges in each of the major marketswhere it conducts its business. Moreover, in response to the 2007–2008 financial crisis, legislators andregulators, both in the U.S. and worldwide, are in the process of adopting, finalizing and implementing a widerange of reforms that will result in major changes to the way the Company is regulated and conducts its business.It will take time for the comprehensive effects of these reforms to emerge and be understood.

Regulatory Outlook.

The Dodd-Frank Act was enacted on July 21, 2010. While certain portions of the Dodd-Frank Act becameeffective immediately, most other portions are effective following transition periods or through numerousrulemakings by multiple governmental agencies, and although a large number of rules have been proposed, manyare still subject to final rulemaking or transition periods. U.S. regulators also plan to propose additionalregulations to implement the Dodd-Frank Act. Accordingly, it remains difficult to assess fully the impact that theDodd-Frank Act will have on the Company and on the financial services industry generally. In addition, various

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international developments, such as the adoption of or further revisions to risk-based capital, leverage andliquidity standards by the Basel Committee on Banking Supervision (the “Basel Committee”), including BaselIII, and the implementation of those standards in jurisdictions in which the Company operates, will continue toimpact the Company in the coming years.

It is likely that 2014 and subsequent years will see further material changes in the way major financialinstitutions are regulated in both the U.S. and other markets in which the Company operates, although it remainsdifficult to predict the exact impact these changes will have on the Company’s business, financial condition,results of operations and cash flows for a particular future period.

Financial Holding Company.

Consolidated Supervision.

The Company has operated as a bank holding company and financial holding company under the BHC Act sinceSeptember 2008. As a bank holding company, the Company is subject to comprehensive consolidatedsupervision, regulation and examination by the Federal Reserve. As a result of the Dodd-Frank Act, the FederalReserve also gained heightened authority to examine, prescribe regulations and take action with respect to all ofthe Company’s subsidiaries. In particular, as a result of the Dodd-Frank Act, the Company is, or will become,subject to (among other things) significantly revised and expanded regulation and supervision, to more intensivescrutiny of its businesses and plans for expansion of those businesses, to new activities limitations, to a systemicrisk regime that will impose heightened capital and liquidity requirements, to new restrictions on activities andinvestments imposed by a section of the BHC Act added by the Dodd-Frank Act referred to as the “VolckerRule” and to comprehensive new derivatives regulation. In addition, the Consumer Financial Protection Bureauhas primary rulemaking, enforcement and examination authority over the Company and its subsidiaries withrespect to federal consumer protection laws, to the extent applicable.

Scope of Permitted Activities. The BHC Act places limits on the activities of bank holding companies andfinancial holding companies, and grants the Federal Reserve authority to limit the Company’s ability to conductactivities. The Company must obtain Federal Reserve Board approval before engaging in certain banking andother financial activities both in the U.S. and internationally. Since becoming a bank holding company inSeptember 2008, the Company has disposed of certain nonconforming assets and conformed certain activities tothe requirements of the BHC Act.

In addition, the Company continues to engage in discussions with the Federal Reserve regarding its commoditiesactivities, as the BHC Act also grandfathers “activities related to the trading, sale or investment in commoditiesand underlying physical properties,” provided that the Company was engaged in “any of such activities as ofSeptember 30, 1997 in the United States” and provided that certain other conditions that are within theCompany’s reasonable control are satisfied. If the Federal Reserve were to determine that any of the Company’scommodities activities did not qualify for the BHC Act grandfather exemption, then the Company would likelybe required to divest any such activities that did not otherwise conform to the BHC Act. At this time, theCompany believes, based on its interpretation of applicable law, that (i) such commodities activities qualify forthe BHC Act grandfather exemption or otherwise conform to the BHC Act and (ii) if the Federal Reserve were todetermine otherwise, any required divestment would not have a material adverse impact on its financialcondition. In January 2014, the Federal Reserve issued an advance notice of proposed rulemaking, which seekspublic comment on certain matters related to financial holding companies’ physical commodity activities andmerchant banking investments in nonfinancial companies.

Activities Restrictions under the Volcker Rule. In December 2013, U.S. regulators issued final regulations toimplement the Volcker Rule. The Volcker Rule will, over time, prohibit “banking entities,” including theCompany and its affiliates, from engaging in certain prohibited “proprietary trading” activities, as defined in theVolcker Rule, subject to exemptions for underwriting, market making-related activities, risk mitigating hedgingand certain other activities. The Volcker Rule will also require banking entities to either restructure or unwind

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certain investments and relationships with “covered funds,” as defined in the Volcker Rule. Banking entities haveuntil July 21, 2015 to bring all of their activities and investments into conformance with the Volcker Rule,subject to possible extensions. The Volcker Rule requires banking entities to establish comprehensivecompliance programs designed to help ensure and monitor compliance with restrictions under the Volcker Rule.

The Company is continuing its review of activities that may be affected by the Volcker Rule, including itstrading operations and asset management activities, and is taking steps to establish the necessary complianceprograms to comply with the Volcker Rule. The Company had already taken certain steps to comply with theVolcker Rule prior to the issuance of final regulations, including, for example, the divestiture of its in-houseproprietary quantitative trading unit in January 2013. Given the complexity of the new framework, the fullimpact of the Volcker Rule is still uncertain, and will ultimately depend on the interpretation and implementationby the five regulatory agencies responsible for its oversight.

Capital and Liquidity Standards. The Federal Reserve establishes capital requirements for the Company andevaluates its compliance with such capital requirements. The Office of the Comptroller of the Currency (the“OCC”) establishes similar capital requirements and standards for the Company’s Subsidiary Banks. Underexisting capital regulations, for the Company to remain a financial holding company, its Subsidiary Banks mustqualify as “well-capitalized” by maintaining a total risk-based capital ratio (total capital to risk-weighted assets)of at least 10% and a Tier 1 risk-based capital ratio of at least 6%. To maintain its status as a financial holdingcompany, the Company is also required to be “well-capitalized” by maintaining these capital ratios. EffectiveJanuary 1, 2015, the “well-capitalized” standard for the Company’s Subsidiary Banks will be revised to reflectthe higher capital requirements in the U.S. Basel III final rule, as defined below. The Federal Reserve mayrequire the Company and its peer financial holding companies to maintain risk and leverage-based capital ratiossubstantially in excess of mandated minimum levels, depending upon general economic conditions and afinancial holding company’s particular condition, risk profile and growth plans. In addition, under the FederalReserve and OCC’s leverage capital rules, the Company and the Subsidiary Banks are subject to a minimum Tier1 leverage ratio (Tier 1 capital to average total consolidated assets) of 4%.

As of December 31, 2013, the Company calculated its capital ratios and risk-weighted assets in accordance withthe existing capital adequacy standards for financial holding companies adopted by the Federal Reserve. Theseexisting capital standards are based upon a framework described in the “International Convergence of CapitalMeasurement and Capital Standards,” July 1988, as amended, also referred to as Basel I. In December 2007, theU.S. banking regulators published final regulations incorporating the Basel II Accord, which requiresinternationally active U.S. banking organizations, as well as certain of their U.S. bank subsidiaries, to implementBasel II standards over the next several years. On January 1, 2013, the U.S. banking regulators’ rules toimplement the Basel Committee’s market risk capital framework, referred to as “Basel 2.5,” became effective,which increased the capital requirements for securitizations and correlation trading within the Company’s tradingbook, as well as incorporated add-ons for stressed Value-at-Risk and incremental risk requirements.

In December 2010, the Basel Committee reached an agreement on Basel III. In July 2013, the U.S. bankingregulators promulgated final rules to implement many aspects of Basel III (the “U.S. Basel III final rule”). TheCompany became subject to the U.S. Basel III final rule on January 1, 2014. Certain requirements in the U.S.Basel III final rule, including the minimum risk-based capital ratios and new capital buffers, will commence orbe phased in over several years.

The U.S. Basel III final rule contains new capital standards that raise capital requirements, strengthencounterparty credit risk capital requirements, introduce a leverage ratio as a supplemental measure to the risk-based ratio and replace the use of externally developed credit ratings with alternatives such as the Organisationfor Economic Co-operation and Development’s country risk classifications. Under the U.S. Basel III final rule,the Company is subject, on a fully phased-in basis, to a minimum Common Equity Tier 1 risk-based capital ratioof 4.5%, a minimum Tier 1 risk-based capital ratio of 6% and a minimum total risk-based capital ratio of 8%.

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The Company is also subject to a 2.5% Common Equity Tier 1 capital conservation buffer and, if deployed, up toa 2.5% Common Equity Tier 1 countercyclical buffer, on a fully phased-in basis by 2019. Failure to maintainsuch buffers will result in restrictions on the Company’s ability to make capital distributions, including thepayment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers. Inaddition, certain new items will be deducted from Common Equity Tier 1 capital and certain existing deductionswill be modified. The majority of these capital deductions is subject to a phase-in schedule and will be fullyphased in by 2018. Under the U.S. Basel III final rule, unrealized gains and losses on available-for-sale securitieswill be reflected in Common Equity Tier 1 capital, subject to a phase-in schedule.

U.S. banking regulators have published final regulations implementing a provision of the Dodd-Frank Actrequiring that certain institutions supervised by the Federal Reserve, including the Company, be subject tominimum capital requirements that are not less than the generally applicable risk-based capital requirements.Currently, this minimum “capital floor” is based on Basel I. Beginning on January 1, 2015, the U.S. Basel IIIfinal rule will replace the current Basel I-based “capital floor” with a standardized approach that, among otherthings, modifies the existing risk weights for certain types of asset classes. The “capital floor” applies to thecalculation of minimum risk-based capital requirements as well as the capital conservation buffer and, ifdeployed, the countercyclical capital buffer.

On February 21, 2014, the Federal Reserve and the OCC approved the Company’s and the Subsidiary Banks’respective use of the U.S. Basel III advanced internal ratings-based approach for determining credit risk capitalrequirements and advanced measurement approaches for determining operational risk capital requirements(collectively, the “advanced approaches method”) to calculate and publicly disclose their risk-based capital ratiosbeginning with the second quarter of 2014, subject to the “capital floor” discussed above. One of the stipulationsfor this approval is that the Company will be required to satisfy certain conditions, as agreed to with theregulators, regarding the modeling used to determine its estimated risk-weighted assets associated withoperational risk.

In addition to the U.S. Basel III final rule, the Dodd-Frank Act requires the Federal Reserve to establish morestringent capital requirements for certain bank holding companies, including the Company. The Federal Reservehas indicated that it intends to address this requirement by implementing the Basel Committee’s capital surchargefor global systemically important banks (“G-SIBs”). The Financial Stability Board (“FSB”) has provisionallyidentified the G-SIBs and assigned each G-SIB a Common Equity Tier 1 capital surcharge ranging from 1.0% to2.5% of risk-weighted assets. The Company is provisionally assigned a G-SIB capital surcharge of 1.5%. TheFSB has stated that it intends to update the list of G-SIBs annually.

The U.S. Basel III final rule also subjects certain banking organizations, including the Company, to a minimumsupplementary leverage ratio of 3% beginning on January 1, 2018. In January 2014, the Basel Committeefinalized revisions to the denominator of the Basel III leverage ratio. The revised denominator differs from thesupplementary leverage ratio in the treatment of, among other things, derivatives, securities financingtransactions and other off-balance sheet items. U.S. banking regulators may issue regulations to implement therevised Basel III leverage ratio.

The U.S. banking regulators have also proposed a rule to implement enhanced supplementary leverage standardsfor certain large bank holding companies and their subsidiary insured depository institutions, including theCompany and the Subsidiary Banks. Under this proposal, a covered bank holding company would need tomaintain a leverage buffer of Tier 1 capital of greater than 2% in addition to the 3% minimum (for a total ofgreater than 5%), in order to avoid limitations on capital distributions, including dividends and stock repurchases,and discretionary bonus payments to executive officers. This proposal would further establish a “well-capitalized” threshold based on a supplementary leverage ratio of 6% for insured depository institutionsubsidiaries, including the Subsidiary Banks. If this proposal is adopted, its requirements would become effectiveon January 1, 2018 with public disclosure of the ratio required beginning in 2015.

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The Basel Committee has developed two standards intended for use in liquidity risk supervision, the LiquidityCoverage Ratio (“LCR”) and the Net Stable Funding Ratio (“NSFR”). The LCR was developed to ensure bankshave sufficient high-quality liquid assets to cover net cash outflows arising from significant stress over 30 calendardays. This standard’s objective is to promote the short-term resilience of the liquidity risk profile of banks and bankholding companies. The NSFR has a time horizon of one year and is defined as the ratio of the amount of availablestable funding to the amount of required stable funding. This standard’s objective is to promote resilience over alonger time horizon. In January 2014, the Basel Committee proposed revisions to the original December 2010version of the NSFR and continues to contemplate the introduction of the NSFR, including any final revisions, as aminimum standard by January 1, 2018.

In October 2013, the U.S. banking regulators proposed a rule to implement the LCR in the U.S. (“U.S. LCRproposal”). The U.S. LCR proposal would apply to the Company and the Subsidiary Banks. The U.S. LCRproposal is more stringent in certain respects compared to the Basel Committee’s version of the LCR, andincludes a generally narrower definition of high-quality liquid assets, a different methodology for calculating netcash outflows during the 30-day stress period as well as a shorter, two-year phase-in period that ends onDecember 31, 2016. The Federal Reserve has also indicated that it may implement regulatory measures related toshort-term wholesale funding.

See also “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidityand Capital Resources—Regulatory Requirements” in Part II, Item 7 herein.

Capital Planning, Stress Tests and Dividends. Pursuant to the Dodd-Frank Act, the Federal Reserve hasadopted capital planning and stress test requirements for large bank holding companies, including the Company,which form part of the Federal Reserve’s annual Comprehensive Capital Analysis and Review (“CCAR”)framework. Under the Federal Reserve’s capital plan final rule, the Company must submit an annual capital planto the Federal Reserve, taking into account the results of separate stress tests designed by the Company and theFederal Reserve.

The capital plan must include a description of all planned capital actions over a nine-quarter planning horizon,including any issuance of a debt or equity capital instrument, any capital distribution (i.e., payments of dividendsor stock repurchases), and any similar action that the Federal Reserve determines could impact the bank holdingcompany’s consolidated capital. The capital plan must include a discussion of how the bank holding companywill maintain capital above the minimum regulatory capital ratios, including the minimum ratios under the U.S.Basel III final rule that are phased in over the planning horizon, and above a Tier 1 common risk-based capitalratio of 5%, and serve as a source of strength to its subsidiary U.S. depository institutions under supervisorystress scenarios. The capital plan final rule requires that such companies receive no objection from the FederalReserve before making a capital distribution. In addition, even with an approved capital plan, the bank holdingcompany must seek the approval of the Federal Reserve before making a capital distribution if, among otherreasons, the bank holding company would not meet its regulatory capital requirements after making the proposedcapital distribution. In addition to capital planning requirements, the OCC, the Federal Reserve and the FederalDeposit Insurance Corporation (“FDIC”) have authority to prohibit or to limit the payment of dividends by thebanking organizations they supervise, including the Company and the Subsidiary Banks, if, in the bankingregulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of thefinancial condition of the banking organization. All of these policies and other requirements could influence theCompany’s ability to pay dividends and repurchase stock, or require it to provide capital assistance to theSubsidiary Banks under circumstances which the Company would not otherwise decide to do so.

The Company expects that, by March 31, 2014, the Federal Reserve will either object or provide a notice of non-objection to the Company’s 2014 capital plan that was submitted to the Federal Reserve on January 6, 2014.

In October 2012, the Federal Reserve issued its stress test final rule as required by the Dodd-Frank Act thatrequires the Company to conduct semi-annual company-run stress tests. Under this rule, the Company is requiredto publicly disclose the summary results of its company-run stress tests under the severely adverse economic

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scenario. The rule also subjects the Company to an annual supervisory stress test conducted by the FederalReserve. The capital planning and stress testing requirements for large bank holding companies form part of theFederal Reserve’s annual CCAR process.

The Dodd-Frank Act also requires each of the Subsidiary Banks to conduct an annual stress test, althoughMSPNA was given an exemption by the OCC for the 2014 stress test. MSBNA submitted its 2014 annualcompany-run stress tests to the OCC and the Federal Reserve on January 6, 2014.

See also “—Capital and Liquidity Standards” above and “Management’s Discussion and Analysis of FinancialCondition and Results of Operation—Liquidity and Capital Resources—Regulatory Requirements” in Part II,Item 7 herein.

Systemic Risk Regime. The Dodd-Frank Act established a regulatory framework applicable to financialinstitutions deemed to pose systemic risks. Bank holding companies with $50 billion or more in consolidatedassets, such as the Company, became automatically subject to the systemic risk regime in July 2010. A newoversight body, the Financial Stability Oversight Council (the “Council”), can recommend prudential standards,reporting and disclosure requirements to the Federal Reserve for systemically important financial institutions,must approve any finding by the Federal Reserve that a financial institution poses a grave threat to financialstability and must undertake mitigating actions. The Council is also empowered to designate systemicallyimportant payment, clearing and settlement activities of financial institutions, subjecting them to prudentialsupervision and regulation and, assisted by the new Office of Financial Research within the U.S. Department ofthe Treasury (“U.S. Treasury”) (established by the Dodd-Frank Act), can gather data and reports from financialinstitutions, including the Company.

Pursuant to the Dodd-Frank Act, the Company must also provide to the Federal Reserve and FDIC, and MSBNAmust provide to the FDIC, an annual plan for rapid and orderly resolution in the event of material financialdistress. The Company and MSBNA submitted their most recent annual resolution plans to the Federal Reserveand the FDIC, as required, on October 1, 2013.

In February 2014, the Federal Reserve issued final rules to implement certain requirements of the Dodd-FrankAct’s systemic risk regime. Effective on January 1, 2015, the final rules will require bank holding companieswith $50 billion or more in total consolidated assets, such as the Company, to conduct internal liquidity stresstests, maintain unencumbered highly liquid assets to meet projected net cash outflows for 30 days over the rangeof liquidity stress scenarios used in internal stress tests, and comply with various liquidity risk managementrequirements. In addition, the final rules will require institutions to comply with a range of risk management andcorporate governance requirements, such as establishment of a risk committee of the board of directors andappointment of a chief risk officer, both of which the Company already has. Under the final rules, upon a gravethreat determination by the Council, the Federal Reserve must require financial institutions subject to thesystemic risk regime to maintain a debt-to-equity ratio of no more than 15-to-1 if the Council considers itnecessary to mitigate the risk.

The systemic risk regime provides that, for institutions posing a grave threat to U.S. financial stability, theFederal Reserve, upon Council vote, must limit that institution’s ability to merge, restrict its ability to offerfinancial products, require it to terminate activities, impose conditions on activities or, as a last resort, require itto dispose of assets. The Federal Reserve also has the ability to establish further standards, including thoseregarding contingent capital, enhanced public disclosures, and limits on short-term debt, including off-balancesheet exposures.

In addition, the Federal Reserve has proposed rules that would limit the aggregate exposure of each bank holdingcompany with $500 billion or more in total consolidated assets, such as the Company, and each companydesignated by the Council, to each other such institution to 10% of the aggregate capital and surplus of eachinstitution, and limit the aggregate exposure of such institutions to any other unaffiliated counterparty to 25% ofthe institution’s aggregate capital and surplus. The proposed rules would also create a new early remediation

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framework to address financial distress or material management weaknesses determined with reference to fourlevels of early remediation, including heightened supervisory review, initial remediation, recovery, andresolution assessment, with specific limitations and requirements tied to each level. The Federal Reserve hasstated that it will issue, at a later date, final rules establishing single counterparty credit limits and an earlyremediation framework.

See also “—Capital and Liquidity Standards” above and “—Orderly Liquidation Authority” below.

Orderly Liquidation Authority. Under the Dodd-Frank Act, certain financial companies, including bank holdingcompanies such as the Company and certain covered subsidiaries, can be subjected to resolution under a neworderly liquidation authority. The U.S. Treasury Secretary, in consultation with the President of the U.S., must firstmake certain extraordinary financial distress and systemic risk determinations, and action must be recommended bytwo-thirds of the FDIC Board and two-thirds of the Federal Reserve Board. Absent such actions, the Company as abank holding company would remain subject to resolution under the U.S. Bankruptcy Code.

The orderly liquidation authority went into effect in July 2010, and rulemaking is proceeding in stages, withsome regulations now finalized and others planned but not yet proposed. If the Company were subject to theorderly liquidation authority, the FDIC would be appointed receiver, which would give the FDIC considerablepowers to resolve the Company, including (i) the power to remove officers and directors responsible for theCompany’s failure and to appoint new directors and officers; (ii) the power to assign assets and liabilities to athird party or bridge financial company without the need for creditor consent or prior court review; (iii) theability to differentiate among creditors, including by treating junior creditors better than senior creditors, subjectto a minimum recovery right to receive at least what they would have received in bankruptcy liquidation; and(iv) broad powers to administer the claims process to determine distributions from the assets of the receivershipto creditors not transferred to a third party or bridge financial institution. In December 2013, the FDIC releasedits proposed single point of entry strategy for resolution of a systemically important financial institution underthe orderly liquidation authority. The FDIC’s release outlines how it would use its powers under the orderlyliquidation authority to resolve a systemically important financial institution by placing its top-tier U.S. holdingcompany in receivership and keeping its operating subsidiaries open and out of insolvency proceedings bytransferring the operating subsidiaries to a new bridge holding company, recapitalizing the operating subsidiariesand imposing losses on the shareholders and creditors of the holding company in receivership according to theirstatutory order of priority. The Federal Reserve has indicated that it may also introduce a requirement that certainlarge bank holding companies maintain a minimum amount of long-term debt at the holding company level tofacilitate orderly resolution of those firms.

U.S. Subsidiary Banks.

U.S. Banking Institutions. MSBNA, primarily a wholesale commercial bank, offers retail securities-basedlending and commercial lending services in addition to deposit products. Certain foreign exchange activities arealso conducted in MSBNA. As an FDIC-insured national bank, MSBNA is subject to supervision, regulation andexamination by the OCC.

MSPNA offers certain mortgage and other secured lending products primarily for customers of its affiliate retailbroker-dealer, Morgan Stanley Smith Barney LLC (“MSSB LLC”). MSPNA also offers certain deposit products,as well as prime brokerage custody services. MSPNA is an FDIC-insured national bank whose activities aresubject to supervision, regulation and examination by the OCC.

Effective October 1, 2013, the lending limits applicable to the Company’s U.S. Subsidiary Banks were revised totake into account credit exposure arising from derivative transactions, securities lending, securities borrowingand repurchase and reverse repurchase agreements with third parties.

In January 2014, the OCC proposed a set of specific risk governance guidelines to formalize its heightenedexpectations for large national banks, including MSBNA. The proposed guidelines set minimum standards for

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the design and implementation of a bank’s risk governance framework and the oversight of that framework by abank’s board of directors.

Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 provides aframework for regulation of depository institutions and their affiliates, including parent holding companies, bytheir federal banking regulators. Among other things, it requires the relevant federal banking regulator to take“prompt corrective action” (“PCA”) with respect to a depository institution if that institution does not meetcertain capital adequacy standards. Current PCA regulations generally apply only to insured banks and thriftssuch as MSBNA or MSPNA and not to their parent holding companies. The Federal Reserve is, however, subjectto limitations, authorized to take appropriate action at the holding company level. In addition, as described above,under the systemic risk regime, the Company will become subject to an early remediation protocol in the event offinancial distress. The Dodd-Frank Act also formalized the requirement that bank holding companies, such theCompany, serve as a source of strength to their U.S. bank subsidiaries and commit resources to support thesesubsidiaries in the event such subsidiaries are in financial distress.

Transactions with Affiliates. The Company’s U.S. bank subsidiaries are subject to Sections 23A and 23B ofthe Federal Reserve Act, which impose restrictions on any extensions of credit to, purchase of assets from, andcertain other transactions with, any affiliates. These restrictions limit the total amount of credit exposure that theymay have to any one affiliate and to all affiliates, as well as collateral requirements, and they require all suchtransactions to be made on market terms. Effective July 2012, derivatives, securities borrowing and securitieslending transactions between the Company’s U.S. bank subsidiaries and their affiliates became subject to theserestrictions. The Federal Reserve has indicated that it will propose rulemaking to implement these restrictions.These reforms will place limits on the Company’s U.S. bank subsidiaries’ ability to engage in derivatives,repurchase agreements and securities lending transactions with other affiliates of the Company.

In addition, the Volcker Rule generally prohibits “covered transactions,” such as extensions of credit, between(i) the Company or any of its affiliates and (ii) “covered funds” for which the Company or any of its affiliatesserve as the investment manager, investment adviser, commodity trading advisor or sponsor and other “coveredfunds” organized and offered pursuant to specific exemptions in the Volcker Rule.

FDIC Regulation. An FDIC–insured depository institution is generally liable for any loss incurred or expectedto be incurred by the FDIC in connection with the failure of an insured depository institution under commoncontrol by the same bank holding company. As FDIC-insured depository institutions, MSBNA and MSPNA areexposed to each other’s losses. In addition, both institutions are exposed to changes in the cost of FDICinsurance. In 2010, the FDIC adopted a restoration plan to replenish the reserve fund over a multi-year period.Under the Dodd-Frank Act, some of the restoration must be paid for exclusively by large depository institutions,including MSBNA, and FDIC deposit insurance assessments are calculated using a new methodology thatgenerally favors banks that are mostly funded by deposits.

Institutional Securities and Wealth Management.

Broker-Dealer and Investment Adviser Regulation. The Company’s primary U.S. broker-dealer subsidiaries,MS&Co. and MSSB LLC, are registered broker-dealers with the SEC and in all 50 states, the District ofColumbia, Puerto Rico and the U.S. Virgin Islands, and are members of various self-regulatory organizations,including the Financial Industry Regulatory Authority, Inc. (“FINRA”), and various securities exchanges andclearing organizations. Broker-dealers are subject to laws and regulations covering all aspects of the securitiesbusiness, including sales and trading practices, securities offerings, publication of research reports, use ofcustomers’ funds and securities, capital structure, recordkeeping and retention, and the conduct of their directors,officers, representatives and other associated persons. Broker-dealers are also regulated by securitiesadministrators in those states where they do business. Violations of the laws and regulations governing a broker-dealer’s actions could result in censures, fines, the issuance of cease-and-desist orders, revocation of licenses orregistrations, the suspension or expulsion from the securities industry of such broker-dealer or its officers oremployees, or other similar consequences by both federal and state securities administrators.

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

The Dodd-Frank Act includes various provisions that affect the regulation of broker-dealer sales practices andcustomer relationships. For example, the SEC is authorized to adopt a fiduciary duty applicable to broker-dealerswhen providing personalized investment advice about securities to retail customers. The U.S. Department ofLabor is considering revisions to regulations under the Employee Retirement Income Security Act of 1974 thatcould subject broker-dealers to a fiduciary duty and prohibit specified transactions for a wider range of customerinteractions. These developments may impact the manner in which affected businesses are conducted, decreaseprofitability and increase potential liabilities.

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

As registered U.S. broker-dealers, certain subsidiaries of the Company are subject to the SEC’s net capital ruleand the net capital requirements of various exchanges, other regulatory authorities and self-regulatoryorganizations. Many non-U.S. regulatory authorities and exchanges also have rules relating to capital and, insome cases, liquidity requirements that apply to the Company’s non-U.S. broker-dealer subsidiaries. These rulesare generally designed to measure general financial integrity and/or liquidity and require that at least a minimumamount of net and/or liquid assets be maintained by the subsidiary. See also “—Financial Holding Company—Consolidated Supervision” and “—Financial Holding Company—Capital and Liquidity Standards” above. Rulesof FINRA and other self-regulatory organizations also impose limitations and requirements on the transfer ofmember organizations’ assets.

Compliance with regulatory capital requirements may limit the Company’s operations requiring the intensive useof capital. Such requirements restrict the Company’s ability to withdraw capital from its broker-dealersubsidiaries, which in turn may limit its ability to pay dividends, repay debt, or redeem or purchase shares of itsown outstanding stock. Any change in such rules or the imposition of new rules affecting the scope, coverage,calculation or amount of capital requirements, or a significant operating loss or any unusually large chargeagainst capital, could adversely affect the Company’s ability to pay dividends or to expand or maintain presentbusiness levels. In addition, such rules may require the Company to make substantial capital infusions into one ormore of its broker-dealer subsidiaries in order for such subsidiaries to comply with such rules.

MS&Co. and MSSB LLC are members of the Securities Investor Protection Corporation (“SIPC”), whichprovides protection for customers of broker-dealers against losses in the event of the insolvency of a broker-dealer. SIPC protects customers’ eligible securities held by a member broker-dealer up to $500,000 per customerfor all accounts in the same capacity subject to a limitation of $250,000 for claims for uninvested cash balances.To supplement this SIPC coverage, each of MS&Co. and MSSB LLC have purchased additional protection forthe benefit of their customers in the form of an annual policy issued by certain underwriters and variousinsurance companies that provides protection for each eligible customer above SIPC limits subject to anaggregate firmwide cap of $1 billion with no per client sublimit for securities and a $1.9 million per client limitfor the cash portion of any remaining shortfall. As noted under “—Financial Holding Company—Systemic RiskRegime” above, the Dodd-Frank Act contains special provisions for the orderly liquidation of covered financial

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institutions (which could potentially include MS&Co. and/or MSSB LLC). While these provisions are generallyintended to provide customers of covered broker-dealers with protections at least as beneficial as they wouldenjoy in a broker-dealer liquidation proceeding under the Securities Investor Protection Act, the details andimplementation of such protections are subject to further rulemaking.

The SEC adopted rules requiring broker-dealers to maintain risk management controls and supervisoryprocedures with respect to providing access to securities markets, which became fully effective in 2012. In July2012, the SEC adopted a consolidated audit trail rule, which, when fully implemented, will require broker-dealersto report into one consolidated audit trail comprehensive information about every material event in the lifecycleof every quote, order, and execution in all exchange-listed stocks and options. It is possible that the SEC or self-regulatory organizations could propose or adopt additional market structure rules for equity and fixed incomemarkets in the future. The provisions, new rules and proposals discussed above could result in increased costsand could otherwise adversely affect trading volumes and other conditions in the markets in which we operate.

Regulation of Futures Activities and Certain Commodities Activities. As futures commission merchants,MS&Co. and MSSB LLC are subject to net capital requirements of, and their activities are regulated by, the U.S.Commodity Futures Trading Commission (the “CFTC”), the National Futures Association (the “NFA”), aregistered futures association, and various commodity futures exchanges. MS&Co. and MSSB LLC and certainof their affiliates are registered members of the NFA in various capacities. Rules and regulations of the CFTC,NFA and commodity futures exchanges address obligations related to, among other things, the segregation ofcustomer funds and the holding apart of a secured amount, the use by futures commission merchants of customerfunds, recordkeeping and reporting obligations, risk disclosure, risk management and discretionary trading.MS&Co. and MSSB LLC have affiliates that are registered as commodity trading advisors and/or commoditypool operators, or are operating under certain exemptions from such registration pursuant to CFTC rules andother guidance. Under CFTC and NFA rules, commodity trading advisors who manage accounts and commoditypool operators that are registered with the NFA must distribute disclosure documents and maintain specifiedrecords relating to their activities, and commodity trading advisors and commodity pool operators have certainresponsibilities with respect to each pool they advise or operate. Violations of the rules of the CFTC, the NFA orthe commodity exchanges could result in remedial actions, including fines, registration restrictions orterminations, trading prohibitions or revocations of commodity exchange memberships.

The Company’s commodities activities are subject to extensive and evolving energy, commodities,environmental, health and safety and other governmental laws and regulations in the U.S. and abroad. Intensifiedscrutiny of certain energy markets by U.S. federal, state and local authorities in the U.S. and abroad and by thepublic has resulted in increased regulatory and legal enforcement and remedial proceedings involving energycompanies, including those engaged in power generation and liquid hydrocarbons trading. Terminal facilities andother assets relating to the Company’s commodities activities also are subject to environmental laws both in theU.S. and abroad. In addition, pipeline, transport and terminal operations are subject to state laws in connectionwith the cleanup of hazardous substances that may have been released at properties currently or previouslyowned or operated by us or locations to which we have sent wastes for disposal. See also “—Financial HoldingCompany—Scope of Permitted Activities” above.

Derivatives Regulation. Through the Dodd-Frank Act, the Company faces a comprehensive U.S. regulatoryregime for its activities in certain OTC derivatives. The regulation of “swaps” and “security-based swaps”(collectively, “Swaps”) in the U.S. is being, and will continue to be, effected and implemented through theCFTC, SEC and other agency regulations. The CFTC has completed the majority of its regulations in this area,most of which are in effect. The SEC and other agencies charged with regulating Swaps have not yet adopted themajority of their Swap regulations.

Subject to certain limited exceptions, the Dodd-Frank Act requires central clearing of certain types of Swaps,public and regulatory reporting, and mandatory trading on regulated exchanges or execution facilities. Reportingrequirements for CFTC-regulated Swaps are now in effect and certain types of CFTC-regulated interest rate andindex credit default swaps are subject to mandatory central clearing. Certain Swaps will be required to be tradedon an exchange or execution facility starting in February 2014.

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The Dodd-Frank Act also requires the registration of “swap dealers” and “major swap participants” with theCFTC and “security-based swap dealers” and “major security-based swap participants” with the SEC(collectively, “Swaps Entities”). Certain of the Company’s subsidiaries have registered with the CFTC as swapdealers and in the future additional subsidiaries may register with the CFTC as swap dealers. One or moresubsidiaries of the Company will in the future be required to register with the SEC as security-based swapdealers.

Swaps Entities are or will be subject to a comprehensive regulatory regime with new obligations for the Swapsactivities for which they are registered, including new capital requirements, a new margin regime for unclearedSwaps and a new segregation regime for collateral of counterparties to uncleared Swaps. Swaps Entities aresubject to additional duties, including, among others, internal and external business conduct and documentationstandards with respect to their Swaps counterparties, recordkeeping and reporting. The Company’s swap dealersare also subject to new rules under the Dodd-Frank Act regarding segregation of customer collateral for clearedtransactions, large trader reporting, and anti-fraud and anti-manipulation requirements related to activities inSwaps.

The specific parameters of these requirements for Swaps have been and continue to be developed through CFTC,SEC and bank regulator rulemakings. While many of the CFTC’s requirements are already final and effective,others are subject to further rulemaking or deferred compliance dates. In particular, the CFTC, SEC and thebanking regulators have proposed, but not yet adopted, rules regarding margin and capital requirements forSwaps Entities. In September 2013, the Basel Committee and the International Organization of SecuritiesCommissions released their final policy framework on margin requirements for non-centrally-cleared derivatives.The full impact on the Company of the U.S. agencies’ margin and capital requirements for Swaps Entities willnot be known with certainty until the requirements are finalized. In November 2013, the CFTC re-proposed rulesthat, if finalized as proposed, would limit positions in 28 agricultural, energy and metals commodities, includingswaps, futures and options that are economically equivalent to those commodity contracts. Through this re-proposal, the CFTC is taking steps to institute position limits that were previously finalized in November 2011but were vacated by a federal court in September 2012.

Although the full impact of U.S. derivatives regulation on the Company remains unclear, the Company hasalready, and will continue to, face increased costs and regulatory oversight due to the registration and regulatoryrequirements indicated above. Complying with the Swaps rules also has required, and will in the future require,the Company to change its Swaps businesses, and has required, and will in the future require, extensive systemsand personnel changes. Compliance with Swap-related partially finalized regulatory capital requirements mayrequire the Company to devote more capital to its Swaps business.

In July 2013, the CFTC issued final guidance on the cross-border application of its Swaps regulations and anexemptive order providing a delay in compliance timing of certain of those regulations as applied to certain non-U.S. entities engaging in Swaps activities. Even with the issuance of the guidance, the full scope of theextraterritorial impact of U.S. Swaps regulation remains unclear.

The E.U. has adopted and implemented certain rules relating to the OTC derivatives market and these rulesimposed regulatory reporting beginning in February 2014. The E.U. plans to impose central clearingrequirements on OTC derivatives in the future. In addition, other non-U.S. jurisdictions are in the process ofadopting and implementing legislation emanating from the G20 commitments that will require, among otherthings, the central clearing of certain OTC derivatives, mandatory reporting of derivatives and bilateral riskmitigation procedures for non-cleared trades. It remains unclear at present how the non-U.S. and U.S. derivativesregulatory regimes will interact.

Non-U.S. Regulation. The Company’s Institutional Securities businesses also are regulated extensively bynon-U.S. regulators, including governments, securities exchanges, commodity exchanges, self-regulatoryorganizations, central banks and regulatory bodies, especially in those jurisdictions in which the Companymaintains an office. Non-U.S. policy makers and regulators, including the European Commission and European

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Supervisory Authorities, continue to propose and adopt numerous market reforms, including those that mayfurther impact the structure of banks, and formulate regulatory standards and measures that will be of relevanceand importance to the Company’s European operations. Certain Morgan Stanley subsidiaries are regulated asbroker-dealers under the laws of the jurisdictions in which they operate. Subsidiaries engaged in banking andtrust activities outside the U.S. are regulated by various government agencies in the particular jurisdiction wherethey are chartered, incorporated and/or conduct their business activity. For instance, the Prudential RegulationAuthority (“PRA”), the Financial Conduct Authority (“FCA”) and several securities and futures exchanges in theUnited Kingdom (“U.K.”), including the London Stock Exchange and Euronext.liffe, regulate the Company’sactivities in the U.K.; the Bundesanstalt für Finanzdienstleistungsaufsicht (the Federal Financial SupervisoryAuthority) and the Deutsche Bôrse AG regulate its activities in the Federal Republic of Germany; EidgenössischeFinanzmarktaufsicht (the Financial Market Supervisory Authority) regulates its activities in Switzerland; theFinancial Services Agency, the Bank of Japan, the Japanese Securities Dealers Association and several Japanesesecurities and futures exchanges, including the Tokyo Stock Exchange, the Osaka Securities Exchange and theTokyo International Financial Futures Exchange, regulate its activities in Japan; the Hong Kong Securities andFutures Commission, the Hong Kong Monetary Authority and the Hong Kong Exchanges and Clearing Limitedregulate its operations in Hong Kong; and the Monetary Authority of Singapore and the Singapore ExchangeLimited regulate its business in Singapore.

Regulators in the U.K., E.U. and other major jurisdictions have also finalized or are in the process of proposingor finalizing risk-based capital, leverage capital, liquidity, banking structural reforms and other regulatorystandards applicable to certain Morgan Stanley subsidiaries that operate in those jurisdictions. For example, theCompany’s primary broker-dealer in the U.K., Morgan Stanley & Co. International plc (“MSIP”), is subject toregulation and supervision by the PRA with respect to prudential matters. As a prudential regulator, the PRAseeks to promote the safety and soundness of the firms that it regulates and to minimize the adverse effects thatsuch firms may have on the stability of the U.K. financial system. The PRA has broad legal authority to establishprudential and other standards to pursue these objectives, including approvals of relevant regulatory models, aswell as to bring formal and informal supervisory and disciplinary actions against regulated firms to addressnoncompliance with such standards. MSIP is also regulated and supervised by the FCA with respect to businessconduct matters. On January 1, 2014, MSIP became subject to the Capital Requirements Regulation and CapitalRequirements (collectively, “CRD IV”), which implements the Basel III and other regulatory requirements forE.U. investment firms, such as MSIP. European Market Infrastructure Regulation introduces new requirementsregarding the central clearing, reporting and conduct of business with respect to derivatives. In addition,proposals to revise the Markets in Financial Instruments Directive would introduce various trading and marketinfrastructure reforms in the E.U. Lawmakers in the E.U. are also in the process of finalizing a proposed directivethat would establish a framework for the recovery and resolution of E.U. credit institutions and investment firms,including MSIP.


Many of the subsidiaries engaged in the Company’s asset management activities are registered as investmentadvisers with the SEC. Many aspects of the Company’s asset management activities are subject to federal andstate laws and regulations primarily intended to benefit the investor or client. These laws and regulationsgenerally grant supervisory agencies and bodies broad administrative powers, including the power to limit orrestrict the Company from carrying on its asset management activities in the event that it fails to comply withsuch laws and regulations. Sanctions that may be imposed for such failure include the suspension of individualemployees, limitations on the Company engaging in various asset management activities for specified periods oftime or specified types of clients, the revocation of registrations, other censures and significant fines. In order tofacilitate its asset management business, the Company owns a registered U.S. broker-dealer, Morgan StanleyDistribution, Inc., which acts as distributor to the Morgan Stanley mutual funds and as placement agent to certainprivate investment funds managed by the Company’s Investment Management business segment. A number oflegal entities within the Company’s Investment Management business are registered as commodity tradingadvisors and/or commodity pool operators, or are operating under certain exemptions from such registration

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pursuant to CFTC rules and other guidance. See also “—Institutional Securities and Wealth Management—Broker-Dealer and Investment Adviser Regulation” and “—Institutional Securities and Wealth Management—Regulation of Futures Activities and Certain Commodities Activities” above.

As a result of the passage of the Dodd-Frank Act, the Company’s asset management activities will be subject tocertain additional laws and regulations, including, but not limited to, additional reporting and recordkeepingrequirements (including with respect to clients that are private funds), restrictions on sponsoring or investing in,or maintaining certain other relationships with, “covered funds,” as defined in the Volcker Rule, subject tocertain limited exemptions, and certain rules and regulations regarding trading activities, including trading inderivatives markets. Many of these new requirements may increase the expenses associated with the Company’sasset management activities and/or reduce the investment returns the Company is able to generate for its assetmanagement clients. Several important elements of the Dodd-Frank Act will not be known until rulemaking isfinalized and certain final regulations are adopted.

The Company is continuing its review of its asset management activities that may be affected by the Volcker Ruleand is taking steps to establish the necessary compliance programs to help ensure and monitor compliance with theVolcker Rule. The Company had already taken certain steps to comply with the Volcker Rule prior to the issuanceof the final regulations, including, for example, launching new funds that are designed to comply with the VolckerRule. Given the complexity of the new framework, the full impact of the Volcker Rule is still uncertain, and willultimately depend on the interpretation and implementation by the five regulatory agencies responsible for itsoversight. See also “—Financial Holding Company—Activities Restrictions under the Volcker Rule.”

The Company’s Investment Management business is also regulated outside the U.S. For example, the FinancialConduct Authority and the Prudential Regulation Authority regulate the Company’s business in the U.K.; theFinancial Services Agency regulates the Company’s business in Japan; the Hong Kong Securities and FuturesCommission regulates the Company’s business in Hong Kong; and the Monetary Authority of Singaporeregulates the Company’s business in Singapore.

Anti-Money Laundering and Economic Sanctions.

The Company’s Anti-Money Laundering (“AML”) program is coordinated on an enterprise-wide basis. In theU.S., for example, the Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001, imposes significantobligations on financial institutions to detect and deter money laundering and terrorist financing activity,including requiring banks, bank holding company subsidiaries, broker-dealers, futures commission merchants,and mutual funds to implement AML programs, verify the identity of customers that maintain accounts, andmonitor and report suspicious activity to appropriate law enforcement or regulatory authorities. Outside the U.S.,applicable laws, rules and regulations similarly require designated types of financial institutions to implementAML programs. The Company has implemented policies, procedures and internal controls that are designed tocomply with all applicable AML laws and regulations. The Company has also implemented policies, procedures,and internal controls that are designed to comply with the regulations and economic sanctions programsadministered by the U.S. Treasury’s Office of Foreign Assets Control (“OFAC”), which enforces economic andtrade sanctions against targeted foreign countries, entities and individuals based on external threats to the U.S.foreign policy, national security, or economy; by other governments; or by global or regional multilateralorganizations, such as the United Nations Security Council and the E.U. as applicable.

Anti-Corruption.

The Company is subject to applicable anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act andthe U.K. Bribery Act, in the jurisdictions in which it operates. Anti-corruption laws generally prohibit offering,promising, giving, or authorizing others to give anything of value, either directly or indirectly, to a governmentofficial or private party in order to influence official action or otherwise gain an unfair business advantage, suchas to obtain or retain business. The Company has implemented policies, procedures, and internal controls that aredesigned to comply with such laws, rules and regulations.

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Protection of Client Information.

Many aspects of the Company’s business are subject to legal requirements concerning the use and protection ofcertain customer information, including those adopted pursuant to the Gramm-Leach-Bliley Act and the Fair andAccurate Credit Transactions Act of 2003 in the U.S., the E.U. Data Protection Directive and various laws inAsia, including the Japanese Personal Information (Protection) Law, the Hong Kong Personal Data (Protection)Ordinance and the Australian Privacy Act. The Company has adopted measures designed to comply with theseand related applicable requirements in all relevant jurisdictions.

Research.

Both U.S. and non-U.S. regulators continue to focus on research conflicts of interest. Research-relatedregulations have been implemented in many jurisdictions. New and revised requirements resulting from theseregulations and the global research settlement with U.S. federal and state regulators (to which the Company is aparty) have necessitated the development or enhancement of corresponding policies and procedures.

Compensation Practices and Other Regulation.

The Company’s compensation practices are subject to oversight by the Federal Reserve. In particular, theCompany is subject to the Federal Reserve’s guidance that is designed to help ensure that incentive compensationpaid by banking organizations does not encourage imprudent risk-taking that threatens the organizations’ safetyand soundness. The scope and content of the Federal Reserve’s policies on executive compensation arecontinuing to develop and may change based on findings from its peer review process, and the Company expectsthat these policies will evolve over a number of years.

The Company is subject to the compensation-related provisions of the Dodd-Frank Act, which may impact itscompensation practices. Pursuant to the Dodd-Frank Act, among other things, federal regulators, including theFederal Reserve, must prescribe regulations to require covered financial institutions, including the Company, toreport the structures of all of their incentive-based compensation arrangements and prohibit incentive-basedpayment arrangements that encourage inappropriate risks by providing employees, directors or principalshareholders with compensation that is excessive or that could lead to material financial loss to the coveredfinancial institution. In April 2011, seven federal agencies, including the Federal Reserve, jointly proposed aninteragency rule implementing this requirement. Further, pursuant to the Dodd-Frank Act, the SEC must directlisting exchanges to require companies to implement policies relating to disclosure of incentive-basedcompensation that is based on publicly reported financial information and the clawback of such compensationfrom current or former executive officers following certain accounting restatements.

In addition to the guidelines issued by the Federal Reserve and referenced above, the Company’s compensationpractices may also be impacted by other regulations, including those promulgated in accordance with the FSBcompensation principles and standards, CRD IV, Alternative Investment Fund Managers Directive regulations,the fifth Undertakings for Collective Investment in Transferable Securities Directive and proposed secondMarkets in Financial Instruments Directive. The FSB standards are to be implemented by local regulators,including in the U.K., where the remuneration of employees of certain banks is governed by the RemunerationCode. In the E.U., beginning on January 1, 2014, the Company’s compensation practices with respect to certainemployees whose activities have a material impact on the risk profile of the Company’s E.U. operations will besubject to CRD IV, which includes a fixed cap on bonuses and other variable remuneration restrictions.

For a discussion of certain risks relating to the Company’s regulatory environment, see “Risk Factors” in Part I,Item 1A herein.

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Executive Officers of Morgan Stanley.

The executive officers of Morgan Stanley and their ages and titles as of February 25, 2014 are set forth below.Business experience for the past five years is provided in accordance with SEC rules.

Gregory J. Fleming (50). Executive Vice President (since February 2010), President of InvestmentManagement (since February 2010) and President of Wealth Management of Morgan Stanley (since January2011). President of Research of Morgan Stanley (February 2010 to January 2011). Senior Research Scholar atYale Law School and Distinguished Visiting Fellow of the Center for the Study of Corporate Law at Yale LawSchool (January 2009 to December 2009). President of Merrill Lynch & Co., Inc. (“Merrill Lynch”) (February2008 to January 2009). Co-President of Merrill Lynch (May 2007 to February 2008). Executive Vice Presidentand Co-President of the Global Markets and Investment Banking Group of Merrill Lynch (August 2003 to May2007).

James P. Gorman (55). Chairman of the Board of Directors and Chief Executive Officer of Morgan Stanley(since January 2012). President and Chief Executive Officer (January 2010 through December 2011) andmember of the Board of Directors (since January 2010). Co-President (December 2007 to December 2009) andCo-Head of Strategic Planning (October 2007 to December 2009). President and Chief Operating Officer ofWealth Management (February 2006 to April 2008).

Eric F. Grossman (47). Executive Vice President and Chief Legal Officer of Morgan Stanley (since January2012). Global Head of Legal (September 2010 to January 2012). Global Head of Litigation (January 2006 toSeptember 2010) and General Counsel of the Americas (May 2009 to September 2010). General Counsel ofWealth Management (November 2008 to June 2009). Partner at the law firm of Davis Polk & Wardwell LLP(June 2001 to December 2005).

Keishi Hotsuki (51). Chief Risk Officer of Morgan Stanley (since May 2011). Interim Chief Risk Officer(January 2011 to May 2011) and Head of Market Risk Department (since March 2008). Director of MitsubishiUFJ Morgan Stanley Securities Co., Ltd. (since May 2010). Global Head of Market Risk Management at MerrillLynch (June 2005 to September 2007).

Colm Kelleher (56). Executive Vice President (since October 2007) and President of Institutional Securities(since January 2013). Co-President of Institutional Securities of Morgan Stanley (January 2010 to December2012). Chief Financial Officer and Co-Head of Strategic Planning (October 2007 to December 2009). Head ofGlobal Capital Markets (February 2006 to October 2007). Co-Head of Fixed Income Europe (May 2004 toFebruary 2006).

Ruth Porat (56). Executive Vice President and Chief Financial Officer of Morgan Stanley (since January2010). Vice Chairman of Investment Banking (September 2003 to December 2009). Global Head of FinancialInstitutions Group (September 2006 to December 2009) and Chairman of the Financial Sponsors Group (July2004 to September 2006) within Investment Banking.

James A. Rosenthal (60). Executive Vice President and Chief Operating Officer of Morgan Stanley (sinceJanuary 2011). Head of Corporate Strategy (January 2010 to May 2011). Chief Operating Officer of WealthManagement (January 2010 to August 2011). Head of Firmwide Technology and Operations of Morgan Stanley(March 2008 to January 2010). Chief Financial Officer of Tishman Speyer (May 2006 to March 2008).

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Item 1A. Risk Factors.Liquidity and Funding Risk.

Liquidity and funding risk refers to the risk that we will be unable to finance our operations due to a loss ofaccess to the capital markets or difficulty in liquidating our assets. Liquidity and funding risk also encompassesour ability to meet our financial obligations without experiencing significant business disruption or reputationaldamage that may threaten our viability as a going concern. For more information on how we monitor and manageliquidity and funding risk, see “Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources” in Part II, Item 7 herein.

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

Liquidity is essential to our businesses. Our liquidity could be negatively affected by our inability to raise funding inthe long-term or short-term debt capital markets or our inability to access the secured lending markets. Factors that wecannot control, such as disruption of the financial markets or negative views about the financial services industrygenerally, including concerns regarding the remaining sovereign debt issues in Europe or fiscal matters in the U.S.,could impair our ability to raise funding. In addition, our ability to raise funding could be impaired if investors orlenders develop a negative perception of our long-term or short-term financial prospects due to factors such as if wewere to incur large trading losses, are downgraded by the rating agencies, suffer a decline in the level of our businessactivity, or if regulatory authorities take significant action against us, or we discover significant employee misconductor illegal activity. If we are unable to raise funding using the methods described above, we would likely need to financeor liquidate unencumbered assets, such as our investment and trading portfolios, to meet maturing liabilities. We maybe unable to sell some of our assets, or we may have to sell assets at a discount from market value, either of whichcould adversely affect our results of operations, cash flows and financial condition.

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

The cost and availability of unsecured financing generally are impacted by our short-term and long-term creditratings. The rating agencies are continuing to monitor certain issuer specific factors that are important to thedetermination of our credit ratings, including governance, the level and quality of earnings, capital adequacy,funding and liquidity, risk appetite and management, asset quality, strategic direction, and business mix.Additionally, the rating agencies will look at other industry-wide factors such as regulatory or legislativechanges, macro-economic environment, and perceived levels of government support, and it is possible that theycould downgrade our ratings and those of similar institutions. For example, in November 2013, Moody’s InvestorServices, Inc. (“Moody’s”) took certain ratings actions with respect to eight large U.S. banking groups, includingdowngrading us, to remove certain uplift from the U.S. government support in their ratings. See also“Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity andCapital Resources—Credit Ratings” in Part II, Item 7 herein.

Our credit ratings also can have a significant impact on certain trading revenues, particularly in those businesseswhere longer term counterparty performance is a key consideration, such as OTC derivative transactions,including credit derivatives and interest rate swaps. In connection with certain OTC trading agreements andcertain other agreements associated with the Institutional Securities business segment, we may be required toprovide additional collateral to, or immediately settle any outstanding liability balance with, certaincounterparties in the event of a credit ratings downgrade. Termination of our trading and other agreements couldcause us to sustain losses and impair our liquidity by requiring us to find other sources of financing or to makesignificant cash payments or securities movements. The additional collateral or termination payments which mayoccur in the event of a future credit rating downgrade vary by contract and can be based on ratings by either orboth of Moody’s and Standard & Poor’s Financial Services LLC. At December 31, 2013, the future potentialcollateral amounts and termination payments that could be called or required by counterparties, exchanges andclearing organizations in the event of one-notch or two-notch downgrade scenarios based on the relevantcontractual downgrade triggers were $1,522 million and an incremental $3,321 million, respectively.

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

The parent holding company depends on dividends, distributions and other payments from its subsidiaries to funddividend payments and to fund all payments on its obligations, including debt obligations. Regulatory, taxrestrictions or elections and other legal restrictions may limit our ability to transfer funds freely, either to or fromour subsidiaries. In particular, many of our subsidiaries, including our broker-dealer subsidiaries, are subject tolaws, regulations and self-regulatory organization rules that authorize regulatory bodies to block or reduce theflow of funds to the parent holding company, or that prohibit such transfers altogether in certain circumstances,including steps to “ring fence” entities by regulators outside of the U.S. to protect clients and creditors of suchentities in the event of financial difficulties involving such entities. These laws, regulations and rules may hinderour ability to access funds that we may need to make payments on our obligations. Furthermore, as a bankholding company, we may become subject to a prohibition or to limitations on our ability to pay dividends orrepurchase our stock. The OCC, the Federal Reserve and the FDIC have the authority, and under certaincircumstances the duty, to prohibit or to limit the payment of dividends by the banking organizations theysupervise, including us and our bank company subsidiaries.

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

Our ability to raise funding in the long-term or short-term debt capital markets or the equity markets, or to accesssecured lending markets, has in the past been, and could in the future be, adversely affected by conditions in theU.S. and international markets and economy. Global market and economic conditions have been particularlydisrupted and volatile in the last several years and continue to be, including as a result of the European sovereigndebt crisis, and uncertainty regarding U.S. fiscal matters. In particular, our cost and availability of funding havebeen, and may in the future be, adversely affected by illiquid credit markets and wider credit spreads. Continuedturbulence in the U.S., the E.U. and other international markets and economies could adversely affect ourliquidity and financial condition and the willingness of certain counterparties and customers to do business withus.

Market Risk.

Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, impliedvolatilities (the price volatility of the underlying instrument imputed from option prices), correlations or othermarket factors, such as market liquidity, will result in losses for a position or portfolio owned by us. For moreinformation on how we monitor and manage market risk, see “Quantitative and Qualitative Disclosure aboutMarket Risk” in Part II, Item 7A.

Our results of operations may be materially affected by market fluctuations and by global and economicconditions and other factors.

Our results of operations may be materially affected by market fluctuations due to global and economicconditions and other factors. Our results of operations in the past have been, and in the future may continue to be,materially affected by many factors, including the effect of economic and political conditions and geopoliticalevents; the effect of market conditions, particularly in the global equity, fixed income, credit and commoditiesmarkets, including corporate and mortgage (commercial and residential) lending and commercial real estatemarkets; the impact of current, pending and future legislation (including the Dodd-Frank Act), regulation(including capital, leverage and liquidity requirements), policies (including fiscal and monetary), and legal andregulatory actions in the U.S. and worldwide; the level and volatility of equity, fixed income and commodityprices, interest rates, currency values and other market indices; the availability and cost of both credit and capitalas well as the credit ratings assigned to our unsecured short-term and long-term debt; investor, consumer andbusiness sentiment and confidence in the financial markets; the performance of our acquisitions, divestitures,joint ventures, strategic alliances or other strategic arrangements (including with Mitsubishi UFJ Financial

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Group, Inc. (“MUFG”)); our reputation; inflation, natural disasters, and acts of war or terrorism; the actions andinitiatives of current and potential competitors, as well as governments, regulators and self-regulatoryorganizations; the effectiveness of our risk management policies; and technological changes and risks, includingcybersecurity risks; or a combination of these or other factors. In addition, legislative, legal and regulatorydevelopments related to our businesses are likely to increase costs, thereby affecting results of operations. Thesefactors also may have an adverse impact on our ability to achieve our strategic objectives.

The results of our Institutional Securities business segment, particularly results relating to our involvement inprimary and secondary markets for all types of financial products, are subject to substantial fluctuations due to avariety of factors, such as those enumerated above that we cannot control or predict with great certainty. Thesefluctuations impact results by causing variations in new business flows and in the fair value of securities and otherfinancial products. Fluctuations also occur due to the level of global market activity, which, among other things,affects the size, number and timing of investment banking client assignments and transactions and the realization ofreturns from our principal investments. During periods of unfavorable market or economic conditions, the level ofindividual investor participation in the global markets, as well as the level of client assets, may also decrease, whichwould negatively impact the results of our Wealth Management business segment. In addition, fluctuations in globalmarket activity could impact the flow of investment capital into or from assets under management or supervisionand the way customers allocate capital among money market, equity, fixed income or other investment alternatives,which could negatively impact our Investment Management business segment.

We may experience declines in the value of our financial instruments and other losses related to volatile andilliquid market conditions.

Market volatility, illiquid market conditions and disruptions in the credit markets make it extremely difficult tovalue certain of our securities, particularly during periods of market displacement. Subsequent valuations, in lightof factors then prevailing, may result in significant changes in the values of these securities in future periods. Inaddition, at the time of any sales and settlements of these securities, the price we ultimately realize will dependon the demand and liquidity in the market at that time and may be materially lower than their current fair value.Any of these factors could cause a decline in the value of our securities portfolio, which may have an adverseeffect on our results of operations in future periods.

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

Holding large and concentrated positions may expose us to losses.

Concentration of risk may reduce revenues or result in losses in our market-making, investing, block trading,underwriting and lending businesses in the event of unfavorable market movements. We commit substantialamounts of capital to these businesses, which often results in our taking large positions in the securities of, ormaking large loans to, a particular issuer or issuers in a particular industry, country or region.

We have incurred, and may continue to incur, significant losses in the real estate sector.

We finance and acquire principal positions in a number of real estate and real estate-related products for our ownaccount, for investment vehicles managed by affiliates in which we also may have a significant investment, forseparate accounts managed by affiliates and for major participants in the commercial and residential real estatemarkets.

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We also originate loans secured by commercial and residential properties. Further, we securitize and trade in awide range of commercial and residential real estate and real estate-related whole loans, mortgages and other realestate and commercial assets and products, including residential and commercial mortgage-backed securities.These businesses have been, and may continue to be, adversely affected by the downturn in the real estate sector.In connection with these activities, we have provided, or otherwise agreed to be responsible for, certainrepresentations and warranties. Under certain circumstances, we may be required to repurchase such assets ormake other payments related to such assets if such representations and warranties were breached. Between 2004and December 31, 2013, we sponsored approximately $148.0 billion of residential mortgage-backed securities(“RMBS”) primarily containing U.S. residential loans. Of that amount, we made representations and warrantiesconcerning approximately $47.0 billion of loans and agreed to be responsible for the representations andwarranties made by third-party sellers, many of which are now insolvent, on approximately $21.0 billion ofloans. At December 31, 2013, the current unpaid principal balance (“UPB”) for all the residential assets subjectto such representations and warranties was approximately $17.2 billion and the cumulative losses associated withU.S. RMBS were approximately $13.5 billion. We did not make, or otherwise agree to be responsible, for therepresentations and warranties made by third party sellers on approximately $79.9 billion of residential loans thatwe securitized during that time period. We have not sponsored any U.S. RMBS transactions since 2007.

We have also made representations and warranties in connection with our role as an originator of certaincommercial mortgage loans that we securitized in commercial mortgage-backed securities (“CMBS”). Between2004 and December 31, 2013, we originated approximately $50.6 billion and $13.0 billion of U.S. and non-U.S.commercial mortgage loans, respectively, that were placed into CMBS sponsored by us. At December 31, 2013,the current UPB for all U.S. commercial mortgage loans subject to such representations and warranties was $33.0billion. At December 31, 2013, the current UPB when known for all non-U.S. commercial mortgage loans,subject to such representations and warranties was approximately $3.0 billion and the UPB at the time of salewhen the current UPB is not known was $0.4 billion.

Over the last several years, the level of litigation and investigatory activity (both formal and informal) bygovernment and self-regulatory agencies has increased materially in the financial services industry. As a result,we have been and expect that we may continue to become, the subject of increased claims for damages and otherrelief in the future. We continue to monitor our real estate-related activities in order to manage our exposures andpotential liability from these markets and businesses. See “Legal Proceedings—Residential Mortgage and CreditCrisis Related Matters” in Part I, Item 3 herein.

Credit Risk.

Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financialobligations to us. For more information on how we monitor and manage credit risk, see “Quantitative andQualitative Disclosure about Market Risk—Risk Management—Credit Risk” in Part II, Item 7A herein.

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

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

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We also incur credit risk in the Wealth Management business segment lending to individual investors, including,but not limited to, margin and securities-based loans collateralized by securities, residential mortgage loans andhome equity lines of credit.

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

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

The commercial soundness of many financial institutions may be closely interrelated as a result of credit, trading,clearing or other relationships between the institutions. For example, increased centralization of trading activitiesthrough particular clearing houses, central agents or exchanges as required by provisions of the Dodd-Frank Actmay increase our concentration of risk with respect to these entities. As a result, concerns about, or a default orthreatened default by, one institution could lead to significant market-wide liquidity and credit problems, lossesor defaults by other institutions. This is sometimes referred to as “systemic risk” and may adversely affectfinancial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, withwhich we interact on a daily basis, and therefore could adversely affect us. See also “Systemic Risk Regime”under “Business—Supervision and Regulation—Financial Holding Company” in Part I, Item 1 herein.

Operational Risk.

Operational risk refers to the risk of loss, or of damage to our reputation, resulting from inadequate or failedprocesses, people and systems or from external events (e.g., fraud, legal and compliance risks or damage tophysical assets). We may incur operational risk across the full scope of our business activities, including revenue-generating activities (e.g., sales and trading) and control groups (e.g., information technology and tradeprocessing). Legal, regulatory and compliance risk is included in the scope of operational risk and is discussedbelow under “Legal, Regulatory and Compliance Risk.” For more information on how we monitor and manageoperational risk, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Operational Risk” in Part II, Item 7A herein.

We are subject to operational risk that could adversely affect our businesses.

Our businesses are highly dependent on our ability to process, on a daily basis, a large number of transactionsacross numerous and diverse markets in many currencies. In addition, we may introduce new products or servicesor change processes, resulting in new operational risk that we may not fully appreciate or identify. In general, thetransactions we process are increasingly complex. We perform the functions required to operate our differentbusinesses either by ourselves or through agreements with third parties. We rely on the ability of our employees,our internal systems and systems at technology centers operated by unaffiliated third parties to process a highvolume of transactions.

We also face the risk of operational failure or termination of any of the clearing agents, exchanges, clearinghouses or other financial intermediaries we use to facilitate our securities transactions. In the event of abreakdown or improper operation of our or a third party’s systems or improper or unauthorized action by thirdparties or our employees, we could suffer financial loss, an impairment to our liquidity, a disruption of ourbusinesses, regulatory sanctions or damage to our reputation. In addition, the interconnectivity of multiplefinancial institutions with central agents, exchanges and clearing houses, and the increased importance of theseentities, increases the risk that an operational failure at one institution or entity may cause an industry-wideoperational failure that could materially impact our ability to conduct business.

Our operations rely on the secure processing, storage and transmission of confidential and other information inour computer systems and the systems of third parties with which we do business or that facilitate our business

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activities, such as vendors. Like other financial services firms, we and our third party providers have been andcontinue to be subject to unauthorized access, mishandling or misuse, computer viruses or malware, cyberattacks, denial of service attacks and other events. The increased use of smartphones, tablets and other mobiledevices may also heighten these and other operational risks. Events such as these could have a security impact onour systems and jeopardize our or our clients’ or counterparties’ personal, confidential, proprietary or otherinformation processed and stored in, and transmitted through, our and our third party providers’ computersystems. Furthermore, such events could cause interruptions or malfunctions in our, our clients’, ourcounterparties’ or third parties’ operations, which could result in reputational damage, client dissatisfaction,litigation or regulatory fines or penalties not covered by insurance maintained by us, and adversely affect ourbusiness, financial condition or results of operations.

Despite the business contingency plans we have in place, there can be no assurance that such plans will fullymitigate all potential business continuity risks to us. Our ability to conduct business may be adversely affected bya disruption in the infrastructure that supports our business and the communities where we are located, which areconcentrated in the New York metropolitan area, London, Hong Kong and Tokyo. This may include a disruptioninvolving physical site access, terrorist activities, disease pandemics, catastrophic events, natural disasters,extreme weather events, electrical, environmental, computer servers, communications or other services we use,our employees or third parties with whom we conduct business.

Legal, Regulatory and Compliance Risk.

Legal, regulatory and compliance risk includes the risk of legal or regulatory sanctions, material financial lossincluding fines, penalties, judgments, damages and/or settlements, or loss to reputation we may suffer as a resultof our failure to comply with laws, regulations, rules, related self-regulatory organization standards and codes ofconduct applicable to our business activities. Legal, regulatory and compliance risk also includes contractual andcommercial risk such as the risk that a counterparty’s performance obligations will be unenforceable. In today’senvironment of rapid and possibly transformational regulatory change, we also view regulatory change as acomponent of legal, regulatory and compliance risk. For more information on how we monitor and manage legal,regulatory and compliance risk, see “Quantitative and Qualitative Disclosures about Market Risk—RiskManagement—Legal, Regulatory and Compliance Risk” in Part II, Item 7A herein.

The financial services industry is subject to extensive regulation, which is undergoing major changes that willimpact our business.

Like other major financial services firms, we are subject to extensive regulation by U.S. federal and stateregulatory agencies and securities exchanges and by regulators and exchanges in each of the major marketswhere we conduct our business. These laws and regulations significantly affect the way we do business, and canrestrict the scope of our existing businesses and limit our ability to expand our product offerings and pursuecertain investments.

In response to the financial crisis, legislators and regulators, both in the U.S. and worldwide, have adopted, or arecurrently considering enacting, financial market reforms that have resulted and could result in major changes tothe way our global operations are regulated. In particular, as a result of the Dodd-Frank Act, we are, or willbecome, subject to (among other things) significantly revised and expanded regulation and supervision, to moreintensive scrutiny of our businesses and any plans for expansion of those businesses, to new activities limitations,to a systemic risk regime that imposes heightened capital and liquidity requirements to new restrictions onactivities and investments imposed by the Volcker Rule, and to comprehensive new derivatives regulation. Whilecertain portions of the Dodd-Frank Act became effective immediately, most other portions are effectivefollowing transition periods or through numerous rulemakings by multiple governmental agencies, and althougha large number of rules have been proposed, many are still subject to final rulemaking or transition periods. U.S.regulators also plan to propose additional regulations to implement the Dodd-Frank Act. Many of the changesrequired by the Dodd-Frank Act could materially impact the profitability of our businesses and the value of

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assets we hold, expose us to additional costs, require changes to business practices or force us to discontinuebusinesses, adversely affect our ability to pay dividends and repurchase our stock, or require us to raise capital,including in ways that may adversely impact our shareholders or creditors. In addition, similar regulatoryrequirements are being proposed by foreign policymakers and regulators, which may be inconsistent or conflictwith regulations that we are subject to in the U.S. and, if adopted may adversely affect us. While there continuesto be uncertainty about the full impact of these changes, we do know that the Company will be subject to a morecomplex regulatory framework, and will incur costs to comply with new requirements as well as to monitor forcompliance in the future.

For example, the Volcker Rule provision of the Dodd-Frank Act will have an impact on us, including potentiallylimiting various aspects of our business. We are continuing our review of activities that may be affected by theVolcker Rule, including our trading operations and asset management activities, and are taking steps to establishthe necessary compliance programs to comply with the Volcker Rule. Given the complexity of the newframework, the full impact of the Volcker Rule is still uncertain, and will ultimately depend on the interpretationand implementation by the five regulatory agencies responsible for its oversight.

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

As a global financial services firm, we face the risk of investigations and proceedings by governmental and self-regulatory organizations in all countries in which we conduct our business. Interventions by authorities mayresult in adverse judgments, settlements, fines, penalties, injunctions or other relief. In addition to the monetaryconsequences, these measures could, for example, impact our ability to engage in, or impose limitations on,certain of our businesses. The number of these investigations and proceedings, as well as the amount of penaltiesand fines sought, has increased substantially in recent years with regard to many firms in the financial servicesindustry, including us. Significant regulatory action against us could materially adversely affect our business,financial condition or results of operations or cause us significant reputational harm, which could seriously harmour business. The Dodd-Frank Act also provides compensation to whistleblowers who present the SEC or CFTCwith information related to securities or commodities laws violations that leads to a successful enforcementaction. As a result of this compensation, it is possible we could face an increased number of investigations by theSEC or CFTC.

We have been named, from time to time, as a defendant in various legal actions, including arbitrations, classactions, and other litigation, as well as investigations or proceedings brought by regulatory agencies, arising inconnection with our activities as a global diversified financial services institution. Certain of the actual orthreatened legal or regulatory actions include claims for substantial compensatory and/or punitive damages,claims for indeterminate amounts of damages, or may result in penalties, fines, or other results adverse to us. Insome cases, the issuers that would otherwise be the primary defendants in such cases are bankrupt or in financialdistress. Like any large corporation, we are also subject to risk from potential employee misconduct, includingnon-compliance with policies and improper use or disclosure of confidential information.

Substantial legal liability could materially adversely affect our business, financial condition or results ofoperations or cause us significant reputational harm, which could seriously harm our business. For example, overthe last several years, the level of litigation and investigatory activity (both formal and informal) by governmentand self-regulatory agencies has increased materially in the financial services industry. As a result, we have been,and expect that we may continue to become, the subject of increased claims for damages and other relief in thefuture and there can be no assurance that additional material losses will not be incurred from claims that have notyet been asserted or are not yet determined to be material. For more information regarding legal proceedings inwhich we are involved see “Legal Proceedings” in Part I, Item 3 herein.

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Our business, financial condition and results of operations could be adversely affected by governmental fiscaland monetary policies.

We are affected by fiscal and monetary policies adopted by regulatory authorities and bodies of the U.S. andother governments. For example, the actions of the Federal Reserve and international central banking authoritiesdirectly impact our cost of funds for lending, capital raising and investment activities and may impact the valueof financial instruments we hold. In addition, such changes in monetary policy may affect the credit quality ofour customers. Changes in domestic and international monetary policy are beyond our control and difficult topredict.

Our commodities activities subject us to extensive regulation, potential catastrophic events and environmentalrisks and regulation that may expose us to significant costs and liabilities.

In connection with the commodities activities in our Institutional Securities business segment, we engage in theproduction, storage, transportation, marketing and trading of several commodities, including metals (base andprecious), crude oil, oil products, natural gas, electric power, emission credits, coal, freight, liquefied natural gasand related products and indices. In addition, we are an electricity power marketer in the U.S. and own electricitygenerating facilities in the U.S.; we own TransMontaigne Inc. and its subsidiaries, a group of companiesoperating in the refined petroleum products marketing and distribution business; and we own a minority interestin Heidmar Holdings LLC, which owns a group of companies that provide international marine transportationand U.S. marine logistics services. As a result of these activities, we are subject to extensive and evolvingenergy, commodities, environmental, health and safety and other governmental laws and regulations. In addition,liability may be incurred without regard to fault under certain environmental laws and regulations for theremediation of contaminated areas. Further, through these activities we are exposed to regulatory, physical andcertain indirect risks associated with climate change. Our commodities business also exposes us to the risk ofunforeseen and catastrophic events, including natural disasters, leaks, spills, explosions, release of toxicsubstances, fires, accidents on land and at sea, wars, and terrorist attacks that could result in personal injuries,loss of life, property damage, and suspension of operations. For more information about the planned sale of ourglobal oil merchanting business, see “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations—Business Segments—Institutional Securities—Sale of Global Oil Merchanting Business” in PartII, Item 7 herein.

Although we have attempted to mitigate our pollution and other environmental risks by, among other measures,adopting appropriate policies and procedures for power plant operations, monitoring the quality of petroleumstorage facilities and transport vessels and implementing emergency response programs, these actions may notprove adequate to address every contingency. In addition, insurance covering some of these risks may not beavailable, and the proceeds, if any, from insurance recovery may not be adequate to cover liabilities with respectto particular incidents. As a result, our financial condition, results of operations and cash flows may be adverselyaffected by these events.

We continue to engage in discussions with the Federal Reserve regarding our commodities activities, as the BHCAct provides a grandfather exemption for “activities related to the trading, sale or investment in commodities andunderlying physical properties,” provided that we were engaged in “any of such activities as of September 30,1997 in the United States” and provided that certain other conditions that are within our reasonable control aresatisfied. If the Federal Reserve were to determine that any of our commodities activities did not qualify for theBHC Act grandfather exemption, then we would likely be required to divest any such activities that did nototherwise conform to the BHC Act. See also “Scope of Permitted Activities” under “Business—Supervision andRegulation” in Part I, Item 1 herein.

We also expect the other laws and regulations affecting our commodities business to increase in both scope andcomplexity. During the past several years, intensified scrutiny of certain energy markets by federal, state andlocal authorities in the U.S. and abroad and the public has resulted in increased regulatory and legal enforcement,litigation and remedial proceedings involving companies engaged in the activities in which we are engaged. For

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example, the U.S. and the E.U. have increased their focus on the energy markets which has resulted in increasedregulation of companies participating in the energy markets, including those engaged in power generation andliquid hydrocarbons trading. In addition, new regulation of OTC derivatives markets in the U.S. and similarlegislation proposed or adopted abroad will impose significant new costs and impose new requirements on ourcommodities derivatives activities. We may incur substantial costs or loss of revenue in complying with currentor future laws and regulations and our overall businesses and reputation may be adversely affected by the currentlegal environment. In addition, failure to comply with these laws and regulations may result in substantial civiland criminal fines and penalties.

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

As a global financial services firm that provides products and services to a large and diversified group of clients,including corporations, governments, financial institutions and individuals, we face potential conflicts of interestin the normal course of business. For example, potential conflicts can occur when there is a divergence ofinterests between us and a client, among clients, or between an employee on the one hand and us or a client onthe other. We have policies, procedures and controls that are designed to address potential conflicts of interest.However, identifying and mitigating potential conflicts of interest can be complex and challenging, and canbecome the focus of media and regulatory scrutiny. Indeed, actions that merely appear to create a conflict can putour reputation at risk even if the likelihood of an actual conflict has been mitigated. It is possible that potentialconflicts could give rise to litigation or enforcement actions, which may lead to our clients being less willing toenter into transactions in which a conflict may occur and could adversely affect our businesses and reputation.

Our regulators have the ability to scrutinize our activities for potential conflicts of interest, including throughdetailed examinations of specific transactions. In addition, our status as a bank holding company supervised bythe Federal Reserve subjects us to direct Federal Reserve scrutiny with respect to transactions between our U.S.bank subsidiaries and their affiliates.

Risk Management.

Our risk management strategies may not be fully effective in mitigating our risk exposures in all marketenvironments or against all types of risk.

We have devoted significant resources to develop our risk management policies and procedures and expect tocontinue to do so in the future. Nonetheless, our risk management strategies, including our hedging strategies,may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk,including risks that are unidentified or unanticipated. As our businesses change and grow, and the markets inwhich we operate evolve, our risk management strategies may not always adapt with those changes. Some of ourmethods of managing risk are based upon our use of observed historical market behavior and management’sjudgment. As a result, these methods may not predict future risk exposures, which could be significantly greaterthan the historical measures indicate. For example, market conditions during the financial crisis involvedunprecedented dislocations and highlight the limitations inherent in using historical information to manage risk.Management of market, credit, liquidity, operational, legal, regulatory and compliance risks requires, amongother things, policies and procedures to record properly and verify a large number of transactions and events, andthese policies and procedures may not be fully effective. Our trading risk management strategies and techniquesalso seek to balance our ability to profit from trading positions with our exposure to potential losses. While weemploy a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and thejudgments that accompany their application cannot anticipate every economic and financial outcome or thetiming of such outcomes. For example, to the extent that our trading or investing activities involve less liquidtrading markets or are otherwise subject to restrictions on sale or hedging, we may not be able to reduce ourpositions and therefore reduce our risk associated with such positions. We may, therefore, incur losses in thecourse of our trading or investing activities. For more information on how we monitor and manage market andcertain other risks, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Market Risk” in Part II, Item 7A herein.

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Competitive Environment.

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

The financial services industry and all aspects of our businesses are intensely competitive, and we expect them toremain so. We compete with commercial banks, brokerage firms, insurance companies, electronic trading andclearing platforms, financial data repositories, sponsors of mutual funds, hedge funds, energy companies andother companies offering financial or ancillary services in the U.S., globally and through the internet. Wecompete on the basis of several factors, including transaction execution, capital or access to capital, products andservices, innovation, reputation, risk appetite and price. Over time, certain sectors of the financial servicesindustry have become more concentrated, as institutions involved in a broad range of financial services have leftbusinesses, been acquired by or merged into other firms or have declared bankruptcy. Such changes could resultin our remaining competitors gaining greater capital and other resources, such as the ability to offer a broaderrange of products and services and geographic diversity, or new competitors may emerge. We have experiencedand may continue to experience pricing pressures as a result of these factors and as some of our competitors seekto obtain market share by reducing prices. In addition, certain of our competitors may be subject to different, andin some cases, less stringent, legal and regulatory regimes, than we are, thereby putting us at a competitivedisadvantage. For more information regarding the competitive environment in which we operate, see“Business—Competition” and “Business—Supervision and Regulation” in Part I, Item 1 herein.

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

We have experienced intense price competition in some of our businesses in recent years. In particular, theability to execute securities trades electronically on exchanges and through other automated trading markets hasincreased the pressure on trading commissions or comparable fees. The trend toward direct access to automated,electronic markets will likely continue and will likely increase as additional markets move to more automatedtrading platforms. We have experienced and it is likely that we will continue to experience competitive pressuresin these and other areas in the future as some of our competitors may seek to obtain market share by reducingprices (in the form of commissions or pricing).

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

Our people are our most important resource and competition for qualified employees is intense. In order to attractand retain qualified employees, we must compensate such employees at market levels. Typically, those levelshave caused employee compensation to be our greatest expense as compensation is highly variable and changesbased on business and individual performance and market conditions. If we are unable to continue to attract andretain highly qualified employees, or do so at rates or in forms necessary to maintain our competitive position, orif compensation costs required to attract and retain employees become more expensive, our performance,including our competitive position, could be materially adversely affected. The financial industry has and maycontinue to experience more stringent regulation of employee compensation, including limitations relating toincentive-based compensation, clawback requirements and special taxation, which could have an adverse effecton our ability to hire or retain the most qualified employees.

International Risk.

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

We are subject to political, economic, legal, tax, operational, franchise and other risks that are inherent inoperating in many countries, including risks of possible nationalization, expropriation, price controls, capitalcontrols, exchange controls, increased taxes and levies and other restrictive governmental actions, as well as theoutbreak of hostilities or political and governmental instability. In many countries, the laws and regulationsapplicable to the securities and financial services industries are uncertain and evolving, and it may be difficult for

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us to determine the exact requirements of local laws in every market. Our inability to remain in compliance withlocal laws in a particular market could have a significant and negative effect not only on our business in thatmarket but also on our reputation generally. We are also subject to the enhanced risk that transactions westructure might not be legally enforceable in all cases.

Various emerging market countries have experienced severe political, economic and financial disruptions,including significant devaluations of their currencies, defaults or potential defaults on sovereign debt, capital andcurrency exchange controls, high rates of inflation and low or negative growth rates in their economies. Crimeand corruption, as well as issues of security and personal safety, also exist in certain of these countries. Theseconditions could adversely impact our businesses and increase volatility in financial markets generally.

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

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

Acquisition and Joint Venture Risk.

We may be unable to fully capture the expected value from acquisitions, divestitures, joint ventures, minoritystakes and strategic alliances.

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

For example, the ownership arrangements relating to the Company’s joint venture in Japan with MUFG of theirrespective investment banking and securities businesses are complex. MUFG and the Company have integratedtheir respective Japanese securities businesses by forming two joint venture companies, MUMSS andMSMS. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—OtherMatters—Japanese Securities Joint Venture” in Part II, Item 7 herein.

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

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

Certain of our business initiatives, including expansions of existing businesses, may bring us into contact,directly or indirectly, with individuals and entities that are not within our traditional client and counterparty baseand may expose us to new asset classes and new markets. These business activities expose us to new andenhanced risks, greater regulatory scrutiny of these activities, increased credit-related, sovereign and operationalrisks, and reputational concerns regarding the manner in which these assets are being operated or held.

For more information regarding the regulatory environment in which we operate, see also “Business—Supervision and Regulation” in Part I, Item 1 herein.

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Item 1B. Unresolved Staff Comments.

The Company, like other well-known seasoned issuers, from time to time receives written comments from thestaff of the SEC regarding its periodic or current reports under the Exchange Act. There are no comments thatremain unresolved that the Company received not less than 180 days before the end of the year to which thisreport relates that the Company believes are material.

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Item 2. Properties.

The Company has offices, operations and data centers located around the world. The Company’s properties thatare not owned are leased on terms and for durations that are reflective of commercial standards in thecommunities where these properties are located. The Company believes the facilities it owns or occupies areadequate for the purposes for which they are currently used and are well maintained. The Company’s principaloffices consist of the following properties:

LocationOwned/Leased Lease Expiration

Approximate Square Footageas of December 31, 2013(A)

U.S. Locations

1585 BroadwayNew York, New York(Global Headquarters and Institutional

Securities Headquarters)

Owned N/A 1,346,500 square feet

2000 Westchester AvenuePurchase, New York(Wealth Management Headquarters)

Owned N/A 597,400 square feet

522 Fifth AvenueNew York, New York(Investment Management Headquarters)

Owned N/A 581,250 square feet

New York, New York(Several locations)

Leased 2014 – 2029 2,394,600 square feet

Brooklyn, New York(Several locations)

Leased 2014 – 2023 344,100 square feet

Jersey City, New Jersey(Several locations)

Leased 2014 369,200 square feet

International Locations

20 Bank StreetLondon(London Headquarters)


Canary WharfLondon

Leased(B) 2020 454,600 square feet

1 Austin Road WestKowloon(Hong Kong Headquarters)


Sapporo’s Yebisu Garden PlaceEbisu, Shibuya-ku

Leased 2013(C) 300,700 square feet

Otemachi Financial City South TowerOtemachi, Chiyoda-ku(Tokyo Headquarters)

Leased 2028(C) 246,700 square feet

(A) The indicated total aggregate square footage leased does not include space occupied by Morgan Stanley branch offices.(B) The Company holds the freehold interest in the land and building.(C) The Company began relocating its Tokyo headquarters from Yebisu Garden Place to Otemachi Financial City South Tower beginning in

December 2013. The relocation will be complete by March 31, 2014.

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Item 3. Legal Proceedings.In addition to the matters described below, in the normal course of business, the Company has been named, fromtime 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 actualor threatened legal actions include claims for substantial compensatory and/or punitive damages or claims forindeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants insuch cases are bankrupt or in financial distress.

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

The Company contests liability and/or the amount of damages as appropriate in each pending matter. Whereavailable information indicates that it is probable a liability had been incurred at the date of the consolidatedfinancial statements and the Company can reasonably estimate the amount of that loss, the Company accrues theestimated loss by a charge to income. The Company expects future litigation accruals in general to continue to beelevated and the changes in accruals from period to period may fluctuate significantly, given the currentenvironment regarding government investigations and private litigation affecting global financial services firms,including the Company.

In many proceedings and investigations, however, it is inherently difficult to determine whether any loss isprobable or even possible or to estimate the amount of any loss. The Company cannot predict with certainty if,how or when such proceedings or investigations will be resolved or what the eventual settlement, fine, penalty orother relief, if any, may be, particularly for proceedings and investigations where the factual record is beingdeveloped 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 potentiallylengthy discovery and determination of important factual matters, determination of issues related to classcertification and the calculation of damages or other relief, and by addressing novel or unsettled legal questionsrelevant to the proceedings or investigations in question, before a loss or additional loss or range of loss oradditional loss can be reasonably estimated for a proceeding or investigation. Subject to the foregoing, theCompany believes, based on current knowledge and after consultation with counsel, that the outcome of suchproceedings and investigations will not have a material adverse effect on the consolidated financial condition ofthe Company, although the outcome of such proceedings or investigations could be material to the Company’soperating results and cash flows for a particular period depending on, among other things, the level of theCompany’s revenues or income for such period.

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

Residential Mortgage and Credit Crisis Related Matters.

Regulatory and Governmental Matters. The Company is responding to subpoenas and requests for informationfrom certain federal and state regulatory and governmental entities, including among others various members ofthe RMBS Working Group of the Financial Fraud Enforcement Task Force, concerning the origination,financing, purchase, securitization and servicing of subprime and non-subprime residential mortgages and relatedmatters such as residential mortgage backed securities (“RMBS”), collateralized debt obligations (“CDOs”),structured investment vehicles (“SIVs”) and credit default swaps backed by or referencing mortgage pass-

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through certificates. These matters include, but are not limited to, investigations related to the Company’s duediligence on the loans that it purchased for securitization, the Company’s communications with ratings agencies,the Company’s disclosures to investors, and the Company’s handling of servicing and foreclosure related issues.

On January 30, 2014, the Company reached an agreement in principle with the Staff of the Enforcement Divisionof the U.S. Securities and Exchange Commission (the “SEC”) to resolve an investigation related to certainsubprime RMBS transactions sponsored and underwritten by the Company in 2007. Pursuant to the agreement inprinciple, the Company would be charged with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act, andthe Company would pay disgorgement and penalties in an amount of $275 million and would neither admit nordeny the SEC’s findings. The SEC has not yet presented the proposed settlement to the Commission and noassurance can be given that it will be accepted.

Class Actions. Beginning in December 2007, several purported class action complaints were filed in theUnited States District Court for the Southern District of New York (the “SDNY”) asserting claims on behalf ofparticipants in the Company’s 401(k) plan and employee stock ownership plan against the Company and otherparties, including certain present and former directors and officers, under the Employee Retirement IncomeSecurity Act of 1974 (“ERISA”). In February 2008, these actions were consolidated in a single proceeding,styled In re Morgan Stanley ERISA Litigation. The consolidated complaint relates in large part to the Company’ssubprime and other mortgage related losses, but also includes allegations regarding the Company’s disclosures,internal controls, accounting and other matters. On March 16, 2011, a purported class action, styled Coulter v.Morgan Stanley & Co. Incorporated et al., was filed in the SDNY asserting claims on behalf of participants inthe Company’s 401(k) plan and employee stock ownership plan against the Company and certain current andformer officers and directors for breach of fiduciary duties under ERISA. The complaint alleges, among otherthings, that defendants knew or should have known that from January 2, 2008 to December 31, 2008, the plans’investment in Company stock was imprudent given the extraordinary risks faced by the Company and itscommon stock during that period. On March 28, 2013, the court granted defendants’ motions to dismiss bothactions. Plaintiffs filed notices of appeal on June 27, 2013 in the United States Court of Appeals for the SecondCircuit (the “Second Circuit”) in both matters, which have been consolidated on appeal.

On February 12, 2008, a purported class action, styled Joel Stratte-McClure, et al. v. Morgan Stanley, et al., wasfiled in the SDNY against the Company and certain present and former executives asserting claims on behalf of apurported class of persons and entities who purchased shares of the Company’s common stock during the periodJune 20, 2007 to December 19, 2007 and who suffered damages as a result of such purchases. The allegations inthe amended complaint related in large part to the Company’s subprime and other mortgage related losses, andalso included allegations regarding the Company’s disclosures, internal controls, accounting and other matters.On August 8, 2011, defendants filed a motion to dismiss the second amended complaint, which was granted onJanuary 18, 2013. On May 29, 2013, the plaintiffs filed an appeal in the Second Circuit, which appeal is pending.

On May 7, 2009, the Company was named as a defendant in a purported class action lawsuit brought underSections 11, 12 and 15 of the Securities Act of 1933, as amended (the “Securities Act”), which is now styled Inre Morgan Stanley Mortgage Pass-Through Certificates Litigation and is pending in the SDNY. The thirdamended complaint, filed on September 30, 2011, alleges, among other things, that the registration statementsand offering documents related to the offerings of certain mortgage pass-through certificates in 2006 containedfalse and misleading information concerning the pools of residential loans that backed these securitizations. Theplaintiffs seek, among other relief, class certification, unspecified compensatory and rescissionary damages,costs, interest and fees. On January 31, 2013, plaintiffs filed a fourth amended complaint, in which they purportto represent investors who purchased approximately $7.82 billion in mortgage pass-through certificates issued in2006 by 13 trusts. On August 30, 2013, plaintiffs filed a motion for class certification.

On May 14, 2009, the Company was named as one of several underwriter defendants in a purported class actionlawsuit brought under Sections 11, 12 and 15 of the Securities Act which is now styled In re IndyMac Mortgage-Backed Securities Litigation and is pending in the SDNY. The claims against the Company relate to offerings ofmortgage pass-through certificates issued by several trusts sponsored by affiliates of IndyMac Bancorp during

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2006 and 2007. Plaintiff alleges, among other things, that the registration statements and offering documentsrelated to the offerings of certain mortgage pass-through certificates contained false and misleading informationconcerning the pools of residential loans that backed these securitizations. The plaintiffs seek, among other relief,class certification, unspecified compensatory and rescissionary damages, costs, interest and fees. The amount ofthe certificates underwritten by the Company at issue in the litigation was approximately $1.68 billion. OnAugust 17, 2012, the court granted class certification with respect to one offering underwritten by the Company.On August 30, 2013, plaintiffs filed a motion to expand the certified class to include additional offerings.IndyMac Bank, which was the sponsor of these securitizations, filed for bankruptcy on July 31, 2008, and theCompany’s ability to be indemnified by IndyMac Bank is limited.

On October 25, 2010, the Company, certain affiliates and Pinnacle Performance Limited, a special purposevehicle (“SPV”), were named as defendants in a purported class action related to securities issued by the SPV inSingapore, commonly referred to as Pinnacle Notes. The case is styled Ge Dandong, et al. v. PinnaclePerformance Ltd., et al. and is pending in the SDNY. An amended complaint was filed on October 22, 2012. Thecourt denied defendants’ motion to dismiss the amended complaint on August 22, 2013 and granted classcertification on October 17, 2013. On October 30, 2013, defendants filed a petition for permission to appeal thecourt’s decision granting class certification. On January 31, 2014, plaintiffs filed a second amendedcomplaint. The second amended complaint alleges that the defendants engaged in a fraudulent scheme to defraudinvestors by structuring the Pinnacle Notes to fail and benefited subsequently from the securities’ failure. Inaddition, the second amended complaint alleges that the securities’ offering materials contained materialmisstatements or omissions regarding the securities’ underlying assets and the alleged conflicts of interestbetween the defendants and the investors. The second amended complaint asserts common law claims of fraud,aiding and abetting fraud, fraudulent inducement, aiding and abetting fraudulent inducement, and breach of theimplied covenant of good faith and fair dealing. Plaintiffs seek damages of approximately $138.7 million,rescission, punitive damages, and interest.

Other Litigation. On December 23, 2009, the Federal Home Loan Bank of Seattle filed a complaint against theCompany and another defendant in the Superior Court of the State of Washington, styled Federal Home LoanBank of Seattle v. Morgan Stanley & Co. Inc., et al. The amended complaint, filed on September 28, 2010,alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgagepass-through certificates backed by securitization trusts containing residential mortgage loans. The total amountof certificates allegedly sold to plaintiff by the Company was approximately $233 million. The complaint raisesclaims under the Washington State Securities Act and seeks, among other things, to rescind the plaintiff’spurchase of such certificates. On October 18, 2010, defendants filed a motion to dismiss the action. By ordersdated June 23, 2011 and July 18, 2011, the court denied defendants’ omnibus motion to dismiss plaintiff’samended complaint and on August 15, 2011, the court denied the Company’s individual motion to dismiss theamended complaint.

On March 15, 2010, the Federal Home Loan Bank of San Francisco filed two complaints against the Company andother defendants in the Superior Court of the State of California. These actions are styled Federal Home Loan Bankof San Francisco v. Credit Suisse Securities (USA) LLC, et al., and Federal Home Loan Bank of San Francisco v.Deutsche Bank Securities Inc. et al., respectively. Amended complaints were filed on June 10, 2010. The amendedcomplaints allege that defendants made untrue statements and material omissions in connection with the sale toplaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residentialmortgage loans. The amount of certificates allegedly sold to plaintiff by the Company in these cases wasapproximately $704 million and $276 million, respectively. The complaints raise claims under both the federalsecurities laws and California law and seek, among other things, to rescind the plaintiff’s purchase of suchcertificates. On August 11, 2011, plaintiff’s Securities Act claims were dismissed with prejudice. The defendantsfiled answers to the amended complaints on October 7, 2011. On February 9, 2012, defendants’ demurrers withrespect to all other claims were overruled. On December 20, 2013, plaintiff’s negligent misrepresentation claimswere dismissed with prejudice. A bellwether trial is currently scheduled to begin in September 2014. The Companyis not a defendant in connection with the securitizations at issue in that trial.

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On July 15, 2010, The Charles Schwab Corp. filed a complaint against the Company and other defendants in theSuperior Court of the State of California, styled The Charles Schwab Corp. v. BNP Paribas Securities Corp., etal. The complaint alleges that defendants made untrue statements and material omissions in the sale to one ofplaintiff’s subsidiaries of a number of mortgage pass-through certificates backed by securitization trustscontaining residential mortgage loans. The total amount of certificates allegedly sold to plaintiff’s subsidiary bythe Company was approximately $180 million. The complaint raises claims under both the federal securities lawsand California law and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. Plaintifffiled an amended complaint on August 2, 2010. On September 22, 2011, defendants filed demurrers to theamended complaint. On October 13, 2011, plaintiff voluntarily dismissed its claims brought under the SecuritiesAct. On January 27, 2012, the court, in a ruling from the bench, substantially overruled defendants’ demurrers.On March 5, 2012, the plaintiff filed a second amended complaint. On April 10, 2012, the Company filed ademurrer to certain causes of action in the second amended complaint, which the court overruled on July 24,2012. The Company filed its answer to the second amended complaint on August 3, 2012. An initial trial ofcertain of plaintiff’s claims is scheduled to begin in July 2015.

On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against the Company, whichis styled China Development Industrial Bank v. Morgan Stanley & Co. Incorporated and is pending in theSupreme Court of NY. The Complaint relates to a $275 million credit default swap referencing the super seniorportion of the STACK 2006-1 CDO. The complaint asserts claims for common law fraud, fraudulent inducementand fraudulent concealment and alleges that the Company misrepresented the risks of the STACK 2006-1 CDOto CDIB, and that the Company knew that the assets backing the CDO were of poor quality when it entered intothe credit default swap with CDIB. The complaint seeks compensatory damages related to the approximately$228 million that CDIB alleges it has already lost under the credit default swap, rescission of CDIB’s obligationto pay an additional $12 million, punitive damages, equitable relief, fees and costs. On March 10, 2011, theCompany filed its answer to the complaint.

On October 15, 2010, the Federal Home Loan Bank of Chicago filed a complaint against the Company and otherdefendants in the Circuit Court of the State of Illinois, styled Federal Home Loan Bank of Chicago v. Bank ofAmerica Funding Corporation et al. The complaint alleges that defendants made untrue statements and materialomissions in the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trustscontaining residential mortgage loans and asserts claims under Illinois law. The total amount of certificatesallegedly sold to plaintiff by the Company at issue in the action was approximately $203 million. The complaintseeks, among other things, to rescind the plaintiff’s purchase of such certificates. On March 24, 2011, the courtpresiding over Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation et al. grantedplaintiff leave to file an amended complaint. The Company filed its answer on December 21, 2012. OnDecember 13, 2013, the court entered an order dismissing all claims related to one of the securitizations at issue.

On April 20, 2011, the Federal Home Loan Bank of Boston filed a complaint against the Company and otherdefendants in the Superior Court of the Commonwealth of Massachusetts styled Federal Home Loan Bank ofBoston v. Ally Financial, Inc. F/K/A GMAC LLC et al. An amended complaint was filed on June 19, 2012 andalleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgagepass-through certificates backed by securitization trusts containing residential mortgage loans. The total amountof certificates allegedly issued by the Company or sold to plaintiff by the Company was approximately $385million. The amended complaint raises claims under the Massachusetts Uniform Securities Act, theMassachusetts Consumer Protection Act and common law and seeks, among other things, to rescind theplaintiff’s purchase of such certificates. On May 26, 2011, defendants removed the case to the United StatesDistrict Court for the District of Massachusetts. On October 11, 2012, defendants filed motions to dismiss theamended complaint, which was granted in part and denied in part on September 30, 2013. The defendants filedan answer to the amended complaint on December 16, 2013.

On July 5, 2011, Allstate Insurance Company and certain of its affiliated entities filed a complaint against theCompany in the Supreme Court of NY, styled Allstate Insurance Company, et al. v. Morgan Stanley, et al. Anamended complaint was filed on September 9, 2011 and alleges that defendants made untrue statements and

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material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitizationtrusts containing residential mortgage loans. The total amount of certificates allegedly issued and/or sold toplaintiffs by the Company was approximately $104 million. The complaint raises common law claims offraud, fraudulent inducement, aiding and abetting fraud and negligent misrepresentation and seeks, among otherthings, compensatory and/or rescissionary damages associated with plaintiffs’ purchases of such certificates. OnMarch 15, 2013, the court denied in substantial part the defendants’ motion to dismiss the amended complaint,which order the Company appealed on April 11, 2013. On May 3, 2013, the Company filed its answer to theamended complaint.

On July 18, 2011, the Western and Southern Life Insurance Company and certain affiliated companies filed acomplaint against the Company and other defendants in the Court of Common Pleas in Ohio, styled Western andSouthern Life Insurance Company, et al. v. Morgan Stanley Mortgage Capital Inc., et al. An amended complaintwas filed on April 2, 2012 and alleges that defendants made untrue statements and material omissions in the saleto plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residentialmortgage loans. The amount of the certificates allegedly sold to plaintiffs by the Company was approximately$153 million. The amended complaint raises claims under the Ohio Securities Act, federal securities laws, andcommon law and seeks, among other things, to rescind the plaintiffs’ purchases of such certificates. TheCompany filed its answer on August 17, 2012. Trial is currently scheduled to begin in May 2015.

On November 4, 2011, the Federal Deposit Insurance Corporation (“FDIC”), as receiver for Franklin BankS.S.B, filed two complaints against the Company in the District Court of the State of Texas. Each was styledFederal Deposit Insurance Corporation, as Receiver for Franklin Bank S.S.B v. Morgan Stanley & CompanyLLC F/K/A Morgan Stanley & Co. Inc. and alleged that the Company made untrue statements and materialomissions in connection with the sale to plaintiff of mortgage pass-through certificates backed by securitizationtrusts containing residential mortgage loans. The amount of certificates allegedly underwritten and sold toplaintiff by the Company in these cases was approximately $67 million and $35 million, respectively. Thecomplaints each raised claims under both federal securities law and the Texas Securities Act and each seeks,among other things, compensatory damages associated with plaintiff’s purchase of such certificates. OnMarch 20, 2012, the Company filed answers to the complaints in both cases. On June 7, 2012, the two cases wereconsolidated. On January 10, 2013, the Company filed a motion for summary judgment and special exceptionswith respect to plaintiff’s claims. On February 6, 2013, the FDIC filed an amended consolidated complaint. OnFebruary 25, 2013, the Company filed a motion for summary judgment and special exceptions, which motionwas denied in substantial part on April 26, 2013. On May 3, 2013, the FDIC filed a second amended consolidatedcomplaint. Trial is currently scheduled to begin in November 2014.

On January 20, 2012, Sealink Funding Limited filed a complaint against the Company in the Supreme Court ofNY, styled Sealink Funding Limited v. Morgan Stanley, et al. Plaintiff purports to be the assignee of claims ofcertain special purpose vehicles (“SPVs”) formerly sponsored by SachsenLB Europe. An amended complaintwas filed on May 21, 2012 and alleges that defendants made untrue statements and material omissions in the saleto the SPVs of certain mortgage pass-through certificates backed by securitization trusts containing residentialmortgage loans. The total amount of certificates allegedly issued by the Company and/or sold by the Companywas approximately $507 million. The amended complaint raises common law claims of fraud, fraudulentinducement, and aiding and abetting fraud and seeks, among other things, compensatory and/or rescissionarydamages as well as punitive damages associated with plaintiffs’ purchases of such certificates. On March 20,2013, plaintiff filed a second amended complaint. On May 3, 2013, the Company filed a motion to dismiss thesecond amended complaint.

On January 25, 2012, Dexia SA/NV and certain of its affiliated entities filed a complaint against the Company inthe Supreme Court of NY, styled Dexia SA/NV et al. v. Morgan Stanley, et al. An amended complaint was filedon May 24, 2012 and alleges that defendants made untrue statements and material omissions in the sale toplaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residentialmortgage loans. The total amount of certificates allegedly issued by the Company and/or sold to plaintiffs by the

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Company was approximately $626 million. The amended complaint raises common law claims offraud, fraudulent inducement, and aiding and abetting fraud and seeks, among other things, compensatory and/orrescissionary damages as well as punitive damages associated with plaintiffs’ purchases of such certificates. OnOctober 16, 2013, the court granted the defendants’ motion to dismiss the amended complaint. On November 18,2013, plaintiffs filed a notice of appeal of the dismissal and a motion to renew their opposition to defendants’motion to dismiss.

On April 25, 2012, The Prudential Insurance Company of America and certain affiliates filed a complaint againstthe Company and certain affiliates in the Superior Court of the State of New Jersey, styled The PrudentialInsurance Company of America, et al. v. Morgan Stanley, et al. The complaint alleges that defendants madeuntrue statements and material omissions in connection with the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount ofcertificates allegedly sponsored, underwritten and/or sold by the Company is approximately $1 billion. Thecomplaint raises claims under the New Jersey Uniform Securities Law, as well as common law claims ofnegligent misrepresentation, fraud and tortious interference with contract and seeks, among other things,compensatory damages, punitive damages, rescission and rescissionary damages associated with plaintiffs’purchases of such certificates. On October 16, 2012, plaintiffs filed an amended complaint which, among otherthings, increases the total amount of the certificates at issue by approximately $80 million, adds causes of actionfor fraudulent inducement, equitable fraud, aiding and abetting fraud, and violations of the New Jersey RICOstatute, and includes a claim for treble damages. On March 15, 2013, the court denied the defendants’ motion todismiss the amended complaint. On April 26, 2013, the defendants filed an answer to the amended complaint.

On August 7, 2012, U.S. Bank, in its capacity as Trustee, filed a complaint on behalf of Morgan StanleyMortgage Loan Trust 2006-4SL and Mortgage Pass-Through Certificates, Series 2006-4SL (together, the“Trust”) against the Company. The matter is styled Morgan Stanley Mortgage Loan Trust 2006-4SL, et al. v.Morgan Stanley Mortgage Capital Inc. and is pending in the Supreme Court of NY. The complaint asserts claimsfor breach of contract and alleges, among other things, that the loans in the Trust, which had an original principalbalance of approximately $303 million, breached various representations and warranties. The complaint seeks,among other relief, rescission of the mortgage loan purchase agreement underlying the transaction, specificperformance and unspecified damages and interest. On October 8, 2012, the Company filed a motion to dismissthe complaint.

On August 8, 2012, U.S. Bank, in its capacity as Trustee, filed a complaint on behalf of Morgan StanleyMortgage Loan Trust 2006-14SL, Mortgage Pass-Through Certificates, Series 2006-14SL, Morgan StanleyMortgage Loan Trust 2007-4SL and Mortgage Pass-Through Certificates, Series 2007-4SL against the Company.The complaint is styled Morgan Stanley Mortgage Loan Trust 2006-14SL, et al. v. Morgan Stanley MortgageCapital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc. and is pending in theSupreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, thatthe loans in the trusts, which had original principal balances of approximately $354 million and $305 millionrespectively, breached various representations and warranties. The complaint seeks, among other relief,rescission of the mortgage loan purchase agreements underlying the transactions, specific performance andunspecified damages and interest. On October 9, 2012, the Company filed a motion to dismiss the complaint. OnAugust 16, 2013, the court granted in part and denied in part the Company’s motion to dismiss the complaint. OnSeptember 17, 2013, the Company filed its answer to the complaint. On September 26, 2013, and October 7,2013, the Company and the plaintiffs, respectively, filed notices of appeal with respect to the court’s August 16,2013 decision.

On August 10, 2012, the FDIC, as receiver for Colonial Bank, filed a complaint against the Company in theCircuit Court of Montgomery, Alabama styled Federal Deposit Insurance Corporation as Receiver for ColonialBank v. Citigroup Mortgage Loan Trust Inc. et al.. The complaint alleges that the Company made untruestatements and material omissions in connection with the sale to Colonial Bank of a mortgage pass-throughcertificate backed by a securitization trust containing residential loans. The complaint raises claims under federal

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securities law and the Alabama Securities Act and seeks, among other things, compensatory damages. The totalamount of the certificate allegedly sponsored, underwritten and/or sold by the Company to Colonial Bank wasapproximately $65 million. On September 13, 2013, the plaintiff filed an amended complaint. Defendants filed amotion to dismiss the amended complaint on November 12, 2013.

On September 28, 2012, U.S. Bank, in its capacity as Trustee, filed a complaint on behalf of Morgan StanleyMortgage Loan Trust 2006-13ARX against the Company styled Morgan Stanley Mortgage Loan Trust 2006-13ARX v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley MortgageCapital Inc., pending in the Supreme Court of NY. U.S. Bank filed an amended complaint on January 17, 2013,which asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which hadan original principal balance of approximately $609 million, breached various representations and warranties.The amended complaint seeks, among other relief, declaratory judgment relief, specific performance andunspecified damages and interest. On March 18, 2013, the Company filed a motion to dismiss the complaint.

On October 22, 2012, Asset Management Fund d/b/a AMF Funds and certain of its affiliated funds filed acomplaint against the Company in the Supreme Court of NY, styled Asset Management Fund d/b/a AMF Fundset al v. Morgan Stanley et al. The complaint alleges that defendants made material misrepresentations andomissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trustscontaining residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/orsold by the Company to plaintiffs was approximately $122 million. The complaint asserts causes of actionagainst the Company for, among other things, common law fraud, fraudulent concealment, aiding and abettingfraud, and negligent misrepresentation, and seeks, among other things, monetary and punitive damages. OnDecember 3, 2012, the Company filed a motion to dismiss the complaint. On July 18, 2013, the court dismissedclaims with respect to seven certificates purchased by the plaintiff. The remaining claims relate to certificateswith an original balance of $10.6 million. On September 12, 2013, plaintiffs filed a notice of appeal concerningthe court’s decision granting in part and denying in part the defendants’ motion to dismiss. Defendants filed anotice of cross-appeal on September 26, 2013.

On December 14, 2012, Royal Park Investments SA/NV filed a complaint against the Company, certainaffiliates, and other defendants in the Supreme Court of NY, styled Royal Park Investments SA/NV v. MerrillLynch et al. The complaint alleges that defendants made material misrepresentations and omissions in the sale toplaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residentialmortgage loans totaling approximately $628 million. On March 15, 2013, defendants filed a motion to dismissthe complaint. On June 17, 2013, the court signed a joint proposed order and stipulation allowing plaintiffs toreplead their complaint and defendants to withdraw their motion to dismiss without prejudice. On October 24,2013, plaintiff filed a new complaint against the Company in the Supreme Court of NY, styled Royal ParkInvestments SA/NV v. Morgan Stanley et al. The new complaint alleges that defendants made materialmisrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed bysecuritization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored,underwritten and/or sold by the Company to plaintiff was approximately $597 million. The complaint raisescommon law claims of fraud, fraudulent inducement, negligent misrepresentation, and aiding and abetting fraudand seeks, among other things, compensatory and punitive damages. On February 3, 2014, the Company filed amotion to dismiss the complaint.

On January 10, 2013, U.S. Bank, in its capacity as Trustee, filed a complaint on behalf of Morgan StanleyMortgage Loan Trust 2006-10SL and Mortgage Pass-Through Certificates, Series 2006-10SL against theCompany. The complaint is styled Morgan Stanley Mortgage Loan Trust 2006-10SL, et al. v. Morgan StanleyMortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc. and ispending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, amongother things, that the loans in the trust, which had an original principal balance of approximately $300 million,breached various representations and warranties. The complaint seeks, among other relief, an order requiring theCompany to comply with the loan breach remedy procedures in the transaction documents, unspecified damages,and interest. On March 11, 2013, the Company filed a motion to dismiss the complaint.

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On January 31, 2013, HSH Nordbank AG and certain affiliates filed a complaint against the Company, certainaffiliates, and other defendants in the Supreme Court of NY, styled HSH Nordbank AG et al. v. Morgan Stanleyet al. The complaint alleges that defendants made material misrepresentations and omissions in the sale toplaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residentialmortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Companyto plaintiff was approximately $524 million. The complaint alleges causes of action against the Company forcommon law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, andrescission and seeks, among other things, compensatory and punitive damages. On April 12, 2013, defendantsfiled a motion to dismiss the complaint.

On February 14, 2013, Bank Hapoalim B.M. filed a complaint against the Company and certain affiliates in theSupreme Court of NY, styled Bank Hapoalim B.M. v. Morgan Stanley et al. The complaint alleges thatdefendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount ofcertificates allegedly sponsored, underwritten and/or sold by the Company to plaintiff was approximately $141million. The complaint alleges causes of action against the Company for common law fraud, fraudulentconcealment, aiding and abetting fraud, and negligent misrepresentation, and seeks, among other things,compensatory and punitive damages. On April 26, 2013, defendants filed a motion to dismiss the complaint.

On March 7, 2013, the Federal Housing Finance Agency filed a summons with notice on behalf of the trustee ofthe Saxon Asset Securities Trust, Series 2007-1, against the Company and an affiliate. The matter is styledFederal Housing Finance Agency, as Conservator for the Federal Home Loan Mortgage Corporation, on behalfof the Trustee of the Saxon Asset Securities Trust, Series 2007-1 v. Saxon Funding Management LLC andMorgan Stanley and is pending in the Supreme Court of NY. The notice asserts claims for breach of contract andalleges, among other things, that the loans in the trust, which had an original principal balance of approximately$593 million, breached various representations and warranties. The notice seeks, among other relief, specificperformance of the loan breach remedy procedures in the transaction documents, unspecified damages,indemnity, and interest.

On May 3, 2013, plaintiffs in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. filed acomplaint against the Company, certain affiliates, and other defendants in the Supreme Court of NY. The complaintalleges that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgagepass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount ofcertificates allegedly sponsored, underwritten and/or sold by the Company to plaintiff was approximately $694 million.The complaint alleges causes of action against the Company for common law fraud, fraudulent concealment, aidingand abetting fraud, negligent misrepresentation, and rescission and seeks, among other things, compensatory andpunitive damages. On July 12, 2013, defendants filed a motion to dismiss the complaint.

On May 17, 2013, plaintiff in IKB International S.A. in Liquidation, et al. v. Morgan Stanley, et al. filed acomplaint against the Company and certain affiliates in the Supreme Court of NY. The complaint alleges thatdefendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount ofcertificates allegedly sponsored, underwritten and/or sold by the Company to plaintiff was approximately$132 million. The complaint alleges causes of action against the Company for common law fraud, fraudulentconcealment, aiding and abetting fraud, and negligent misrepresentation, and seeks, among other things,compensatory and punitive damages. On July 26, 2013, defendants filed a motion to dismiss the complaint.

On July 2, 2013, the trustee, Deutsche Bank became the named plaintiff in Federal Housing Finance Agency, asConservator for the Federal Home Loan Mortgage Corporation, on behalf of the Trustee of the Morgan StanleyABS Capital I Inc. Trust, Series 2007-NC1 (MSAC 2007-NC1) v. Morgan Stanley ABS Capital I Inc., and filed acomplaint in the Supreme Court of NY under the caption Deutsche Bank National Trust Company, as Trustee forthe Morgan Stanley ABS Capital I Inc. Trust, Series 2007-NC1 v. Morgan Stanley ABS Capital I, Inc. On

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February 3, 2014, the plaintiff filed an amended complaint, which asserts claims for breach of contract andbreach of the implied covenant of good faith and fair dealing and alleges, among other things, that the loans inthe trust, which had an original principal balance of approximately $1.25 billion, breached variousrepresentations and warranties. The amended complaint seeks, among other relief, specific performance of theloan breach remedy procedures in the transaction documents, unspecified damages, rescission and interest.

On July 8, 2013, plaintiff filed a complaint in Morgan Stanley Mortgage Loan Trust 2007-2AX, by U.S. BankNational Association, solely in its capacity as Trustee v. Morgan Stanley Mortgage Capital Holdings LLC, assuccessor-by-merger to Morgan Stanley Mortgage Capital Inc., and Greenpoint Mortgage Funding, Inc. Thecomplaint, filed in the Supreme Court of NY, asserts claims for breach of contract and alleges, among otherthings, that the loans in the Trust, which had an original principal balance of approximately $650 million,breached various representations and warranties. The complaint seeks, among other relief, specific performanceof the loan breach remedy procedures in the transaction documents, unspecified damages and interest. OnAugust 22, 2013, the Company a filed a motion to dismiss the complaint.

On August 5, 2013, Landesbank Baden-Württemberg and two affiliates filed a complaint against the Company andcertain affiliates in the Supreme Court of NY styled Landesbank Baden-Württemberg et al. v. Morgan Stanley etal. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiffs ofcertain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. Thetotal amount of certificates allegedly sponsored, underwritten and/or sold by the Company to plaintiffs wasapproximately $50 million. The complaint alleges causes of action against the Company for, among other things,common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescissionbased upon mutual mistake, and seeks, among other things, rescission, compensatory damages, and punitivedamages. On October 4, 2013, defendants filed a motion to dismiss the complaint.

On August 16, 2013, plaintiffs in National Credit Union Administration Board v. Morgan Stanley & Co.Incorporated, et al. filed a complaint against the Company and certain affiliates in the United States District Courtfor the District of Kansas. The complaint alleges that defendants made untrue statements of material fact or omittedto state material facts in the sale to plaintiffs of certain mortgage pass-through certificates issued by securitizationtrusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Company to plaintiffs was approximately $567 million. The complaint alleges causes of actionagainst the Company for violations of Section 11 and Section 12(a)(2) of the Securities Act of 1933, violations ofthe California Corporate Securities Law of 1968, and violations of the Kansas Blue Sky Law and seeks, amongother things, rescissionary and compensatory damages. The defendants filed a motion to dismiss the complaint onNovember 4, 2013. On December 27, 2013, the court granted the motion to dismiss in substantial part. Thesurviving claims relate to one certificate purchased by the plaintiff for approximately $17 million.

On August 26, 2013, a complaint was filed against the Company and certain affiliates in the Supreme Court ofNY, styled Phoenix Light SF Limited et al v. Morgan Stanley et al. The complaint alleges that defendants madeuntrue statements and material omissions in the sale to plaintiffs, or their assignors, of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount ofcertificates allegedly issued by the Company and/or sold to plaintiffs or their assignors by the Company wasapproximately $344 million. The complaint raises common law claims of fraud, fraudulent inducement, aidingand abetting fraud, negligent misrepresentation and rescission based on mutual mistake and seeks, among otherthings, compensatory damages, punitive damages or alternatively rescission or rescissionary damages associatedwith the purchase of such certificates. The defendants filed a motion to dismiss on December 13, 2013.

On September 23, 2013, plaintiffs in National Credit Union Administration Board v. Morgan Stanley & Co. Inc.,et al. filed a complaint against the Company and certain affiliates in the SDNY. The complaint alleges thatdefendants made untrue statements of material fact or omitted to state material facts in the sale to plaintiffs ofcertain mortgage pass-through certificates issued by securitization trusts containing residential mortgage loans.The total amount of certificates allegedly sponsored, underwritten and/or sold by the Company to plaintiffs was

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approximately $417 million. The complaint alleges causes of action against the Company for violations ofSection 11 and Section 12(a)(2) of the Securities Act of 1933, violations of the Texas Securities Act, andviolations of the Illinois Securities Law of 1953 and seeks, among other things, rescissionary and compensatorydamages. The defendants filed a motion to dismiss the complaint on November 13, 2013. On January 22, 2014,the court granted defendants’ motion to dismiss with respect to claims arising under the Securities Act of 1933and denied defendants’ motion to dismiss with respect to claims arising under Texas Securities Act and theIllinois Securities Law of 1953.

On November 6, 2013, Deutsche Bank, in its capacity as trustee, became the named plaintiff in Federal HousingFinance Agency, as Conservator for the Federal Home Loan Mortgage Corporation, on behalf of the Trustee ofthe Morgan Stanley ABS Capital I Inc. Trust, Series 2007-NC3 (MSAC 2007-NC3) v. Morgan Stanley MortgageCapital Holdings LLC, and filed a complaint in the Supreme Court of NY under the caption Deutsche BankNational Trust Company, solely in its capacity as Trustee for Morgan Stanley ABS Capital I Inc. Trust, Series2007-NC3 v. Morgan Stanley Mortgage Capital Holdings LLC, as Successor-by-Merger to Morgan StanleyMortgage Capital Inc. The complaint asserts claims for breach of contract and breach of the implied covenant ofgood faith and fair dealing and alleges, among other things, that the loans in the trust, which had an originalprincipal balance of approximately $1.3 billion, breached various representations and warranties. The complaintseeks, among other relief, specific performance of the loan breach remedy procedures in the transactiondocuments, unspecified damages, rescission, interest and costs. On December 16, 2013, the Company filed amotion to dismiss the complaint.

On December 24, 2013, Commerzbank AG London Branch filed a summons with notice against the Companyand others in the Supreme Court of NY, styled Commerzbank AG London Branch v. UBS AG et al. Plaintiffpurports to be the assignee of claims of certain other entities. The notice alleges that defendants made materialmisrepresentations and omissions in the sale to plaintiff’s assignors of certain mortgage pass-through certificatesbacked by securitization trusts containing residential mortgage loans. The total amount of certificates allegedlysponsored, underwritten and/or sold by the Company to plaintiffs was approximately $207 million. The noticeidentifies causes of action against the Company for, among other things, common-law fraud, fraudulentinducement, aiding and abetting fraud, civil conspiracy, tortious interference and unjust enrichment. The noticeidentifies the relief sought to include, among other things, monetary damages of at least approximately $207million and punitive damages.

On December 30, 2013, Wilmington Trust Company, in its capacity as trustee for Morgan Stanley MortgageLoan Trust 2007-12, filed a complaint against the Company. The matter is styled Wilmington Trust Company v.Morgan Stanley Mortgage Capital Holdings LLC et al. and is pending in the Supreme Court of NY. Thecomplaint asserts claims for breach of contract and alleges, among other things, that the loans in the trust, whichhad an original principal balance of approximately $516 million, breached various representations andwarranties. The complaint seeks, among other relief, unspecified damages, interest and costs.

On January 15, 2014, the FDIC, as receiver for United Western Bank filed a complaint against the Company andothers in the District Court of the State of Colorado, styled Federal Deposit Insurance Corporation, as Receiver forUnited Western Bank v. Banc of America Funding Corp., et al. The complaint alleges that the Company madeuntrue statements and material omissions in connection with the sale to United Western Bank of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificatesallegedly sponsored, underwritten and/or sold to United Western Bank by the Company was approximately $75million. The complaint raises claims under both federal securities law and the Colorado Securities Act and seeks,among other things, compensatory damages associated with plaintiff’s purchase of such certificates.

Other Matters. On a case-by-case basis the Company has entered into agreements to toll the statute oflimitations applicable to potential civil claims related to RMBS, CDOs and other mortgage-related products andservices when the Company has concluded that it is in its interest to do so.

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On October 18, 2011, the Company received a letter from Gibbs & Bruns LLP (the “Law Firm”), which ispurportedly representing a group of investment advisers and holders of mortgage pass-through certificates issuedby RMBS trusts that were sponsored or underwritten by the Company. The letter asserted that the Law Firm’sclients collectively hold 25% or more of the voting rights in 17 RMBS trusts sponsored or underwritten by theCompany and that these trusts have an aggregate outstanding balance exceeding $6 billion. The letter allegedgenerally that large numbers of mortgages in these trusts were sold or deposited into the trusts based on falseand/or fraudulent representations and warranties by the mortgage originators, sellers and/or depositors. The letteralso alleged generally that there is evidence suggesting that the Company has failed prudently to servicemortgage loans in these trusts. On January 31, 2012, the Law Firm announced that its clients hold over 25% ofthe voting rights in 69 RMBS trusts securing over $25 billion of RMBS sponsored or underwritten by theCompany, and that its clients had issued instructions to the trustees of these trusts to open investigations intoallegedly ineligible mortgages held by these trusts. The Law Firm’s press release also indicated that the LawFirm’s clients anticipate that they may provide additional instructions to the trustees, as needed, to further theinvestigations. On September 19, 2012, the Company received two purported Notices of Non-Performance fromthe Law Firm purportedly on behalf of the holders of significant voting rights in various trusts securing over $28billion of residential mortgage backed securities sponsored or underwritten by the Company. The Notice purportsto identify certain covenants in Pooling and Servicing Agreements (“PSAs”) that the holders allege that theServicer and Master Servicer failed to perform, and alleges that each of these failures has materially affected therights of certificateholders and constitutes an ongoing event of default under the relevant PSAs. On November 2,2012, the Company responded to the letters, denying the allegations therein.

Commercial Mortgage Related Matter.

On January 25, 2011, the Company was named as a defendant in The Bank of New York Mellon Trust, NationalAssociation v. Morgan Stanley Mortgage Capital, Inc., a litigation pending in the SDNY. The suit, brought bythe trustee of a series of commercial mortgage pass-through certificates, alleges that the Company breachedcertain representations and warranties with respect to an $81 million commercial mortgage loan that wasoriginated and transferred to the trust by the Company. The complaint seeks, among other things, to have theCompany repurchase the loan and pay additional monetary damages. On June 27, 2011, the court denied theCompany’s motion to dismiss, but directed the filing of an amended complaint. On July 29, 2011, the Companyfiled its answer to the first amended complaint. On June 20, 2013, the court granted in part and denied in part theCompany’s motion for summary judgment, and denied the plaintiff’s motion for summary judgment. OnOctober 30, 2013, the Company filed a supplemental motion for summary judgment.

Matters Related to the CDS Market.

On July 1, 2013, the European Commission (“EC”) issued a Statement of Objections (“SO”) addressed to twelvefinancial firms (including the Company), the International Swaps and Derivatives Association, Inc. (“ISDA”) andMarkit Group Limited (“Markit”) and various affiliates alleging that, between 2006 and 2009, the recipientsbreached European Union competition law by taking and refusing to take certain actions in an effort to preventthe development of exchange traded credit default swap (“CDS”) products. The SO indicates that the EC plans toimpose remedial measures and fines on the recipients. The Company and the other recipients filed a response tothe SO on January 21, 2014. The Company and others have also responded to an investigation by the AntitrustDivision of the United States Department of Justice related to the CDS market.

Beginning in May 2013, twelve financial firms (including the Company), as well as ISDA and Markit, werenamed as defendants in multiple purported antitrust class actions now consolidated into a single proceeding in theSDNY styled In Re: Credit Default Swaps Antitrust Litigation. Plaintiffs allege that defendants violated UnitedStates antitrust laws from 2008 to present in connection with their alleged efforts to prevent the development ofexchange traded CDS products. The complaints seek, among other relief, certification of a class of plaintiffs whopurchased CDS from defendants in the United States, treble damages and injunctive relief.

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The following matters were terminated during or following the quarter ended December 31, 2013:

In re: Lehman Brothers Equity/Debt Securities Litigation, which had been pending in the SDNY, related toseveral offerings of debt and equity securities issued by Lehman Brothers Holdings Inc. during 2007 and 2008. Agroup of underwriter defendants, including the Company, settled the main litigation on December 2, 2012. Theremaining opt-out claims and appeals have now been resolved.

Stichting Pensioenfonds ABP v. Morgan Stanley, et al., which had been pending in the Supreme Court of NY,involved allegations that the defendants made untrue statements and material omissions to plaintiff in connectionwith the sale of certain mortgage pass-through certificates backed by securitization trusts containing residentialmortgage loans. On November 15, 2013, the parties entered into an agreement to settle the litigation. OnDecember 3, 2013, the court dismissed the action.

Bayerische Landesbank, New York Branch v. Morgan Stanley, et al., which had been pending in the SupremeCourt of NY, involved allegations that the defendants made untrue statements and material omissions to plaintiffin connection with the sale of certain mortgage pass-through certificates backed by securitization trustscontaining residential mortgage loans. On December 6, 2013, the parties entered into an agreement to settle thelitigation. On January 2, 2014, the court dismissed the action.

Seagull Point, LLC, individually and on behalf of Morgan Stanley ABS Capital I Inc. Trust 2007 HE-5 v. WMCMortgage Corp., et al., which had been pending in the Supreme Court of NY, involved allegations that the loansin the trust breached various representations and warranties. On January 9, 2014, plaintiff filed a notice ofdiscontinuance, dismissing the action against all defendants.

Federal Home Loan Bank of Chicago v. Bank of America Securities LLC, et al., which had been pending in theSuperior Court of the State of California, involved allegations that the defendants made untrue statements andmaterial omissions to plaintiff in connection with the sale of certain mortgage pass-through certificates backed bysecuritization trusts containing residential mortgage loans. On December 6, 2013, plaintiff filed a request fordismissal of all of its claims against the Company. On January 27, 2014, the court dismissed the action.

Metropolitan Life Insurance Company, et al. v. Morgan Stanley, et al., which had been pending in the SupremeCourt of NY, involved allegations that the defendants made untrue statements and material omissions to plaintiffsin connection with the sale of certain mortgage pass-through certificates backed by securitization trustscontaining residential mortgage loans. On January 23, 2014, the parties reached an agreement in principle tosettle the litigation.

Cambridge Place Investment Management Inc. v. Morgan Stanley & Co., Inc., et al., which had been pending inthe Superior Court of the Commonwealth of Massachusetts, involved allegations that the defendants made untruestatements and material omissions to plaintiff in connection with the sale of certain mortgage pass-throughcertificates backed by securitization trusts containing residential mortgage loans. On February 11, 2014, theparties entered into an agreement to settle the litigation. On February 20, 2014, the court dismissed the action.

Federal Housing Finance Agency, as Conservator v. Morgan Stanley et al., which had been pending in theSDNY, involved allegations that the defendants made untrue statements and material omissions to plaintiff inconnection with the sale of certain mortgage pass-through certificates backed by securitization trusts containingresidential mortgage loans. On February 7, 2014, the parties entered into an agreement to settle the litigation. OnFebruary 20, 2014, the court dismissed the action.

On December 12, 2013, the Company entered into an agreement with American International Group, Inc.(“AIG”) to resolve AIG’s potential claims against the Company related to AIG’s purchases of certain mortgagepass-through certificates sponsored or underwritten by the Company backed by securitization trusts containingresidential mortgage loans.

Item 4. Mine Safety DisclosuresNot applicable.

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Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities.

Morgan Stanley’s common stock trades on the NYSE under the symbol “MS.” As of February 19, 2014, theCompany had 79,140 holders of record; however, the Company believes the number of beneficial owners ofcommon stock exceeds this number.

The table below sets forth, for each of the last eight quarters, the low and high sales prices per share of theCompany’s common stock as reported by Bloomberg Financial Markets and the amount of any cash dividendsper share of the Company’s common stock declared by its Board of Directors for such quarter.

LowSale Price

HighSale Price Dividends

2013:Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26.41 $31.85 $0.05Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23.83 $29.50 $0.05Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20.16 $27.17 $0.05First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19.32 $24.47 $0.05

2012:Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13.49 $19.45 $0.05Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.29 $18.50 $0.05Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.26 $20.05 $0.05First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13.49 $21.19 $0.05

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The table below sets forth the information with respect to purchases made by or on behalf of the Company of itscommon stock during the fourth quarter of the year ended December 31, 2013.

Issuer Purchases of Equity Securities(dollars in millions, except per share amounts)

Period

TotalNumber

ofShares

Purchased

AveragePrice

Paid PerShare

Total Number ofShares PurchasedAs Part of PubliclyAnnounced Plansor Programs(C)

Approximate DollarValue of Sharesthat May Yet BePurchased Under

the Plans orPrograms

Month #1 (October 1, 2013—October 31, 2013)Share Repurchase Program(A) . . . . . . . . . . . . . . . . . 1,495,000 $29.26 1,495,000 $1,394Employee Transactions(B) . . . . . . . . . . . . . . . . . . . . 172,249 $27.46 — —

Month #2 (November 1, 2013—November 30, 2013)Share Repurchase Program(A) . . . . . . . . . . . . . . . . . 4,038,832 $29.65 4,038,832 $1,274Employee Transactions(B) . . . . . . . . . . . . . . . . . . . . 56,206 $30.10 — —

Month #3 (December 1, 2013—December 31, 2013)Share Repurchase Program(A) . . . . . . . . . . . . . . . . . 2,087,000 $30.81 2,087,000 $1,210Employee Transactions(B) . . . . . . . . . . . . . . . . . . . . 170,552 $31.19 — —

TotalShare Repurchase Program(A) . . . . . . . . . . . . . . . . . 7,620,832 $29.89 7,620,832 $1,210Employee Transactions(B) . . . . . . . . . . . . . . . . . . . . 399,007 $29.43 — —

(A) On December 19, 2006, the Company announced that its Board of Directors authorized the repurchase of up to $6 billion of theCompany’s outstanding stock under a share repurchase program (the “Share Repurchase Program”). The Share Repurchase Program is aprogram for capital management purposes that considers, among other things, business segment capital needs, as well as equity-basedcompensation and benefit plan requirements. The Share Repurchase Program has no set expiration or termination date. Share repurchasesby the Company are subject to regulatory approval. In July 2013, the Company received no objection from the Federal Reserve torepurchase up to $500 million of the Company’s outstanding common stock under rules permitting annual capital distributions (12 Codeof Federal Regulations 225.8, Capital Planning), of which approximately $150 million as of December 31, 2013 may yet be purchaseduntil March 31, 2014. For further information, see “Liquidity and Capital Resources—Capital Management” in Part I, Item 2.

(B) Includes: (1) shares delivered or attested in satisfaction of the exercise price and/or tax withholding obligations by holders of employeeand director stock options (granted under employee and director stock compensation plans) who exercised options; (2) shares withheld,delivered or attested (under the terms of grants under employee and director stock compensation plans) to offset tax withholdingobligations that occur upon vesting and release of restricted shares; (3) shares withheld, delivered and attested (under the terms of grantsunder employee and director stock compensation plans) to offset tax withholding obligations that occur upon the delivery of outstandingshares underlying restricted stock units; and (4) shares withheld, delivered and attested (under the terms of grants under employee anddirector stock compensation plans) to offset the cash payment for fractional shares. The Company’s employee and director stockcompensation plans provide that the value of the shares withheld, delivered or attested, shall be valued using the fair market value of theCompany’s common stock on the date the relevant transaction occurs, using a valuation methodology established by the Company.

(C) Share purchases under publicly announced programs are made pursuant to open-market purchases, Rule 10b5-1 plans or privatelynegotiated transactions (including with employee benefit plans) as market conditions warrant and at prices the Company deemsappropriate.

***

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Stock performance graph. The following graph compares the cumulative total shareholder return (rounded tothe nearest whole dollar) of the Company’s common stock, the S&P 500 Stock Index (“S&P 500”) and the S&P500 Financials Index (“S5FINL”) for the last five years. The graph assumes a $100 investment at the closingprice on December 31, 2008 and reinvestment of dividends on the respective dividend payment dates withoutcommissions. This graph does not forecast future performance of the Company’s common stock.

240

220

200

180

160

140

120

100

80

60

40

20

MS S&P 500 S5FINL

Dolla

rs

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13

$228.10

$206.40

$190.19

CUMULATIVE TOTAL SHAREHOLDER RETURNDecember 31, 2008 - December 31, 2013

MS S&P 500 S5FINL

12/31/2008 . . . . . . . . . . . . . . . . . . . . . $100.00 $100.00 $100.0012/31/2009 . . . . . . . . . . . . . . . . . . . . . $187.93 $126.45 $117.1512/31/2010 . . . . . . . . . . . . . . . . . . . . . $174.03 $145.49 $131.3612/31/2011 . . . . . . . . . . . . . . . . . . . . . $ 97.59 $148.55 $108.9512/30/2012 . . . . . . . . . . . . . . . . . . . . . $124.84 $172.31 $140.2712/31/2013 . . . . . . . . . . . . . . . . . . . . . $206.40 $228.10 $190.19

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Item 6. Selected Financial Data.

MORGAN STANLEY

SELECTED FINANCIAL DATA(dollars in millions, except share and per share data)

2013 2012 2011 2010 2009

Income Statement Data:Revenues:

Investment banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,246 $ 4,758 $ 4,991 $ 5,122 $ 5,020Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,359 6,990 12,384 9,393 7,723Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,777 742 573 1,825 (1,034)Commissions and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,629 4,253 5,343 4,909 4,210Asset management, distribution and administration fees . . . . . . . . . . . . . . . . . . . . 9,638 9,008 8,409 7,843 5,802Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 990 556 176 1,235 672

Total non-interest revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,639 26,307 31,876 30,327 22,393

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,209 5,692 7,234 7,288 7,468Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,431 5,897 6,883 6,394 6,678

Net interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 778 (205) 351 894 790

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,417 26,102 32,227 31,221 23,183

Non-interest expenses:Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,277 15,615 16,325 15,860 14,287Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,658 9,967 9,792 9,154 7,753

Total non-interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,935 25,582 26,117 25,014 22,040

Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . . 4,482 520 6,110 6,207 1,143Provision for (benefit from) income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 826 (237) 1,414 743 (298)

Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,656 757 4,696 5,464 1,441Discontinued operations(1):

Gain (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (72) (48) (170) 600 (127)Provision for (benefit from) income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29) (7) (119) 362 (92)

Net gain (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . (43) (41) (51) 238 (35)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,613 716 4,645 5,702 1,406Net income applicable to redeemable noncontrolling interests(2) . . . . . . . . . . . . . 222 124 — — —Net income applicable to nonredeemable noncontrolling interests(2) . . . . . . . . . . 459 524 535 999 60

Net income applicable to Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,932 $ 68 $ 4,110 $ 4,703 $ 1,346Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 98 2,043 1,109 2,253

Earnings (loss) applicable to Morgan Stanley common shareholders(3) . . . . . . . . . . . . $ 2,655 $ (30) $ 2,067 $ 3,594 $ (907)

Amounts applicable to Morgan Stanley:Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,975 $ 138 $ 4,168 $ 4,478 $ 1,404Net gain (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43) (70) (58) 225 (58)

Net income applicable to Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,932 $ 68 $ 4,110 $ 4,703 $ 1,346

50

2013 2012 2011 2010 2009

Per Share Data:Earnings (loss) per basic common share(4):

Income (loss) from continuingoperations . . . . . . . . . . . . . . . . . . . . . . . . $ 1.42 $ 0.02 $ 1.28 $ 2.49 $ (0.72)

Net gain (loss) from discontinuedoperations . . . . . . . . . . . . . . . . . . . . . . . . (0.03) (0.04) (0.03) 0.15 (0.05)

Earnings (loss) per basic commonshare . . . . . . . . . . . . . . . . . . . . . . . . $ 1.39 $ (0.02) $ 1.25 $ 2.64 $ (0.77)

Earnings (loss) per diluted common share(4):Income (loss) from continuing

operations . . . . . . . . . . . . . . . . . . . . . . . . $ 1.38 $ 0.02 $ 1.27 $ 2.45 $ (0.72)Net gain (loss) from discontinued

operations . . . . . . . . . . . . . . . . . . . . . . . . (0.02) (0.04) (0.04) 0.18 (0.05)

Earnings (loss) per diluted commonshare . . . . . . . . . . . . . . . . . . . . . . . . $ 1.36 $ (0.02) $ 1.23 $ 2.63 $ (0.77)

Book value per common share(5) . . . . . . . . . . . . $ 32.24 $ 30.70 $ 31.42 $ 31.49 $ 27.26Dividends declared per common share . . . . . . . . $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.17

Balance Sheet and Other Operating Data:Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 832,702 $ 780,960 $ 749,898 $ 807,698 $ 771,462Total deposits . . . . . . . . . . . . . . . . . . . . . . . 112,379 83,266 65,662 63,812 62,215Long-term borrowings . . . . . . . . . . . . . . . . 153,575 169,571 184,234 192,457 193,374Morgan Stanley shareholders’ equity . . . . . 65,921 62,109 62,049 57,211 46,688Return on average common equity(6) . . . . . 4.3% N/M 3.8% 9.0% N/MAverage common shares outstanding(3):

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . 1,905,823,882 1,885,774,276 1,654,708,640 1,361,670,938 1,185,414,871Diluted . . . . . . . . . . . . . . . . . . . . . . . . . 1,956,519,738 1,918,811,270 1,675,271,669 1,411,268,971 1,185,414,871

N/M—Not Meaningful.(1) Prior-period amounts have been recast for discontinued operations. See Note 1 to the consolidated financial statements in Item 8 for

information on discontinued operations.(2) Information includes 100%, 65% and 51% ownership of the retail securities joint venture between the Company and Citigroup Inc. (the

“Wealth Management JV”) effective June 28, 2013, September 17, 2012 and May 31, 2009, respectively (see Note 3 to the consolidatedfinancial statements in Item 8).

(3) Amounts shown are used to calculate earnings per basic and diluted common share.(4) For the calculation of basic and diluted earnings per common share, see Note 16 to the consolidated financial statements in Item 8.(5) Book value per common share equals common shareholders’ equity of $62,701 million at December 31, 2013, $60,601 million at

December 31, 2012, $60,541 million at December 31, 2011, $47,614 million at December 31, 2010 and $37,091 million at December 31,2009, divided by common shares outstanding of 1,945 million at December 31, 2013, 1,974 million at December 31, 2012, 1,927 millionat December 31, 2011, 1,512 million at December 31, 2010 and 1,361 million at December 31, 2009.

(6) The calculation of return on average common equity uses net income applicable to Morgan Stanley less preferred dividends as apercentage of average common equity. The return on average common equity is a non-generally accepted accounting principle financialmeasure that the Company considers to be a useful measure to the Company and investors to assess operating performance.

51

Item 7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.

Introduction.

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

Effective with the quarter ended June 30, 2013, the Global Wealth Management Group and Asset Managementbusiness segments were re-titled Wealth Management and Investment Management, respectively.

A summary of the activities of each of the Company’s business segments is as follows:

Institutional Securities provides financial advisory and capital-raising services, including: advice on mergersand acquisitions, restructurings, real estate and project finance; corporate lending; sales, trading, financingand market-making activities in equity and fixed income securities and related products, including foreignexchange and commodities; and investment activities.

Wealth Management provides brokerage and investment advisory services to individual investors and small-to-medium sized businesses and institutions covering various investment alternatives; financial and wealthplanning services; annuity and other insurance products; credit and other lending products; cashmanagement services; retirement services; and engages in fixed income trading, which primarily facilitatesclients’ trading or investments in such securities.

Investment Management provides a broad array of investment strategies that span the risk/return spectrumacross geographies, asset classes, and public and private markets to a diverse group of clients across theinstitutional and intermediary channels as well as high net worth clients.

See Note 1 to the consolidated financial statements in Item 8 for a discussion of the Company’s discontinuedoperations.

The results of operations in the past have been, and in the future may continue to be, materially affected by manyfactors, including: the effect of economic and political conditions and geopolitical events; the effect of marketconditions, particularly in the global equity, fixed income, credit and commodities markets, including corporateand mortgage (commercial and residential) lending and commercial real estate markets; the impact of current,pending and future legislation (including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the“Dodd-Frank Act”)), regulation (including capital, leverage and liquidity requirements), policies (including fiscaland monetary) and legal and regulatory actions in the United States of America (“U.S.”) and worldwide; the leveland volatility of equity, fixed income, and commodity prices, interest rates, currency values and other marketindices; the availability and cost of both credit and capital as well as the credit ratings assigned to the Company’sunsecured short-term and long-term debt; investor, consumer and business sentiment and confidence in thefinancial markets; the performance of the Company’s acquisitions, divestitures, joint ventures, strategic alliancesor other strategic arrangements; the Company’s reputation; inflation, natural disasters and acts of war orterrorism; the actions and initiatives of current and potential competitors as well as governments, regulators andself-regulatory organizations; the effectiveness of the Company’s risk management policies; technologicalchanges and risks, including cybersecurity risks; or a combination of these or other factors. In addition,legislative, legal and regulatory developments related to the Company’s businesses are likely to increase costs,thereby affecting results of operations. These factors also may have an adverse impact on the Company’s abilityto achieve its strategic objectives. For a further discussion of these and other important factors that could affectthe Company’s business, see “Business—Competition” and “Business—Supervision and Regulation” in Part I,Item 1, “Risk Factors” in Part I, Item 1A and “Other Matters” herein.

52

The discussion of the Company’s results of operations below may contain forward-looking statements. Thesestatements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that maycause actual results to differ materially. For a discussion of the risks and uncertainties that may affect theCompany’s future results, see “Forward-Looking Statements” immediately preceding “Business—Competition”and “Business—Supervision and Regulation” in Part I, Item 1, “Risk Factors” in Part I, Item 1A and “ExecutiveSummary—Significant Items” and “Other Matters” herein.

53

Executive Summary.

Financial Information and Statistical Data (dollars in millions, except where noted and per share amounts).

2013 2012 2011

Net revenues:Institutional Securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,443 $11,025 $17,683Wealth Management(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,214 13,034 12,772Investment Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,988 2,219 1,887Intersegment Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (228) (176) (115)

Consolidated net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,417 $26,102 $32,227

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,613 $ 716 $ 4,645Net income applicable to redeemable noncontrolling interests(2) . . . . . . . . . . . 222 124 —Net income applicable to nonredeemable noncontrolling interests(2) . . . . . . . 459 524 535

Net income applicable to Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,932 $ 68 $ 4,110

Income (loss) from continuing operations applicable to Morgan Stanley:Institutional Securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 984 $ (797) $ 3,450Wealth Management(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,488 803 683Investment Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503 136 35Intersegment Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (4) —

Income from continuing operations applicable to Morgan Stanley . . . . . . . . . $ 2,975 $ 138 $ 4,168Net gain (loss) from discontinued operations applicable to Morgan

Stanley(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43) (70) (58)

Net income applicable to Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,932 $ 68 $ 4,110Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 98 2,043

Earnings (loss) applicable to Morgan Stanley common shareholders . . . . . . . $ 2,655 $ (30) $ 2,067

Earnings (loss) per basic common share:Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.42 $ 0.02 $ 1.28Net gain (loss) from discontinued operations(3) . . . . . . . . . . . . . . . . . . . . . . . (0.03) (0.04) (0.03)

Earnings (loss) per basic common share(4) . . . . . . . . . . . . . . . . . . . . . . . $ 1.39 $ (0.02) $ 1.25

Earnings (loss) per diluted common share:Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.38 $ 0.02 $ 1.27Net gain (loss) from discontinued operations(3) . . . . . . . . . . . . . . . . . . . . . . . (0.02) (0.04) (0.04)

Earnings (loss) per diluted common share(4) . . . . . . . . . . . . . . . . . . . . . $ 1.36 $ (0.02) $ 1.23

Regional net revenues(5):Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,282 $20,200 $22,306Europe, Middle East and Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,542 3,078 6,619Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,593 2,824 3,302

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,417 $26,102 $32,227

54

Financial Information and Statistical Data (dollars in millions, except where noted and per share amounts)—(Continued).

2013 2012 2011

Average common equity (dollars in billions):Institutional Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37.9 $ 29.0 $ 32.7Wealth Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.2 13.3 13.2Investment Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.8 2.4 2.6Parent capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 16.1 5.9

Consolidated average common equity . . . . . . . . . . . . . . . . . . . $ 61.9 $ 60.8 $ 54.4

Return on average common equity(6):Institutional Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3% N/M 5.1%Wealth Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.0% 6.0% 3.4%Investment Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.6% 5.4% N/MConsolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4% 0.1% 4.0%

Book value per common share(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32.24 $ 30.70 $ 31.42Average tangible common equity (dollars in billions)(8) . . . . . . . . . . $ 53.0 $ 53.9 $ 47.5Return on average tangible common equity(9) . . . . . . . . . . . . . . . . . . 5.1% 0.1% 4.5%Tangible book value per common share(10) . . . . . . . . . . . . . . . . . . . . $ 27.16 $ 26.86 $ 27.95Effective income tax rate from continuing operations(11) . . . . . . . . . 18.4% (45.6)% 23.1%Worldwide employees at December 31, 2013, 2012 and 2011 . . . . . . 55,794 57,061 61,546Global Liquidity Reserve held by bank and non-bank legal entities

at December 31, 2013, 2012 and 2011 (dollars in billions)(12) . . . . $ 202 $ 182 $ 182Average Global Liquidity Reserve (dollars in billions)(12):

Bank legal entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75 $ 63 $ 64Non-bank legal entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 113 113

Total average Global Liquidity Reserve . . . . . . . . . . . . . . . . . $ 192 $ 176 $ 177

Long-term borrowings at December 31, 2013, 2012 and 2011 . . . . . . $153,575 $169,571 $184,234Maturities of long-term borrowings outstanding at December 31,

2013, 2012 and 2011 (next 12 months) . . . . . . . . . . . . . . . . . . . . . . . $ 24,193 $ 25,303 $ 35,082Capital ratios at December 31, 2013, 2012 and 2011:

Total capital ratio(13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.9% 18.5% 17.5%Tier 1 common capital ratio(13) . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.8% 14.6% 12.6%Tier 1 capital ratio(13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.7% 17.7% 16.2%Tier 1 leverage ratio(14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6% 7.1% 6.6%

Consolidated assets under management or supervision atDecember 31, 2013, 2012 and 2011 (dollars in billions)(15):

Investment Management(16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 373 $ 338 $ 287Wealth Management(1)(17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 692 551 472

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,065 $ 889 $ 759

55

Financial Information and Statistical Data (dollars in millions, except where noted and per share amounts)—(Continued).

2013 2012 2011

Institutional Securities(1):Pre-tax profit margin(18) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6% N/M 26%Wealth Management(1)(17):Wealth Management representatives at December 31, 2013, 2012 and

2011(19) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,456 16,352 17,033Annual revenues per representative (dollars in thousands)(20) . . . . . . . . . . . . . . . . $ 867 $ 786 $ 731Assets by client segment at December 31, 2013, 2012 and 2011 (dollars in

billions):$10 million or more . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 678 $ 538 $ 468$1 million to $10 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 776 699 682

Subtotal $1 million or more . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,454 1,237 1,150

$100,000 to $1 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 414 414 375Less than $100,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 45 41

Total client assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,909 $ 1,696 $ 1,566

Fee-based client assets as a percentage of total client assets(21) . . . . . . . . . . . . . . 37% 33% 30%Client assets per representative(22) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 116 $ 104 $ 92Fee-based client asset flows (dollars in billions)(23) . . . . . . . . . . . . . . . . . . . . . . . . $ 51.9 $ 26.9 $ 47.0Bank deposits at December 31, 2013, 2012 and 2011 (dollars in billions)(24) . . . . $ 134 $ 131 $ 111Retail locations at December 31, 2013, 2012 and 2011 . . . . . . . . . . . . . . . . . . . . . . 649 694 734Pre-tax profit margin(18) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18% 12% 10%Investment Management:Pre-tax profit margin(18) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33% 27% 13%Selected management financial measures, excluding DVA:Net revenues, excluding DVA(25) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $33,098 $30,504 $28,546Income from continuing operations applicable to Morgan Stanley, excluding

DVA(25) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,427 $ 3,256 $ 1,893Income per diluted common share from continuing operations, excluding

DVA(25) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.61 $ 1.64 $ (0.08)Return on average common equity, excluding DVA(6) . . . . . . . . . . . . . . . . . . . . . 5.0% 5.2% N/MReturn on average tangible common equity, excluding DVA(9) . . . . . . . . . . . . . . 5.8% 5.9% N/M

N/M—Not Meaningful.DVA—Debt Valuation Adjustment represents the change in the fair value of certain of the Company’s long-term and short-term borrowingsresulting from the fluctuation in the Company’s credit spreads and other credit factors.(1) On January 1, 2013, the International Wealth Management business was transferred from the Wealth Management business segment to

the Equity division within the Institutional Securities business segment. Accordingly, all results and statistical data have been recast forall periods to reflect the International Wealth Management business as part of the Institutional Securities business segment.

(2) See Notes 2, 3 and 15 to the consolidated financial statements in Item 8 for information on redeemable and nonredeemablenoncontrolling interests.

(3) See Note 1 to the consolidated financial statements in Item 8 for information on discontinued operations.(4) For the calculation of basic and diluted earnings per share (“EPS”), see Note 16 to the consolidated financial statements in Item 8.(5) Regional net revenues reflect the regional view of the Company’s consolidated net revenues, on a managed basis. For further discussion

regarding the geographic methodology for net revenues, see Note 21 to the consolidated financial statements in Item 8.(6) The calculation of each business segment’s return on average common equity uses income from continuing operations applicable to

Morgan Stanley less preferred dividends as a percentage of each business segment’s average common equity. The return on averagecommon equity is a non-generally accepted accounting principle (“non-GAAP”) financial measure that the Company considers to be auseful measure to the Company and investors to assess operating performance. The computation of average common equity for eachbusiness segment is determined using the Company’s Required Capital framework (“Required Capital Framework”), an internal capitaladequacy measure (see “Liquidity and Capital Resources—Regulatory Requirements—Required Capital” herein). The effective tax ratesused in the computation of business segments’ return on average common equity were determined on a separate legal entity basis. To

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determine the return on consolidated average common equity, excluding the impact of DVA, also a non-GAAP financial measure, boththe numerator and the denominator were adjusted to exclude the impact of DVA. The impact of DVA in 2013, 2012 and 2011 was(0.6)%, (5.1)% and 4.2%, respectively.

(7) Book value per common share equals common shareholders’ equity of $62,701 million at December 31, 2013, $60,601 million atDecember 31, 2012 and $60,541 million at December 31, 2011 divided by common shares outstanding of 1,945 million at December 31,2013, 1,974 million at December 31, 2012 and 1,927 million at December 31, 2011. Book value per common share in 2011 was reducedby approximately $2.61 per share as a result of the Mitsubishi UFJ Financial Group, Inc. (“MUFG”) stock conversion (see “SignificantItems—MUFG Stock Conversion” herein).

(8) Average tangible common equity is a non-GAAP financial measure that the Company considers to be a useful measure that the Companyand investors use to assess capital adequacy. For a discussion of tangible common equity, see “Liquidity and Capital Resources—CapitalManagement” herein.

(9) Return on average tangible common equity is a non-GAAP financial measure that the Company considers to be a useful measure that theCompany and investors use to assess capital adequacy. The calculation of return on average tangible common equity uses income fromcontinuing operations applicable to Morgan Stanley less preferred dividends as a percentage of average tangible common equity. Todetermine the return on average tangible common equity, excluding the impact of DVA, also a non-GAAP financial measure, both thenumerator and the denominator were adjusted to exclude the impact of DVA. The impact of DVA in 2013, 2012 and 2011 was (0.7)%,(5.8)% and 4.8%, respectively.

(10) Tangible book value per common share equals tangible common equity of $52,828 million at December 31, 2013, $53,014 million atDecember 31, 2012 and $53,850 million at December 31, 2011 divided by common shares outstanding of 1,945 million at December 31,2013, 1,974 million at December 31, 2012 and 1,927 million at December 31, 2011. Tangible book value per common share is a non-GAAP financial measure that the Company considers to be a useful measure that the Company and investors use to assess capitaladequacy.

(11) For a discussion of the effective income tax rate, see “Overview of 2013 Financial Results” and “Significant Items—Income Tax Items”herein.

(12) For a discussion of Global Liquidity Reserve, see “Liquidity and Capital Resources—Liquidity Risk Management Framework—GlobalLiquidity Reserve” herein.

(13) As of December 31, 2013, the Company calculated its Total, Tier 1 and Tier 1 common capital ratios and risk-weighted assets (“RWAs”)in accordance with the capital adequacy standards for financial holding companies adopted by the Board of Governors of the FederalReserve System (the “Federal Reserve”). These standards are based upon a framework described in the International Convergence ofCapital Measurement and Capital Standards, July 1988, as amended, also referred to as Basel I. On January 1, 2013, the U.S. bankingregulators’ rules to implement the Basel Committee on Banking Supervision’s market risk capital framework amendment, commonlyreferred to as “Basel 2.5”, became effective, which increased the capital requirements for securitizations and correlation trading withinthe Company’s trading book, as well as incorporated add-ons for stressed Value-at-Risk (“VaR”) and incremental risk requirements(“market risk capital framework amendment”). The Company’s Total, Tier 1 and Tier 1 common capital ratios and RWAs for 2013 werecalculated under this revised framework. The Company’s Total, Tier 1 and Tier 1 common capital ratios and RWAs for prior periodshave not been recalculated under this revised framework. For a discussion of Total, Tier 1 and Tier 1 common capital ratios, see“Liquidity and Capital Resources—Regulatory Requirements” herein.

(14) For a discussion of Tier 1 leverage ratio, see “Liquidity and Capital Resources—Regulatory Requirements” herein.(15) Revenues and expenses associated with these assets are included in the Company’s Wealth Management and Investment Management

business segments.(16) Amounts exclude the Investment Management business segment’s proportionate share of assets managed by entities in which it owns a

minority stake.(17) Prior-period amounts have been recast to exclude Quilter & Co. Ltd. (“Quilter”). See Note 1 to the consolidated financial statements in

Item 8 for information on discontinued operations.(18) Pre-tax profit margin is a non-GAAP financial measure that the Company considers to be a useful measure that the Company and

investors use to assess operating performance. Percentages represent income from continuing operations before income taxes as apercentage of net revenues.

(19) At December 31, 2013, 2012 and 2011, global representatives for the Company were 16,784, 16,780 and 17,512, which includeapproximately 328, 428 and 479 representatives associated with the International Wealth Management business, the results of which arereported in the Institutional Securities business segment, respectively.

(20) Annual revenues per representative in 2013, 2012 and 2011 equal Wealth Management business segment’s annual revenues divided bythe average representative headcount in 2013, 2012 and 2011, respectively.

(21) Fee-based client assets represent the amount of assets in client accounts where the basis of payment for services is a fee calculated onthose assets. Effective in 2013, client assets also include certain additional non-custodied assets as a result of the completion of thepurchase of the remaining interest in the retail securities joint venture between the Company and Citigroup Inc. (“Citi”) (the “WealthManagement JV”) platform conversion.

(22) Client assets per representative equal total period-end client assets divided by period-end representative headcount.(23) Beginning January 1, 2013, the Company enhanced its definition of fee-based asset flows. Fee-based asset flows have been recast for all

periods to include dividends, interest and client fees and to exclude cash management related activity.(24) Approximately $104 billion, $72 billion and $56 billion of the bank deposit balances at December 31, 2013, 2012 and 2011, respectively,

are held at Company-affiliated depositories with the remainder held at Citi affiliated depositories. The Company considers the remainingdeposits held with Citi affiliated depositories a non-GAAP measure, which the Company and investors use to assess deposits in the

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Wealth Management business segment. The deposit balances are held at certain of the Company’s Federal Deposit InsuranceCorporation (the “FDIC”) insured depository institutions for the benefit of the Company’s clients through their accounts. For additionalinformation regarding deposits, see Notes 3, 10 and 25 to the consolidated financial statements in Item 8 and “Liquidity and CapitalResources—Funding Management—Deposits” herein.

(25) From time to time, the Company may disclose certain “non-GAAP financial measures” in the course of its earnings releases, earningsconference calls, financial presentations and otherwise. For these purposes, “GAAP” refers to generally accepted accounting principles inthe U.S. The U.S. Securities and Exchange Commission defines a “non-GAAP financial measure” as a numerical measure of historical orfuture financial performance, financial positions, or cash flows that excludes or includes amounts or is subject to adjustments thateffectively exclude, or include, amounts from the most directly comparable measure calculated and presented in accordance with GAAP.Non-GAAP financial measures disclosed by the Company are provided as additional information to investors in order to provide themwith further transparency about, or an alternative method for assessing, our financial condition and operating results. These measures arenot in accordance with, or a substitute for, GAAP, and may be different from or inconsistent with non-GAAP financial measures used byother companies. Whenever the Company refers to a non-GAAP financial measure, the Company will also generally present the mostdirectly comparable financial measure calculated and presented in accordance with GAAP, along with a reconciliation of the differencesbetween the non-GAAP financial measure and the GAAP financial measure.

2013 2012 2011

Reconciliation of Selected Management Financial Measures from a Non-GAAP to a GAAP Basis(dollars in millions, except per share amounts):

Net revenuesNet revenues—non-GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $33,098 $30,504 $28,546Impact of DVA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (681) (4,402) 3,681

Net revenues—GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,417 $26,102 $32,227

Income (loss) from continuing operations applicable to Morgan StanleyIncome applicable to Morgan Stanley—non-GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,427 $ 3,256 $ 1,893Impact of DVA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (452) (3,118) 2,275

Income applicable to Morgan Stanley—GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,975 $ 138 $ 4,168

Earnings (loss) per diluted common shareIncome from continuing operations per diluted common share—non-GAAP . . . . . . . . . . . . . . . . . . $ 1.61 $ 1.64 $ (0.08)Impact of DVA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.23) (1.62) 1.35

Income from continuing operations per diluted common share—GAAP . . . . . . . . . . . . . . . . . . . . . . $ 1.38 $ 0.02 $ 1.27

Average diluted shares—non-GAAP (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,957 1,919 1,655Impact of DVA (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 20

Average diluted shares—GAAP (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,957 1,919 1,675

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Global Market and Economic Conditions.

During 2013, global market and economic conditions showed improvement from 2012, though significantuncertainty remained. Investor sentiment was boosted by encouraging signs of improvement in the globaleconomy during the second half of 2013. The U.S. economy continued its moderate growth pace, but while as awhole the recession in the euro-area came to an end, significant pockets of slow or negative growth remained inEurope. During 2013, global market and economic conditions were also challenged by investor concerns aboutthe U.S. longer-term budget outlook and the scaling back of monetary stimulus, the remaining Europeansovereign debt issues and slowing economic growth in emerging markets. Shorter-term concerns over the U.S.budget standoff were resolved in late 2013 as Congress came to a tentative agreement on federal governmentfunding for the next two fiscal years. The agreement was in response to a shut-down of the U.S. federalgovernment that lasted for 16 days during October 2013. Elsewhere, especially in parts of Europe, growthremains stymied by fiscal and longer-term structural issues in the economy.

In the U.S., major equity market indices ended the year significantly higher compared with year-end 2012. TheU.S. economy continued its moderate growth pace in 2013. Labor market conditions improved as theunemployment rate declined to 6.7% at December 31, 2013 from 7.9% at December 31, 2012. Consumerspending and business investment advanced during 2013. The housing market generally strengthened in 2013,although rising mortgage rates have resulted in recent softness in housing starts and home sales. Apart fromfluctuations due to changes in energy prices, inflation has been running below the Federal Reserve’s longer-runobjective, but longer-term inflation expectations have remained stable. The Federal Open Market Committee(“FOMC”) of the Federal Reserve kept key interest rates at historically low levels. At December 31, 2013, thefederal funds target rate remained between 0.0% and 0.25%, and the discount rate remained at 0.75%. Earlier in2013 concerns about the Federal Reserve’s plan to scale back its monetary stimulus plan caused investors to selloff holdings. Subsequently, the FOMC announced in December that it would be decreasing its purchases ofTreasury and mortgage-backed securities in January 2014. The continuing U.S. recovery, though tepid, is alsorelieving some of the pressure on the federal budget experienced during the past several years.

In Europe, major equity market indices finished 2013 higher compared with year-end 2012. Euro-area grossdomestic product started to grow in the second quarter of 2013, and the European Central Bank (“ECB”) viewsthis as a gradual recovery in economic conditions, albeit with significant downside risks. The euro-areaunemployment rate increased to 12.0% at December 31, 2013 from 11.9% at 2012 year-end. At December 31,2013, Bank of England’s benchmark interest rate was 0.5%, which was unchanged from December 31, 2012. Tostimulate economic activity in Europe, during 2013 the ECB lowered the benchmark interest rate from 0.75% to0.25% and indicated it will keep open its special liquidity facilities until at least the middle of 2014.

Major equity market indices in Asia ended the year higher, with the notable exception of the Shanghai StockExchange Composite Index in China. Japan’s economic activity grew moderately during 2013, primarilyresulting from a series of economic stimulus packages announced by the Japanese government and the Bank ofJapan (“BOJ”) in early 2013. The BOJ maintained its monetary stimulus plan during the remainder of 2013. Thepace of China’s economic growth slowed during 2013, though China’s overall growth was still strong comparedwith the U.S., Europe and Japan. During 2013, the Chinese government began to implement reforms torestructure its economy away from reliance on exports and investments and toward more sustainable growthdriven by domestic consumption.

Overview of 2013 Financial Results.

Consolidated Results. The Company recorded net income applicable to Morgan Stanley of $2,932 million onnet revenues of $32,417 million in 2013 compared with net income applicable to Morgan Stanley of $68 millionon net revenues of $26,102 million in 2012.

Net revenues in 2013 included negative revenues due to the impact of DVA of $681 million compared withnegative revenues of $4,402 million in 2012. Non-interest expenses increased 9% to $27,935 million in 2013compared with $25,582 million in 2012. Compensation expenses increased 4% to $16,277 million in 2013

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compared with $15,615 million in 2012. Non-compensation expenses increased 17% to $11,658 million in 2013compared with $9,967 million in 2012. The increase in non-compensation expenses primarily reflected higherlegal expenses.

Earnings (loss) per diluted common share (“diluted EPS”) and diluted EPS from continuing operations were$1.36 and $1.38, respectively, in 2013 compared with $(0.02) and $0.02, respectively, in 2012. The diluted EPScalculation for 2013 included a negative adjustment of approximately $151 million related to the purchase of theremaining interest in the Wealth Management JV, which was completed in June 2013.

Excluding the impact of DVA, net revenues were $33,098 million, and diluted EPS from continuing operationswas $1.61 per share in 2013 compared with $30,504 million and $1.64 per share, respectively, in 2012.

The Company’s effective tax rate from continuing operations was 18.4% for 2013. The effective tax rateincluded an aggregate discrete net tax benefit of $407 million. Excluding this aggregate discrete net tax benefit,the effective tax rate from continuing operations in 2013 would have been 27.5%.

Institutional Securities. Income from continuing operations before taxes was $869 million in 2013 comparedwith a loss from continuing operations before taxes of $1,688 million in 2012. Net revenues for 2013 were$15,443 million compared with $11,025 million in 2012. The results in 2013 included negative revenues due tothe impact of DVA of $681 million compared with negative revenues of $4,402 million in 2012. Investmentbanking revenues for 2013 increased 11% from 2012 to $4,377 million, reflecting higher revenues from equityand fixed income underwriting transactions, partially offset by lower advisory revenues. The following sales andtrading net revenues results exclude the impact of DVA. Sales and trading net revenues are composed of: tradingrevenues; commissions and fees; asset management, distribution and administration fees; and net interestrevenues (expenses). The presentation of net revenues excluding the impact of DVA is a non-GAAP financialmeasure that the Company considers useful for the Company and investors to allow further comparability ofperiod-to-period operating performance. Equity sales and trading net revenues, excluding the impact of DVA, of$6,607 million increased 11% from 2012, reflecting strong performance across most products and regions fromhigher client activity, with particular strength in prime brokerage. Excluding the impact of DVA, fixed incomeand commodities sales and trading net revenues were $4,197 million in 2013, a decrease of 25% from 2012,reflecting lower levels of client activity across most products. Net investment gains of $707 million wererecognized in 2013, compared with net investment gains of $219 million in 2012, primarily reflecting a gain onthe disposition of an investment in an insurance broker. Other revenues of $608 million were recognized in 2013compared with other revenues of $203 million in 2012. Other revenues included income arising from theCompany’s 40% stake in Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (“MUMSS”) (see “ExecutiveSummary—Significant Items—Japanese Securities Joint Venture” herein). Non-interest expenses increased 15%in 2013 to $14,574 million, primarily due to higher non-compensation expenses. Compensation and benefitsexpenses in 2013 decreased 2% from 2012 to $6,823 million, primarily due to lower headcount. Non-compensation expenses were $7,751 million in 2013 compared with $5,735 million in 2012, reflecting theincreased level of legal expenses.

Wealth Management. Income from continuing operations before taxes was $2,629 million in 2013 comparedwith $1,622 million in 2012. Net revenues were $14,214 million in 2013 compared with $13,034 million in 2012.Transactional revenues, consisting of Trading, Commissions and fees and Investment banking increased 8% from2012 to $4,293 million. Trading revenues increased 11% from 2012 to $1,161 million in 2013, primarily due togains related to investments associated with certain employee deferred compensation plans and higher revenuesfrom fixed income products. Commissions and fees revenues increased 6% from 2012 to $2,209 million in 2013,primarily due to higher equity, mutual fund and alternatives activity. Investment banking revenues increased 11%from 2012 to $923 million in 2013, primarily due to higher levels of underwriting activity in closed-end fundsand unit trusts. Asset management, distribution and administration fees increased 6% from 2012 to $7,638million in 2013, primarily due to higher fee-based revenues, partially offset by lower revenues from referral feesfrom the bank deposit program. Net interest increased 20% from 2012 to $1,880 million in 2013, primarily due to

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higher balances in the bank deposit program and growth in loans and lending commitments in Portfolio LoanAccount (“PLA”) securities-based lending products. In addition, interest expense declined in 2013 due to theCompany’s redemption of all Class A Preferred Interests owned by Citi and its affiliates, in connection with theCompany’s acquisition of 100% ownership of the Wealth Management JV effective at the end of the secondquarter of 2013. Total client asset balances were $1,909 billion at December 31, 2013 and client assets in fee-based accounts were $697 billion, or 37% of total client assets. Fee-based client asset flows for 2013 were $51.9billion compared with $26.9 billion in 2012. Prior period amounts have been recast to reflect the transfer of theInternational Wealth Management business from the Wealth Management business segment to the InstitutionalSecurities business segment and for the Company’s enhanced definition of fee-based asset flows (see “BusinessSegments” herein). Compensation and benefits expenses increased 6% from 2012 to $8,271 million in 2013,primarily due to higher compensable revenues. Non-compensation expenses decreased 8% from 2012 to $3,314million in 2013, primarily driven by the absence of platform integration costs and non-recurring technologywrite-offs, partially offset by an impairment expense of $36 million related to certain intangible assets(management contracts) associated with alternative investment funds in 2013.

Investment Management. Income from continuing operations before taxes was $984 million in 2013 comparedwith $590 million in 2012. Net revenues were $2,988 million in 2013 compared with $2,219 million in 2012. Theincrease in net revenues reflected higher net investment gains predominantly within the Company’s MerchantBanking and Real Estate Investing businesses and higher gains on certain investments associated with theCompany’s employee deferred compensation and co-investment plans. Results in 2013 also included anadditional allocation of fund income to the Company as general partner, upon exceeding cumulative fundperformance thresholds (“carried interest”). Non-interest expenses were $2,004 million in 2013 compared with$1,629 million in 2012. Compensation and benefits expenses increased 41% to $1,183 million in 2013, primarilydue to higher net revenues. Non-compensation expenses increased 4% to $821 million in 2013, primarily due tohigher brokerage and clearing and professional services expenses, partially offset by lower informationprocessing expenses.

Significant Items.

Litigation. The Company incurred litigation expenses of approximately $1,952 million in 2013, $513 million in2012 and $151 million in 2011. The litigation expenses incurred in 2013 were primarily due to settlements andreserve additions related to residential mortgage-backed securities and credit crisis-related matters (see“Contingencies—Legal” in Note 13 to the consolidated financial statements in Item 8). Litigation expenses areincluded in Other expenses in the consolidated statements of income. The Company expects future litigationexpenses in general to continue to be elevated, and the changes in expenses from period to period may fluctuatesignificantly, given the current environment regarding financial crisis-related government investigations andprivate litigation affecting global financial services firms, including the Company.

Investment Gains. The Company’s Investments revenues increased to $1,777 million in 2013 compared with$742 million in 2012. Of this increase, $543 million related to higher net investment gains and to a lesser extentthe benefit of carried interest within the Company’s Merchant Banking and Real Estate Investing businesses inthe Investment Management business segment. In addition, the increase includes a gain on the disposition of aninvestment in an insurance broker in 2013 in the Institutional Securities business segment.

Japanese Securities Joint Venture. During 2013, 2012 and 2011, the Company recorded income (loss) of $570million, $152 million and $(783) million, respectively, within Other revenues in the consolidated statements ofincome, arising from the Company’s 40% stake in MUMSS. Net income applicable to nonredeemablenoncontrolling interests associated with MUFG’s interest in Morgan Stanley MUFG Securities Co., Ltd.(“MSMS”) was $259 million, $163 million and $1 million for 2013, 2012 and 2011, respectively (see Note 22 tothe consolidated financial statements in Item 8).

In June 2013, MUMSS paid a dividend of approximately $287 million, of which the Company receivedapproximately $115 million for its proportionate share of MUMSS.

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Income Tax Items. In 2013, the Company recognized an aggregate discrete net tax benefit of $407 million. Thisincluded discrete tax benefits of: $161 million related to the remeasurement of reserves and related interestassociated with new information regarding the status of certain tax authority examinations; $92 million related tothe establishment of a previously unrecognized deferred tax asset from a legal entity reorganization; $73 millionthat is attributable to tax planning strategies to optimize foreign tax credit utilization as a result of the anticipatedrepatriation of earnings from certain non-U.S. subsidiaries; and $81 million due to the retroactive effective dateof the American Taxpayer Relief Act of 2012 (the “Relief Act”). The Relief Act that was enacted on January 2,2013, among other things, extended with retroactive effect to January 1, 2012 a provision of U.S. tax law thatdefers the imposition of tax on certain active financial services income of certain foreign subsidiaries earnedoutside the U.S. until such income is repatriated to the U.S. as a dividend.

In 2012, the Company recognized an aggregate net tax benefit of $142 million. This included a discrete taxbenefit of $299 million related to the remeasurement of reserves and related interest associated with either theexpiration of the applicable statute of limitations or new information regarding the status of certain InternalRevenue Service examinations and an aggregate out-of-period net tax provision of $157 million, to adjust theoverstatement of deferred tax assets associated with partnership investments, principally in the Company’sInvestment Management business segment and repatriated earnings of foreign subsidiaries recorded in prioryears. The Company has evaluated the effects of the understatement of the income tax provision bothqualitatively and quantitatively and concluded that it did not have a material impact on any prior annual orquarterly consolidated financial statements.

Corporate Lending. The Company recorded the following amounts primarily associated with loans and lendingcommitments within the Institutional Securities business segment (see “Business Segments—InstitutionalSecurities” herein):

2013 2012 2011

(dollars in millions)

Other sales and trading:Gains (losses) on loans and lending commitments and Net interest(1) . . . . . . . . . . $ 596 $1,650 $(699)Gains (losses) on hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (156) (910) 68

Total Other sales and trading revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 440 $ 740 $(631)

Other revenues:Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (46) $ (85) $ (6)Losses on loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (68) (54) —

Total Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(114) $ (139) $ (6)

Other expenses: Provision for unfunded commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . (45) (71) (18)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 281 $ 530 $(655)

(1) Effective April 2012, the Company began accounting for all new originated loans and lending commitments as either held for investmentor held for sale.

Wealth Management JV. The Company completed the purchase of the remaining 35% interest in the WealthManagement JV from Citi on June 28, 2013 for the previously established price of $4.725 billion. The Companyrecorded a negative adjustment to retained earnings of approximately $151 million (net of tax) in 2013 to reflectthe difference between the purchase price for the 35% interest in the joint venture and its carrying value. In 2012,the Company purchased an additional 14% stake in the Wealth Management JV from Citi for $1.89 billion,increasing the Company’s interest from 51% to 65%. The Company recorded a negative adjustment to Paid-in-capital of approximately $107 million (net of tax) to reflect the difference between the purchase price for the14% interest in the Wealth Management JV and its carrying value. Also in 2012, the Wealth Managementbusiness segment’s non-interest expenses included approximately $173 million of non-recurring costs related tothe Wealth Management JV integration. For more information, see Note 3 to the consolidated statements inItem 8.

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Available for Sale Securities. During 2013, 2012 and 2011, the available for sale portfolio held within theWealth Management business segment reported unrealized gains (losses) of $(433) million, $28 million and $87million, net of tax, respectively, that were included in Accumulated other comprehensive income. The unrealizedlosses were primarily due to changes in interest rates. The securities in the Company’s available for sale portfoliowith an unrealized loss were not other-than-temporarily impaired at December 31, 2013, 2012 and 2011. Formore information, see Notes 2 and 5 to the consolidated financial statements in Item 8.

Monoline Insurers. The results for 2011 included losses of $1,838 million related to the Company’scounterparty credit exposures to Monoline Insurers (“Monolines”), principally MBIA Insurance Corporation(“MBIA”).

During 2011, the Company announced a comprehensive settlement with MBIA. The settlement terminatedoutstanding credit default swap (“CDS”) protection purchased from MBIA on commercial mortgage-backedsecurities and resolved pending litigation between the two parties for consideration of a net cash payment to theCompany.

MUFG Stock Conversion. On June 30, 2011, the Company’s outstanding Series B Preferred Stock owned byMUFG with a face value of $7.8 billion (carrying value $8.1 billion) and a 10% dividend was converted into385,464,097 shares of the Company’s common stock, including approximately 75 million shares resulting fromthe adjustment to the conversion ratio pursuant to the transaction agreement. As a result of the adjustment to theconversion ratio, the Company incurred a one-time, non-cash negative adjustment of approximately $1.7 billionin its calculation of basic and diluted earnings per share during 2011.

European Peripheral Countries. On December 22, 2011, the Company entered into agreements torestructure certain derivative transactions that decreased its exposure to obligors in Greece, Ireland, Italy,Portugal and Spain (the “European Peripherals”). As a result, the Company’s results in 2011 included interestrate product revenues of approximately $600 million related primarily to the release of credit valuationadjustments associated with the transactions, reported within Trading revenues in the consolidated statement ofincome.

Huaxin Securities Joint Venture. In June 2011, the Company and Huaxin Securities Co., Ltd. (also known asChina Fortune Securities Co., Ltd.) jointly announced the operational commencement of their securities jointventure in China. During 2011, the Company recorded initial costs of $130 million related to the formation ofthis joint venture in Other expenses in the consolidated statement of income.

Business Segments.

Substantially all of the Company’s operating revenues and operating expenses are allocated to its businesssegments. Certain revenues and expenses have been allocated to each business segment, generally in proportionto its respective net revenues, non-interest expenses or other relevant measures.

As a result of treating certain intersegment transactions as transactions with external parties, the Companyincludes an Intersegment Eliminations category to reconcile the business segment results to the Company’sconsolidated results. Intersegment Eliminations also reflect the effect of fees paid by the Institutional Securitiesbusiness segment to the Wealth Management business segment related to the bank deposit program.

On January 1, 2013, the International Wealth Management business was transferred from the WealthManagement business segment to the Equity division within the Institutional Securities business segment.Accordingly, all results and statistical data have been recast for all periods to reflect the International WealthManagement business as part of the Institutional Securities business segment.

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Net Revenues.

Trading. Trading revenues include revenues from customers’ purchases and sales of financial instruments inwhich the Company acts as a market maker as well as gains and losses on the Company’s related positions.Trading revenues include the realized gains and losses from sales of cash instruments and derivative settlements,unrealized gains and losses from ongoing fair value changes of the Company’s positions related to market-making activities, and gains and losses related to investments associated with certain employee deferredcompensation plans. In many markets, the realized and unrealized gains and losses from the purchase and saletransactions will include any spreads between bids and offers. Certain fees received on loans carried at fair valueand dividends from equity securities are also recorded in this line item since they relate to market-makingpositions. Commissions received for purchasing and selling listed equity securities and options are recordedseparately in the Commissions and fees line item. Other cash and derivative instruments typically do not havefees associated with them, and fees for related services would be recorded in Commissions and fees.

The Company often invests directly, as a principal, in investments or other financial instruments to economicallyhedge its obligations under its deferred compensation plans. Changes in value of such investments made by theCompany are recorded in Trading revenues and Investments revenues. Expenses associated with the relateddeferred compensation plans are recorded in Compensation and benefits. Compensation expense is calculatedbased on the notional value of the award granted, adjusted for upward and downward changes in fair value of thereferenced investment and is recognized ratably over the prescribed vesting period for the award. Generally,changes in compensation expense resulting from changes in fair value of the referenced investment will be offsetby changes in fair value of investments made by the Company. However, there may be a timing differencebetween the immediate revenue recognition of gains and losses on the Company’s investments and the deferredrecognition of the related compensation expense over the vesting period.

As a market maker, the Company stands ready to buy, sell or otherwise transact with customers under a varietyof market conditions and provide firm or indicative prices in response to customer requests. The Company’sliquidity obligations can be explicit and obligatory in some cases, and in others, customers expect the Companyto be willing to transact with them. In order to most effectively fulfill its market-making function, the Companyengages in activities, across all of its trading businesses, that include, but are not limited to: (i) taking positions inanticipation of, and in response to, customer demand to buy or sell and—depending on the liquidity of therelevant market and the size of the position—to hold those positions for a period of time; (ii) managing andassuming basis risk (risk associated with imperfect hedging) between customized customer risks and thestandardized products available in the market to hedge those risks; (iii) building, maintaining and rebalancinginventory, through trades with other market participants, and engaging in accumulation activities toaccommodate anticipated customer demand; (iv) trading in the market to remain current on pricing and trends;and (v) engaging in other activities to provide efficiency and liquidity for markets. Although not included inTrading revenues, interest income and expense are also impacted by market-making activities as debt securitiesheld by the Company earn interest and securities are loaned, borrowed, sold with agreement to repurchase andpurchased with agreement to resell.

Investments. The Company’s investments generally are held for long-term appreciation and generally aresubject to significant sales restrictions. Estimates of the fair value of the investments may involve significantjudgment and may fluctuate significantly over time in light of business, market, economic and financialconditions generally or in relation to specific transactions. In some cases, such investments are required or are anecessary part of offering other products. The revenues recorded are the result of realized gains and losses fromsales and unrealized gains and losses from ongoing fair value changes of the Company’s holdings as well as frominvestments associated with certain employee deferred compensation plans (as mentioned above). Typically,there are no fee revenues from these investments. The sales restrictions on the investments relate primarily toredemption and withdrawal restrictions on investments in real estate funds, hedge funds and private equity funds,which include investments made in connection with certain employee deferred compensation plans (see Note 4 tothe consolidated financial statements in Item 8). Restrictions on interests in exchanges and clearinghousesgenerally include a requirement to hold those interests for the period of time that the Company is clearing trades

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on that exchange or clearinghouse. Additionally, there are certain investments related to assets held byconsolidated real estate funds, which are primarily related to holders of noncontrolling interests.

Commissions and Fees. Commission and fee revenues primarily arise from agency transactions in listed andover-the-counter (“OTC”) equity securities, services related to sales and trading activities, and sales of mutualfunds, futures, insurance products and options.

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

Asset management, distribution and administration fees in the Wealth Management business segment alsoinclude revenues from individual investors electing a fee-based pricing arrangement and fees for investmentmanagement. Mutual fund distribution fees in the Wealth Management business segment are based on either theaverage daily fund net asset balances or average daily aggregate net fund sales and are affected by changes in theoverall level and mix of assets under management or supervision.

Asset management fees in the Investment Management business segment arise from investment managementservices the Company provides to investment vehicles pursuant to various contractual arrangements. TheCompany receives fees primarily based upon mutual fund daily average net assets or based on monthly orquarterly invested equity for other vehicles. Performance-based fees in the Investment Management businesssegment are earned on certain funds as a percentage of appreciation earned by those funds and, in certain cases,are based upon the achievement of performance criteria. These fees are normally earned annually and arerecognized on a monthly or quarterly basis.

Net Interest. Interest income and Interest expense are a function of the level and mix of total assets andliabilities, including trading assets and trading liabilities; securities available for sale; securities borrowed orpurchased under agreements to resell; securities loaned or sold under agreements to repurchase; loans; deposits;commercial paper and other short-term borrowings; long-term borrowings; trading strategies; customer activityin the Company’s prime brokerage business; and the prevailing level, term structure and volatility of interestrates. Certain Securities purchased under agreements to resell (“reverse repurchase agreements”) and Securitiessold under agreements to repurchase (“repurchase agreements”) and Securities borrowed and Securities loanedtransactions may be entered into with different customers using the same underlying securities, therebygenerating a spread between the interest revenues on the reverse repurchase agreements or securities borrowedtransactions and the interest expense on the repurchase agreements or securities loaned transactions.

Lending Activities.

The Company provides loans to a variety of customers, from large corporate and institutional clients to high networth individuals, primarily through its U.S. bank subsidiaries, Morgan Stanley Bank, N.A. (“MSBNA”) andMorgan Stanley Private Bank, National Association (“MSPBNA”). The Company’s lending activities in theInstitutional Securities business segment primarily include corporate lending activities, in which the Companyprovides loans or lending commitments to selected corporate clients. In addition to corporate lending activity, theInstitutional Securities business segment engages to a lesser extent in other lending activity, including corporateloans purchased and sold in the secondary market. The Company’s lending activities in the Wealth Managementbusiness segment principally include margin loans collateralized by securities, securities-based lending thatallows clients to borrow money against the value of qualifying securities in PLAs and residential mortgagelending. The Company’s lending activities have grown during 2013 and 2012 and the Company expects thistrend to continue. For a further discussion of the Company’s credit risks, see “Quantitative and QualitativeDisclosures about Market Risk—Risk Management—Credit Risk” in Item 7A. See also Notes 8 and 13 to theconsolidated financial statements in Item 8 for additional information about the Company’s financing receivablesand lending commitments, respectively.

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INSTITUTIONAL SECURITIES

INCOME STATEMENT INFORMATION

2013 2012(1) 2011(1)


Revenues:Investment banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,377 $ 3,930 $ 4,240Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,147 6,002 11,425Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 707 219 239Commissions and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,425 2,176 2,849Asset management, distribution and administration fees . . . . . . . . . . . . . . . . . 280 242 206Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 608 203 (236)

Total non-interest revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,544 12,772 18,723

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,572 4,224 5,860Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,673 5,971 6,900

Net interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,101) (1,747) (1,040)

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,443 11,025 17,683

Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,823 6,978 7,567Non-compensation expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,751 5,735 5,566

Total non-interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,574 12,713 13,133

Income (loss) from continuing operations before income taxes . . . . . . . . . . . . . . . 869 (1,688) 4,550Provision for (benefit from) income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (393) (1,061) 880

Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,262 (627) 3,670

Discontinued operations:Gain (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . (81) (158) (216)Provision for (benefit from) income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29) (36) (110)

Net gains (losses) on discontinued operations . . . . . . . . . . . . . . . . . . . . . (52) (122) (106)

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,210 (749) 3,564Net income applicable to redeemable noncontrolling interests . . . . . . . . . . . . 1 4 —Net income applicable to nonredeemable noncontrolling interests . . . . . . . . . 277 170 220

Net income (loss) applicable to Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 932 $ (923) $ 3,344

Amounts applicable to Morgan Stanley:Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 984 $ (797) $ 3,450Net gains (losses) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . (52) (126) (106)

Net income (loss) applicable to Morgan Stanley . . . . . . . . . . . . . . . $ 932 $ (923) $ 3,344

(1) Prior-period amounts have been recast to reflect the transfer of the International Wealth Management business from the WealthManagement business segment to the Institutional Securities business segment.

Supplemental Financial Information.

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

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Investment banking revenues were as follows:

2013 2012 2011


Advisory revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,310 $1,369 $1,737Underwriting revenues:

Equity underwriting revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,262 892 1,144Fixed income underwriting revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,805 1,669 1,359

Total underwriting revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,067 2,561 2,503

Total investment banking revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,377 $3,930 $4,240

The following table presents the Company’s volumes of announced and completed mergers and acquisitions,equity and equity-related offerings, and fixed income offerings:

2013(1) 2012(1) 2011(1)

(dollars in billions)

Announced mergers and acquisitions(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $520 $464 $510Completed mergers and acquisitions(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 508 391 657Equity and equity-related offerings(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 52 47Fixed income offerings(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287 284 231

(1) Source: Thomson Reuters, data at January 14, 2014. Announced and completed mergers and acquisitions volumes are based on fullcredit to each of the advisors in a transaction. Equity and equity-related offerings and fixed income offerings are based on full credit forsingle book managers and equal credit for joint book managers. Transaction volumes may not be indicative of net revenues in a givenperiod. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawalor change in the value of a transaction.

(2) Amounts include transactions of $100 million or more. Announced mergers and acquisitions exclude terminated transactions.(3) Amounts include Rule 144A and public common stock, convertible and rights offerings.(4) Amounts include non-convertible preferred stock, mortgage-backed and asset-backed securities and taxable municipal debt. Amounts

also include publicly registered and Rule 144A issues. Amounts exclude leveraged loans and self-led issuances.

Sales and Trading Net Revenues.

Sales and trading net revenues are composed of Trading revenues; Commissions and fees; Asset management,distribution and administration fees; and Net interest revenues (expenses). See “Business Segments—NetRevenues” herein for information about the composition of the above-referenced components of sales and tradingrevenues. In assessing the profitability of its sales and trading activities, the Company views these net revenuesin the aggregate. In addition, decisions relating to trading are based on an overall review of aggregate revenuesand costs associated with each transaction or series of transactions. This review includes, among other things, anassessment of the potential gain or loss associated with a transaction, including any associated commissions andfees, dividends, the interest income or expense associated with financing or hedging the Company’s positions,and other related expenses. See Note 12 to the consolidated financial statements in Item 8 for further informationrelated to gains (losses) on derivative instruments.

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Sales and trading net revenues were as follows:

2013 2012(1) 2011(1)


Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,147 $ 6,002 $11,425Commissions and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,425 2,176 2,849Asset management, distribution and administration fees . . . . . . . . . . . . . . . . . . . . . 280 242 206Net interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,101) (1,747) (1,040)

Total sales and trading net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,751 $ 6,673 $13,440

(1) All prior-year amounts have been recast to conform to the current year’s presentation. For further information, see “Business Segments”herein and Note 1 to the consolidated financial statements in Item 8.

Sales and trading net revenues by business were as follows:

2013 2012(1) 2011(1)


Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,529 $4,811 $ 7,263Fixed income and commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,594 2,358 7,506Other(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (372) (496) (1,329)

Total sales and trading net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,751 $6,673 $13,440


(2) Other sales and trading net revenues include net losses associated with costs related to the amount of liquidity held (“negative carry”), netgains (losses) on economic hedges related to the Company’s long-term debt and net gains (losses) from certain loans and lendingcommitments and related hedges associated with the Company’s lending activities.

The following sales and trading net revenues results exclude the impact of DVA (see footnote 2 in the followingtable). The reconciliation of sales and trading, including equity sales and trading and fixed income andcommodities sales and trading net revenues, from a non-GAAP to a GAAP basis is as follows:

2013 2012(1) 2011(1)


Total sales and trading net revenues—non-GAAP(2) . . . . . . . . . . . . . . . . . . . . . . . $10,432 $11,075 $ 9,759Impact of DVA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (681) (4,402) 3,681

Total sales and trading net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,751 $ 6,673 $13,440

Equity sales and trading net revenues—non-GAAP(2) . . . . . . . . . . . . . . . . . . . . . . $ 6,607 $ 5,941 $ 6,644Impact of DVA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (78) (1,130) 619

Equity sales and trading net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,529 $ 4,811 $ 7,263

Fixed income and commodities sales and trading net revenues—non-GAAP(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,197 $ 5,630 $ 4,444

Impact of DVA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (603) (3,272) 3,062

Fixed income and commodities sales and trading net revenues . . . . . . . . . . . $ 3,594 $ 2,358 $ 7,506


(2) Sales and trading net revenues, including fixed income and commodities and equity sales and trading net revenues that exclude theimpact of DVA, are non-GAAP financial measures that the Company considers useful for the Company and investors to allow furthercomparability of period-to-period operating performance.

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2013 Compared with 2012.

Investment Banking. Investment banking revenues in 2013 increased 11% from 2012, reflecting higherrevenues from equity and fixed income underwriting transactions, partially offset by lower advisory revenues.Overall, underwriting revenues of $3,067 million increased 20% from 2012. Equity underwriting revenuesincreased 41% to $1,262 million in 2013, largely driven by increased client activity across Europe, Asia and theAmericas. Fixed income underwriting revenues were $1,805 million in 2013, an increase of 8% from 2012,reflecting a continued favorable debt underwriting environment. Advisory revenues from merger, acquisition andrestructuring transactions (“M&A”) were $1,310 million in 2013, a decrease of 4% from 2012, reflective of thelower level of deal activity in 2013. Industry-wide announced M&A activity for 2013 was relatively flatcompared with 2012, with increases in the Americas offset by decreases in Europe, Middle East and Africa.

Sales and Trading Net Revenues. Total sales and trading net revenues increased to $9,751 million in 2013from $6,673 million in 2012, reflecting higher revenues in equity and fixed income sales and trading netrevenues and lower losses in other sales and trading net revenues.

Equity. Equity sales and trading net revenues increased to $6,529 million in 2013 from $4,811 million in 2012.The results in equity sales and trading net revenues included negative revenue due to the impact of DVA of $78million in 2013 compared with negative revenue of $1,130 million in 2012. Equity sales and trading net revenues,excluding the impact of DVA, increased 11% to $6,607 million in 2013 from 2012, reflecting strong performanceacross most products and regions, from higher client activity with particular strength in prime brokerage.

In 2013, equity sales and trading net revenues also reflected gains of $37 million related to changes in the fairvalue of net derivative contracts attributable to the tightening of counterparties’ CDS spreads and other factorscompared with gains of $68 million in 2012. The Company also recorded losses of $15 million in 2013 related tochanges in the fair value of net derivative contracts attributable to the tightening of the Company’s CDS spreadsand other factors compared with losses of $243 million in 2012. The gains and losses on CDS spreads and otherfactors include gains and losses on related hedging instruments.

Fixed Income and Commodities. Fixed income and commodities sales and trading net revenues were $3,594million in 2013 compared with net revenues of $2,358 million in 2012. Results in 2013 included negativerevenue of $603 million due to the impact of DVA compared with negative revenue of $3,272 million in 2012.Fixed income product net revenues, excluding the impact of DVA, in 2013 decreased 26% over 2012, primarilyreflecting lower levels of client activity across most products and significant revenue declines in interest rateproducts. Commodity net revenues, excluding the impact of DVA, in 2013 decreased 38% over 2012, primarilyreflecting lower levels of client activity across energy markets.

In 2013, fixed income and commodities sales and trading net revenues reflected gains of $127 million related tochanges in the fair value of net derivative contracts attributable to the tightening of counterparties’ CDS spreadsand other factors compared with losses of $128 million in 2012 due to the widening of such spreads and otherfactors. The Company also recorded losses of $114 million in 2013 related to changes in the fair value of netderivative contracts attributable to the tightening of the Company’s CDS spreads and other factors comparedwith losses of $482 million in 2012. The gains and losses on CDS spreads and other factors include gains andlosses on related hedging instruments.

Other. In addition to the equity and fixed income and commodities sales and trading net revenues discussedabove, sales and trading net revenues included other trading revenues, consisting of costs related to negativecarry, gains (losses) on economic hedges related to the Company’s long-term debt and certain activitiesassociated with the Company’s corporate lending activities. Effective April 1, 2012, the Company beganaccounting for all new corporate loans and lending commitments as either held for investment or held for sale.

Other sales and trading net losses were $372 million in 2013 compared with net losses of $496 million in 2012.The results in both periods included net losses related to negative carry and losses on economic hedges and other

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costs related to the Company’s long-term debt. The results in 2013 and 2012 were partially offset by net gains of$440 million and $740 million, respectively, associated with corporate loans and lending commitments.

Net Interest. Net interest expense decreased to $1,101 million in 2013 from $1,747 million in 2012, primarilydue to lower costs associated with the Company’s long-term borrowings.

Investments. See “Business Segments—Net Revenues” herein for further information on what is included inInvestments.

Net investment gains of $707 million were recognized in 2013 compared with net investment gains of $219million in 2012. The increase primarily reflected a gain on the disposition of an investment in an insurancebroker. The results in 2013 and 2012 included mark-to-market gains on principal investments in real estate fundsand net gains from investments associated with the Company’s deferred compensation and co-investment plans.

Other. Other revenues of $608 million were recognized in 2013 compared with other revenues of $203 millionin 2012. The results in 2013 primarily included income of $570 million, arising from the Company’s 40% stakein MUMSS, compared with income of $152 million in 2012 (see “Executive Summary—Significant Items—Japanese Securities Joint Venture” herein). The gains in both periods were partially offset by the provision forloan losses and losses associated with investments in low-income housing and alternative energy.

Non-interest Expenses. Non-interest expenses increased 15% in 2013 compared with 2012. The increase wasprimarily due to higher non-compensation expenses. Compensation and benefits expenses decreased 2% in 2013,primarily due to lower headcount. Results included severance expenses of $141 million related to reductions inforce in 2013 compared with $120 million in 2012. Non-compensation expenses increased 35% in 2013compared with 2012. The increase primarily reflected additions to legal expenses for litigation and investigationsrelated to residential mortgage-backed securities and the credit crisis (see “Contingencies—Legal” in Note 13 tothe consolidated financial statements in Item 8). Brokerage, clearing and exchange expenses increased 16% in2013 compared with 2012 primarily due to higher volumes of activity. Information processing andcommunications expenses decreased 9% in 2013 compared with 2012 primarily due to lower technology costs.Professional services expenses increased 5% in 2013 compared with 2012 primarily due to higher consultingexpenses related to the Company’s technology platform.


Investment Banking. Investment banking revenues in 2012 decreased 7% from 2011, reflecting lower revenuesfrom advisory and equity underwriting transactions, partially offset by higher revenues from fixed incomeunderwriting transactions. Advisory revenues from merger, acquisition and restructuring transactions were$1,369 million in 2012, a decrease of 21% from 2011, reflecting lower completed market volumes. Overall,underwriting revenues of $2,561 million increased 2% from 2011. Fixed income underwriting revenues were$1,669 million in 2012, an increase of 23% from 2011, reflecting increased bond issuance volumes. Equityunderwriting revenues decreased 22% to $892 million in 2012, reflecting lower levels of market activity.

Sales and Trading Net Revenues. Total sales and trading net revenues decreased to $6,673 million in 2012 from$13,440 million in 2011, reflecting lower revenues in fixed income and commodities sales and trading net revenuesand equity sales and trading net revenues, partially offset by lower losses in other sales and trading net revenues.

Equity. Equity sales and trading net revenues decreased 34% to $4,811 million in 2012 from 2011. The resultsin equity sales and trading net revenues included negative revenue in 2012 of $1,130 million due to the impact ofDVA compared with positive revenue of $619 million in 2011 due to the impact of DVA. Equity sales andtrading net revenues, excluding the impact of DVA, in 2012 decreased 11% from 2011, reflecting lower revenuesin the cash business, as a result of lower volumes.

In 2012, equity sales and trading net revenues reflected gains of $68 million related to changes in the fair valueof net derivative contracts attributable to the tightening of counterparties’ CDS spreads and other credit factorscompared with losses of $38 million in 2011 due to the widening of such spreads and other credit factors. The

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Company also recorded losses of $243 million in 2012 related to changes in the fair value of net derivativecontracts attributable to the tightening of the Company’s CDS spreads and other credit factors compared withgains of $182 million in 2011 due to the widening of such spreads and other credit factors. The gains and losseson CDS spreads and other credit factors include gains and losses on related hedging instruments.

Fixed Income and Commodities. Fixed income and commodities sales and trading net revenues were $2,358million in 2012 compared with net revenues of $7,506 million in 2011. Results in 2012 included negativerevenue of $3,272 million due to the impact of DVA, compared with positive revenue of $3,062 million in 2011due to the impact of DVA. Fixed income product net revenues, excluding the impact of DVA, in 2012 increased45% over 2011, reflecting higher results in interest rate, foreign exchange and credit products, including higherlevels of client activity in securitized products, with results in 2011 being negatively impacted by losses of$1,838 million from Monolines, including a loss approximating $1.7 billion in the fourth quarter of 2011 fromthe Company’s comprehensive settlement with MBIA (see “Executive Summary—Significant Items—MonolineInsurers” herein for further information). The results in 2011 also included interest rate product revenues ofapproximately $600 million, primarily related to the release of credit valuation adjustments upon therestructuring of certain derivative transactions that decreased the Company’s exposure to the EuropeanPeripherals (see “Executive Summary—Significant Items—European Peripheral Countries” herein for furtherinformation). Commodity net revenues, excluding the impact of DVA, decreased 20% in 2012 due to a difficultmarket environment. Results in the fourth quarter of 2011 included a loss of approximately $108 million uponapplication of the overnight indexed swap (“OIS”) curve to certain fixed income products (see Note 4 to theconsolidated financial statements in Item 8).

In 2012, fixed income and commodities sales and trading net revenues reflected losses of $128 million related tochanges in the fair value of net derivative contracts attributable to the widening of counterparties’ CDS spreadsand other credit factors compared with losses of $1,249 million, including Monolines, in 2011. The Companyalso recorded losses of $482 million in 2012 related to changes in the fair value of net derivative contractsattributable to the tightening of the Company’s CDS spreads and other credit factors compared with gains of$746 million in 2011 due to the widening of such spreads and other credit factors. The gains and losses on CDSspreads and other factors include gains and losses on related hedging instruments.

Other. Other sales and trading net losses were $496 million in 2012 compared with net losses of $1,329 millionin 2011. The results in both years included losses related to negative carry. The 2012 results included losses oneconomic hedges related to the Company’s long-term debt compared with gains in 2011. Results in 2012 werepartially offset by net gains of $740 million associated with loans and lending commitments. Results in 2011included net losses of approximately $631 million associated with loans and lending commitments. The results in2012 also included net investment gains in the Company’s deferred compensation and co-investment planscompared with net losses in 2011.

Net Interest. Net interest expense increased to $1,747 million in 2012 from $1,040 million in 2011, primarilydue to lower revenues from securities purchased under agreements to resell and securities borrowed transactions.

Investments. Net investment gains of $219 million were recognized in 2012 compared with net investmentgains of $239 million in 2011. The gains in 2012 and 2011 primarily included mark-to-market gains on principalinvestments in real estate funds and net gains from investments associated with the Company’s deferredcompensation and co-investment plans.

Other. Other revenues of $203 million were recognized in 2012 compared with other losses of $236 million in2011. The results in 2012 included income of $152 million, arising from the Company’s 40% stake in MUMSS.The results in 2011 included pre-tax losses of $783 million arising from the Company’s 40% stake in MUMSS(see “Executive Summary—Significant Items—Japanese Securities Joint Venture” herein). The gains in 2012were partially offset by increases in the provision for loan losses. The results in both periods also included gainsfrom the Company’s retirement of certain of its debt.

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Non-interest Expenses. Non-interest expenses decreased 3% in 2012. The decrease was due to lowercompensation expenses, partially offset by higher non-compensation expenses. Compensation and benefitsexpenses decreased 8% in 2012, in part due to lower net revenues, excluding DVA and the comprehensivesettlement with MBIA, and were partially offset by severance expenses related to reductions in force during theyear. Non-compensation expenses increased 3% in 2012, compared with 2011. Brokerage, clearing and exchangeexpenses decreased 9% in 2012, primarily due to lower volumes of activity. Information processing andcommunications expense increased 6% in 2012, primarily due to ongoing investments in technology.Professional services expenses increased 21% in 2012, primarily due to higher legal and regulatory costs andconsulting expenses. Other expenses increased 4% in 2012. The results in 2012 included increased litigationexpense and a higher provision for unfunded loan commitments. The results in 2011 included the initial costs of$130 million associated with Morgan Stanley Huaxin Securities Company Limited (see “Executive Summary—Significant Items—Huaxin Securities Joint Venture” herein for further information). The results in 2011 alsoincluded a charge of $59 million due to the bank levy on relevant liabilities and equities on the consolidatedbalance sheets of “U.K. Banking Groups” at December 31, 2011 as defined under the bank levy legislationenacted by the U.K. government in July 2011.

Income Tax Items.

In 2013, the Company recognized in income from continuing operations an aggregate discrete net tax benefit of$407 million attributable to the Institutional Securities business segment. This included discrete tax benefits of:$161 million related to the remeasurement of reserves and related interest associated with new informationregarding the status of certain tax authority examinations; $92 million related to the establishment of a previouslyunrecognized deferred tax asset from a legal entity reorganization; $73 million that is attributable to tax planningstrategies to optimize foreign tax credit utilization as a result of the anticipated repatriation of earnings fromcertain non-U.S. subsidiaries; and $81 million due to the retroactive effective date of the Relief Act.

In 2012, the Company recognized in income from continuing operations a net tax benefit of $249 millionattributable to the Institutional Securities business segment. This included a discrete tax benefit of $299 millionrelated to the remeasurement of reserves and related interest associated with either the expiration of theapplicable statute of limitations or new information regarding the status of certain Internal Revenue Serviceexaminations and an out-of-period net tax provision of $50 million, primarily related to the overstatement ofdeferred tax assets associated with repatriated earnings of foreign subsidiaries recorded in prior years. TheCompany has evaluated the effects of the understatement of the income tax provision both qualitatively andquantitatively, and concluded that it did not have a material impact on any prior annual or quarterly consolidatedfinancial statements.

Discontinued Operations.

For a discussion about discontinued operations, see Note 1 to the consolidated financial statements in Item 8.

Nonredeemable Noncontrolling Interests.

Nonredeemable noncontrolling interests primarily relate to MUFG’s interest in MSMS (see “ExecutiveSummary—Significant Items—Japanese Securities Joint Venture” herein).

Sale of Global Oil Merchanting Business.

On December 20, 2013, the Company and a subsidiary of Rosneft Oil Company (“Rosneft”) entered into aPurchase Agreement pursuant to which the Company will sell the global oil merchanting unit of its commoditiesdivision to Rosneft. The transaction is subject to regulatory approvals and other customary conditions and isexpected to close in the second half of 2014. At December 31, 2013, the transaction does not meet the criteria fordiscontinued operations and is not expected to have a material impact on the Company’s consolidated financialstatements.

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WEALTH MANAGEMENT


2013 2012(1) 2011(1)


Revenues:Investment banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 923 $ 835 $ 738Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,161 1,043 988Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 10 4Commissions and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,209 2,080 2,495Asset management, distribution and administration fees . . . . . . . . . . . . . . . . . 7,638 7,190 6,709Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389 309 406

Total non-interest revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,334 11,467 11,340

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100 1,886 1,719Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 319 287

Net interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,880 1,567 1,432

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,214 13,034 12,772

Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,271 7,796 7,910Non-compensation expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,314 3,616 3,555

Total non-interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,585 11,412 11,465

Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . 2,629 1,622 1,307Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 920 557 461

Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,709 1,065 846

Discontinued operations:Income (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . (1) 94 21Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 26 7

Net gain (loss) from discontinued operations . . . . . . . . . . . . . . . . . (1) 68 14

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,708 1,133 860Net income applicable to redeemable noncontrolling interests . . . . 221 120 —Net income applicable to nonredeemable noncontrolling

interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 167 170

Net income applicable to Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,487 $ 846 $ 690

Amounts applicable to Morgan Stanley:Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,488 $ 803 $ 683Net gain (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . (1) 43 7

Net income applicable to Morgan Stanley . . . . . . . . . . . . . . . . . . . . $ 1,487 $ 846 $ 690


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Net Revenues. The Wealth Management business segment’s net revenues are composed of Transactional,Asset management, Net interest and Other revenues. Transactional revenues include Investment banking,Trading, and Commissions and fees. Asset management revenues include Asset management, distribution andadministration fees, and referral fees related to the bank deposit program. Net interest revenues include netinterest revenues related to the bank deposit program, interest on securities available for sale and all other netinterest revenues. Other revenues include revenues from available for sale securities, customer account servicesfees, other miscellaneous revenues and revenues from Investments.

2013 2012(1) 2011(1)


Net revenues:Transactional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,293 $ 3,958 $ 4,221Asset management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,638 7,190 6,709Net interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,880 1,567 1,432Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403 319 410

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,214 $13,034 $12,772


Wealth Management JV. On June 28, 2013, the Company completed the purchase of the remaining 35% stakein the Wealth Management JV for $4.725 billion. As the 100% owner of the Wealth Management JV, theCompany retains all of the related net income previously applicable to the noncontrolling interests in the WealthManagement JV, and benefit from the termination of certain related debt and operating agreements with theWealth Management JV partner.

Concurrent with the acquisition of the remaining 35% stake in the Wealth Management JV, the deposit sweepagreement between Citi and the Company was terminated. In 2013, $26 billion of deposits held by Citi relating tocustomer accounts were transferred to the Company’s depository institutions. At December 31, 2013,approximately $30 billion of additional deposits are scheduled to be transferred to the Company’s depositoryinstitutions on an agreed-upon basis through June 2015.

For further information, see Note 3 to the consolidated financial statements in Item 8.

2013 compared with 2012.

Transactional.

Investment Banking. Wealth Management business segment’s investment banking revenues include revenuesfrom the distribution of equity and fixed income securities, including initial public offerings, secondary offerings,closed-end funds and unit trusts. Investment banking revenues increased 11% from 2012 to $923 million in 2013,primarily due to higher levels of underwriting activity in closed-end funds and unit trusts.

Trading. Trading revenues include revenues from customers’ purchases and sales of financial instruments inwhich the Company acts as principal and gains and losses on the Company’s inventory positions, which are heldprimarily to facilitate customer transactions and gains and losses associated with certain employee deferredcompensation plans. Trading revenues increased 11% from 2012 to $1,161 million in 2013, primarily due togains related to investments associated with certain employee deferred compensation plans and higher revenuesfrom fixed income products.

Commissions and Fees. Commissions and fees revenues primarily arise from agency transactions in listed andOTC equity securities and sales of mutual funds, futures, insurance products and options. Commissions and feesrevenues increased 6% from 2012 to $2,209 million in 2013, primarily due to higher equity, mutual fund andalternatives activity.

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Asset Management.

Asset Management, Distribution and Administration Fees. See “Business Segments—Net Revenues” hereinfor information about the composition of Asset management, distribution and administration fees.

Asset management, distribution and administration fees increased 6% from 2012 to $7,638 million in 2013,primarily due to higher fee-based revenues, partially offset by lower revenues from referral fees from the bankdeposit program. The referral fees for deposits placed with Citi-affiliated depository institutions declined to $240million in 2013 from $383 million in 2012. Lower revenues from the bank deposit program and the decrease inreferral fees are both due to the ongoing transfer of deposits to the Company from Citi.

Balances in the bank deposit program increased to $134 billion at December 31, 2013 from $131 billion atDecember 31, 2012, which includes deposits held by Company-affiliated FDIC-insured depository institutions of$104 billion at December 31, 2013 and $72 billion at December 31, 2012. As a result of the Company’s 100%ownership of the Wealth Management JV, the deposits held in non-affiliated depositories will transfer to theCompany-affiliated depositories on an agreed-upon basis through June 2015.

Client assets in fee-based accounts increased to $697 billion and represented 37% of total client assets atDecember 31, 2013 compared with $554 billion and 33% at December 31, 2012, respectively. Total client assetbalances increased to $1,909 billion at December 31, 2013 from $1,696 billion at December 31, 2012, primarilydue to the impact of market conditions and higher fee-based client asset flows. Client asset balances inhouseholds with assets greater than $1 million increased to $1,454 billion at December 31, 2013 from $1,237billion at December 31, 2012. Effective from the quarter ended March 31, 2013, client assets also include certainadditional non-custodied assets as a result of the completion of the Wealth Management JV platform conversion.Fee-based client asset flows for 2013 were $51.9 billion compared with $26.9 billion in 2012.

Beginning January 1, 2013, the Company enhanced its definition of fee-based asset flows. Fee-based asset flowshave been recast for all periods to include dividends, interest and client fees and to exclude cash managementrelated activity.

Net Interest.

Interest income and Interest expense are a function of the level and mix of total assets and liabilities. Net interestis driven by securities-based lending, mortgage lending, margin loans, securities borrowed and securities loanedtransactions and bank deposit program activity.

Net interest increased 20% to $1,880 million in 2013 from 2012, primarily due to higher balances in the bankdeposit program and growth in loans and lending commitments in PLA securities-based lending products. Inaddition, interest expense declined in 2013 due to the Company’s redemption of all the Class A PreferredInterests owned by Citi and its affiliates, in connection with the Company’s acquisition of 100% ownership of theWealth Management JV effective at the end of the second quarter of 2013. The loans and lending commitmentsin the Company’s Wealth Management business segment have grown in 2013, and the Company expects thistrend to continue. See “Business Segments—Lending Activities” herein and “Quantitative and QualitativeDisclosures about Market Risk—Credit Risk” in Item 7A.

Other.

Other revenues were $389 million in 2013, an increase of 26% from 2012, primarily due to a gain on sale of theglobal stock plan business and realized gains on securities available for sale.

Non-interest Expenses.

Non-interest expenses increased 2% in 2013 from 2012. Compensation and benefits expenses increased 6% in2013 from 2012, primarily due to higher compensable revenues. Non-compensation expenses decreased 8% in2013 from 2012, primarily driven by the absence of platform integration costs and non-recurring technology

75

write-offs, partially offset by an impairment expense of $36 million related to certain intangible assets(management contracts) associated with alternative investment funds in 2013 (see Note 9 to the consolidatedfinancial statements in Item 8).


Transactional.

Investment Banking. Investment banking revenues increased 13% to $835 million in 2012 from 2011,primarily due to higher revenues from closed-end funds and higher fixed income underwriting.

Trading. Trading revenues increased 6% to $1,043 million in 2012 from 2011, primarily due to gains related toinvestments associated with certain employee deferred compensation plans and higher revenues from structurednotes and corporate bonds transactions, partially offset by lower revenues from municipal securities, corporateequity securities, government securities and foreign exchange transactions.

Commissions and Fees. Commissions and fees revenues decreased 17% to $2,080 million in 2012 from 2011,primarily due to lower client activity.

Asset Management.

Asset Management, Distribution and Administration Fees. Asset management, distribution and administrationfees increased 7% to $7,190 million in 2012 from 2011, primarily due to higher fee-based revenues, and higherrevenues from annuities and the bank deposit program held at Citi depositories. The referral fees for depositsplaced with Citi-affiliated depository institutions were $383 million and $255 million in 2012 and 2011,respectively.

Balances in the bank deposit program increased to $131 billion at December 31, 2012 from $111 billion atDecember 31, 2011. Deposits held by Company-affiliated FDIC-insured depository institutions were $72 billionat December 31, 2012 and $56 billion at December 31, 2011.

Client assets in fee-based accounts increased to $554 billion and represented 33% of total client assets atDecember 31, 2012 compared with $468 billion and 30% at December 31, 2011, respectively. Total client assetbalances increased to $1,696 billion at December 31, 2012 from $1,566 billion at December 31, 2011, primarilydue to the impact of market conditions and net new asset inflows. Client asset balances in households with assetsgreater than $1 million increased to $1,237 billion at December 31, 2012 from $1,150 billion at December 31,2011. Global fee-based client asset flows for 2012 were $26.9 billion compared with $47.0 billion in 2011.

Net Interest.

Net interest increased 9% to $1,567 million in 2012 from 2011, primarily resulting from higher revenues fromthe bank deposit program, interest on the available for sale portfolio and secured financing activities.

Other. Other revenues were $309 million in 2012, a decrease of 24% from 2011, primarily due to lower gainson sales of securities available for sale.

Non-interest Expenses. Non-interest expenses were flat in 2012 from 2011. Compensation and benefitsexpenses decreased 1% from 2011, primarily due to lower compensable revenues, partially offset by higherexpenses associated with certain employee deferred compensation plans. Non-compensation expenses increased2% in 2012 from 2011. Information processing and communications expenses increased 7% in 2012, primarilydue to higher telecommunications and data storage costs. Marketing and business development expensesincreased 10% from 2011, primarily due to higher costs associated with advertising and infrastructure, partiallyoffset by lower costs associated with conferences and seminars. Other expenses increased 5% in 2012, primarily

76

due to non-recurring costs related to Wealth Management JV integration (see “Executive Summary—SignificantItems—Wealth Management JV” herein). Professional services expenses decreased 7% in 2012 from 2011,primarily due to lower technology consulting costs.


On April 2, 2012, the Company completed the sale of Quilter, its retail wealth management business in the U.K.,resulting in a pre-tax gain of $108 million for the year ended December 31, 2012 in the Wealth Managementbusiness segment. The results of Quilter are reported as discontinued operations for all periods presented. SeeNote 1 to the consolidated financial statements in Item 8.

77

INVESTMENT MANAGEMENT


2013 2012 2011


Revenues:Investment banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11 $ 17 $ 13Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 (45) (22)Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,056 513 330Asset management, distribution and administration fees . . . . . . . . . . . . . . . . . . . . 1,853 1,703 1,582Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 55 25

Total non-interest revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,994 2,243 1,928

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 10 10Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 34 51

Net interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) (24) (41)

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,988 2,219 1,887

Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,183 841 848Non-compensation expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 821 788 786

Total non-interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,004 1,629 1,634

Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . 984 590 253Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299 267 73

Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 685 323 180

Discontinued operations:Gain from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 13 24Provision for (benefit from) income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 4 (17)

Net gain from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . 9 9 41

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 694 332 221Net income applicable to nonredeemable noncontrolling interests . . . . . . . . . . . . 182 187 145

Net income applicable to Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 512 $ 145 $ 76

Amounts applicable to Morgan Stanley:Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 503 $ 136 $ 35Net gain from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 9 41

Net income applicable to Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . $ 512 $ 145 $ 76

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Statistical Data.

The Investment Management business segment’s period-end and average assets under management orsupervision were as follows:

AtDecember 31, Average for

2013 2012 2013 2012 2011


Assets under management or supervision by asset class:Traditional Asset Management:

Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140 $120 $130 $114 $112Fixed income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 62 61 59 60Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 100 104 87 66Alternatives(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 27 29 26 18

Total Traditional Asset Management . . . . . . . . . . . . . . . . . . . 343 309 324 286 256

Real Estate Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 20 20 19 17

Merchant Banking:Private Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 9 9 9 9FrontPoint(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — 1

Total Merchant Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 9 9 9 10

Total assets under management or supervision . . . . . . . . . . . . $373 $338 $353 $314 $283

Share of minority stake assets(2)(3) . . . . . . . . . . . . . . . . . . . . $ 6 $ 5 $ 6 $ 5 $ 7

(1) The alternatives asset class includes a range of investment products such as funds of hedge funds, funds of private equity funds and fundsof real estate funds.

(2) On March 1, 2011, the Company and the principals of FrontPoint Partners LLC (“FrontPoint”) completed a transaction wherebyFrontPoint senior management and portfolio managers own a majority equity stake in FrontPoint, and the Company retains a minoritystake. At December 31, 2011, the assets under management attributed to FrontPoint are represented within the share of minority stakeassets.

(3) Amounts represent the Investment Management business segment’s proportional share of assets managed by entities in which it owns aminority stake.

79

Activity in the Investment Management business segment’s assets under management or supervision during2013, 2012 and 2011 was as follows:

2013 2012 2011


Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $338 $287 $272Net flows by asset class:

Traditional Asset Management:Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (2) 4Fixed income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (1) (6)Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 26 20Alternatives(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1 8

Total Traditional Asset Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 24 26

Real Estate Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) 1 1

Merchant Banking:Private Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 — —FrontPoint(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (1)

Total Merchant Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 — (1)

Total net flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 25 26Net market appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 26 (7)Decrease due to FrontPoint transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (4)

Total net increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 51 15

Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $373 $338 $287

(1) Fixed income outflows for 2011 include $1.3 billion due to the revised treatment of assets under management previously reported as anet flow.

(2) The alternatives asset class includes a range of investment products such as funds of hedge funds, funds of private equity funds and fundsof real estate funds.

(3) The amount in 2011 includes two months of net flows related to FrontPoint.


Investment Banking. The Investment Management business segment generates investment banking revenuesprimarily from the placement of investments in real estate and merchant banking funds.

Trading. See “Business Segments—Net Revenues” herein for information about the composition of Tradingrevenues.

The Company recognized gains of $41 million in 2013 compared with losses of $45 million in 2012. Tradingresults in 2013 primarily reflected gains related to certain consolidated real estate funds sponsored by theCompany. Trading results in 2012 primarily reflected losses related to certain consolidated real estate fundssponsored by the Company, as well as losses on hedges on certain investments.

Investments. Real estate and private equity investments generally are held for long-term appreciation andgenerally are subject to significant sales restrictions. Estimates of the fair value of the investments involvesignificant judgment and may fluctuate significantly over time in light of business, market, economic andfinancial conditions generally or in relation to specific transactions.

The Company recorded net investment gains of $1,056 million in 2013 compared with gains of $513 million in2012. The increase in 2013 was primarily related to higher net investment gains predominantly within the

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Company’s Merchant Banking and Real Estate Investing businesses and higher gains on certain investmentsassociated with the Company’s employee deferred compensation and co-investment plans. Results in 2013 alsoincluded the benefit of carried interest.

Asset Management, Distribution and Administration Fees. “See Business Segments—Net Revenues” hereinfor information about the composition of Asset management, distribution and administration fees.

Asset management, distribution and administration fees increased 9% to $1,853 million in 2013. The increaseprimarily reflected higher management and administration revenues, primarily due to higher average assets undermanagement, as well as higher performance fees.

The Company’s assets under management increased $35 billion from $338 billion at December 31, 2012 to $373billion at December 31, 2013, reflecting market appreciation and positive net flows. The Company recorded $22billion in market appreciation and net inflows of $13 billion in 2013, primarily reflecting net customer inflows inliquidity funds. In 2012, the Company recorded $26 billion in market appreciation and $25 billion in netcustomer inflows primarily in liquidity funds.

Other. Other revenues were $33 million in 2013 as compared with $55 million in 2012. The results in 2013included higher revenues associated with the Company’s minority investment in Avenue Capital Group, a NewYork-based investment manager, partially offset by lower revenues associated with the Company’s minorityinvestment in Lansdowne Partners, a London-based investment manager. The results in 2012 included gainsassociated with the expiration of a lending facility to a real estate fund sponsored by the Company.

Non-interest Expenses. Non-interest expenses were $2,004 million in 2013 as compared with $1,629 million in2012. Compensation and benefits expenses increased 41% in 2013, primarily due to higher net revenues. Non-compensation expenses increased 4% in 2013, primarily due to higher brokerage and clearing and professionalservices expenses, partially offset by lower information processing expenses.


Trading. In 2012, the Company recognized losses of $45 million compared with losses of $22 million in 2011.Trading results in 2012 primarily reflected losses related to certain consolidated real estate funds sponsored bythe Company, as well as losses on hedges on certain investments. Trading results in 2011 primarily reflectedlosses related to certain investments associated with the Company’s employee deferred compensation and co-investment plans and certain consolidated real estate funds sponsored by the Company.

Investments. The Company recorded net investment gains of $513 million in 2012 compared with gains of$330 million in 2011. The increase in 2012 was primarily related to higher net gains in the Company’s MerchantBanking business, as well as higher net investment gains associated with certain consolidated real estate fundssponsored by the Company.

Asset Management, Distribution and Administration Fees. Asset management, distribution and administrationfees increased 8% to $1,703 million in 2012. The increase in 2012 primarily reflected higher management andadministration revenues and higher performance fees.

The Company’s assets under management increased $51 billion from $287 billion at December 31, 2011 to $338billion at December 31, 2012, reflecting $26 billion in market appreciation and net customer inflows of $25billion primarily in liquidity funds. In 2011, net inflows of $26 billion primarily reflected the sweep of theWealth Management JV client cash balances of approximately $19 billion into Morgan Stanley managedliquidity funds and inflows of $8 billion into alternatives funds, partially offset by outflows of $6 billion in fixedincome products.

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Other. Other revenues were $55 million in 2012 as compared with $25 million in 2011. The results in 2012included gains associated with the expiration of a lending facility to a real estate fund sponsored by theCompany. The results in 2012 also included lower revenues associated with the Company’s minority investmentsin Avenue Capital Group and Lansdowne Partners. The results in 2011 were partially offset by a $27 millionwritedown in the Company’s minority investment in FrontPoint.

Non-interest Expenses. Non-interest expenses were $1,629 million in 2012 as compared with $1,634 million in2011. Compensation and benefits expenses decreased 1% in 2012. Non-compensation expenses were relativelyunchanged in 2012 compared with 2011.

Income Tax Items.

In 2012, the Company recognized in income from continuing operations an out-of-period net tax provision of$107 million, attributable to the Investment Management business segment, primarily related to theoverstatement of deferred tax assets associated with partnership investments in prior years. The Company hasevaluated the effects of the understatement of the income tax provision both qualitatively and quantitatively andconcluded that it did not have a material impact on any prior annual or quarterly consolidated financialstatements.


In the fourth quarter of 2011, the Company classified a real estate property management company as held for salewithin the Investment Management business segment. The transaction closed during the first quarter of 2012.The results of this company are reported as discontinued operations for all periods presented.

For further information on discontinued operations, see Note 1 to the consolidated financial statements in Item 8.


Nonredeemable noncontrolling interests are primarily related to the consolidation of certain real estate fundssponsored by the Company. Investment gains associated with these consolidated funds were $151 million, $225million and $180 million in 2013, 2012 and 2011, respectively.

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Accounting Developments.

Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.

In January 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting update clarifyingwhen an in-substance repossession or foreclosure occurs; that is, when a creditor should be considered to havereceived physical possession of residential real estate property collateralizing a consumer mortgage loan suchthat the loan receivable should be derecognized and the real estate property recognized. This guidance iseffective for the Company beginning January 1, 2015. This guidance can be applied using either a modifiedretrospective transition method or a prospective transition method. This guidance is not expected to have amaterial impact on the Company’s consolidated financial statements.

Accounting for Investments in Qualified Affordable Housing Projects.

In January 2014, the FASB issued an accounting update providing guidance on accounting for investments by areporting entity in flow-through limited liability entities that manage or invest in affordable housing projects thatqualify for the low-income housing tax credit. The amendments permit reporting entities to make an accountingpolicy election to account for their investments in qualified affordable housing projects using the proportionalamortization method if certain conditions are met. Under the proportional amortization method, an entityamortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received andrecognizes the net investment performance in the income statement as a component of income tax expense(benefit). This guidance is effective for the Company retrospectively beginning January 1, 2015. Early adoptionis permitted. The Company is currently evaluating the potential impact of adopting this accounting update.

Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar TaxLoss, or a Tax Credit Carryforward Exists.

In July 2013, the FASB issued an accounting update providing guidance on the financial statement presentationof an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforwardexists. This guidance requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to bepresented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, asimilar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertaintax position is disallowed. This guidance is effective for the Company beginning January 1, 2014. This guidanceis expected to be applied prospectively to all unrecognized tax benefits that exist at the effective date. Theadoption of this accounting guidance is not expected to have a material impact on the Company’s consolidatedfinancial statements.

Amendments to the Scope, Measurement, and Disclosure Requirements of an Investment Company.

In June 2013, the FASB issued an accounting update that modifies the criteria used in defining an investmentcompany under GAAP and sets forth certain measurement and disclosure requirements. This update requires aninvestment company to measure noncontrolling interests in another investment company at fair value andrequires an entity to disclose the fact that it is an investment company, and provide information about changes, ifany, in its status as an investment company. An entity will also need to include disclosures around financialsupport that has been provided or is contractually required to be provided to any of its investees. This guidance iseffective for the Company prospectively beginning January 1, 2014. The adoption of this accounting guidancedid not have a material impact on the Company’s consolidated financial statements.

Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of CertainSubsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.

In March 2013, the FASB issued an accounting update requiring the parent entity to release any relatedcumulative translation adjustment into net income when the parent ceases to have a controlling financial interest

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in a subsidiary that is a foreign entity. When the parent ceases to have a controlling financial interest in asubsidiary or group of assets that is a business within a foreign entity, the related cumulative translationadjustment would be released into net income only if the sale or transfer results in the complete or substantiallycomplete liquidation of the foreign entity in which the subsidiary or group of assets had resided. This guidance iseffective for the Company prospectively beginning on January 1, 2014. The adoption of this accounting guidancedid not have a material impact on the Company’s consolidated financial statements.

Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of theObligation Is Fixed at the Reporting Date.

In February 2013, the FASB issued an accounting update that requires an entity to measure obligations resultingfrom joint and several liability arrangements for which the total amount of the obligation is fixed at the reportingdate, as the sum of the amount the reporting entity agreed to pay and any additional amount the reporting entityexpects to pay on behalf of its co-obligors. This update also requires additional disclosures about thoseobligations. This guidance is effective for the Company retrospectively beginning on January 1, 2014. Theadoption of this accounting guidance is not expected to have a material impact on the Company’s consolidatedfinancial statements.

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Other Matters.Legal Matters.

On February 4, 2014, and subsequent to the release of the Company’s 2013 earnings on January 17, 2014, legalreserves were increased, which increased Other expenses within the Institutional Securities business segment inthe fourth quarter and year ended December 31, 2013 by $150 million related to the settlement with the FederalHousing Finance Agency (see “Contingencies—Legal” in Note 13 to the consolidated financial statements inItem 8). This decreased diluted EPS and diluted EPS from continuing operations by $0.05 in the fourth quarterand year ended December 31, 2013.

Real Estate.

The Company acts as the general partner for various real estate funds and also invests in certain of these funds asa limited partner. The Company’s real estate investments at December 31, 2013 and December 31, 2012 aredescribed below. Such amounts exclude investments associated with certain employee deferred compensationand co-investment plans.

At December 31, 2013 and December 31, 2012, the consolidated statements of financial condition includedamounts representing real estate investment assets of consolidated subsidiaries of approximately $2.2 billion,including noncontrolling interests of approximately $1.8 billion in both periods, for a net amount of $0.5 billionand $0.4 billion, respectively. This net presentation is a non-GAAP financial measure that the Companyconsiders to be a useful measure for the Company and investors to use in assessing the Company’s net exposure.In addition, the Company has contractual capital commitments, guarantees, lending facilities and counterpartyarrangements with respect to real estate investments of $0.3 billion at December 31, 2013.

In addition to the Company’s real estate investments, the Company engages in various real estate-relatedactivities, including origination of loans secured by commercial and residential properties. The Company alsosecuritizes and trades in a wide range of commercial and residential real estate and real estate-related wholeloans, mortgages and other real estate. In connection with these activities, the Company has provided, orotherwise agreed to be responsible for, representations and warranties. Under certain circumstances, theCompany may be required to repurchase such assets or make other payments related to such assets if suchrepresentations and warranties were breached. The Company continues to monitor its real estate-related activitiesin order to manage its exposures and potential liability from these markets and businesses. See “LegalProceedings—Residential Mortgage and Credit Crisis Related Matters” in Part I, Item 3 and Note 13 to theconsolidated financial statements in Item 8 for further information.

Japanese Securities Joint Venture.

The Company holds a 40% voting interest and MUFG holds a 60% voting interest in MUMSS, while theCompany holds a 51% voting interest and MUFG holds a 49% voting interest in MSMS. The Companyconsolidates MSMS in its consolidated financial statements and accounts for its interest in MUMSS as an equitymethod investment within the Institutional Securities business segment (see Note 22 to the consolidated financialstatements in Item 8). During 2013, 2012 and 2011, the Company recorded income (loss) of $570 million, $152million and $(783) million, respectively, within Other revenues in the consolidated statements of income, arisingfrom the Company’s 40% stake in MUMSS.

In order to enhance the risk management at MUMSS, during 2011, the Company entered into a transaction withMUMSS whereby the risk associated with the fixed income trading positions that previously caused the majorityof the aforementioned MUMSS losses in 2011 was transferred to MSMS. In return for entering into thetransaction, the Company received total consideration of $659 million, which represented the estimated fair valueof the fixed income trading positions transferred.

To the extent that losses incurred by MUMSS result in a requirement to restore its capital, MUFG is solelyresponsible for providing this additional capital to a minimum level, whereas the Company is not obligated to

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contribute additional capital to MUMSS. To the extent that MUMSS is required to increase its capital level dueto factors other than losses, such as changes in regulatory requirements, both MUFG and the Company arerequired to contribute the necessary capital based upon their economic interest as set forth above.


See Note 22 to the consolidated financial statements in Item 8 and “Executive Summary—Significant Items—Japanese Securities Joint Venture” herein for further information.

Defined Benefit Pension and Other Postretirement Plans.

Expense. The Company recognizes the compensation cost of an employee’s pension benefits (including prior-service cost) over the employee’s estimated service period. This process involves making certain estimates andassumptions, including the discount rate and the expected long-term rate of return on plan assets. The definedbenefit pension plan that is qualified under Section 401(a) of the Internal Revenue Code (the “U.S. QualifiedPlan”) ceased future benefit accruals after December 31, 2010. Any benefits earned by participants under theU.S. Qualified Plan at December 31, 2010 were preserved and will be payable based on the U.S. Qualified Plan’sprovisions. Net periodic pension expense for U.S. and non-U.S. plans was $97 million, $99 million and $72million for 2013, 2012 and 2011, respectively.

Contributions. The Company made contributions of $42 million, $42 million and $57 million to its U.S. andnon-U.S. defined benefit pension plans in 2013, 2012 and 2011, respectively. These contributions were fundedwith cash from operations.

The Company determines the amount of its pension contributions to its funded plans by considering severalfactors, including the level of plan assets relative to plan liabilities, the types of assets in which the plans areinvested, expected plan liquidity needs and expected future contribution requirements. The Company’s policy isto fund at least the amounts sufficient to meet minimum funding requirements under applicable employee benefitand tax laws (for example, in the U.S., the minimum required contribution under the Employee RetirementIncome Security Act of 1974, or “ERISA”). At December 31, 2013, December 31, 2012 and December 31, 2011,there were no minimum required ERISA contributions for the U.S. Qualified Plan. No contributions were madeto the U.S. Qualified Plan for 2013, 2012 and 2011.

See Note 19 to the consolidated financial statements in Item 8 for more information on the Company’s definedbenefit pension and postretirement plans.

Income Tax Matters.

The income of certain foreign subsidiaries earned outside the United States has been excluded from taxation inthe U.S. as a result of a provision of U.S. tax law that defers the imposition of tax on certain active financialservices income until such income is repatriated to the United States as a dividend. This provision, which expiredfor taxable years beginning on or after January 1, 2014, had previously been extended by Congress on severaloccasions, including the most recent extension that occurred on January 2, 2013, as part of the Relief Act. If thisprovision is not extended, the overall financial impact to the Company would depend upon the level, compositionand geographic mix of future earnings but could increase the Company’s 2014 annual effective tax rate and havean adverse impact on the Company’s net income, but not its cash flows due to utilization of tax attributescarryforwards.

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Regulatory Outlook.

The Dodd-Frank Act was enacted on July 21, 2010. While certain portions of the Dodd-Frank Act becameeffective immediately, most other portions are effective following transition periods or through numerousrulemakings by multiple governmental agencies, and although a large number of rules have been proposed, manyare still subject to final rulemaking or transition periods. U.S. regulators also plan to propose additionalregulations to implement the Dodd-Frank Act. Accordingly, it remains difficult to assess fully the impact that theDodd-Frank Act will have on the Company and on the financial services industry generally. In addition, variousinternational developments, such as the adoption of or further revisions to risk-based capital, leverage andliquidity standards by the Basel Committee, including Basel III, and the implementation of those standards injurisdictions in which the Company operates, will continue to impact the Company in the coming years.

At the end of 2013, the U.S. regulators adopted the final Volcker Rule regulations. Banking entities, includingthe Company, generally have until July 21, 2015 to bring all of their activities and investments into conformancewith the Volcker Rule, subject to possible extensions. The Company is continuing its review of activities thatmay be affected by the Volcker Rule, including its trading operations and asset management activities, and istaking steps to establish the necessary compliance programs to comply with the Volcker Rule. Given thecomplexity of the new framework, the full impact of the Volcker Rule is still uncertain, and will ultimatelydepend on the interpretation and implementation by the five regulatory agencies responsible for its oversight.

It is likely that 2014 and subsequent years will see further material changes in the way major financialinstitutions are regulated in both the U.S. and other markets in which the Company operates, although it remainsdifficult to predict the exact impact these changes will have on the Company’s business, financial condition,results of operations and cash flows for a particular future period. See also “Business—Supervision andRegulation” in Part I, Item 1.

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Critical Accounting Policies.

The Company’s consolidated financial statements are prepared in accordance with accounting principlesgenerally accepted in the U.S., which require the Company to make estimates and assumptions (see Note 1 to theconsolidated financial statements in Item 8). The Company believes that of its significant accounting policies(see Note 2 to the consolidated financial statements in Item 8), the following policies involve a higher degree ofjudgment and complexity.

Fair Value.

Financial Instruments Measured at Fair Value. A significant number of the Company’s financial instrumentsare carried at fair value. The Company makes estimates regarding valuation of assets and liabilities measured atfair value in preparing the consolidated financial statements. These assets and liabilities include, but are notlimited to:

• Trading assets and Trading liabilities;

• Securities available for sale;

• Securities received as collateral and Obligation to return securities received as collateral;

• Certain Securities purchased under agreements to resell;

• Certain Deposits;

• Certain Commercial paper and other short-term borrowings, primarily structured notes;

• Certain Securities sold under agreements to repurchase;

• Certain Other secured financings; and

• Certain Long-term borrowings, primarily structured notes.

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

In determining fair value, the Company uses various valuation approaches. A hierarchy for inputs is used inmeasuring fair value that maximizes the use of observable prices and inputs and minimizes the use ofunobservable prices and inputs by requiring that the relevant observable inputs be used when available. Thehierarchy is broken down into three levels, wherein Level 1 uses observable prices in active markets, and Level 3consists of valuation techniques that incorporate significant unobservable inputs and, therefore, require thegreatest use of judgment. In periods of market disruption, the observability of prices and inputs may be reducedfor many instruments. This condition could cause an instrument to be recategorized from Level 1 to Level 2 orLevel 2 to Level 3. In addition, a downturn in market conditions could lead to declines in the valuation of manyinstruments. For further information on the valuation process, fair value definition, Level 1, Level 2, Level 3 andrelated valuation techniques, and quantitative information about and sensitivity of significant unobservable inputsused in Level 3 fair value measurements, see Notes 2 and 4 to the consolidated financial statements in Item 8.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis. At December 31, 2013, certain ofthe Company’s assets were measured at fair value on a non-recurring basis, primarily relating to loans, otherinvestments, premises, equipment and software costs, and intangible assets. The Company incurs losses or gainsfor any adjustments of these assets to fair value. A downturn in market conditions could result in impairmentcharges in future periods.

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

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See Note 4 to the consolidated financial statements in Item 8 for further information on assets and liabilities thatare measured at fair value on a non-recurring basis.

Fair Value Control Processes. The Company employs control processes to validate the fair value of itsfinancial instruments, including those derived from pricing models. These control processes are designed toensure that the values used for financial reporting are based on observable inputs wherever possible. In the eventthat observable inputs are not available, the control processes are designed to assure that the valuation approachutilized is appropriate and consistently applied and that the assumptions are reasonable.

See Note 2 to the consolidated financial statements in Item 8 for additional information regarding the Company’svaluation policies, processes and procedures.

Goodwill and Intangible Assets.

Goodwill. The Company tests goodwill for impairment on an annual basis on July 1 and on an interim basiswhen certain events or circumstances exist. The Company tests for impairment at the reporting unit level, whichis generally at the level of or one level below its business segments. Goodwill no longer retains its associationwith a particular acquisition once it has been assigned to a reporting unit. As such, all the activities of a reportingunit, whether acquired or organically developed, are available to support the value of the goodwill. For both theannual and interim tests, the Company has the option to first assess qualitative factors to determine whether theexistence of events or circumstances leads to a determination that it is more likely than not that the fair value of areporting unit is less than its carrying amount. If after assessing the totality of events or circumstances, theCompany determines it is more likely than not that the fair value of a reporting unit is greater than its carryingamount, then performing the two-step impairment test is not required. However, if the Company concludesotherwise, then it is required to perform the first step of the two-step impairment test. Goodwill impairment isdetermined by comparing the estimated fair value of a reporting unit with its respective carrying value. If theestimated fair value exceeds the carrying value, goodwill at the reporting unit level is not deemed to be impaired.If the estimated fair value is below carrying value, however, further analysis is required to determine the amountof the impairment. Additionally, if the carrying value of a reporting unit is zero or a negative value and it isdetermined that it is more likely than not the goodwill is impaired, further analysis is required. The estimated fairvalue of the reporting units is derived based on valuation techniques the Company believes market participantswould use for each of the reporting units. The estimated fair value is generally determined by utilizing adiscounted cash flow methodology or methodologies that incorporate price-to-book and price-to-earningsmultiples of certain comparable companies. At each annual goodwill impairment testing date, each of theCompany’s reporting units with goodwill had a fair value that was substantially in excess of its carrying value.

Intangible Assets. Amortizable intangible assets are amortized over their estimated useful lives and arereviewed for impairment on an interim basis when certain events or circumstances exist. An impairment existswhen the carrying amount of the intangible asset exceeds its fair value. An impairment loss will be recognizedonly if the carrying amount of the intangible asset is not recoverable and exceeds its fair value. The carryingamount of the intangible asset is not recoverable if it exceeds the sum of the expected undiscounted cash flows.

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

See Notes 4 and 9 to the consolidated financial statements in Item 8 for additional information about goodwilland intangible assets.

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Legal and Regulatory Contingencies.

In the normal course of business, the Company has been named, from time to time, as a defendant in variouslegal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as aglobal diversified financial services institution.

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

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

Accruals for litigation and regulatory proceedings are generally determined on a case-by-case basis. Whereavailable information indicates that it is probable a liability had been incurred at the date of the consolidatedfinancial statements and the Company can reasonably estimate the amount of that loss, the Company accrues theestimated loss by a charge to income. In many proceedings, however, it is inherently difficult to determinewhether any loss is probable or even possible or to estimate the amount of any loss. For certain legal proceedingsand investigations, the Company can estimate possible losses, additional losses, ranges of loss or ranges ofadditional loss in excess of amounts accrued. For certain other legal proceedings and investigations, theCompany cannot reasonably estimate such losses, particularly for proceedings and investigations where thefactual record is being developed or contested or where plaintiffs or government entities seek substantial orindeterminate damages, restitution, disgorgement or penalties. Numerous issues may need to be resolved,including through potentially lengthy discovery and determination of important factual matters, determination ofissues related to class certification and the calculation of damages or other relief, and by addressing novel orunsettled legal questions relevant to the proceedings or investigations in question, before a loss or additional lossor range of loss or additional loss can be reasonably estimated for a proceeding or investigation.

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

See Note 13 to the consolidated financial statements in Item 8 for additional information on legal proceedings.

Income Taxes.

The Company is subject to the income and indirect tax laws of the U.S., its states and municipalities and those ofthe foreign jurisdictions in which the Company has significant business operations. These tax laws are complexand subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. TheCompany must make judgments and interpretations about the application of these inherently complex tax lawswhen determining the provision for income taxes and the expense for indirect taxes and must also make estimatesabout when certain items affect taxable income in the various tax jurisdictions. Disputes over interpretations ofthe tax laws may be settled with the taxing authority upon examination or audit. The Company periodicallyevaluates the likelihood of assessments in each taxing jurisdiction resulting from current and subsequent years’examinations, and unrecognized tax benefits related to potential losses that may arise from tax audits areestablished in accordance with the guidance on accounting for unrecognized tax benefits. Once established,unrecognized tax benefits are adjusted when there is more information available or when an event occursrequiring a change.

The Company’s provision for income taxes is composed of current and deferred taxes. Current income taxesapproximate taxes to be paid or refunded for the current period. The Company’s deferred income taxes reflect thenet tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities andare measured using the applicable enacted tax rates and laws that will be in effect when such differences are

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expected to reverse. The Company’s deferred tax balances also include deferred assets related to tax attributescarryforwards, such as net operating losses and tax credits that will be realized through reduction of future taxliabilities and, in some cases, are subject to expiration if not utilized within certain periods. The Companyperforms regular reviews to ascertain whether deferred tax assets are realizable. These reviews includemanagement’s estimates and assumptions regarding future taxable income and incorporate various tax planningstrategies, including strategies that may be available to utilize net operating losses before they expire. Once thedeferred tax asset balances have been determined, the Company may record a valuation allowance against thedeferred tax asset balances to reflect the amount of these balances (net of valuation allowance) that the Companyestimates it is more likely than not to realize at a future date. Both current and deferred income taxes couldreflect adjustments related to the Company’s unrecognized tax benefits.

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

See Note 2 to the consolidated financial statements in Item 8 for additional information on the Company’ssignificant assumptions, judgments and interpretations associated with the accounting for income taxes andNote 20 to the consolidated financial statements in Item 8 for additional information on the Company’s taxexaminations.

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Liquidity and Capital Resources.

The Company’s senior management establishes liquidity and capital policies. Through various risk and controlcommittees, the Company’s senior management reviews business performance relative to these policies,monitors the availability of alternative sources of financing, and oversees the liquidity and interest rate andcurrency sensitivity of the Company’s asset and liability position. The Company’s Treasury Department, FirmRisk Committee, Asset and Liability Management Committee and other control groups assist in evaluating,monitoring and controlling the impact that the Company’s business activities have on its consolidated statementsof financial condition, liquidity and capital structure. Liquidity and capital matters are reported regularly to theBoard’s Risk Committee.

The Balance Sheet.

The Company monitors and evaluates the composition and size of its balance sheet on a regular basis. TheCompany’s balance sheet management process includes quarterly planning, business specific limits, monitoringof business specific usage versus limits, key metrics and new business impact assessments.

The Company establishes balance sheet limits at the consolidated, business segment and business unit levels. TheCompany monitors balance sheet usage versus limits, and variances resulting from business activity or marketfluctuations are reviewed. On a regular basis, the Company reviews current performance versus limits andassesses the need to re-allocate limits based on business unit needs. The Company also monitors key metrics,including asset and liability size, composition of the balance sheet, limit utilization and capital usage.

The tables below summarize total assets for the Company’s business segments at December 31, 2013 andDecember 31, 2012:

At December 31, 2013

InstitutionalSecurities

WealthManagement

InvestmentManagement Total


AssetsCash and cash equivalents(1) . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,169 $ 28,967 $ 747 $ 59,883Cash deposited with clearing organizations or segregated

under federal and other regulations or requirements(2) . . . 36,422 2,781 — 39,203Trading assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273,959 2,104 4,681 280,744Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . — 53,430 — 53,430Securities received as collateral(2) . . . . . . . . . . . . . . . . . . . . . 20,508 — — 20,508Federal funds sold and securities purchased under

agreements to resell(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,812 11,318 — 118,130Securities borrowed(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,366 341 — 129,707Customer and other receivables(2) . . . . . . . . . . . . . . . . . . . . . 33,927 22,493 684 57,104Loans, net of allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,890 24,984 — 42,874Other assets(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,543 10,293 1,283 31,119

Total assets(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $668,596 $156,711 $7,395 $832,702

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InstitutionalSecurities(5)

WealthManagement(5)



AssetsCash and cash equivalents(1) . . . . . . . . . . . . . . . . . . . . . . . $ 33,370 $ 12,714 $ 820 $ 46,904Cash deposited with clearing organizations or segregated

under federal and other regulations orrequirements(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,116 4,854 — 30,970

Trading assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,885 2,285 4,433 267,603Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . — 39,869 — 39,869Securities received as collateral(2) . . . . . . . . . . . . . . . . . . . 14,278 — — 14,278Federal funds sold and securities purchased under

agreements to resell(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,957 13,455 — 134,412Securities borrowed(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,302 399 — 121,701Customer and other receivables(2) . . . . . . . . . . . . . . . . . . . 39,362 24,161 765 64,288Loans, net of allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,078 16,968 — 29,046Other assets(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,701 10,860 1,328 31,889

Total assets(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $648,049 $125,565 $7,346 $780,960

(1) Cash and cash equivalents include Cash and due from banks and Interest bearing deposits with banks.(2) Certain of these assets are included in secured financing assets (see “Secured Financing” herein).(3) Other assets include Other investments; Premises, equipment and software costs; Goodwill; Intangible assets; and Other assets.(4) Total assets include Global Liquidity Reserves of $202 billion and $182 billion at December 31, 2013 and December 31, 2012,

respectively. The Global Liquidity Reserve at December 31, 2013 was higher than the preceding year, primarily due to approximately$26 billion of deposits relating to customer accounts that were transferred to the Company’s depository institutions from Citi during 2013(see Note 3 to the consolidated financial statements in Item 8).

(5) On January 1, 2013, the International Wealth Management business was transferred from the Wealth Management business segment tothe Equity division within the Institutional Securities business segment. Accordingly, prior-period amounts have been recast to reflect theInternational Wealth Management business as part of the Institutional Securities business segment.

A substantial portion of the Company’s total assets consists of liquid marketable securities and short-termreceivables arising principally from sales and trading activities in the Institutional Securities business segment.The liquid nature of these assets provides the Company with flexibility in managing the size of its balance sheet.The Company’s total assets increased to $832,702 million at December 31, 2013 from $780,960 million atDecember 31, 2012. The increase in total assets was primarily due to an increase in Cash and cash equivalents,Securities available for sale and loans, net of allowances (see Notes 3 and 25 to the consolidated financialstatements in Item 8).

The Company’s assets and liabilities are primarily related to transactions attributable to sales and trading andsecurities financing activities. At December 31, 2013, securities financing assets and liabilities were $352 billionand $353 billion, respectively. At December 31, 2012, securities financing assets and liabilities were $348 billionand $300 billion, respectively. Securities financing transactions include cash deposited with clearingorganizations or segregated under federal and other regulations or requirements, repurchase and resaleagreements, securities borrowed and loaned transactions, securities received as collateral and obligation to returnsecurities received, and customer and other receivables and payables. Securities borrowed or purchased underagreements to resell and securities loaned or sold under agreements to repurchase are treated as collateralizedfinancings (see Notes 2 and 6 to the consolidated financial statements in Item 8). Securities sold underagreements to repurchase and Securities loaned were $178 billion at December 31, 2013 and averaged $176billion during 2013. Securities purchased under agreements to resell and Securities borrowed were $248 billion atDecember 31, 2013 and averaged $281 billion during 2013. The Securities purchased under agreements to reselland Securities borrowed period-end balance was lower than the average balances during the year endedDecember 31, 2013 due to a reduction in the Company’s requirements for collateral over the period.

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Securities financing assets and liabilities also include matched book transactions with minimal market, creditand/or liquidity risk. Matched book transactions accommodate customers, as well as obtain securities for thesettlement and financing of inventory positions. The customer receivable portion of the securities financingtransactions includes customer margin loans, collateralized by customer-owned securities, and customer cash,which is segregated in accordance with regulatory requirements. The customer payable portion of the securitiesfinancing transactions primarily includes customer payables to the Company’s prime brokerage customers. TheCompany’s risk exposure on these transactions is mitigated by collateral maintenance policies that limit theCompany’s credit exposure to customers. Included within securities financing assets were $21 billion and $14billion at December 31, 2013 and December 31, 2012, respectively, recorded in accordance with accountingguidance for the transfer of financial assets that represented offsetting assets and liabilities for fully collateralizednon-cash loan transactions.

Liquidity Risk Management Framework.

The primary goal of the Company’s liquidity risk management framework is to ensure that the Company hasaccess to adequate funding across a wide range of market conditions. The framework is designed to enable theCompany to fulfill its financial obligations and support the execution of the Company’s business strategies.

The following principles guide the Company’s liquidity risk management framework:

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

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

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

• Limited access to funding should be anticipated through the Contingency Funding Plan (“CFP”).

The core components of the Company’s liquidity risk management framework are the CFP, Liquidity StressTests and the Global Liquidity Reserve (as defined below), which support the Company’s target liquidity profile.

Contingency Funding Plan.

The Company’s CFP describes the data and information flows, limits, targets, operating environment indicators,escalation procedures, roles and responsibilities, and available mitigating actions in the event of a liquidity stress.The CFP also sets forth the principal elements of the Company’s liquidity stress testing which identifies stressevents of different severity and duration, assesses current funding sources and uses and establishes a plan formonitoring and managing a potential liquidity stress event.

Liquidity Stress Tests.

The Company uses liquidity stress tests to model liquidity outflows across multiple scenarios over a range oftime horizons. These scenarios contain various combinations of idiosyncratic and systemic stress events.

The assumptions underpinning the Liquidity Stress Tests include, but are not limited to, the following:

• No government support;

• No access to equity and unsecured debt markets;

• Repayment of all unsecured debt maturing within the stress horizon;

• Higher haircuts and significantly lower availability of secured funding;

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

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• Additional collateral that would be required due to collateral substitutions, collateral disputes anduncalled collateral;

• Discretionary unsecured debt buybacks;

• Drawdowns on unfunded commitments provided to third parties;

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

• Limited access to the foreign exchange swap markets;

• Return of securities borrowed on an uncollateralized basis; and

• Maturity roll-off of outstanding letters of credit with no further issuance.

The Liquidity Stress Tests are produced for the Parent and major operating subsidiaries, as well as at majorcurrency levels, to capture specific cash requirements and cash availability across the Company. The LiquidityStress Tests assume that subsidiaries will use their own liquidity first to fund their obligations before drawingliquidity from the Parent. The Parent will support its subsidiaries and will not have access to subsidiaries’liquidity reserves that are subject to any regulatory, legal or tax constraints.

At December 31, 2013, the Company maintained sufficient liquidity to meet current and contingent fundingobligations as modeled in its Liquidity Stress Tests.

Global Liquidity Reserve.

The Company maintains sufficient liquidity reserves (“Global Liquidity Reserve”) to cover daily funding needsand to meet strategic liquidity targets sized by the CFP and Liquidity Stress Tests. The size of the GlobalLiquidity Reserve is actively managed by the Company. The following components are considered in sizing theGlobal Liquidity Reserve: unsecured debt maturity profile, balance sheet size and composition, funding needs ina stressed environment inclusive of contingent cash outflows and collateral requirements. In addition, the GlobalLiquidity Reserve includes an additional reserve, which is primarily a discretionary surplus based on theCompany’s risk tolerance and is subject to change dependent on market and firm-specific events.

The Global Liquidity Reserve is held within the Parent and major operating subsidiaries. The Global LiquidityReserve is composed of diversified cash and cash equivalents and highly liquid unencumbered securities.Eligible unencumbered securities include U.S. government securities, U.S. agency securities, U.S. agencymortgage-backed securities, non-U.S. government securities and other highly liquid investment grade securities.

Global Liquidity Reserve by Type of Investment.

The table below summarizes the Company’s Global Liquidity Reserve by type of investment:

AtDecember 31,

2013


Cash deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18Cash deposits with central banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36Unencumbered highly liquid securities:

U.S. government obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84U.S. agency and agency mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Non-U.S. sovereign obligations(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Investments in money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Other investment grade securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Global Liquidity Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $202

(1) Non-U.S. sovereign obligations are composed of unencumbered German, French, Dutch, U.K., Brazilian and Japanese governmentobligations.

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The ability to monetize assets during a liquidity crisis is critical. The Company believes that the assets held in theGlobal Liquidity Reserve can be monetized within five business days in a stressed environment given the highlyliquid and diversified nature of the reserves. The currency profile of the Global Liquidity Reserve is consistentwith the CFP and Liquidity Stress Tests. In addition to the Global Liquidity Reserve, the Company has other cashand cash equivalents and other unencumbered assets that are available for monetization that are not included inthe balances in the table above.

Global Liquidity Reserve Held by Bank and Non-Bank Legal Entities.

The table below summarizes the Global Liquidity Reserve held by bank and non-bank legal entities:

At December 31,2013

Average Balance(1)2013


Bank legal entities:Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85 $ 70Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5

Total Bank legal entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 75

Non-Bank legal entities:Domestic(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 83Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 34

Total Non-Bank legal entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 117

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $202 $192

(1) The Company calculates the average Global Liquidity Reserve based upon daily amounts.(2) The Parent held $58 billion at December 31, 2013, which averaged $63 billion during 2013.

The Company is exposed to intra-day settlement risk in connection with liquidity provided to its major broker-dealer subsidiaries for intra-day clearing and settlement of its securities and financing activity.

Basel Liquidity Framework.

The Basel Committee has developed two standards intended for use in liquidity risk supervision: the LiquidityCoverage Ratio (“LCR”) and the Net Stable Funding Ratio (“NSFR”).

The LCR was developed to ensure banks have sufficient high-quality liquid assets to cover net cash outflowsarising from significant stress over 30 calendar days. This standard’s objective is to promote the short-termresilience of the liquidity risk profile of banks and bank holding companies. The Company is compliant with theBasel Committee’s version of the LCR, which stipulates that the ratio of the Company’s portfolio ofunencumbered high-quality liquid assets to total net cash outflows over a 30-day standardized supervisoryliquidity stress scenario must be at least 100%.

The NSFR has a time horizon of one year and is defined as the ratio of the amount of available stable funding tothe amount of required stable funding. This standard’s objective is to promote resilience over a longer timehorizon. In January 2014, the Basel Committee proposed revisions to the original December 2010 version of theNSFR and continues to contemplate the introduction of the NSFR, including any final revisions, as a minimumstandard by January 1, 2018.

In late October 2013, the U.S. banking regulators proposed a rule to implement the LCR in the United States(“U.S. LCR proposal”). The U.S. LCR proposal would apply to the Company and MSBNA and MSPBNA (the“Subsidiary Banks”). The U.S. LCR proposal is more stringent in certain respects compared with the BaselCommittee’s version of the LCR, and includes a generally narrower definition of high-quality liquid assets, a

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different methodology for calculating net cash outflows during the 30-day stress period as well as a shorter, two-year phase-in period that ends on December 31, 2016. The Company continues to evaluate the U.S. LCRproposal and its potential impact on the Company’s current liquidity and funding requirements.

Funding Management.

The Company manages its funding in a manner that reduces the risk of disruption to the Company’s operations.The Company pursues a strategy of diversification of secured and unsecured funding sources (by product, byinvestor and by region) and attempts to ensure that the tenor of the Company’s liabilities equals or exceeds theexpected holding period of the assets being financed.

The Company funds its balance sheet on a global basis through diverse sources. These sources may include theCompany’s equity capital, long-term debt, repurchase agreements, securities lending, deposits, commercialpaper, letters of credit and lines of credit. The Company has active financing programs for both standard andstructured products targeting global investors and currencies.

Secured Financing. A substantial portion of the Company’s total assets consists of liquid marketable securitiesand arises principally from its Institutional Securities business segment’s sales and trading activities. The liquidnature of these assets provides the Company with flexibility in funding these assets with secured financing. TheCompany’s goal is to achieve an optimal mix of durable secured and unsecured financing. Secured financinginvestors principally focus on the quality of the eligible collateral posted. Accordingly, the Company activelymanages its secured financing book based on the quality of the assets being funded.

The Company utilizes shorter-term secured financing only for highly liquid assets and has established longertenor limits for less liquid asset classes, for which funding may be at risk in the event of a market disruption. TheCompany defines highly liquid assets as those that are consistent with the standards of the Global LiquidityReserve, and less liquid assets as those that do not meet these standards. At December 31, 2013, the weightedaverage maturity of the Company’s secured financing against less liquid assets was greater than 120 days. Tofurther minimize the refinancing risk of secured financing for less liquid assets, the Company has establishedconcentration limits to diversify its investor base and reduce the amount of monthly maturities for securedfinancing of less liquid assets. Furthermore, the Company obtains spare capacity, or term secured fundingliabilities in excess of less liquid inventory, as an additional risk mitigant to replace maturing trades in the eventthat secured financing markets or our ability to access them become limited. Finally, in addition to the above riskmanagement framework, the Company holds a portion of its Global Liquidity Reserve against the potentialdisruption to its secured financing capabilities.

Unsecured Financing. The Company views long-term debt and deposits as stable sources of funding.Unencumbered securities and non-security assets are financed with a combination of long- and short-term debtand deposits. The Company’s unsecured financings include structured borrowings, whose payments andredemption values are based on the performance of certain underlying assets, including equity, credit, foreignexchange, interest rates and commodities. When appropriate, the Company may use derivative products toconduct asset and liability management and to make adjustments to the Company’s interest rate and structuredborrowings risk profile (see Note 12 to the consolidated financial statements in Item 8).

Short-Term Borrowings. The Company’s unsecured short-term borrowings consist of commercial paper, bankloans, bank notes and structured notes with maturities of 12 months or less at issuance.

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The table below summarizes the Company’s short-term unsecured borrowings:

AtDecember 31,

2013

AtDecember 31,

2012


Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8 $ 306Other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,134 1,832

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,142 $2,138

Deposits. The Company’s bank subsidiaries’ funding sources include time deposits, money market depositaccounts, demand deposit accounts, repurchase agreements, federal funds purchased, commercial paper andFederal Home Loan Bank advances. The vast majority of deposits in the Subsidiary Banks are sourced from theCompany’s retail brokerage accounts and are considered to have stable, low-cost funding characteristics.Concurrent with the acquisition of the remaining 35% stake in the Wealth Management JV, the deposit sweepagreement between Citi and the Company was terminated. In 2013, $26 billion of deposits held by Citi relating tocustomer accounts were transferred to the Company’s depository institutions. At December 31, 2013,approximately $30 billion of additional deposits are scheduled to be transferred to the Company’s depositoryinstitutions on an agreed-upon basis through June 2015 (see Note 3 to the consolidated financial statements inItem 8).

Deposits were as follows:

AtDecember 31,

2013(1)

AtDecember 31,

2012(1)


Savings and demand deposits(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $109,908 $80,058Time deposits(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,471 3,208

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $112,379 $83,266

(1) Total deposits subject to FDIC insurance at December 31, 2013 and December 31, 2012 were $84 billion and $62 billion, respectively.(2) There were no non-interest bearing deposits at December 31, 2013. Amounts include non-interest bearing deposits of $1,037 million at

December 31, 2012.(3) Certain time deposit accounts are carried at fair value under the fair value option (see Note 4 to the consolidated financial statements in

Item 8).

Senior Indebtedness. At December 31, 2013, the aggregate outstanding carrying amount of the Company’ssenior indebtedness was approximately $143 billion (including guaranteed obligations of the indebtedness ofsubsidiaries) compared with $158 billion at December 31, 2012. The decrease in the amount of seniorindebtedness was primarily due to repayments of notes, offset by new issuances of long-term borrowings.

Long-Term Borrowings. The Company believes that accessing debt investors through multiple distributionchannels helps provide consistent access to the unsecured markets. In addition, the issuance of long-term debtallows the Company to reduce reliance on short-term credit sensitive instruments (e.g., commercial paper andother unsecured short-term borrowings). Long-term borrowings are generally managed to achieve staggeredmaturities, thereby mitigating refinancing risk, and to maximize investor diversification through sales to globalinstitutional and retail clients across regions, currencies and product types. Availability and cost of financing tothe Company can vary depending on market conditions, the volume of certain trading and lending activities, theCompany’s credit ratings and the overall availability of credit.

The Company may engage in various transactions in the credit markets (including, for example, debt retirements)that it believes are in the best interests of the Company and its investors.

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Long-term borrowings at December 31, 2013 consisted of the following:

Parent Subsidiaries Total


Due in 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,495 $ 1,698 $ 24,193Due in 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,722 1,368 21,090Due in 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,142 2,002 23,144Due in 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,458 1,837 26,295Due in 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,575 1,733 15,308Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,913 1,632 43,545

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $143,305 $10,270 $153,575

Long-Term Borrowing Activity in 2013. During 2013, the Company issued and reissued notes with a principalamount of approximately $28 billion. This amount included the Company’s issuance of $2.0 billion insubordinated debt on November 22, 2013, $2.0 billion in subordinated debt on May 21, 2013, $3.7 billion insenior unsecured debt on April 25, 2013 and $4.5 billion in senior unsecured debt on February 25, 2013. Inconnection with the note issuances, the Company generally enters into certain transactions to obtain floatinginterest rates. The weighted average maturity of the Company’s long-term borrowings, based upon statedmaturity dates, was approximately 5.4 years at December 31, 2013. During 2013, approximately $39 billion inaggregate long-term borrowings matured or were retired. Subsequent to December 31, 2013 and throughFebruary 10, 2014, the Company’s long-term borrowings (net of issuances) decreased by approximately $2.2billion. This amount includes the Company’s issuance of $2.8 billion in senior debt on January 24, 2014.

Credit Ratings.

The Company relies on external sources to finance a significant portion of its day-to-day operations. The cost andavailability of financing generally is impacted by the Company’s credit ratings. In addition, the Company’s creditratings can have an impact on certain trading revenues, particularly in those businesses where longer termcounterparty performance is a key consideration, such as OTC derivative transactions, including creditderivatives and interest rate swaps. Rating agencies will look at company specific factors; other industry factorssuch as regulatory or legislative changes; the macro-economic environment and perceived levels of governmentsupport, among other things.

Some rating agencies have stated that they currently incorporate various degrees of credit rating uplift fromexternal sources of potential support, as well as perceived government support of systemically important banks,including the credit ratings of the Company. Rating agencies continue to monitor the progress of U.S. financialreform legislation to assess whether the possibility of extraordinary government support for the financial systemin any future financial crises is negatively impacted. Legislative and rulemaking outcomes may lead to reduceduplift assumptions for U.S. banks and thereby place downward pressure on credit ratings. For example, inNovember 2013, Moody’s Investor Services, Inc. (“Moody’s”) took certain ratings actions with respect to eightlarge U.S. banking groups, including downgrading the Company, to remove certain uplift from the U.S.government support in their ratings. At the same time, proposed and final U.S. financial reform legislation andattendant rulemaking also have positive implications for credit ratings such as higher standards for capital andliquidity levels. The net result on credit ratings and the timing of any change in rating agency views on changesin government support and other financial reform is currently uncertain.

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At January 31, 2014, the Parent’s and MSBNA’s senior unsecured ratings were as set forth below:

Parent Morgan Stanley Bank, N.A.

Short-TermDebt

Long-TermDebt

RatingOutlook

Short-TermDebt

Long-TermDebt

RatingOutlook

DBRS, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . R-1 (middle) A (high) Negative — — —Fitch Ratings, Inc. . . . . . . . . . . . . . . . . . . . . . . F1 A Stable F1 A StableMoody’s Investor Services, Inc.(1) . . . . . . . . . P-2 Baa2 Stable P-2 A3 StableRating and Investment Information, Inc. . . . . . a-1 A Negative — — —Standard & Poor’s Financial Services

LLC(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-2 A- Negative A-1 A Negative

(1) On August 22, 2013, Moody’s placed the senior and subordinated debt ratings of the holding companies for the six largest U.S. banks onreview as it continued to consider reducing its government (or systemic) support assumptions to reflect the impact of U.S. bankresolution policies. As part of this review, Moody’s placed the Company’s “Baa1” long-term senior, “Baa2” long-term subordinated and“P-2” short-term on review for downgrade. On November 14, 2013, Moody’s downgraded the Company’s long-term debt rating one-notch from “Baa1” to “Baa2” and left the short-term rating unchanged at “P-2”. A stable outlook was assigned to the Parent’s ratingoutlook.

(2) On June 11, 2013, Standard & Poor’s Financial Services LLC (“S&P”) announced that it continues to assess the degree to which itfactors extraordinary government support into its ratings on non-operating bank holding companies and was factoring that assessmentinto the negative outlooks on the non-operating bank holding companies of the eight U.S. bank groups that S&P classifies as having highsystematic importance. S&P’s negative outlook for the Company’s issuer credit ratings reflects not only S&P’s continued assessment ofextraordinary government support, but also the impact that recently finalized regulations, particularly the Volcker Rule, could have onthe Company’s business.

In connection with certain OTC trading agreements and certain other agreements where the Company is aliquidity provider to certain financing vehicles associated with the Institutional Securities business segment, theCompany may be required to provide additional collateral or immediately settle any outstanding liabilitybalances with certain counterparties or pledge additional collateral to certain exchanges and clearingorganizations in the event of a future credit rating downgrade irrespective of whether the Company is in a netasset or liability position.

The additional collateral or termination payments that may be called in the event of a future credit ratingdowngrade vary by contract and can be based on ratings by either or both of Moody’s and S&P. At December 31,2013, the future potential collateral amounts and termination payments that could be called or required bycounterparties or exchanges and clearing organizations in the event of one-notch or two-notch downgradescenarios based on the relevant contractual downgrade triggers were $1,522 million and an incremental $3,321million, respectively.

While certain aspects of a credit rating downgrade are quantifiable pursuant to contractual provisions, the impactit will have on the Company’s business and results of operation in future periods is inherently uncertain and willdepend on a number of interrelated factors, including, among others, the magnitude of the downgrade, individualclient behavior and future mitigating actions the Company may take. The liquidity impact of additional collateralrequirements is included in the Company’s Liquidity Stress Tests.

Capital Management.

The Company’s senior management views capital as an important source of financial strength. The Companyactively manages its 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 ratingagency guidelines and, therefore, in the future may expand or contract its capital base to address the changingneeds of its businesses. The Company attempts to maintain total capital, on a consolidated basis, at least equal tothe sum of its operating subsidiaries’ equity.

At December 31, 2013, the Company had approximately $1.2 billion remaining under its current sharerepurchase program out of the $6 billion authorized by the Board of Directors in December 2006. The share

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repurchase program is for capital management purposes and considers, among other things, business segmentcapital needs as well as equity-based compensation and benefit plan requirements. Share repurchases by theCompany are subject to regulatory approval.

In July 2013, the Company received no objection from the Federal Reserve to repurchase through March 31,2014, up to $500 million of the Company’s outstanding common stock under rules relating to annual capitaldistributions (Title 12 of the Code of Federal Regulations, Section 225.8, Capital Planning). Share repurchasesare made pursuant to the share repurchase program previously authorized by the Company’s Board of Directorsand are exercised from time to time at prices the Company deems appropriate subject to various factors,including the Company’s capital position and market conditions. The share repurchases may be effected throughopen market purchases or privately negotiated transactions, including through Rule 10b5-1 plans, and may besuspended at any time (see also “Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities” in Item 5). During 2013, the Company repurchased approximately $350million of the Company’s outstanding common stock as part of its share repurchase program.

Series E Preferred Stock. On September 30, 2013, the Company issued 34,500,000 Depositary Shares, for anaggregate price of $862 million. Each Depositary Share represents a 1/1,000th interest in a share of perpetual SeriesE Fixed-to-Floating Rate Non-Cumulative Preferred Stock, $0.01 par value (“Series E Preferred Stock”). The SeriesE Preferred Stock is redeemable at the Company’s option, (i) in whole or in part, from time to time, on any dividendpayment date on or after October 15, 2023 or (ii) in whole but not in part at any time within 90 days following aregulatory capital treatment event (as described in the terms of that series), in each case at a redemption price of$25,000 per share (equivalent to $25.00 per Depositary Share). The Series E Preferred Stock also has a preferenceover the Company’s common stock upon liquidation. The Series E Preferred Stock offering (net of related issuancecosts) resulted in proceeds of approximately $854 million (see Note 15 to the consolidated financial statements inItem 8).

Series F Preferred Stock. On December 10, 2013, the Company issued 34,000,000 Depositary Shares, for anaggregate price of $850 million. Each Depositary Share represents a 1/1,000th interest in a share of perpetual SeriesF Fixed-to-Floating Rate Non-Cumulative Preferred Stock, $0.01 par value (“Series F Preferred Stock”). The SeriesF Preferred Stock is redeemable at the Company’s option, (i) in whole or in part, from time to time, on any dividendpayment date on or after January 15, 2024 or (ii) in whole but not in part at any time within 90 days following aregulatory capital treatment event (as described in the terms of that series), in each case at a redemption price of$25,000 per share (equivalent to $25.00 per Depositary Share). The Series F Preferred Stock also has a preferenceover the Company’s common stock upon liquidation. The Series F Preferred Stock offering (net of related issuancecosts) resulted in proceeds of approximately $842 million (see Note 15 to the consolidated financial statements inItem 8).

The Board of Directors determines the declaration and payment of dividends on a quarterly basis. In January2014, the Company announced that its Board of Directors declared a quarterly dividend per common share of$0.05. In December 2013, the Company also announced that the Board of Directors declared a quarterly dividendof $255.56 per share of Series A Floating Rate Non-Cumulative Preferred Stock (represented by DepositaryShares, each representing a 1/1,000th interest in a share of preferred stock and each having a dividend of$0.25556), a quarterly dividend of $25.00 per share of Series C Non-Cumulative Non-Voting Perpetual PreferredStock, a quarterly dividend of $519.53 per share of Series E Fixed-to-Floating Rate Non-Cumulative PerpetualPreferred Stock and the initial quarterly dividend of $167.10 per share of Series F Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock.

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The following table sets forth the Company’s tangible Morgan Stanley shareholders’ equity and tangiblecommon equity at December 31, 2013 and December 31, 2012 and average balances during 2013:

Balance at Average Balance(1)

December 31,2013

December 31,2012 2013


Common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62,701 $60,601 $61,895Preferred equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,220 1,508 1,839

Morgan Stanley shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . 65,921 62,109 63,734Junior subordinated debentures issued to capital trusts . . . . . . . . . 4,849 4,827 4,826Less: Goodwill and net intangible assets(2) . . . . . . . . . . . . . . . . . . (9,873) (7,587) (8,900)

Tangible Morgan Stanley shareholders’ equity . . . . . . . . . . . . . . . $60,897 $59,349 $59,660

Common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62,701 $60,601 $61,895Less: Goodwill and net intangible assets(2) . . . . . . . . . . . . . . . . . . (9,873) (7,587) (8,900)

Tangible common equity(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $52,828 $53,014 $52,995

(1) The Company calculates its average balances based upon month-end balances.(2) The goodwill and net intangible assets deduction exclude mortgage servicing rights (net of disallowable mortgage servicing rights) of $7

million and $6 million at December 31, 2013 and December 31, 2012, respectively, and include only the Company’s share of the WealthManagement JV’s goodwill and intangible assets at each respective period (100% at December 31, 2013 and 65% at December 31, 2012)(see Note 3 to the consolidated financial statements in Item 8). The increase in goodwill and net intangible assets at December 31, 2013from December 31, 2012 is primarily due to the purchase of the remaining 35% interest in the Wealth Management JV.

(3) Tangible common equity, a non-GAAP financial measure, equals common equity less goodwill and net intangible assets as definedabove. The Company views tangible common equity as a useful measure to investors because it is a commonly utilized metric andreflects the common equity deployed in the Company’s businesses.

Capital Covenants.

In October 2006 and April 2007, the Company executed replacement capital covenants in connection withofferings by Morgan Stanley Capital Trust VII and Morgan Stanley Capital Trust VIII (the “Capital Securities”),which become effective after the scheduled redemption date in 2046. Under the terms of the replacement capitalcovenants, the Company has agreed, for the benefit of certain specified holders of debt, to limitations on itsability to redeem or repurchase any of the Capital Securities for specified periods of time. For a completedescription of the Capital Securities and the terms of the replacement capital covenants, see the Company’sCurrent Reports on Form 8-K dated October 12, 2006 and April 26, 2007.

Regulatory Requirements.

Capital.

The Company is a financial holding company under the Bank Holding Company Act of 1956, as amended, and issubject to the regulation and oversight of the Federal Reserve. The Federal Reserve establishes capitalrequirements for the Company, including well-capitalized standards, and evaluates the Company’s compliancewith such capital requirements. The Office of the Comptroller of the Currency (“OCC”) establishes similarcapital requirements and standards for the Subsidiary Banks.

As of December 31, 2013, the Company calculated its capital ratios and RWAs in accordance with the existingcapital adequacy standards for financial holding companies adopted by the Federal Reserve. These existingcapital standards are based upon a framework described in the “International Convergence of CapitalMeasurement and Capital Standards,” July 1988, as amended, also referred to as Basel I. In December 2007, theU.S. banking regulators published final regulations incorporating the Basel II Accord, which requiresinternationally active U.S. banking organizations, as well as certain of their U.S. bank subsidiaries, to implement

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Basel II standards over the next several years. On January 1, 2013, the U.S. banking regulators’ rules toimplement the Basel Committee’s market risk capital framework amendment, commonly referred to as “Basel2.5”, became effective, which increased the capital requirements for securitizations and correlation trading withinthe Company’s trading book, as well as incorporated add-ons for stressed VaR and incremental risk requirements(“market risk capital framework amendment”). The Company’s Total, Tier 1 and Tier 1 common capital ratiosand RWAs subsequent to the Basel 2.5 effective date were calculated under this revised framework. TheCompany’s Total, Tier 1 and Tier 1 common capital ratios and RWAs prior to the Basel 2.5 effective date havenot been recalculated under the revised framework. RWAs reflect both on- and off-balance sheet risk of theCompany. The risk capital calculations will evolve over time as the Company enhances its risk managementmethodology and incorporates improvements in modeling techniques while maintaining compliance with theregulatory requirements and interpretations.

Market RWAs reflect capital charges attributable to the risk of loss resulting from adverse changes in marketprices and other factors. For a further discussion of the Company’s market risks and models such as the VaRmodel, see “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A.

Credit RWAs reflect capital charges attributable to the risk of loss arising from a borrower or counterparty failingto meet its financial obligations. For a further discussion of the Company’s credit risks, see “Quantitative andQualitative Disclosures about Market Risk—Credit Risk” in Item 7A.

Existing Regulatory Capital Framework.

Under the Federal Reserve’s existing regulatory capital framework, total allowable capital is composed of Tier 1capital, which includes Tier 1 common capital, and Tier 2 capital. Tier 1 common capital is defined as Tier 1capital less qualifying perpetual preferred stock and qualifying restricted core capital elements (qualifying trustpreferred securities and noncontrolling interests). Tier 1 capital consists predominantly of common shareholders’equity as well as qualifying preferred stock and qualifying restricted core capital elements less goodwill, non-servicing intangible assets (excluding allowable mortgage servicing rights), net deferred tax assets (recoverablein excess of one year), an after-tax debt valuation adjustment and certain other deductions, including equityinvestments. The debt valuation adjustment in the table below represents the cumulative change in fair value ofcertain long-term and short-term borrowings that was attributable to the Company’s own instrument-specificcredit spreads and is included in retained earnings. For a further discussion of fair value, see Note 4 to theconsolidated financial statements in Item 8.

At December 31, 2013, the Company’s capital levels calculated under Basel I, inclusive of the market risk capitalframework amendment, were in excess of well-capitalized levels with ratios of Tier 1 capital to RWAs of 15.7%and total capital to RWAs of 16.9% (6% and 10% being well-capitalized for regulatory purposes, respectively).The Company’s ratio of Tier 1 common capital to RWAs was 12.8% (5% under stressed conditions is the currentminimum Tier 1 common ratio under the Federal Reserve’s Comprehensive Capital Analysis and Review(“CCAR”) framework). Financial holding companies, including the Company, are subject to a Tier 1 leverageratio defined by the Federal Reserve. Consistent with the Federal Reserve’s definition, the Company calculatedits Tier 1 leverage ratio as Tier 1 capital divided by adjusted average total assets (which reflects adjustments fordisallowed goodwill, certain intangible assets, deferred tax assets, and financial and non-financial equityinvestments). The adjusted average total assets are derived using weekly balances for the period. AtDecember 31, 2013, the Company was in compliance with the Federal Reserve’s Tier 1 leverage requirementwith a Tier 1 leverage ratio of 7.6% (5% is the current well-capitalized standard for regulatory purposes).

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The following table reconciles the Company’s total shareholders’ equity to Tier 1 common, Tier 1, Tier 2 andTotal allowable capital as defined by the regulations issued by the Federal Reserve and presents the Company’sconsolidated capital ratios at December 31, 2013 and December 31, 2012:

AtDecember 31,

2013

AtDecember 31,

2012


Allowable capitalCommon shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 62,701 $ 60,601Less: Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,595) (6,650)Less: Non-servicing intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,279) (3,777)Less: Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,879) (4,785)After-tax debt valuation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,275 823Other deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,306) (1,418)

Tier 1 common capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,917 44,794

Qualifying preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,220 1,508Qualifying restricted core capital elements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,870 8,058

Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,007 54,360

Qualifying subordinated debt and restricted core capital elements . . . . . . . . . . . . . . . . 5,559 2,783Other qualifying amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284 197Other deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (850) (714)

Tier 2 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,993 2,266

Total allowable capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66,000 $ 56,626

Risk-weighted assets(1)Market risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $133,760 $ 54,042Credit risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255,915 252,704

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $389,675 $306,746

Capital ratiosTotal capital ratio(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.9% 18.5%

Tier 1 common capital ratio(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.8% 14.6%

Tier 1 capital ratio(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.7% 17.7%

Tier 1 leverage ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6% 7.1%

(1) Effective January 1, 2013, in accordance with the U.S. banking regulators’ rules the Company implemented the Basel Committee’smarket risk capital framework amendment, commonly referred to as “Basel 2.5”, which increased the capital requirement forsecuritizations and correlation trading within the Company’s trading book as well as incorporated add-ons for stressed VaR andincremental risk requirements. Under the market risk capital framework amendment, total RWAs would have been approximately $424billion at December 31, 2012. At December 31, 2012, the capital ratios would have been approximately as follows: Total capital ratio13.4%, Tier 1 common capital ratio 10.6% and Tier 1 capital ratio 12.8%.

Capital Plans and Stress Tests. In November 2011, the Federal Reserve issued a final rule regarding capitalplans. The final rule requires large bank holding companies such as the Company to submit annual capital plansin order for the Federal Reserve to assess their systems and processes that incorporate forward-lookingprojections of revenues and losses to monitor and maintain their internal capital adequacy. The rule also requiresthat such companies receive no objection from the Federal Reserve before undertaking a capital action.

In addition, the Dodd-Frank Act imposes stress test requirements on large bank holding companies, including theCompany. In October 2012, the Federal Reserve issued its stress test final rule under the Dodd-Frank Act, whichrequires the Company to conduct semi-annual company-run stress tests. The rule also subjects the Company to an

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annual supervisory stress test conducted by the Federal Reserve. The capital planning and stress testingrequirements for large bank holding companies form part of the Federal Reserve’s annual CCAR process.

The Company submitted its 2013 annual capital plan to the Federal Reserve in January 2013. In March 2013, theFederal Reserve published a summary of the supervisory stress test results of each company subject to the finalrule, including the Company. The Company received no objection to its 2013 capital plan, including theacquisition of the remaining 35% interest in the Wealth Management JV, which was completed on June 28, 2013.

In September 2013, the Federal Reserve issued an interim final rule specifying how large bank holdingcompanies, including the Company, should incorporate the U.S. Basel III capital standards into their 2014 capitalplans and 2014 Dodd-Frank Act stress test results. Among other things, the interim final rule requires large bankholding companies to project both Tier 1 Common capital ratio using the methodology currently in effect underexisting capital guidelines and Common Equity Tier 1 ratio under the U.S. Basel III capital standards after givingeffect to phase-in provisions.

As part of the 2014 CCAR process, eight bank holding companies, including the Company, are required to factor inits stress test scenarios the default of its largest counterparty across its derivatives and securities financingtransactions. The Company expects that by March 31, 2014, the Federal Reserve will either object or provide noticeof non-objection to the Company’s 2014 capital plan that was submitted to the Federal Reserve on January 6, 2014.

The Dodd-Frank Act also requires a national bank with total consolidated assets of more than $10 billion toconduct an annual company-run stress test. Beginning in 2012, the OCC’s implementing regulation requiresnational banks with $50 billion or more in average total consolidated assets, including MSBNA, to conduct itsDodd-Frank Act stress test. MSBNA submitted its company-run stress test results to the OCC and the FederalReserve on January 6, 2014. The OCC’s regulation also requires a national bank with more than $10 billion butless than $50 billion in average total consolidated assets, including MSPBNA, to submit the results of its Dodd-Frank Act stress test by March 31, 2014. However, MSPBNA was given an exemption by the OCC for the 2014Dodd-Frank Act stress test.

Basel Capital Framework.

In December 2010, the Basel Committee reached an agreement on Basel III. In July 2013, the U.S. bankingregulators promulgated final rules to implement many aspects of Basel III (the “U.S. Basel III final rule”). TheCompany became subject to the U.S. Basel III final rule beginning on January 1, 2014. Certain requirements inthe U.S. Basel III final rule, including the minimum risk-based capital ratios and new capital buffers, willcommence or be phased in over several years.

The U.S. Basel III final rule contains new capital standards that raise capital requirements, strengthencounterparty credit risk capital requirements, introduce a leverage ratio as a supplemental measure to the risk-based ratio and replace the use of externally developed credit ratings with alternatives such as the Organisationfor Economic Co-operation and Development’s country risk classifications. Under the U.S. Basel III final rule,the Company is subject, on a fully phased in basis, to a minimum Common Equity Tier 1 risk-based capital ratioof 4.5%, a minimum Tier 1 risk-based capital ratio of 6% and a minimum total risk-based capital ratio of 8%.The Company is also subject to a 2.5% Common Equity Tier 1 capital conservation buffer and, if deployed, up toa 2.5% Common Equity Tier 1 countercyclical buffer on a fully phased-in basis by 2019. Failure to maintainsuch buffers will result in restrictions on the Company’s ability to make capital distributions, including thepayment of dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers. Inaddition, certain new items will be deducted from Common Equity Tier 1 capital and certain existing deductionswill be modified. The majority of these capital deductions is subject to a phase-in schedule and will be fullyphased in by 2018. Under the U.S. Basel III final rule, unrealized gains and losses on available-for-sale securitieswill be reflected in Common Equity Tier 1 capital, subject to a phase-in schedule.

Pursuant to the U.S. Basel III final rule, existing trust preferred securities will be fully phased out of theCompany’s Tier 1 capital by January 1, 2016. Thereafter, existing trust preferred securities that do not satisfy the

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U.S. Basel III final rule’s eligibility criteria for Tier 2 capital will be phased out of the Company’s regulatorycapital by January 1, 2022.

U.S. banking regulators have published final regulations implementing a provision of the Dodd-Frank Actrequiring that certain institutions supervised by the Federal Reserve, including the Company, be subject tominimum capital requirements that are not less than the generally applicable risk-based capitalrequirements. Currently, this minimum “capital floor” is based on Basel I. Beginning on January 1, 2015, theU.S. Basel III final rule will replace the current Basel I-based “capital floor” with a standardized approach that,among other things, modifies the existing risk weights for certain types of asset classes. The “capital floor”applies to the calculation of minimum risk-based capital requirements as well as the capital conservation bufferand, if deployed, the countercyclical capital buffer. Accordingly, the methods for calculating the Company’scapital ratios will change as the U.S. Basel III final rule’s revisions to the numerator and denominator are phasedin and following the Company’s completion of the U.S. Basel III advanced approach parallel run period. Theseongoing methodological changes may result in differences in the Company’s reported capital ratios from onereporting period to the next that are independent of changes to the Company’s capital base, asset composition,off-balance sheet exposures or risk profile.

In addition to the U.S. Basel III final rule, the Dodd-Frank Act requires the Federal Reserve to establish morestringent capital requirements for certain bank holding companies, including the Company. The Federal Reservehas indicated that it intends to address this requirement by implementing the Basel Committee’s capital surchargefor global systemically important banks (“G-SIB”). The Financial Stability Board (“FSB”) has provisionallyidentified the G-SIBs and assigned each G-SIB a Common Equity Tier 1 capital surcharge ranging from 1.0% to2.5% of RWAs. The Company is provisionally assigned a G-SIB capital surcharge of 1.5%. The FSB has statedthat it intends to update the list of G-SIBs annually.

The Company estimates its pro forma risk-based Common Equity Tier 1 capital ratio under the U.S. Basel IIIfinal rule’s advanced approaches method to be approximately 10.5% as of December 31, 2013. This estimate isbased on the Company’s current understanding of the U.S. Basel III final rule and other factors, which may besubject to change as the Company receives additional clarification and implementation guidance from regulatorsrelating to the U.S. Basel III final rule, and as the interpretation of the final rule evolves over time. On February21, 2014, the Federal Reserve and the OCC approved the Company’s and the Subsidiary Banks’ respective use ofthe U.S. Basel III advanced approaches method to calculate and publicly disclose their risk-based capital ratiosbeginning with the second quarter of 2014. One of the stipulations for this approval is that the Company will berequired to satisfy certain conditions, as agreed to with the regulators, regarding the modeling used to determineits estimated RWAs associated with operational risk. Pursuant to these conditions, the Company’s estimatedoperational risk RWAs could increase and thus reduce the pro forma Common Equity Tier 1 capital ratio as ofDecember 31, 2013 by an amount up to approximately 50 basis points. The pro forma risk-based CommonEquity Tier 1 capital ratio estimate is a non-GAAP financial measure that the Company considers to be a usefulmeasure for evaluating compliance with new regulatory capital requirements that have not yet become effective.The pro forma risk-based Common Equity Tier 1 capital ratio estimate is based on shareholders’ equity,Common Equity Tier 1 capital, RWAs and certain other data inputs at December 31, 2013. This preliminaryestimate is subject to risks and uncertainties that may cause actual results to differ materially and should not betaken as a projection of what the Company’s capital ratios, RWAs, earnings or other results will actually be atfuture dates. For a discussion of risks and uncertainties that may affect the future results of the Company, see“Risk Factors” in Part I, Item 1A.

The U.S. Basel III final rule also subjects certain banking organizations, including the Company, to a minimumsupplementary leverage ratio of 3% starting on January 1, 2018. In January 2014, the Basel Committee finalizedrevisions to the denominator of the Basel III leverage ratio. The revised denominator differs from thesupplementary leverage ratio in the U.S. Basel III final rule in the treatment of, among other things, derivatives,securities financing transactions and other off-balance sheet items. U.S. banking regulators may issue regulationsto implement the revised Basel III leverage ratio.

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The U.S. banking regulators have also proposed a rule to implement enhanced supplementary leverage standardsfor certain large bank holding companies and their insured depository institution subsidiaries, including theCompany and the Subsidiary Banks. Under this proposal, a covered bank holding company would need tomaintain a leverage buffer of Tier 1 capital of greater than 2% in addition to the 3% minimum (for a total ofgreater than 5%), in order to avoid limitations on capital distributions, including dividends and stock repurchases,and discretionary bonus payments to executive officers. This proposal would further establish a “well-capitalized” threshold based on a supplementary leverage ratio of 6% for insured depository institutionsubsidiaries, including the Subsidiary Banks. If this proposal is adopted, its requirements would become effectiveon January 1, 2018 with public disclosure beginning in 2015. Based on a preliminary analysis of the proposedstandards, the Company expects to meet the supplementary leverage ratio of greater than 5% in 2015. As theenhanced supplementary leverage standards are currently proposals, and may change based on final rules issuedby the U.S. banking regulators, the Company’s expectations are subject to risks and uncertainties that may affectfuture results of the Company. Further, the expectations should not be taken as a projection of what theCompany’s supplemental leverage ratios or earnings or assets will actually be at future dates. For a discussion ofrisks and uncertainties that may affect the future results of the Company, see “Risk Factors” in Part I, Item 1A.

Required Capital.

The Company’s required capital (“Required Capital”) estimation is based on the Required Capital Framework, aninternal capital adequacy measure. This framework is a risk-based use-of-capital measure, which is comparedwith the Company’s regulatory capital to ensure the Company maintains an amount of going concern capital afterabsorbing potential losses from extreme stress events where applicable, at a point in time. The Company definesthe difference between its regulatory capital and aggregate Required Capital as Parent capital. Average Tier 1common capital, aggregate Required Capital and Parent capital for 2013 were approximately $47.7 billion, $38.7billion and $9.0 billion, respectively. The Company generally holds Parent capital for prospective regulatoryrequirements, organic growth, acquisitions and other capital needs.

Tier 1 common capital and common equity attribution to the business segments is based on capital usage calculatedby the Required Capital Framework. In principle, each business segment is capitalized as if it were an independentoperating entity with limited diversification benefit between the business segments. Required Capital is assessed ateach business segment and further attributed to product lines. This process is intended to align capital with the risksin each business segment in order to allow senior management to evaluate returns on a risk-adjusted basis. TheRequired Capital Framework will evolve over time in response to changes in the business and regulatoryenvironment and to incorporate enhancements in modeling techniques. The Company will continue to evaluate theframework with respect to the impact of future regulatory requirements, as appropriate.

The following table presents the business segments’ and Parent’s average Tier 1 common capital and averagecommon equity for 2013 and 2012:

2013 2012

AverageTier 1 Common

Capital

AverageCommon

Equity

AverageTier 1 Common

Capital

AverageCommon

Equity

(dollars in billions)Institutional Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32.7 $37.9 $22.3 $29.0Wealth Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 13.2 3.7 13.3Investment Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 2.8 1.3 2.4Parent capital(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.0 8.0 15.5 16.1

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $47.7 $61.9 $42.8 $60.8

(1) Effective January 2013, the Company updated its Required Capital Framework methodology to coincide with the regulatory changes thatbecame effective in 2013. As a result of this update to the methodology, the majority of which was driven by the implementation of themarket risk capital framework amendment, average Institutional Securities capital increased and average Parent capital decreased,partially offset by accretion of net income at December 31, 2013.

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Off-Balance Sheet Arrangements with Unconsolidated Entities.

The Company enters into various arrangements with unconsolidated entities, including variable interest entities,primarily in connection with its Institutional Securities and Investment Management business segments.

Institutional Securities Activities. The Company utilizes special purpose entities (“SPE”) primarily inconnection with securitization activities. The Company engages in securitization activities related to commercialand residential mortgage loans, U.S. agency collateralized mortgage obligations, corporate bonds and loans,municipal bonds and other types of financial assets. The Company may retain interests in the securitizedfinancial assets as one or more tranches of the securitization. These retained interests are included in theconsolidated statements of financial condition at fair value. Any changes in the fair value of such retainedinterests are recognized in the consolidated statements of income. Retained interests in securitized financialassets were approximately $2.2 billion and $3.2 billion at December 31, 2013 and December 31, 2012,respectively, substantially all of which were related to U.S. agency collateralized mortgage obligations,commercial mortgage loan and residential mortgage loan securitization transactions. For further informationabout the Company’s securitization activities, see Note 7 to the consolidated financial statements in Item 8.

The Company has entered into liquidity facilities with SPEs and other counterparties, whereby the Company isrequired to make certain payments if losses or defaults occur. The Company often may have recourse to theunderlying assets held by the SPEs in the event payments are required under such liquidity facilities (see Note 13to the consolidated financial statements in Item 8).

Investment Management Activities. As a general partner in certain private equity and real estate partnerships, theCompany receives distributions from the partnerships according to the provisions of the partnership agreements. TheCompany may, from time to time, be required to return all or a portion of such distributions to the limited partners inthe event the limited partners do not achieve a certain return as specified in various partnership agreements, subject tocertain limitations. These amounts are noted in the table below under “General partner guarantees”.

Guarantees. The Company discloses information about its obligations under certain guarantee arrangements.Guarantees are defined as contracts and indemnification agreements that contingently require a guarantor tomake payments to the guaranteed party based on changes in an underlying measure (such as an interest or foreignexchange rate, a 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. Guarantees are also defined as contracts thatcontingently require the guarantor to make payments to the guaranteed party based on another entity’s failure toperform under an agreement as well as indirect guarantees of the indebtedness of others.

The table below summarizes certain information regarding the Company’s obligations under guaranteearrangements at December 31, 2013:

Maximum Potential Payout/Notional CarryingAmount(Asset)/Liability

Collateral/Recourse

Years to Maturity

Type of Guarantee Less than 1 1-3 3-5 Over 5 Total

(dollars in millions)Credit derivative contracts(1) . . . $ 313,836 $520,119 $500,241 $ 66,594 $1,400,790 $(16,994) $ —Other credit contracts . . . . . . . . . 75 441 529 816 1,861 (457) —Non-credit derivative

contracts(1) . . . . . . . . . . . . . . . 1,249,932 794,776 353,559 474,921 2,873,188 54,098 —Standby letters of credit and

other financial guaranteesissued(2)(3) . . . . . . . . . . . . . . . 1,024 812 1,205 5,652 8,693 (208) 7,016

Market value guarantees . . . . . . . — 112 83 515 710 7 106Liquidity facilities . . . . . . . . . . . . 2,328 — — — 2,328 (4) 3,042Whole loan sales representations

and warranties . . . . . . . . . . . . . — — — 23,755 23,755 56 —Securitization representations

and warranties . . . . . . . . . . . . . — — — 67,249 67,249 82 —General partner guarantees . . . . . 42 41 62 301 446 73 —

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(1) Carrying amounts of derivative contracts are shown on a gross basis prior to cash collateral or counterparty netting. For furtherinformation on derivative contracts, see Note 12 to the consolidated financial statements in Item 8.

(2) Approximately $2.0 billion of standby letters of credit are also reflected in the “Commitments” table below in primary and secondarylending commitments. Standby letters of credit are recorded at fair value within Trading assets or Trading liabilities in the consolidatedstatements of financial condition.

(3) Amounts include guarantees issued by consolidated real estate funds sponsored by the Company of approximately $13.8 million. Theseguarantees relate to obligations of the fund’s investee entities, including guarantees related to capital expenditures and principal andinterest debt payments.

In the ordinary course of business, the Company guarantees the debt and/or certain trading obligations (includingobligations 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 ortrading counterparties. The activities of the subsidiaries covered by these guarantees (including any related debtor trading obligations) are included in the Company’s consolidated financial statements.

See Note 13 to the consolidated financial statements in Item 8 for information on other guarantees andindemnities.

Commitments and Contractual Obligations.

The Company’s commitments associated with outstanding letters of credit and other financial guaranteesobtained to satisfy collateral requirements, investment activities, corporate lending and financing arrangements,and mortgage lending at December 31, 2013 are summarized below by period of expiration. Since commitmentsassociated with these instruments may expire unused, the amounts shown do not necessarily reflect the actualfuture cash funding requirements:

Years to Maturity Total atDecember 31,

2013Less

than 1 1-3 3-5 Over 5


Letters of credit and other financial guarantees obtained tosatisfy collateral requirements . . . . . . . . . . . . . . . . . . . . $ 389 $ 1 $ — $ 1 $ 391

Investment activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 518 70 30 447 1,065Primary lending commitments—investment grade(1) . . . . 7,695 14,674 36,224 798 59,391Primary lending commitments—non-investment

grade(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,657 5,402 10,066 2,119 19,244Secondary lending commitments(2) . . . . . . . . . . . . . . . . . . 44 38 10 72 164Commitments for secured lending transactions . . . . . . . . . 1,094 166 — — 1,260Forward starting reverse repurchase agreements and

securities borrowing agreements(3)(4) . . . . . . . . . . . . . . 44,890 — — — 44,890Commercial and residential mortgage-related

commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,199 48 301 313 1,861Underwriting commitments . . . . . . . . . . . . . . . . . . . . . . . . 588 — — — 588Other lending commitments . . . . . . . . . . . . . . . . . . . . . . . . 2,660 340 193 128 3,321

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60,734 $20,739 $46,824 $3,878 $132,175

(1) This amount includes $49.4 billion of investment grade and $12 billion of non-investment grade unfunded commitments accounted for asheld for investment and $3.5 billion of investment grade and $4.6 billion of non-investment grade unfunded commitments accounted foras held for sale at December 31, 2013. The remainder of these lending commitments is carried at fair value.

(2) These commitments are recorded at fair value within Trading assets and Trading liabilities in the consolidated statements of financialcondition (see Note 4 to the consolidated financial statements in Item 8).

(3) The Company enters into forward starting reverse repurchase and securities borrowing agreements (agreements that have a trade date ator prior to December 31, 2013 and settle subsequent to period-end) that are primarily secured by collateral from U.S. government agency

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securities and other sovereign government obligations. These agreements primarily settle within three business days, and of the totalamount at December 31, 2013, $42.9 billion settled within three business days.

(4) The Company also has a contingent obligation to provide financing to a clearinghouse through which it clears certain transactions. Thefinancing is required only upon the default of a clearinghouse member. The financing takes the form of a reverse repurchase facility, witha maximum amount of approximately $1.1 billion.

For further description of these commitments, see Note 13 to the consolidated financial statements in Item 8 and“Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk” in Item 7A.

In the normal course of business, the Company enters into various contractual obligations that may require futurecash payments. Contractual obligations include long-term borrowings, other secured financings, contractualinterest payments, contractual payments on time deposits, operating leases and purchase obligations. TheCompany’s future cash payments associated with certain of its obligations at December 31, 2013 are summarizedbelow:

Payments Due in:

At December 31, 2013 2014 2015-2016 2017-2018 Thereafter Total


Long-term borrowings(1) . . . . . . . . . . . . . . . . . . . . . . . . . $24,193 $44,234 $41,603 $43,545 $153,575Other secured financings(1) . . . . . . . . . . . . . . . . . . . . . . . 3,500 4,848 835 567 9,750Contractual interest payments(2) . . . . . . . . . . . . . . . . . . . 5,458 8,994 5,819 19,673 39,944Time deposits(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,432 51 — — 2,483Operating leases—office facilities(4) . . . . . . . . . . . . . . . . 672 1,277 1,035 2,712 5,696Operating leases—equipment(4) . . . . . . . . . . . . . . . . . . . 239 241 163 98 741Purchase obligations(5) . . . . . . . . . . . . . . . . . . . . . . . . . . 634 597 301 125 1,657

Total(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,128 $60,242 $49,756 $66,720 $213,846

(1) See Note 11 to the consolidated financial statements in Item 8. Amounts presented for Other secured financings are financings withoriginal maturities greater than one year.

(2) Amounts represent estimated future contractual interest payments related to unsecured long-term borrowings based on applicable interestrates at December 31, 2013. Amounts include stated coupon rates, if any, on structured or index-linked notes.

(3) Amounts represent contractual principal and interest payments related to time deposits primarily held at the Subsidiary Banks.(4) See Note 13 to the consolidated financial statements in Item 8.(5) Purchase obligations for goods and services include payments for, among other things, consulting, outsourcing, computer and

telecommunications maintenance agreements and certain transmission, transportation and storage contracts related to the commoditiesbusiness. Purchase obligations at December 31, 2013 reflect the minimum contractual obligation under legally enforceable contracts withcontract terms that are both fixed and determinable. These amounts exclude obligations for goods and services that already have beenincurred and are reflected on the Company’s consolidated statement of financial condition.

(6) Amounts exclude unrecognized tax benefits, as the timing and amount of future cash payments are not determinable at this time (seeNote 20 to the consolidated financial statements in Item 8 for further information).

Effects of Inflation and Changes in Foreign Exchange Rates.

To the extent that a worsening inflation outlook results in rising interest rates or has negative impacts on thevaluation of financial instruments that exceed the impact on the value of the Company’s liabilities, it mayadversely affect the Company’s financial position and profitability. Rising inflation may also result in increasesin the Company’s non-interest expenses that may not be readily recoverable in higher prices of services offered.

A significant portion of the Company’s business is conducted in currencies other than the U.S. dollar, andchanges in foreign exchange rates relative to the U.S. dollar, therefore, can affect the value of non-U.S. dollar netassets, revenues and expenses. Potential exposures as a result of these fluctuations in currencies are closelymonitored, and, where cost-justified, strategies are adopted that are designed to reduce the impact of thesefluctuations on the Company’s financial performance. These strategies may include the financing of non-U.S.dollar assets with direct or swap-based borrowings in the same currency and the use of currency forwardcontracts or the spot market in various hedging transactions related to net assets, revenues, expenses or cashflows.

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Risk Management.

Overview.

Management believes effective risk management is vital to the success of the Company’s business activities.Accordingly, the Company employs an enterprise risk management (“ERM”) framework to integrate the diverseroles of risk management into a holistic enterprise structure and to facilitate the incorporation of risk evaluationinto decision-making processes across the Company. The Company has policies and procedures in place toidentify, assess, monitor and manage the significant risks involved in the activities of its Institutional Securities,Wealth Management and Investment Management business segments as well as at the holding company level.Principal risks involved in the Company’s business activities include market, credit, capital and liquidity,operational, legal and regulatory risk.

The cornerstone of the Company’s risk management philosophy is the execution of risk-adjusted returns throughprudent risk-taking that protects the Company’s capital base and franchise. Five key principles underlie thisphilosophy: comprehensiveness, independence, accountability, defined risk tolerance and transparency. The fast-paced, complex, and constantly evolving nature of global financial markets requires that the Company maintain arisk management culture that is incisive, knowledgeable about specialized products and markets, and subject toongoing review and enhancement. To help ensure the efficacy of risk management, which is an essentialcomponent of the Company’s reputation, senior management requires thorough and frequent communication andthe appropriate escalation of risk matters.

Risk Governance Structure.

Risk management at the Company requires independent company-level oversight, accountability of theCompany’s business segments, and effective communication of risk matters to senior management and across theCompany. The nature of the Company’s risks, coupled with its risk management philosophy, informs theCompany’s risk governance structure. The Company’s risk governance structure is comprised of the Board ofDirectors; the Risk Committee of the Board (“BRC”), the Audit Committee of the Board (“BAC”), and theOperations and Technology Committee of the Board (“BOTC”); the Firm Risk Committee (“FRC”); functionalrisk and control committees; senior management oversight (including the Chief Executive Officer, Chief RiskOfficer, Chief Financial Officer, Chief Legal Officer and Chief Compliance Officer); the Internal AuditDepartment and risk managers, committees, and groups within and across the Company’s business segments. Arisk governance structure composed of independent but complementary entities facilitates efficient andcomprehensive supervision of the Company’s risk exposures and processes.

Morgan Stanley Board of Directors. The Board of Directors has oversight for the Company’s ERM frameworkand is responsible for helping to ensure that the Company’s risks are managed in a sound manner. The Board hasauthorized the committees within the ERM framework to help facilitate its risk oversight responsibilities.

Risk Committee of the Board. The BRC is composed of non-management directors. The BRC is responsiblefor assisting the Board in the oversight of the Company’s risk governance structure; the Company’s riskmanagement and risk assessment guidelines and policies regarding major market, credit, liquidity and fundingand reputational risk; the Company’s risk tolerance; and the performance of the Chief Risk Officer. The BRCreports to the full Board on a regular basis.

Audit Committee of the Board. The BAC is composed of independent directors. The BAC is responsible foroversight of the integrity of the Company’s consolidated financial statements, the Company’s compliance withlegal and regulatory requirements, the Company’s system of internal controls, the qualifications andindependence of the Company’s independent auditor, and the performance of the Company’s internal andindependent auditors. In addition, the BAC assists the Board in its oversight of certain aspects of risk

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management, including review of the major franchise, legal and compliance risk exposures of the Company andthe steps management has taken to monitor and control such exposures, as well as guidelines and policies thatgovern the process for risk assessment and risk management. The BAC reports to the full Board on a regularbasis.

Operations and Technology Committee of the Board. The BOTC is composed of non-management directors.The BOTC is responsible for reviewing the major operations and technology risk exposures of the Company andthe steps management has taken to monitor and control such exposures. Additionally, the BOTC is responsiblefor assisting the Board in its oversight of the Company’s operations and technology strategy, includingsignificant investments in support of such strategy. The BOTC is also responsible for the review and approval ofoperations and technology policies, as well as the review of the Company’s risk management and risk assessmentguidelines and policies regarding operations and technology risk. The BOTC reports to the full Board on aregular basis.

Firm Risk Committee. The Board has also authorized the FRC, a management committee appointed andchaired by the Chief Executive Officer, which includes the most senior officers of the Company, including theChief Risk Officer, Chief Legal Officer and Chief Financial Officer, to oversee the Company’s global riskmanagement structure. The FRC’s responsibilities include oversight of the Company’s risk managementprinciples, procedures and limits and the monitoring of capital levels and material market, credit, liquidity andfunding, legal, operational, franchise and regulatory risk matters, and other risks, as appropriate, and the stepsmanagement has taken to monitor and manage such risks. The FRC reports to the full Board, the BAC, the BOTCand the BRC through the Company’s Chief Risk Officer and Chief Financial Officer.

Functional Risk and Control Committees. Functional risk and control committees comprising the ERMframework, including the Firm Credit Risk Committee, the Operational Risk Oversight Committee, the AssetLiability Management Committee, the Global Compliance Committee and the Franchise Committee facilitateefficient and comprehensive supervision of the Company’s risk exposures and processes and the StrategicTransactions Committee, comprised of members of management appointed by the Chief Executive Officer,reviews large strategic transactions and principal investments for the Company. In addition, each businesssegment has a risk committee that is responsible for helping to ensure that the business segment, as applicable,adheres to established limits for market, credit, operational and other risks; implements risk measurement,monitoring, and management policies, procedures, controls and systems that are consistent with the riskframework established by the FRC; and reviews, on a periodic basis, its aggregate risk exposures, risk exceptionexperience, and the efficacy of its risk identification, measurement, monitoring and management policies andprocedures, and related controls.

Chief Risk Officer. The Chief Risk Officer, who is independent of business units, reports to the ChiefExecutive Officer and the BRC. The Chief Risk Officer oversees compliance with the Company’s risk limits;approves exceptions to the Company’s risk limits; independently reviews material market, credit and operationalrisks; and reviews results of risk management processes with the Board, the BRC, and the BAC, as appropriate.The Chief Risk Officer also coordinates with the Chief Financial Officer regarding capital management andworks with the Compensation, Management Development and Succession Committee of the Board to help ensurethat the structure and design of incentive compensation arrangements do not encourage unnecessary andexcessive risk-taking.

Internal Audit Department. The Internal Audit Department provides independent risk and control assessmentand reports to the BAC. The Internal Audit Department provides an independent assessment of the Company’scontrol environment and risk management processes using a risk-based methodology developed fromprofessional auditing standards. The Internal Audit Department also assists in assessing the Company’scompliance with internal guidelines set for risk management and risk monitoring as well as external rules andregulations governing the industry. It affects these responsibilities through risk-based reviews of the Company’sprocesses, activities, products or information systems; targeted reviews of specific controls and activities; pre-implementation audits of new or significantly changed processes, activities, products or information systems; andspecial investigations required as a result of internal factors or regulatory requests.

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Independent Risk Management Functions. The independent risk management functions (Market Risk, CreditRisk Management, Operational Risk, Corporate Treasury and Bank Resource Management departments) areindependent of the Company’s business units. These groups assist senior management and the FRC in monitoringand controlling the Company’s risk through a number of control processes. Each function maintains its own riskgovernance structure with specified individuals and committees responsible for aspects of managing risk. Furtherdiscussion about the responsibilities of the risk management functions may be found below under “Market Risk”,“Credit Risk”, and “Operational Risk” and in “Management’s Discussion and Analysis of Financial Conditionand Results of Operations—Liquidity and Capital Resources” in Part II, Item 7.

Control Groups. The Company control groups include the Legal and Compliance Division, Finance, the TaxDepartment, the Operations Division, the Technology and Data Division, and the Human Resources Department.The Company control groups coordinate with the business segment control groups to review the risk monitoringand risk management policies and procedures relating to, among other things, controls over financial reportingand disclosure; the business segment’s market, credit and operational risk profile; liquidity risks; sales practices;reputational, legal enforceability, compliance and regulatory risk; and operational and technological risks.Participation by the senior officers of the Company and business segment control groups helps ensure that riskpolicies and procedures, exceptions to risk limits, new products and business ventures, and transactions with riskelements undergo thorough review.

Divisional Risk Committees. Each business segment has a risk committee that is responsible for helping toensure that the business segment, as applicable, adheres to established limits for market, credit, operational andother risks; implements risk measurement, monitoring, and management policies and procedures that areconsistent with the risk framework established by the FRC; and reviews, on a periodic basis, its aggregate riskexposures, risk exception experience, and the efficacy of its risk identification, measurement, monitoring andmanagement policies and procedures, and related controls.

Employees. All employees have accountability for risk management. The Company strives to establish aculture of effective risk management through training and development programs, policies, procedures, anddefined roles and responsibilities within the Company. The actions and conduct of each employee are essential torisk management. The Company’s Code of Conduct (the “Code”) has been established to provide a frameworkand standards for employee conduct that further reinforces the Company’s commitment to integrity and highethical standards. Every new hire and every employee annually must certify to their understanding of andadherence to the Code. The employee annual review process includes evaluation of adherence to the Code. TheGlobal Incentive Compensation Discretion Policy sets forth standards that specifically provide that managersmust consider whether the employee effectively managed and supervised the risk control practices of his/heremployee reports during the performance year. The Company has several mutually reinforcing processes toidentify incidents of employee conduct that may have an impact on employment status, current yearcompensation or prior year compensation. The Company’s clawback and cancellation provisions permit recoveryof deferred incentive compensation where, for example, there is a failure to appropriately manage or monitor anemployee who engaged in conduct detrimental to the Company or conduct constituting ‘cause’ for termination.

Stress Value-at-Risk.

The Company frequently enhances its market and credit risk management framework to address severe stressesthat are observed in global markets during economic downturns. During 2013, the Company expanded andimproved its risk measurement processes, including stress tests and scenario analysis, and further refined itsmarket and credit risk limit framework. Stress Value-at-Risk (“S-VaR”), a proprietary methodology thatcomprehensively measures the Company’s market and credit risks, was further refined and continues to be animportant metric used in establishing the Company’s risk appetite and its capital allocation framework. S-VaRsimulates many stress scenarios based on more than 25 years of historical data and attempts to capture thedifferent liquidities of various types of general and specific risks. Additionally, S-VaR captures event and defaultrisks that are particularly relevant for credit portfolios.

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Risk Management Process.

The following is a discussion of the Company’s risk management policies and procedures for its principal risks(capital and liquidity risk is discussed in “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Liquidity and Capital Resources” in Item 7). The discussion focuses on the Company’ssecurities activities (primarily its institutional trading activities) and corporate lending and related activities. TheCompany believes that these activities generate a substantial portion of its principal risks. This discussion and theestimated amounts of the Company’s risk exposure generated by the Company’s statistical analyses are forward-looking statements. However, the analyses used to assess such risks are not predictions of future events, andactual results may vary significantly from such analyses due to events in the markets in which the Companyoperates and certain other factors described below.

Market Risk.

Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, impliedvolatilities (the price volatility of the underlying instrument imputed from option prices), correlations or othermarket factors, such as market liquidity, will result in losses for a position or portfolio. Generally, the Companyincurs market risk as a result of trading, investing and client facilitation activities, principally within theInstitutional Securities business segment where the substantial majority of the Company’s Value-at-Risk (“VaR”)for market risk exposures is generated. In addition, the Company incurs trading-related market risk within theWealth Management business segment. The Investment Management business segment incurs principally Non-trading market risk primarily from capital investments in real estate funds and investments in private equityvehicles.

Sound market risk management is an integral part of the Company’s culture. The various business units andtrading desks are responsible for ensuring that market risk exposures are well-managed and prudent. The controlgroups help ensure that these risks are measured and closely monitored and are made transparent to seniormanagement. The Market Risk Department is responsible for ensuring transparency of material market risks,monitoring compliance with established limits, and escalating risk concentrations to appropriate seniormanagement. To execute these responsibilities, the Market Risk Department monitors the Company’s riskagainst limits on aggregate risk exposures, performs a variety of risk analyses, routinely reports risk summaries,and maintains the Company’s VaR and scenario analysis systems. These limits are designed to control price andmarket liquidity risk. Market risk is also monitored through various measures: using statistics (including VaR, S-VaR and related analytical measures); by measures of position sensitivity; and through routine stress testing,which measures the impact on the value of existing portfolios of specified changes in market factors, andscenario analyses conducted by the Market Risk Department in collaboration with the business units. Thematerial risks identified by these processes are summarized in reports produced by the Market Risk Departmentthat are circulated to and discussed with senior management, the FRC, the BRC, and the Board of Directors.

The Chief Risk Officer, who reports to the Chief Executive Officer and the BRC, among other things, monitorsmarket risk through the Market Risk Department, which reports to the Chief Risk Officer and is independent ofthe business units, and has close interactions with senior management and the risk management control groups inthe business units. The Chief Risk Officer is a member of the FRC, chaired by the Chief Executive Officer,which includes the most senior officers of the Company, and regularly reports on market risk matters to thiscommittee, as well as to the BRC and the Board of Directors.

Sales and Trading and Related Activities.

Primary Market Risk Exposures and Market Risk Management. During 2013, the Company had exposures toa wide range of interest rates, equity prices, foreign exchange rates and commodity prices—and the associatedimplied volatilities and spreads—related to the global markets in which it conducts its trading activities.

The Company is exposed to interest rate and credit spread risk as a result of its market-making activities andother trading in interest rate-sensitive financial instruments (e.g., risk arising from changes in the level or implied

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volatility of interest rates, the timing of mortgage prepayments, the shape of the yield curve and credit spreads).The activities from which those exposures arise and the markets in which the Company is active include, but arenot limited to, the following: corporate and government debt across both developed and emerging markets andasset-backed debt (including mortgage-related securities).

The Company is exposed to equity price and implied volatility risk as a result of making markets in equitysecurities and derivatives and maintaining other positions (including positions in non-public entities). Positions innon-public entities may include, but are not limited to, exposures to private equity, venture capital, privatepartnerships, real estate funds and other funds. Such positions are less liquid, have longer investment horizonsand are more difficult to hedge than listed equities.

The Company is exposed to foreign exchange rate and implied volatility risk as a result of making markets inforeign currencies and foreign currency derivatives, from maintaining foreign exchange positions and fromholding non-U.S. dollar-denominated financial instruments.

The Company is exposed to commodity price and implied volatility risk as a result of market-making activitiesand maintaining commodity positions in physical commodities (such as crude and refined oil products, naturalgas, electricity, and precious and base metals) and related derivatives. Commodity exposures are subject toperiods of high price volatility as a result of changes in supply and demand. These changes can be caused byweather conditions; physical production, transportation and storage issues; or geopolitical and other events thataffect the available supply and level of demand for these commodities.

The Company manages its trading positions by employing a variety of risk mitigation strategies. These strategiesinclude diversification of risk exposures and hedging. Hedging activities consist of the purchase or sale ofpositions in related securities and financial instruments, including a variety of derivative products (e.g., futures,forwards, swaps and options). Hedging activities may not always provide effective mitigation against tradinglosses due to differences in the terms, specific characteristics or other basis risks that may exist between thehedge instrument and the risk exposure that is being hedged. The Company manages the market risk associatedwith its trading activities on a Company-wide basis, on a worldwide trading division level and on an individualproduct basis. The Company manages and monitors its market risk exposures in such a way as to maintain aportfolio that the Company believes is well-diversified in the aggregate with respect to market risk factors andthat reflects the Company’s aggregate risk tolerance as established by the Company’s senior management.

Aggregate market risk limits have been approved for the Company across all divisions worldwide. Additionalmarket risk limits are assigned to trading desks and, as appropriate, products and regions. Trading division riskmanagers, desk risk managers, traders and the Market Risk Department monitor market risk measures againstlimits in accordance with policies set by senior management.

VaR. The Company uses the statistical technique known as VaR as one of the tools used to measure, monitorand review the market risk exposures of its trading portfolios. The Market Risk Department calculates anddistributes daily VaR-based risk measures to various levels of management.

VaR Methodology, Assumptions and Limitations. The Company estimates VaR using a model based onvolatility adjusted historical simulation for general market risk factors and Monte Carlo simulation for name-specific risk in corporate shares, bonds, loans and related derivatives. The model constructs a distribution ofhypothetical daily changes in the value of trading portfolios based on the following: historical observation ofdaily changes in key market indices or other market risk factors; and information on the sensitivity of theportfolio values to these market risk factor changes. The Company’s VaR model uses four years of historical datawith a volatility adjustment to reflect current market conditions. The Company’s VaR for risk managementpurposes (“Management VaR”) is computed at a 95% level of confidence over a one-day time horizon, which is auseful indicator of possible trading losses resulting from adverse daily market moves. The Company’s 95%/one-

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day VaR corresponds to the unrealized loss in portfolio value that, based on historically observed market riskfactor movements, would have been exceeded with a frequency of 5%, or five times in every 100 trading days, ifthe portfolio were held constant for one day.

The Company’s VaR model generally takes into account linear and non-linear exposures to equity andcommodity price risk, interest rate risk, credit spread risk and foreign exchange rates. The model also takes intoaccount linear exposures to implied volatility risks for all asset classes and non-linear exposures to impliedvolatility risks for equity, commodity and foreign exchange referenced products. The VaR model also capturescertain implied correlation risks associated with portfolio credit derivatives as well as certain basis risks (e.g.,corporate debt and related credit derivatives).

The Company uses VaR as one of a range of risk management tools. Among their benefits, VaR models permitestimation of a portfolio’s aggregate market risk exposure, incorporating a range of varied market risks andportfolio assets. One key element of the VaR model is that it reflects risk reduction due to portfoliodiversification or hedging activities. However, VaR has various limitations, which include, but are not limited to:use of historical changes in market risk factors, which may not be accurate predictors of future marketconditions, and may not fully incorporate the risk of extreme market events that are outsized relative to observedhistorical market behavior or reflect the historical distribution of results beyond the 95% confidence interval; andreporting of losses in a single day, which does not reflect the risk of positions that cannot be liquidated or hedgedin one day. A small proportion of market risk generated by trading positions is not included in VaR. Themodeling of the risk characteristics of some positions relies on approximations that, under certain circumstances,could produce significantly different results from those produced using more precise measures. VaR is mostappropriate as a risk measure for trading positions in liquid financial markets and will understate the riskassociated with severe events, such as periods of extreme illiquidity. The Company is aware of these and otherlimitations and, therefore, uses VaR as only one component in its risk management oversight process. Thisprocess also incorporates stress testing and scenario analyses and extensive risk monitoring, analysis, and controlat the trading desk, division and Company levels.

The Company’s VaR model evolves over time in response to changes in the composition of trading portfoliosand to improvements in modeling techniques and systems capabilities. The Company is committed to continuousreview and enhancement of VaR methodologies and assumptions in order to capture evolving risks associatedwith changes in market structure and dynamics. As part of regular process improvement, additional systematicand name-specific risk factors may be added to improve the VaR model’s ability to more accurately estimaterisks to specific asset classes or industry sectors.

Since the reported VaR statistics are estimates based on historical data, VaR should not be viewed as predictiveof the Company’s future revenues or financial performance or of its ability to monitor and manage risk. Therecan be no assurance that the Company’s actual losses on a particular day will not exceed the VaR amountsindicated below or that such losses will not occur more than five times in 100 trading days for a 95%/one-dayVaR. VaR does not predict the magnitude of losses which, should they occur, may be significantly greater thanthe VaR amount.

VaR statistics are not readily comparable across firms because of differences in the firms’ portfolios, modelingassumptions and methodologies. These differences can result in materially different VaR estimates across firmsfor similar portfolios. The impact of such differences varies depending on the factor history assumptions, thefrequency with which the factor history is updated, and the confidence level. As a result, VaR statistics are moreuseful when interpreted as indicators of trends in a firm’s risk profile, rather than as an absolute measure of riskto be compared across firms.

The Company utilizes the same VaR model for risk management purposes as well as regulatory capitalcalculations. The Company’s VaR model has been approved by the Company’s regulators for use in regulatorycapital calculations.

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The portfolio of positions used for the Company’s Management VaR differs from that used for regulatory capitalrequirements (“Regulatory VaR”), as Management VaR contains certain positions that are excluded fromRegulatory VaR. Examples include counterparty credit valuation adjustments, and loans that are carried at fairvalue and associated hedges. Additionally, the Company’s Management VaR excludes certain risks contained inits Regulatory VaR, such as hedges to counterparty exposures related to the Company’s own credit spread.

Table 1 below presents the Management VaR for the Company’s Trading portfolio, on a period-end, annualaverage and annual high and low basis. The Credit Portfolio is disclosed as a separate category from the PrimaryRisk Categories, and includes loans that are carried at fair value and associated hedges, as well as counterpartycredit valuation adjustments and related hedges.

Trading Risks.

The table below presents the Company’s 95%/one-day Management VaR:

Table 1: 95% Management VaR 95%/One-Day VaR for 2013 95%/One-Day VaR for 2012

Market Risk CategoryPeriod

End Average High LowPeriod

End Average High Low


Interest rate and credit spread . . . . . . . . . . $ 41 $ 45 $ 76 $ 31 $ 56 $ 56 $ 87 $33Equity price . . . . . . . . . . . . . . . . . . . . . . . . 22 19 43 15 21 26 39 18Foreign exchange rate . . . . . . . . . . . . . . . . 15 14 22 7 10 13 23 7Commodity price . . . . . . . . . . . . . . . . . . . 15 21 31 15 20 24 32 18Less: Diversification benefit(1)(2) . . . . . . (44) (46) N/A N/A (40) (55) N/A N/A

Primary Risk Categories . . . . . . . . . . . . . . $ 49 $ 53 $ 78 $ 42 $ 67 $ 64 $ 98 $52

Credit Portfolio . . . . . . . . . . . . . . . . . . . . . 12 14 18 12 19 26 50 18Less: Diversification benefit(1)(2) . . . . . . (8) (8) N/A N/A (11) (17) N/A N/A

Total Management VaR . . . . . . . . . . . . . . $ 53 $ 59 $ 85 $ 47 $ 75 $ 73 $107 $57

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

(2) N/A–Not Applicable. The high and low VaR values for the total Management VaR and each of the component VaRs might haveoccurred on different days during the year, and therefore the diversification benefit is not an applicable measure.

The Company’s average Management VaR for the Primary Risk Categories for 2013 was $53 million comparedwith $64 million for 2012. This decrease was primarily driven by reduced exposure to interest rate and creditspread products and reduced exposure to equity products.

The average Credit Portfolio VaR for 2013 was $14 million compared with $26 million for 2012. This decreasewas primarily driven by decreased counterparty credit exposure.

The average Total Management VaR for 2013 was $59 million compared with $73 million for 2012. Thisdecrease was driven by the aforementioned movements.

Distribution of VaR Statistics and Net Revenues for 2013.

One method of evaluating the reasonableness of the Company’s VaR model as a measure of the Company’spotential volatility of net revenues is to compare the VaR with actual trading revenues. Assuming no intra-daytrading, for a 95%/one-day VaR, the expected number of times that trading losses should exceed VaR during theyear is 13, and, in general, if trading losses were to exceed VaR more than 21 times in a year, the adequacy of theVaR model could be questioned. The Company evaluates the reasonableness of its VaR model by comparing the

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potential declines in portfolio values generated by the model with actual trading results for the Company, as wellas individual business units. For days where losses exceed the VaR statistic, the Company examines the driversof trading losses to evaluate the VaR model’s accuracy relative to realized trading results.

The distribution of VaR Statistics and Net Revenues is presented in the histograms below for both the PrimaryRisk Categories and the Total Trading populations.

Primary Risk Categories.

As shown in Table 1, the Company’s average 95%/one-day Primary Risk Categories VaR for 2013 was $53million. The histogram below presents the distribution of the Company’s daily 95%/one-day Primary RiskCategories VaR for 2013, which was in a range between $40 million and $60 million for approximately 82% ofthe trading days during the year.

0

47

74

46 45

12 15 156

0

<40

40 to

45

45 to

50

50 to

55

55 to

60

60 to

65

65 to

70

70 to

75

75 to

80

>80

Num

ber

of D

ays

Year Ended December 31, 2013

Daily 95% / One-day Primary Risk Categories Management VaR


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The histogram below shows the distribution of daily net trading revenues for the Company’s businesses thatcomprise the Primary Risk Categories for 2013. This excludes non-trading revenues of these businesses andrevenues associated with the Company’s own credit risk. During 2013, the Company’s businesses that comprisethe Primary Risk Categories experienced net trading losses on 35 days, of which 1 day was in excess of the 95%/one-day Primary Risk Categories VaR.

0 3 7

25

71 73

49

20

92 0 1 0

<-7

5

-75

to -

50

-50

to -

25

-25

to 0

0 to

25

25 to

50

50 to

75

75 to

100

100

to 1

25

125

to 1

50

150

to 1

75

175

to 2

00

>20

0

Num

ber

of D

ays


Daily Net Trading Revenues for Primary Risk Categories


(Loss) Gain

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Total Trading—including the Primary Risk Categories and the Credit Portfolio.

As shown in Table 1, the Company’s average 95%/one-day Total Management VaR, which includes the PrimaryRisk Categories and the Credit Portfolio, for 2013 was $59 million. The histogram below presents thedistribution of the Company’s daily 95%/one-day Total Management VaR for 2013, which was in a rangebetween $45 million and $65 million for approximately 80% of trading days during the year.

0

58 5445

52

12 14 159

1 0

<45

45 to

50

50 to

55

55 to

60

60 to

65

65 to

70

70 to

75

75 to

80

80 to

85

85 to

90

>90

Num

ber

of D

ays


Daily 95% / One-day Total Management VaR


120

The histogram below shows the distribution of daily net trading revenues for the Company’s Trading businessesfor 2013. This excludes non-trading revenues of these businesses and revenues associated with the Company’sown credit risk. During 2013, the Company experienced net trading losses on 33 days, of which 1 day was inexcess of the 95%/one-day Management VaR.

0 3 7

23

6976

53

1510

2 1 1 0

<-7

5

-75

to -

50

-50

to -

25

-25

to 0

0 to

25

25 to

50

50 to

75

75 to

100

100

to 1

25

125

to 1

50

150

to 1

75

175

to 2

00

>20

0

Num

ber

of D

ays

Year Ended December 31, 2013Daily Net Trading Revenues


(Loss) Gain

Non-Trading Risks.

The Company believes that sensitivity analysis is an appropriate representation of the Company’s non-tradingrisks. Reflected below is this analysis, which covers substantially all of the non-trading risk in the Company’sportfolio.

Counterparty Exposure Related to the Company’s Own Spread.

The credit spread risk relating to the Company’s own mark-to-market derivative counterparty exposure ismanaged separately from VaR. The credit spread risk sensitivity of this exposure corresponds to an increase invalue of approximately $5 million and $6 million for each 1 basis point widening in the Company’s credit spreadlevel for December 31, 2013 and December 31, 2012, respectively.

Funding Liabilities.

The credit spread risk sensitivity of the Company’s mark-to-market funding liabilities corresponded to anincrease in value of approximately $11 million and $13 million for each 1 basis point widening in the Company’scredit spread level for December 31, 2013 and December 31, 2012, respectively.

Interest Rate Risk Sensitivity on Income from Continuing Operations.

The Company measures the interest rate risk of certain assets and liabilities by calculating the hypotheticalsensitivity of net interest income to potential changes in the level of interest rates over the next 12 months. Thissensitivity analysis includes positions that are mark-to-market, as well as positions that are accounted for on anaccrual basis. For interest rate derivatives that are perfect economic hedges to non-mark-to-market assets orliabilities, the disclosed sensitivities include only the impact of the coupon accrual mismatch.

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Given the currently low interest rate environment, the Company uses the following two interest rate scenarios toquantify the Company’s sensitivity: instantaneous parallel shocks of 100 and 200 basis point increases to allpoints on all yield curves simultaneously.

The hypothetical model does not assume any growth, change in business focus, asset pricing philosophy or asset/liability funding mix and does not capture how the Company would respond to significant changes in marketconditions. Furthermore, the model does not reflect the Company’s expectations regarding the movement ofinterest rates in the near term, nor the actual effect on income from continuing operations before income taxes ifsuch changes were to occur.

December 31, 2013 December 31, 2012

+100 BasisPoints

+200 BasisPoints

+100 BasisPoints

+200 BasisPoints


Impact on income from continuing operations before income taxes . . . $642 $1,102 $749 $1,140

Investments.

The Company makes investments in both public and private companies. These investments are predominantlyequity positions with long investment horizons, the majority of which are for business facilitation purposes. Themarket risk related to these investments is measured by estimating the potential reduction in net incomeassociated with a 10% decline in investment values.

10% Sensitivity

Investments December 31, 2013 December 31, 2012


Investments related to Investment Management activities:Hedge fund investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $104 $120Private equity and infrastructure funds . . . . . . . . . . . . . . . . . . . . . . . . . . 148 125Real estate funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 138

Other investments:Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. . . . . . . . . . . . . . . . 161 143Other Company investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 292

Credit Risk.

Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financialobligations. The Company primarily incurs credit risk exposure to institutions and individuals mainly through theInstitutional Securities and Wealth Management business segments.

The Company may incur credit risk in the Institutional Securities business segment through a variety ofactivities, including, but not limited to, the following:

• entering into swap or other derivative contracts under which counterparties have obligations to makepayments to the Company;

• extending credit to clients through various lending commitments;

• providing short- or long-term funding that is secured by physical or financial collateral whose value mayat times be insufficient to fully cover the loan repayment amount;

• posting margin and/or collateral to clearinghouses, clearing agencies, exchanges, banks, securities firmsand other financial counterparties; and

• investing or trading in securities and loan pools, whereby the value of these assets may fluctuate based onrealized or expected defaults on the underlying obligations or loans.

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The Company incurs credit risk in the Wealth Management business segment primarily through lending toindividuals and entities, including, but not limited to, the following:

• margin loans collateralized by securities;

• securities-based and other loans predominantly collateralized by securities; and

• single-family residential prime mortgage loans in conforming, non-conforming or home equity lines ofcredit (“HELOC”) form.

Monitoring and Control.

In order to help protect the Company from losses, the Credit Risk Management Department establishes company-wide practices to evaluate, monitor and control credit risk exposure at the transaction, obligor and portfoliolevels. The Credit Risk Management Department approves extensions of credit, evaluates the creditworthiness ofthe Company’s counterparties and borrowers on a regular basis, and ensures that credit exposure is activelymonitored and managed. The evaluation of counterparties and borrowers includes an assessment of theprobability that an obligor will default on its financial obligations and any losses that may occur when an obligordefaults. In addition, credit risk exposure is actively managed by credit professionals and committees within theCredit Risk Management Department and through various risk committees, whose membership includesindividuals from the Credit Risk Management Department. A comprehensive and global Credit LimitsFramework is also utilized to evaluate and manage credit risk levels across the Company. The Credit LimitsFramework is calibrated within the Company’s risk tolerance and includes single-name limits and portfolioconcentration limits by country, industry and product type. The Credit Risk Management Department ensurestransparency of material credit risks, compliance with established limits and escalation of risk concentrations toappropriate senior management. The Credit Risk Management Department also works closely with the MarketRisk Department and applicable business units to monitor risk exposures and to perform stress tests to identify,analyze and control credit risk concentrations arising in the Company’s lending and trading activities. The stresstests shock market factors (e.g., interest rates, commodity prices, equity prices) and risk parameters such asdefault probabilities and expected losses in order to identify potential credit exposure concentrations to individualcounterparties, countries and industries. Stress and scenario tests are conducted in accordance with establishedCompany policies and procedures and comply with methodologies outlined in the Basel regulatory framework.

Credit Evaluation. The evaluation of corporate and commercial counterparties as well as certain high net worthborrowers includes assigning obligor credit ratings, which reflect an assessment of an obligor’s probability ofdefault. Credit evaluations typically involve the assessment of financial statements, leverage, liquidity, capitalstrength, asset composition and quality, market capitalization and access to capital markets, cash flow projectionsand debt service requirements, and the adequacy of collateral, if applicable. The Credit Risk ManagementDepartment also evaluates strategy, market position, industry dynamics, obligor’s management and other factorsthat could affect the obligor’s risk profile. Additionally, the Credit Risk Management Department evaluates therelative position of the Company’s particular obligation in the borrower’s capital structure and relative recoveryprospects, as well as collateral (if applicable) and other structural elements of the particular transaction.

The evaluation of consumer borrowers is tailored to the specific type of lending. Margin and securities-based loansare evaluated based on factors that include, but are not limited to, the amount of the loan, the degree of leverage andthe quality, diversification, price volatility and liquidity of the collateral. The underwriting of residential real estateloans includes, but is not limited to, review of the obligor’s income, net worth, liquidity, collateral, loan-to-valueratio and credit bureau information. Subsequent credit monitoring for residential real estate loans is performed at theportfolio level and for consumer loans, collateral values are monitored on an ongoing basis.

Credit risk metrics assigned to corporate, commercial and consumer borrowers during the evaluation process areincorporated into the Credit Risk Management Department’s maintenance of the allowance for loan losses for theloans held for investment portfolio. Such allowance serves as a safeguard against probable inherent losses as wellas probable losses related to loans identified for impairment. For more information on the Company’s allowancefor loan losses, see Notes 2 and 8 to the consolidated financial statements in Item 8.

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Risk Mitigation. The Company may seek to mitigate credit risk from its lending and trading activities inmultiple ways, including collateral provisions, guarantees and hedges. At the transaction level, the Companyseeks to mitigate risk through management of key risk elements such as size, tenor, financial covenants, seniorityand collateral. The Company actively hedges its lending and derivatives exposure through various financialinstruments that may include single-name, portfolio and structured credit derivatives. Additionally, the Companymay sell, assign or syndicate funded loans and lending commitments to other financial institutions in the primaryand secondary loan market. In connection with its derivatives trading activities, the Company generally entersinto master netting agreements and collateral arrangements with counterparties. These agreements provide theCompany with the ability to demand collateral, as well as to liquidate collateral and offset receivables andpayables covered under the same master agreement in the event of counterparty default.

Lending Activities.

The Company provides loans to a variety of customers, from large corporate and institutional clients to high networth individuals. In addition, the Company purchases loans in the secondary market. The table belowsummarizes the Company’s loan activity at December 31, 2013. Loans held for investment and loans held forsale are classified in Loans and loans held at fair value are classified in Trading assets in the consolidatedstatements of financial condition at December 31, 2013. See Notes 4 and 8 to the consolidated financialstatements in Item 8 for further information.

InstitutionalSecuritiesCorporateLending(1)


OtherLending(2)

WealthManagementLending(3) Total(4)


Corporate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,837 $ 1,988 $ 3,301 $13,126Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 11,576 11,576Residential real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1 10,001 10,002Wholesale real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,835 6 1,841

Loans held for investment, net of allowance . . . . . . . . . . . . . 7,837 3,824 24,884 36,545

Corporate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,168 — — 6,168Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — —Residential real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 12 100 112Wholesale real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 49 — 49

Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,168 61 100 6,329

Corporate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,892 6,882 — 9,774Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — —Residential real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,434 — 1,434Wholesale real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,404 — 1,404

Loans held at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,892 9,720 — 12,612

Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,897 $13,605 $24,984 $55,486

(1) In addition to loans, at December 31, 2013, $61.4 billion of unfunded lending commitments were accounted for as held for investment,$8.1 billion of unfunded lending commitments were accounted for as held for sale and $9.1 billion of unfunded lending commitmentswere accounted for at fair value.

(2) In addition to loans, at December 31, 2013, $1.3 billion of unfunded lending commitments were accounted for as held for investment and$0.8 billion of unfunded lending commitments were accounted for at fair value.

(3) In addition to loans, at December 31, 2013, $4.5 billion of unfunded lending commitments were accounted for as held for investment.(4) The above table excludes customer margin loans outstanding of $29.2 billion and employee loans outstanding of $5.6 billion at

December 31, 2013. See Notes 6 and 8 to the consolidated financial statements in Item 8 for further information.

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Institutional Securities Corporate Lending Activities. In connection with certain of its Institutional Securitiesbusiness segment activities, the Company provides loans or lending commitments to select corporate clients.These loans and lending commitments have varying terms; may be senior or subordinated; may be secured orunsecured; are generally contingent upon representations, warranties and contractual conditions applicable to theborrower; and may be syndicated, traded or hedged by the Company.

The Company’s corporate lending credit exposure is primarily from loan and lending commitments used forgeneral corporate purposes, working capital and liquidity purposes and typically consist of revolving lines ofcredit, letter of credit facilities and term loans. In addition, the Company provides “event-driven” loans andlending commitments associated with a particular event or transaction, such as to support client merger,acquisition or recapitalization activities. The Company’s “event-driven” loans and lending commitmentstypically consist of revolving lines of credit, term loans and bridge loans.

Corporate lending commitments may not be indicative of the Company’s actual funding requirements, as thecommitment may expire unused or the borrower may not fully utilize the commitment or the Company’s portionof the commitment may be reduced through the syndication or sales process. Such syndications or sales mayinvolve third-party institutional investors where the Company may have a custodial relationship, such as primebrokerage clients.

The Company may hedge and/or sell its exposures in connection with loans and lending commitments.Additionally, the Company may mitigate credit risk by requiring borrowers to pledge collateral and includefinancial covenants in lending commitments. In the consolidated statements of financial condition these loans arecarried at either fair value with changes in fair value recorded in earnings; held for investment, which arerecorded at amortized cost; or held for sale, which are recorded at lower of cost or fair value.

The table below presents the Company’s credit exposure from its corporate lending positions and lendingcommitments, which are measured in accordance with the Company’s internal risk management standards atDecember 31, 2013. The “total corporate lending exposure” column includes funded and unfunded lendingcommitments. Lending commitments represent legally binding obligations to provide funding to clients for alllending transactions. Since commitments associated with these business activities may expire unused or may notbe utilized to full capacity, they do not necessarily reflect the actual future cash funding requirements.

Corporate Lending Commitments and Funded Loans at December 31, 2013

Years to Maturity

TotalCorporateLending

Exposure(2)Credit Rating(1) Less than 1 1-3 3-5 Over 5


AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 859 $ 114 $ 121 $ — $ 1,094AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,719 1,870 5,556 — 10,145A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,935 4,230 11,642 570 19,377BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,391 10,535 21,330 1,004 35,260

Investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,904 16,749 38,649 1,574 65,876Non-investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,712 8,024 12,794 3,627 27,157

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,616 $24,773 $51,443 $5,201 $93,033

(1) Obligor credit ratings are determined by the Credit Risk Management Department.(2) Total corporate lending exposure represents the Company’s potential loss assuming the market price of funded loans and lending

commitments was zero.

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At December 31, 2013, the aggregate amount of investment grade funded loans was $6.5 billion and theaggregate amount of non-investment grade funded loans was $7.9 billion. In connection with these corporatelending activities (which include corporate funded and unfunded lending commitments), the Company hadhedges (which include “single name,” “sector” and “index” hedges) with a notional amount of $9.0 billionrelated to the total corporate lending exposure of $93.0 billion at December 31, 2013.

“Event-Driven” Loans and Lending Commitments at December 31, 2013.

Included in the total corporate lending exposure amounts in the table above at December 31, 2013 were “event-driven” exposures of $9.5 billion composed of funded loans of $2.0 billion and lending commitments of $7.5billion. Included in the “event-driven” exposure at December 31, 2013 were $7.3 billion of loans and lendingcommitments to non-investment grade borrowers. The maturity profile of the “event-driven” loans and lendingcommitments at December 31, 2013 was as follows: 33% will mature in less than 1 year, 17% will mature within1 to 3 years, 32% will mature within 3 to 5 years and 18% will mature in over 5 years.

Industry Exposure—Corporate Lending. The Company also monitors its credit exposure to individualindustries for credit exposure arising from corporate loans and lending commitments as discussed above.

The following table shows the Company’s credit exposure from its primary corporate loans and lendingcommitments by industry at December 31, 2013:

Industry Corporate Lending Exposure


Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,240Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,410Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,095Consumer discretionary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,981Industrials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,514Funds, exchanges and other financial services(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,190Consumer staples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,788Information technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,526Telecommunications services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,658Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,867Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,171Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,593

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $93,033

(1) Includes mutual funds, pension funds, private equity and real estate funds, exchanges and clearinghouses and diversified financialservices.

Institutional Securities Other Lending Activities. In addition to the primary corporate lending activitydescribed above, the Institutional Securities business segment engages in other lending activity. These loansprimarily include corporate loans purchased in the secondary market, commercial and residential mortgage loans,asset-backed loans and financing extended to institutional clients. At December 31, 2013, approximately 99.6%of Institutional Securities Other lending activities held for investment were current; less than 0.4% were on non-accrual status because the loans were past due for a period of 90 days or more or payment of principal or interestwas in doubt.

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At December 31, 2013, Institutional Securities Other lending activities by remaining contract maturity were asfollows:

Years to Maturity Total InstitutionalSecurities Other

Lending ActivitiesLess than 1 1-3 3-5 Over 5


Corporate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,957 $1,236 $2,455 $1,222 $ 8,870Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — —Residential real estate loans . . . . . . . . . . . . . . . . . . . . . . 8 16 91 1,332 1,447Wholesale real estate loans . . . . . . . . . . . . . . . . . . . . . . 174 909 885 1,320 3,288

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,139 $2,161 $3,431 $3,874 $13,605

In addition, Institutional Securities Other lending activities include “margin lending,” which allows the client toborrow against the value of qualifying securities. At December 31, 2013, Institutional Securities margin lendingof $15.2 billion is classified within Customer and other receivables in the consolidated statements of financialcondition.

Wealth Management Lending Activities. The principal Wealth Management lending activities includessecurities-based lending and residential real estate loans. At December 31, 2013, Wealth Management’s lendingactivities by remaining contract maturity were as follows:

Years to Maturity Total WealthManagement

Lending ActivitiesLess than 1 1-3 3-5 Over 5


Securities-based lending and other loans . . . . . . . . . . . . . . $13,241 $509 $539 $ 594 $14,883Residential real estate loans . . . . . . . . . . . . . . . . . . . . . . . . — — — 10,101 10,101

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,241 $509 $539 $10,695 $24,984

Securities-based lending provided to the Company’s retail clients is primarily conducted through the Company’sPLA platform and had an outstanding balance of $13.2 billion within the $14.9 billion in the above table as ofDecember 31, 2013. These loans allow the client to borrow money against the value of qualifying securities forany suitable purpose other than purchasing securities. The Company establishes approved credit lines againstqualifying securities and monitors limits daily and, pursuant to such guidelines, requires customers to depositadditional collateral, or reduce debt positions, when necessary. Factors considered in the review of these loansare the amount, the proposed pledged collateral and its diversification profile and, in the case of concentratedpositions, appropriate liquidity of the underlying collateral or potential hedging strategies. Underlying collateralis also reviewed with respect to the valuation of the securities, historical trading range, volatility analysis and anevaluation of industry concentrations.

Residential real estate loans consist of first and second lien mortgages, including HELOC loans. For these loans,a loan evaluation process is adopted within a framework of credit underwriting policies and collateralvaluation. The Company’s underwriting policy is designed to ensure that all borrowers pass an assessment ofcapacity and willingness to pay, which includes an analysis of applicable industry standard credit scoring models(e.g., Fair Isaac Corporation (“FICO”) scores), debt ratios and reserves of the borrower. Loan-to-value ratios aredetermined based on independent third-party property appraisal/valuations, and security lien position isestablished through title/ownership reports. Eligible conforming loans are currently held for sale, while mostnon-conforming and HELOC loans are held for investment in the Company’s portfolio.

Wealth Management also provides margin lending to retail clients and had an outstanding balance of $14.0billion as of December 31, 2013, which is classified within Customer and other receivables in the consolidatedstatements of financial condition.

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In addition, the Company’s Wealth Management business segment has employee loans that are granted primarilyin conjunction with a program established by the Company to retain and recruit certain employees. These loans,recorded in Customer and other receivables in the consolidated statements of financial condition, are fullrecourse, require periodic payments and have repayment terms ranging from four to 12 years. The Companyestablishes an allowance for loan amounts it does not consider recoverable from terminated employees, which isrecorded in Compensation and benefits expense.

Credit Exposure—Derivatives.

The Company incurs credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instrumentsarises from the failure of a counterparty to perform according to the terms of the contract. In connection with itsOTC derivative activities, the Company generally enters into master netting agreements and collateralarrangements with counterparties. These agreements provide the Company with the ability to demand collateralas well as to liquidate collateral and offset receivables and payables covered under the same master agreement inthe event of counterparty default. The Company manages its trading positions by employing a variety of riskmitigation strategies. These strategies include diversification of risk exposures and hedging. Hedging activitiesconsist of the purchase or sale of positions in related securities and financial instruments, including a variety ofderivative products (e.g., futures, forwards, swaps and options). For credit exposure information on theCompany’s OTC derivative products, see Note 12 to the consolidated financial statements in Item 8.

Credit Derivatives. A credit derivative is a contract between a seller (guarantor) and buyer (beneficiary) ofprotection against the risk of a credit event occurring on one or more debt obligations issued by a specifiedreference entity. The beneficiary typically pays a periodic premium over the life of the contract and is protectedfor the period. If a credit event occurs, the guarantor is required to make payment to the beneficiary based on theterms of the credit derivative contract. Credit events, as defined in the contract, may be one or more of thefollowing defined events: bankruptcy, dissolution or insolvency of the referenced entity, failure to pay, obligationacceleration, repudiation, payment moratorium and restructurings.

The Company trades in a variety of credit derivatives and may either purchase or write protection on a singlename or portfolio of referenced entities. In transactions referencing a portfolio of entities or securities, protectionmay be limited to a tranche of exposure or a single name within the portfolio. The Company is an active marketmaker in the credit derivatives markets. As a market maker, the Company works to earn a bid-offer spread onclient flow business and manages any residual credit or correlation risk on a portfolio basis. Further, theCompany uses credit derivatives to manage its exposure to residential and commercial mortgage loans andcorporate lending exposures during the periods presented. The effectiveness of the Company’s CDS protection asa hedge of the Company’s exposures may vary depending upon a number of factors, including the contractualterms of the CDS.

The Company actively monitors its counterparty credit risk related to credit derivatives. A majority of theCompany’s counterparties is composed of banks, broker-dealers, insurance and other financial institutions.Contracts with these counterparties may include provisions related to counterparty rating downgrades, whichmay result in additional collateral being required by the Company. As with all derivative contracts, the Companyconsiders counterparty credit risk in the valuation of its positions and recognizes credit valuation adjustments asappropriate within Trading revenues in the consolidated statements of income.

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The following table summarizes the key characteristics of the Company’s credit derivative portfolio bycounterparty at December 31, 2013 and December 31, 2012. The fair values shown are before the application ofany counterparty or cash collateral netting. For additional credit exposure information on the Company’s creditderivative portfolio, see Note 12 to the consolidated financial statements in Item 8.


Fair Values(1) Notionals

Receivable Payable Net Beneficiary Guarantor


Banks and securities firms . . . . . . . . . . . . . . . . . . . . . . $36,316 $35,005 $1,311 $1,126,688 $1,093,906Insurance and other financial institutions . . . . . . . . . . . 7,877 7,515 362 265,958 302,835Non-financial entities . . . . . . . . . . . . . . . . . . . . . . . . . . 153 106 47 4,732 4,049

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $44,346 $42,626 $1,720 $1,397,378 $1,400,790

(1) The Company’s CDS are classified in both Level 2 and Level 3 of the fair value hierarchy. Approximately 5% of receivable fair valuesand 5% of payable fair values represent Level 3 amounts (see Note 4 to the consolidated financial statements in Item 8).


Fair Values(1) Notionals

Receivable Payable Net Beneficiary Guarantor


Banks and securities firms . . . . . . . . . . . . . . . . . . . . . . $60,728 $57,399 $3,329 $1,620,774 $1,573,217Insurance and other financial institutions . . . . . . . . . . . 7,313 6,908 405 278,705 313,897Non-financial entities . . . . . . . . . . . . . . . . . . . . . . . . . . 226 187 39 7,922 6,078

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $68,267 $64,494 $3,773 $1,907,401 $1,893,192

(1) The Company’s CDS are classified in both Level 2 and Level 3 of the fair value hierarchy. Approximately 7% of receivable fair valuesand 5% of payable fair values represent Level 3 amounts (see Note 4 to the consolidated financial statements in Item 8).

Other

In addition to the activities noted above, there are other credit risks managed by the Credit Risk ManagementDepartment and various business areas within the Institutional Securities business segment. The Companyparticipates in securitization activities whereby it extends short- or long-term funding to clients through loans andlending commitments that are secured by assets of the borrower and generally provide for over-collateralization,including commercial real estate, loans secured by loan pools, commercial company loans, and secured lines ofrevolving credit. Credit risk with respect to these loans and lending commitments arises from the failure of aborrower to perform according to the terms of the loan agreement or a decline in the underlying collateral value.See Note 7 to the consolidated financial statements in Item 8 for information about the Company’s securitizationactivities. Certain risk management activities as they pertain to establishing appropriate collateral amounts for theCompany’s prime brokerage and securitized product businesses are primarily monitored within those respectiveareas in that they determine the appropriate collateral level for each strategy or position. In addition, a collateralmanagement group monitors collateral levels against requirements and oversees the administration of thecollateral function. See Note 6 to the consolidated financial statements in Item 8 for additional information aboutthe Company’s collateralized transactions.

Country Risk Exposure.

Country risk exposure is the risk that uncertainties arising from the economic, social, security and politicalconditions within a foreign country (any other country other than the U.S.) will adversely affect the ability of thesovereign government and/or obligors within the country to honor their obligations to the Company. Country riskexposure is measured in accordance with the Company’s internal risk management standards and includes

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obligations from sovereign governments, corporations, clearinghouses and financial institutions. The Companyactively manages country risk exposure through a comprehensive risk management framework that combinescredit and market fundamentals and allows the Company to effectively identify, monitor and limit country risk.Country risk exposure before and after hedges is monitored and managed.

The Company’s obligor credit evaluation process may also identify indirect exposures whereby an obligor hasvulnerability or exposure to another country or jurisdiction. Examples of indirect exposures include mutual fundsthat invest in a single country, offshore companies whose assets reside in another country to that of the offshorejurisdiction and finance company subsidiaries of corporations. Indirect exposures identified through the creditevaluation process may result in a reclassification of country risk.

The Company conducts periodic stress testing that seeks to measure the impact on the Company’s credit andmarket exposures of shocks stemming from negative economic or political scenarios. When deemed appropriateby the Company’s risk managers, the stress test scenarios include possible contagion effects. Second order riskssuch as the impact for core European banks of their peripheral exposures may also be considered. The Companyalso conducts legal and documentation analysis of its exposures to obligors in peripheral jurisdictions, which aredefined as exposures in Greece, Ireland, Italy, Portugal and Spain (the “European Peripherals”), to identify therisk that such exposures could be redenominated into new currencies or subject to capital controls in the case ofcountry exit from the Euro-zone. This analysis, and results of the stress tests, may result in the amendment oflimits or exposure mitigation.

In addition to the Company’s country risk exposure, the Company discloses its cross-border risk exposure in“Financial Statements and Supplementary Data—Financial Data Supplement (Unaudited)” in Item 8. It is basedon the Federal Financial Institutions Examination Council’s (“FFIEC”) regulatory guidelines for reporting cross-border information and represents the amounts that the Company may not be able to obtain from a foreigncountry due to country-specific events, including unfavorable economic and political conditions, economic andsocial instability, and changes in government policies.

There can be substantial differences between the Company’s country risk exposure and cross-border riskexposure. For instance, unlike the cross-border risk exposure, the Company’s country risk exposure includes theeffect of certain risk mitigants. In addition, the basis for determining the domicile of the country risk exposure isdifferent from the basis for determining the cross-border risk exposure. Cross-border risk exposure is reportedbased on the country of jurisdiction for the obligor or guarantor. Besides country of jurisdiction, the Companyconsiders factors such as physical location of operations or assets, location and source of cash flows/revenuesand location of collateral (if applicable) in order to determine the basis for country risk exposure. Furthermore,cross-border risk exposure incorporates CDS only where protection is purchased while country risk exposureincorporates CDS where protection is both purchased and sold.

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The Company’s sovereign exposures consist of financial instruments entered into with sovereign and localgovernments. Its non-sovereign exposures consist of exposures to primarily corporations and financial institutions.The following table shows the Company’s five largest non-U.S. country risk net exposures except for selectEuropean countries (see the table in “Country Risk Exposure—Select European Countries” herein) at December 31,2013. Index credit derivatives are included in the Company’s country risk exposure tables. Each reference entitywithin an index is allocated to that reference entity’s country of risk. Index exposures are allocated to the underlyingreference entities in proportion to the notional weighting of each reference entity in the index, adjusted for any fairvalue receivable/payable for that reference entity. Where credit risk crosses multiple jurisdictions, for example, aCDS purchased from an issuer in a specific country that references bonds issued by an entity in a different country,the fair value of the CDS is reflected in the Net Counterparty Exposure column based on the country of the CDSissuer. Further, the notional amount of the CDS adjusted for the fair value of the receivable/payable is reflected inthe Net Inventory column based on the country of the underlying reference entity.

CountryNet

Inventory(1)

NetCounterpartyExposure(2)(3)

FundedLending

UnfundedCommitments

ExposureBeforeHedges Hedges(4)

NetExposure(5)


United Kingdom:Sovereigns . . . . . . $ 404 $ 1 $ — $ — $ 405 $ (74) $ 331Non-sovereigns . . 2,030 11,828 1,260 5,382 20,500 (2,848) 17,652

Subtotal . . . . $2,434 $11,829 $1,260 $5,382 $20,905 $(2,922) $17,983

Japan:Sovereigns . . . . . . $9,000 $ 88 $ — $ — $ 9,088 $ (10) $ 9,078Non-sovereigns . . 784 2,350 26 — 3,160 (50) 3,110

Subtotal . . . . $9,784 $ 2,438 $ 26 $ — $12,248 $ (60) $12,188

Germany:Sovereigns . . . . . . $ (607) $ 748 $ — $ — $ 141 $(1,497) $ (1,356)Non-sovereigns . . 83 4,194 263 4,152 8,692 (1,917) 6,775

Subtotal . . . . $ (524) $ 4,942 $ 263 $4,152 $ 8,833 $(3,414) $ 5,419

Brazil:Sovereigns . . . . . . $3,460 $ — $ — $ — $ 3,460 $ — $ 3,460Non-sovereigns . . 60 159 1,073 213 1,505 (309) 1,196

Subtotal . . . . $3,520 $ 159 $1,073 $ 213 $ 4,965 $ (309) $ 4,656

Canada:Sovereigns . . . . . . $ 723 $ 287 $ — $ — $ 1,010 $ — $ 1,010Non-sovereigns . . 866 1,236 102 1,391 3,595 (242) 3,353

Subtotal . . . . $1,589 $ 1,523 $ 102 $1,391 $ 4,605 $ (242) $ 4,363

(1) Net inventory represents exposure to both long and short single-name and index positions (i.e., bonds and equities at fair value and CDSbased on notional amount assuming zero recovery adjusted for any fair value receivable or payable). As a market maker, the Companytransacts in these CDS positions to facilitate client trading. At December 31, 2013, gross purchased protection, gross written protectionand net exposures related to single-name and index credit derivatives for those countries were $(189.9) billion, $189.0 billion and $(0.9)billion, respectively. For a further description of the triggers for purchased credit protection and whether those triggers may limit theeffectiveness of the Company’s hedges, see “Credit Exposure—Derivatives” herein.

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

(3) At December 31, 2013, the benefit of collateral received against counterparty credit exposure was $7.8 billion in the U.K., with 98% ofcollateral consisting of cash, U.S. and U.K. government obligations, and $11.1 billion in Germany with 96% of collateral consisting ofcash and government obligations of France, Belgium and Netherlands. The benefit of collateral received against counterparty creditexposure in the three other countries totaled approximately $3.9 billion, with collateral primarily consisting of cash, U.S. and Japanesegovernment obligations. These amounts do not include collateral received on secured financing transactions.

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(4) Represents CDS hedges (purchased and sold) on net counterparty exposure and funded lending executed by trading desks responsible forhedging counterparty and lending credit risk exposures for the Company. Based on the CDS notional amount assuming zero recoveryadjusted for any fair value receivable or payable.

(5) In addition, at December 31, 2013, the Company had exposure to these countries for overnight deposits with banks of approximately$10.4 billion.

Country Risk Exposure—Select European Countries. In connection with certain of its Institutional Securitiesbusiness segment activities, the Company has exposure to many foreign countries. The following table shows theCompany’s exposure to the European Peripherals at December 31, 2013. Country exposure is measured inaccordance with the Company’s internal risk management standards and includes obligations from sovereignsand non-sovereigns, which include governments, corporations, clearinghouses and financial institutions.

CountryNet

Inventory(1)

NetCounterpartyExposure(2)(3)

FundedLending

UnfundedCommitments

CDSAdjustment(4)

ExposureBeforeHedges Hedges(5)

NetExposure

(dollars in millions)Greece:

Sovereigns . . . . . . . . . . . . $ 8 $ 7 $— $ — $— $ 15 $ — $ 15Non-sovereigns . . . . . . . . 118 3 — — — 121 (4) 117

Subtotal . . . . . . . . . . $ 126 $ 10 $— $ — $— $ 136 $ (4) $ 132

Ireland:Sovereigns . . . . . . . . . . . . $ 5 $ 1 $— $ — $ 5 $ 11 $ — $ 11Non-sovereigns . . . . . . . . 239 51 — — 13 303 (8) 295

Subtotal . . . . . . . . . . $ 244 $ 52 $— $ — $ 18 $ 314 $ (8) $ 306

Italy:Sovereigns . . . . . . . . . . . . $ 752 $ 221 $— $ — $713 $1,686 $(225) $1,461Non-sovereigns . . . . . . . . 182 849 — 706 115 1,852 (243) 1,609

Subtotal . . . . . . . . . . $ 934 $1,070 $— $ 706 $828 $3,538 $(468) $3,070

Spain:Sovereigns . . . . . . . . . . . . $ 938 $ — $— $ — $ 16 $ 954 $ — $ 954Non-sovereigns . . . . . . . . 235 128 120 976 14 1,473 (234) 1,239

Subtotal . . . . . . . . . . $1,173 $ 128 $120 $ 976 $ 30 $2,427 $(234) $2,193

Portugal:Sovereigns . . . . . . . . . . . . $ (222) $ — $— $ — $ 47 $ (175) $ — $ (175)Non-sovereigns . . . . . . . . (77) 27 103 — 32 85 (9) 76

Subtotal . . . . . . . . . . $ (299) $ 27 $103 $ — $ 79 $ (90) $ (9) $ (99)

Sovereigns . . . . . . . . . . . . . . . . $1,481 $ 229 $— $ — $781 $2,491 $(225) $2,266Non-sovereigns . . . . . . . . . . . . 697 1,058 223 1,682 174 3,834 (498) 3,336

Total EuropeanPeripherals(6) . . . . . . . $2,178 $1,287 $223 $1,682 $955 $6,325 $(723) $5,602

(1) Net inventory represents exposure to both long and short single-name and index positions (i.e., bonds and equities at fair value and CDSbased on notional amount assuming zero recovery adjusted for any fair value receivable or payable). As a market maker, the Companytransacts in these CDS positions to facilitate client trading. At December 31, 2013, gross purchased protection, gross written protectionand net exposures related to single-name and index credit derivatives for the European Peripherals were $(114.6) billion, $114.0 billionand $(0.5) billion, respectively. For a further description of the triggers for purchased credit protection and whether those triggers maylimit the effectiveness of the Company’s hedges, see “Credit Exposure—Derivatives” herein.

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

(3) At December 31, 2013, the benefit of collateral received against counterparty credit exposure was $3.7 billion in the EuropeanPeripherals with 93% of collateral consisting of cash and German government obligations. These amounts do not include collateralreceived on secured financing transactions.

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(4) CDS adjustment represents credit protection purchased from European Peripherals’ banks on European Peripherals’ sovereign andfinancial institution risk. Based on the CDS notional amount assuming zero recovery adjusted for any fair value receivable or payable.

(5) Represents CDS hedges (purchased and sold) on net counterparty exposure and funded lending executed by trading desks responsible forhedging counterparty and lending credit risk exposures for the Company. Based on the CDS notional amount assuming zero recoveryadjusted for any fair value receivable or payable.

(6) In addition, at December 31, 2013, the Company had European Peripherals exposure for overnight deposits with banks of approximately$111 million.

Industry Exposure—OTC Derivative Products. The Company also monitors its credit exposure to individualindustries for current exposure arising from the Company’s OTC derivative contracts.

The following table shows the Company’s OTC derivative products by industry at December 31, 2013:

Industry OTC Derivative Products(1)


Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,142Banks and securities firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,358Funds, exchanges and other financial services(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,433Special purpose vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,908Regional governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,597Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,089Industrials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 914Sovereign governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 816Not-for-profit organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 672Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 538Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503Consumer staples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,157

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,614

(1) For further information on derivative instruments and hedging activities, see Note 12 to the consolidated financial statements in Item 8.(2) Includes mutual funds, pension funds, private equity and real estate funds, exchanges and clearinghouses and diversified financial

services.

Operational Risk.

Operational risk refers to the risk of loss, or of damage to the Company’s reputation, resulting from inadequate orfailed processes, people and systems or from external events (e.g., fraud, legal and compliance risks or damage tophysical assets). The Company may incur operational risk across the full scope of its business activities,including revenue-generating activities (e.g., sales and trading) and control groups (e.g., information technologyand trade processing). Legal, regulatory and compliance risk is included in the scope of operational risk and isdiscussed below under “Legal, Regulatory and Compliance Risk.”

The Company has established an operational risk framework to identify, measure, monitor and control risk acrossthe Company. Effective operational risk management is essential to reducing the impact of operational riskincidents and mitigating legal, regulatory and reputational risks. The framework is continually evolving toaccount for changes in the Company and respond to the changing regulatory and business environment. TheCompany has implemented operational risk data and assessment systems to monitor and analyze internal andexternal operational risk events, business environment and internal control factors and to perform scenarioanalysis. The collected data elements are incorporated in the operational risk capital model. The modelencompasses both quantitative and qualitative elements. Internal loss data and scenario analysis results are directinputs to the capital model, while external operational incidents, business environment internal control factorsand metrics are indirect inputs to the model.

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Primary responsibility for the management of operational risk is with the business segments, the control groupsand the business managers therein. The business managers generally maintain processes and controls designed toidentify, assess, manage, mitigate and report operational risk. Each business segment has a designatedoperational risk coordinator. The operational risk coordinator regularly reviews operational risk issues andreports to senior management within each business. Each control group also has a designated operational riskcoordinator and a forum for discussing operational risk matters with senior management. Oversight ofoperational risk is provided by regional risk committees and senior management. In the event of a merger; jointventure; divestiture; reorganization; or creation of a new legal entity, a new product or a business activity,operational risks are considered, and any necessary changes in processes or controls are implemented.

The Operational Risk Department (“ORD”) is independent of the divisions and reports to the CRO. ORDprovides oversight of operational risk management and independently assesses, measures and monitorsoperational risk. ORD works with the divisions and control groups to help ensure a transparent, consistent andcomprehensive framework for managing operational risk within each area and across the Company. ORD’s scopeincludes the information and technology risk oversight program and supplier management (vendor risk oversightand assessment) program. Furthermore, ORD supports the collection and reporting of operational risk incidentsand the execution of operational risk assessments; provides the infrastructure needed for risk measurement andrisk management; and ensures ongoing validation and verification of the Company’s advanced measurementapproach for operational risk capital.

Business Continuity Management is responsible for identifying key risks and threats to the Company’s resiliencyand planning to ensure that a recovery strategy and required resources are in place for the resumption of criticalbusiness functions following a disaster or other business interruption. Disaster recovery plans are in place forcritical facilities and resources on a company-wide basis, and redundancies are built into the systems as deemedappropriate. The key components of the Company’s disaster recovery plans include: crisis management; businessrecovery plans; applications/data recovery; work area recovery; and other elements addressing management,analysis, training and testing.

The Company maintains an information security program that coordinates the management of informationsecurity risks and satisfies regulatory requirements. Information security policies are designed to protect theCompany’s information assets against unauthorized disclosure, modification or misuse. These policies cover abroad range of areas, including: application entitlements, data protection, incident response, Internet andelectronic communications, remote access and portable devices. The Company has also established policies,procedures and technologies to protect its computers and other assets from unauthorized access.

The Company utilizes the services of external vendors in connection with the Company’s ongoing operations.These may include, for example, outsourced processing and support functions and consulting and otherprofessional services. The Company manages its exposures to the quality of these services through a variety ofmeans, including service level and other contractual agreements, and ongoing monitoring of the vendors’performance. It is anticipated that the use of these services will continue and possibly increase in the future. TheSupplier Risk Management program is responsible for the policies, procedures, organizations, governance andsupporting technology to ensure adequate risk management controls between the Company and its third-partysuppliers as it relates to information security, disaster recoverability and other key areas. The program ensuresCompany compliance with regulatory requirements.

Legal, Regulatory and Compliance Risk.

Legal, regulatory and compliance risk includes the risk of legal or regulatory sanctions, material financial lossincluding fines, penalties, judgments, damages and/or settlements, or loss to reputation the Company may sufferas a result of failure to comply with laws, regulations, rules, related self-regulatory organization standards andcodes of conduct applicable to its business activities. Legal, regulatory and compliance risk also includescontractual and commercial risk such as the risk that a counterparty’s performance obligations will be

134

unenforceable. The Company is generally subject to extensive regulation in the different jurisdictions in which itconducts its business (see also “Business—Supervision and Regulation” in Part I, Item 1 and “Risk Factors” inPart I, Item 1A). The Company has established procedures based on legal and regulatory requirements on aworldwide basis that are designed to foster compliance with applicable statutory and regulatory requirements.The Company, principally through the Legal and Compliance Division, also has established procedures that aredesigned to require that the Company’s policies relating to business conduct, ethics and practices are followedglobally. In connection with its businesses, the Company has and continuously develops various proceduresaddressing issues such as regulatory capital requirements, sales and trading practices, new products, informationbarriers, potential conflicts of interest, structured transactions, use and safekeeping of customer funds andsecurities, lending and credit granting, anti-money laundering, privacy and recordkeeping. In addition, theCompany has established procedures to mitigate the risk that a counterparty’s performance obligations will beunenforceable, including consideration of counterparty legal authority and capacity, adequacy of legaldocumentation, the permissibility of a transaction under applicable law and whether applicable bankruptcy orinsolvency laws limit or alter contractual remedies. The legal and regulatory focus on the financial servicesindustry presents a continuing business challenge for the Company.

135

Item 8. Financial Statements and Supplementary Data.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Morgan Stanley:

We have audited the accompanying consolidated statements of financial condition of Morgan Stanley andsubsidiaries (the “Company”) as of December 31, 2013 and 2012 and the consolidated statements of income,comprehensive income, cash flows, and changes in total equity for the years ended December 31, 2013, 2012 and2011. These consolidated financial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financialposition of the Company as of December 31, 2013 and 2012, and the results of their operations and their cashflows for the years ended December 31, 2013, 2012 and 2011, in conformity with accounting principles generallyaccepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board(United States), the Company’s internal control over financial reporting as of December 31, 2013, based on thecriteria established in Internal Control—Integrated Framework (1992) issued by the Committee of SponsoringOrganizations of the Treadway Commission, and our report dated February 25, 2014 expressed an unqualifiedopinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

New York, New YorkFebruary 25, 2014

136

MORGAN STANLEY

Consolidated Statements of Financial Condition(dollars in millions, except share data)

December 31,2013

December 31,2012

AssetsCash and due from banks ($544 and $526 at December 31, 2013 and December 31, 2012, respectively,

related to consolidated variable interest entities generally not available to the Company) . . . . . . . . . . . . . . $ 16,602 $ 20,878Interest bearing deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,281 26,026Cash deposited with clearing organizations or segregated under federal and other regulations or

requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,203 30,970Trading assets, at fair value (approximately $151,078 and $147,348 were pledged to various parties at

December 31, 2013 and December 31, 2012, respectively; $2,825 and $3,505 related to consolidatedvariable interest entities, generally not available to the Company at December 31, 2013 and December 31,2012, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280,744 267,603

Securities available for sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,430 39,869Securities received as collateral, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,508 14,278Federal funds sold and securities purchased under agreements to resell (includes $866 and $621 at fair value

at December 31, 2013 and December 31, 2012, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,130 134,412Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,707 121,701Customer and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,104 64,288Loans:

Held for investment (net of allowances of $156 and $106 at December 31, 2013 and December 31,2012, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,545 23,917

Held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,329 5,129Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,086 4,999Premises, equipment and software costs (net of accumulated depreciation of $6,420 and $5,525 at

December 31, 2013 and December 31, 2012, respectively) ($201 and $224 at December 31, 2013 andDecember 31, 2012, respectively, related to consolidated variable interest entities, generally not availableto the Company) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,019 5,946

Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,595 6,650Intangible assets (net of accumulated amortization of $1,703 and $1,250 at December 31, 2013 and

December 31, 2012, respectively) (includes $8 and $7 at fair value at December 31, 2013 andDecember 31, 2012, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,286 3,783

Other assets ($11 and $593 at December 31, 2013 and December 31, 2012, respectively, related toconsolidated variable interest entities, generally not available to the Company) . . . . . . . . . . . . . . . . . . . . . . 10,133 10,511

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $832,702 $780,960

LiabilitiesDeposits (includes $185 and $1,485 at fair value at December 31, 2013 and December 31, 2012,

respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $112,379 $ 83,266Commercial paper and other short-term borrowings (includes $1,347 and $725 at fair value at December 31,

2013 and December 31, 2012, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,142 2,138Trading liabilities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,521 120,122Obligation to return securities received as collateral, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,568 18,226Securities sold under agreements to repurchase (includes $561 and $363 at fair value at December 31, 2013

and December 31, 2012, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,676 122,674Securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,799 36,849Other secured financings (includes $5,206 and $9,466 at fair value at December 31, 2013 and December 31,

2012, respectively) ($543 and $976 at December 31, 2013 and December 31, 2012, respectively, relatedto consolidated variable interest entities and are non-recourse to the Company) . . . . . . . . . . . . . . . . . . . . . . 14,215 15,727

Customer and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,125 127,722Other liabilities and accrued expenses ($76 and $117 at December 31, 2013 and December 31, 2012,

respectively, related to consolidated variable interest entities and are non-recourse to the Company) . . . . . 16,672 14,928Long-term borrowings (includes $35,637 and $44,044 at fair value at December 31, 2013 and December 31,

2012, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153,575 169,571Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 763,672 711,223Commitments and contingent liabilities (see Note 13)Redeemable noncontrolling interests (see Notes 3 and 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 4,309Equity

Morgan Stanley shareholders’ equity:Preferred stock (see Note 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,220 1,508Common stock, $0.01 par value:

Shares authorized: 3,500,000,000 at December 31, 2013 and December 31, 2012;Shares issued: 2,038,893,979 at December 31, 2013 and December 31, 2012;Shares outstanding: 1,944,868,751 at December 31, 2013 and 1,974,042,123 at December 31,

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 20Additional Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,570 23,426Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,172 39,912Employee stock trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,718 2,932Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,093) (516)Common stock held in treasury, at cost, $0.01 par value; 94,025,228 shares at December 31, 2013

and 64,851,856 shares at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,968) (2,241)Common stock issued to employee stock trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,718) (2,932)

Total Morgan Stanley shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,921 62,109Nonredeemable noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,109 3,319

Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,030 65,428Total liabilities, redeemable noncontrolling interests and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $832,702 $780,960

See Notes to Consolidated Financial Statements.

137

MORGAN STANLEY

Consolidated Statements of Income(dollars in millions, except share and per share data)

2013 2012 2011

Revenues:Investment banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,246 $ 4,758 $ 4,991Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,359 6,990 12,384Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,777 742 573Commissions and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,629 4,253 5,343Asset management, distribution and administration fees . . . . . . . . . . . . . . . . . . . . 9,638 9,008 8,409Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 990 556 176

Total non-interest revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,639 26,307 31,876

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,209 5,692 7,234Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,431 5,897 6,883

Net interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 778 (205) 351

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,417 26,102 32,227

Non-interest expenses:Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,277 15,615 16,325Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,499 1,543 1,544Brokerage, clearing and exchange fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,711 1,535 1,633Information processing and communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,768 1,912 1,808Marketing and business development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 638 601 594Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,894 1,922 1,793Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,148 2,454 2,420

Total non-interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,935 25,582 26,117

Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . . 4,482 520 6,110Provision for (benefit from) income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 826 (237) 1,414

Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,656 757 4,696

Discontinued operations:Gain (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (72) (48) (170)Provision for (benefit from) income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29) (7) (119)

Net gain (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . (43) (41) (51)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,613 $ 716 $ 4,645Net income applicable to redeemable noncontrolling interests . . . . . . . . . . . . . . . 222 124 —Net income applicable to nonredeemable noncontrolling interests . . . . . . . . . . . . 459 524 535

Net income applicable to Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,932 $ 68 $ 4,110Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 98 2,043

Earnings (loss) applicable to Morgan Stanley common shareholders . . . . . . . . . . . . . . $ 2,655 $ (30) $ 2,067

Amounts applicable to Morgan Stanley:Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,975 $ 138 $ 4,168Net loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43) (70) (58)

Net income applicable to Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,932 $ 68 $ 4,110

Earnings (loss) per basic common share:Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.42 $ 0.02 $ 1.28Net loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.03) (0.04) (0.03)

Earnings (loss) per basic common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.39 $ (0.02) $ 1.25

Earnings (loss) per diluted common share:Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.38 $ 0.02 $ 1.27Net loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.02) (0.04) (0.04)

Earnings (loss) per diluted common share . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.36 $ (0.02) $ 1.23

Dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.20 $ 0.20 $ 0.20Average common shares outstanding:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,905,823,882 1,885,774,276 1,654,708,640

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,956,519,738 1,918,811,270 1,675,271,669


138

MORGAN STANLEY

Consolidated Statements of Comprehensive Income(dollars in millions)

2013 2012 2011

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,613 $ 716 $4,645Other comprehensive income (loss), net of tax:

Foreign currency translation adjustments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (348) $(255) $ 35Amortization of cash flow hedges(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6 7Change in net unrealized gains (losses) on securities available for sale(3) . . . . . . . (433) 28 87Pension, postretirement and other related adjustments(4) . . . . . . . . . . . . . . . . . . . . (5) (260) 251

Total other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (782) $(481) $ 380

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,831 $ 235 $5,025Net income applicable to redeemable noncontrolling interests . . . . . . . . . . . . . . . . 222 124 —Net income applicable to nonredeemable noncontrolling interests . . . . . . . . . . . . . 459 524 535Other comprehensive income (loss) applicable to redeemable noncontrolling

interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (2) —Other comprehensive income (loss) applicable to nonredeemable noncontrolling

interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (205) (120) 70

Comprehensive income (loss) applicable to Morgan Stanley . . . . . . . . . . . . . . . . . . . . . $2,355 $(291) $4,420

(1) Amounts are net of provision for income taxes of $351 million, $120 million and $86 million for 2013, 2012 and 2011, respectively.(2) Amounts are net of provision for income taxes of $3 million, $3 million and $6 million for 2013, 2012 and 2011, respectively.(3) Amounts are net of provision for (benefit from) income taxes of $(296) million, $16 million and $63 million for 2013, 2012 and 2011,

respectively.(4) Amounts are net of provision for (benefit from) income taxes of $8 million, $(156) million and $153 million for 2013, 2012 and 2011,

respectively.


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Consolidated Statements of Cash Flows(dollars in millions)

2013 2012 2011

CASH FLOWS FROM OPERATING ACTIVITIESNet income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,613 $ 716 $ 4,645

Adjustments to reconcile net income to net cash provided by operating activities:Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (117) (639) 413(Income) loss on equity method investees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (375) 23 995Compensation payable in common stock and options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,180 891 1,300Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,511 1,581 1,404Net gain on business dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (34) (156) (24)Net gain on sale of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (45) (78) (143)Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 271 159Provision for credit losses on lending activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 155 (113)Other non-cash adjustments to net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 12 (131)

Changes in assets and liabilities:Cash deposited with clearing organizations or segregated under federal and other regulations or requirements . . . . (8,233) (1,516) (10,274)Trading assets, net of Trading liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,054) 6,389 29,913Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,006) 5,373 11,656Securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,050) 6,387 1,368Customer and other receivables and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,774 (10,030) 5,899Customer and other payables and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,697 (1,283) (6,985)Federal funds sold and securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,282 (4,257) 18,098Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,002 20,920 (42,798)

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,553 24,759 15,382

CASH FLOWS FROM INVESTING ACTIVITIESProceeds from (payments for):

Premises, equipment and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,316) (1,312) (1,304)Business dispositions, net of cash disposed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,147 1,725 —Japanese securities joint venture with MUFG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (129)Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,057) (3,486) (9,208)Purchases of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,557) (24,477) (20,601)Sales of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,425 10,398 17,064Maturities and redemptions of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,757 4,738 2,934Other investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 (211) 510

Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,461) (12,625) (10,734)

CASH FLOWS FROM FINANCING ACTIVITIESNet proceeds from (payments for):

Commercial paper and other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (705) (413)Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (557) (296) (791)Other secured financings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,726) (6,628) 1,867Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,113 17,604 1,850

Proceeds from:Excess tax benefits associated with stock-based awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 42 —Derivatives financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,003 243 129Issuance of preferred stock, net of issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,696 — —Issuance of long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,939 23,646 32,725

Payments for:Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38,742) (43,092) (39,232)Derivatives financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,216) (125) (132)Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (691) (227) (317)Purchase of additional stake in Wealth Management JV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,725) (1,890) —Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (475) (469) (834)

Net cash provided by (used for) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,633 (11,897) (5,148)

Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (202) (119) (314)

Effect of cash and cash equivalents related to variable interest entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (544) (526) 511

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,979 (408) (303)Cash and cash equivalents, at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,904 47,312 47,615

Cash and cash equivalents, at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,883 $ 46,904 $ 47,312

Cash and cash equivalents include:Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,602 $ 20,878 $ 13,165Interest bearing deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,281 26,026 34,147

Cash and cash equivalents, at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,883 $ 46,904 $ 47,312

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash payments for interest were $4,793 million, $5,213 million and $6,835 million for 2013, 2012 and 2011, respectively.Cash payments for income taxes were $930 million, $388 million and $892 million for 2013, 2012 and 2011, respectively.


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Consolidated Statements of Changes in Total Equity(dollars in millions)

PreferredStock

CommonStock

Paid-inCapital

RetainedEarnings

EmployeeStockTrusts

AccumulatedOther

ComprehensiveIncome (Loss)

CommonStock

Held inTreasuryat Cost

CommonStock

Issued toEmployee

StockTrusts

Non-redeemable

Non-controllingInterests

TotalEquity

BALANCE AT DECEMBER 31,2010 . . . . . . . . . . . . . . . . . . . . . . . . $ 9,597 $ 16 $13,521 $38,603 $ 3,465 $ (467) $(4,059) $(3,465) $8,196 $65,407

Net income applicable to MorganStanley . . . . . . . . . . . . . . . . . . . . . . — — — 4,110 — — — — — 4,110

Net income applicable tononredeemable noncontrollinginterests . . . . . . . . . . . . . . . . . . . . . — — — — — — — — 535 535

Dividends . . . . . . . . . . . . . . . . . . . . . . — — — (646) — — — — — (646)Shares issued under employee plans

and related tax effects . . . . . . . . . . — — (642) — (299) — 1,877 299 — 1,235Repurchases of common stock . . . . . . — — — — — — (317) — — (317)Net change in Accumulated other

comprehensive income . . . . . . . . . . — — — — — 310 — — 70 380Other increase in equity method

investments . . . . . . . . . . . . . . . . . . — — 146 — — — — — — 146MUFG stock conversion . . . . . . . . . . (8,089) 4 9,811 (1,726) — — — — — —Other net decreases . . . . . . . . . . . . . . — — — — — — — — (772) (772)

BALANCE AT DECEMBER 31,2011 . . . . . . . . . . . . . . . . . . . . . . . . 1,508 20 22,836 40,341 3,166 (157) (2,499) (3,166) 8,029 70,078

Net income applicable to MorganStanley . . . . . . . . . . . . . . . . . . . . . . — — — 68 — — — — — 68



and related tax effects . . . . . . . . . . — — 662 — (234) — 485 234 — 1,147Repurchases of common stock . . . . . . — — — — — — (227) — — (227)Net change in Accumulated other

comprehensive income . . . . . . . . . . — — — — — (359) — — (120) (479)Purchase of additional stake in

Wealth Management JV . . . . . . . . . — — (107) — — — — — (1,718) (1,825)Reclassification to redeemable

noncontrolling interests . . . . . . . . . — — — — — — — — (4,288) (4,288)Other net increases . . . . . . . . . . . . . . . — — 35 — — — — — 892 927

BALANCE AT DECEMBER 31,2012 . . . . . . . . . . . . . . . . . . . . . . . . 1,508 20 23,426 39,912 2,932 (516) (2,241) (2,932) 3,319 65,428

Net income applicable to MorganStanley . . . . . . . . . . . . . . . . . . . . . . — — — 2,932 — — — — — 2,932



and related tax effects . . . . . . . . . . — — 1,160 — (1,214) — (36) 1,214 — 1,124Repurchases of common stock . . . . . . — — — — — — (691) — — (691)Net change in Accumulated other

comprehensive income . . . . . . . . . . — — — — — (577) — — (205) (782)Issuance of preferred stock . . . . . . . . 1,712 — (16) — — — — — — 1,696Wealth Management JV redemption

value adjustment . . . . . . . . . . . . . . — — — (151) — — — — — (151)Other net decreases . . . . . . . . . . . . . . — — — — — — — — (464) (464)

BALANCE AT DECEMBER 31,2013 . . . . . . . . . . . . . . . . . . . . . . . . $ 3,220 $ 20 $24,570 $42,172 $ 1,718 $(1,093) $(2,968) $(1,718) $3,109 $69,030


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Introduction and Basis of Presentation.

The Company. Morgan Stanley, a financial holding company, is a global financial services firm that maintainssignificant market positions in each of its business segments—Institutional Securities, Wealth Management andInvestment Management. The Company, through its subsidiaries and affiliates, provides a wide variety ofproducts 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 “MorganStanley” or the “Company” mean Morgan Stanley (the “Parent”) together with its consolidated subsidiaries.

Effective with the quarter ended June 30, 2013, the Global Wealth Management Group and Asset Managementbusiness segments were re-titled Wealth Management and Investment Management, respectively.

A summary of the activities of each of the Company’s business segments is as follows:

Institutional Securities provides financial advisory and capital raising services, including: advice on mergersand acquisitions, restructurings, real estate and project finance; corporate lending; sales, trading, financingand market-making activities in equity and fixed income securities and related products, including foreignexchange and commodities; and investment activities.

Wealth Management provides brokerage and investment advisory services to individual investors and small-to-medium sized businesses and institutions covering various investment alternatives; financial and wealthplanning services; annuity and other insurance products; credit and other lending products; cashmanagement services; retirement services; and engages in fixed income trading, which primarily facilitatesclients’ trading or investments in such securities.

Investment Management provides a broad array of investment strategies that span the risk/return spectrumacross geographies, asset classes and public and private markets to a diverse group of clients across theinstitutional and intermediary channels as well as high net worth clients.


Quilter. On April 2, 2012, the Company completed the sale of Quilter & Co. Ltd. (“Quilter”), its retail wealthmanagement business in the United Kingdom (“U.K.”). Net revenues for Quilter were $148 million and $134million for 2012 and 2011, respectively. Net pre-tax gains (losses) were $(1) million, $97 million and $21 millionfor 2013, 2012 and 2011, respectively, and included a gain of approximately $108 million in 2012 in connectionwith the sale of Quilter. The results of Quilter are reported as discontinued operations within the WealthManagement business segment for all periods presented.

Saxon. On October 24, 2011, the Company announced that it had reached an agreement to sell Saxon, aprovider of servicing and subservicing of residential mortgage loans, to Ocwen Financial Corporation. Thetransaction, which was restructured as a sale of Saxon’s assets during the first quarter of 2012, was substantiallycompleted in the second quarter of 2012. Net revenues for Saxon were $79 million and $28 million for 2012 and2011, respectively, and pre-tax losses were $64 million, $187 million and $194 million for 2013, 2012 and 2011,respectively. Revenues included a pre-tax gain of approximately $51 million in 2012, primarily resulting fromthe subsequent increase in fair value of Saxon, which had incurred impairment losses of $98 million in thequarter ended December 31, 2011. Pre-tax loss in 2012 included a provision of approximately $115 millionrelated to a settlement with the Board of Governors of the Federal Reserve System (the “Federal Reserve”)concerning the independent foreclosure review related to Saxon. The results of Saxon are reported asdiscontinued operations within the Institutional Securities business segment for all periods presented.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other. In the fourth quarter of 2011, the Company classified a real estate property management company asheld for sale within the Investment Management business segment. The transaction closed during the first quarterof 2012. The results of this company are reported as discontinued operations within the Investment Managementbusiness segment for all periods presented.

Remaining pre-tax gain (loss) amounts of $(7) million, $42 million and $3 million for 2013, 2012 and 2011,respectively, that are included in discontinued operations primarily related to the sale of the Company’s retailasset management business, Revel Entertainment Group, LLC (“Revel”) and a principal investment.

Prior-period amounts have been recast for discontinued operations.

Sale of Global Oil Merchanting Business.

On December 20, 2013, the Company and a subsidiary of Rosneft Oil Company (“Rosneft”) entered into aPurchase Agreement pursuant to which the Company will sell the global oil merchanting unit of its commoditiesdivision to Rosneft. The transaction is subject to regulatory approvals and other customary conditions and isexpected to close in the second half of 2014. At December 31, 2013, the transaction does not meet the criteria fordiscontinued operations and is not expected to have a material impact on the Company’s consolidated financialstatements.

Basis of Financial Information. The consolidated financial statements are prepared in accordance withaccounting principles generally accepted in the United States of America (“U.S.”), which require the Company tomake estimates and assumptions regarding the valuations of certain financial instruments, the valuation ofgoodwill and intangible assets, compensation, deferred tax assets, the outcome of litigation and tax matters, andother matters that affect the consolidated financial statements and related disclosures. The Company believes thatthe estimates utilized in the preparation of the consolidated financial statements are prudent and reasonable.Actual results could differ materially from these estimates. Intercompany balances and transactions have beeneliminated.

In 2013, the Company renamed “Principal transactions—Trading” revenues as “Trading” revenues and“Principal transactions—Investments” revenues as “Investments” revenues in the consolidated statements ofincome, and “Financial instruments owned” as “Trading assets,” “Financial instruments sold, not yet purchased”as “Trading liabilities,” “Receivables” as “Customer and other receivables” and “Payables” as “Customer andother payables” in the consolidated statements of financial condition.

Consolidation. The consolidated financial statements include the accounts of the Company, its wholly ownedsubsidiaries and other entities in which the Company has a controlling financial interest, including certainvariable interest entities (“VIE”) (see Note 7). For consolidated subsidiaries that are less than wholly owned, thethird-party holdings of equity interests are referred to as noncontrolling interests. The portion of net incomeattributable to noncontrolling interests for such subsidiaries is presented as either Net income (loss) applicable toredeemable noncontrolling interests or Net income (loss) applicable to nonredeemable noncontrolling interests inthe consolidated statements of income. The portion of the shareholders’ equity of such subsidiaries that isredeemable is presented as Redeemable noncontrolling interests outside of the equity section in the consolidatedstatements of financial condition at December 31, 2012. The portion of the shareholders’ equity of suchsubsidiaries that is nonredeemable is presented as Nonredeemable noncontrolling interests, a component of totalequity, in the consolidated statements of financial condition at December 31, 2013 and 2012.

For entities where (1) the total equity investment at risk is sufficient to enable the entity to finance its activitieswithout additional subordinated financial support and (2) the equity holders bear the economic residual risks andreturns of the entity and have the power to direct the activities of the entity that most significantly affect its

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economic performance, the Company consolidates those entities it controls either through a majority votinginterest or otherwise. For VIEs (i.e., entities that do not meet these criteria), the Company consolidates thoseentities where the Company has the power to make the decisions that most significantly affect the economicperformance of the VIE and has the obligation to absorb losses or the right to receive benefits that couldpotentially be significant to the VIE, except for certain VIEs that are money market funds, are investmentcompanies or are entities qualifying for accounting purposes as investment companies. Generally, the Companyconsolidates those entities when it absorbs a majority of the expected losses or a majority of the expected residualreturns, or both, of the entities.

For investments in entities in which the Company does not have a controlling financial interest but hassignificant influence over operating and financial decisions, the Company generally applies the equity method ofaccounting with net gains and losses recorded within Other revenues. Where the Company has elected to measurecertain eligible investments at fair value in accordance with the fair value option, net gains and losses arerecorded within Investments revenues (see Note 4).

Equity and partnership interests held by entities qualifying for accounting purposes as investment companies arecarried at fair value.

The Company’s significant regulated U.S. and international subsidiaries include Morgan Stanley & Co. LLC(“MS&Co.”), Morgan Stanley Smith Barney LLC (“MSSB LLC”), Morgan Stanley & Co. International plc(“MSIP”), Morgan Stanley MUFG Securities Co., Ltd. (“MSMS”), Morgan Stanley Bank, N.A. (“MSBNA”) andMorgan Stanley Private Bank, National Association (“MSPBNA”).

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

2. Significant Accounting Policies.

Revenue Recognition.

Investment Banking. Underwriting revenues and advisory fees from mergers, acquisitions and restructuringtransactions are recorded when services for the transactions are determined to be substantially completed,generally as set forth under the terms of the engagement. Transaction-related expenses, primarily consisting oflegal, travel and other costs directly associated with the transaction, are deferred and recognized in the sameperiod as the related investment banking transaction revenues. Underwriting revenues are presented net of relatedexpenses. Non-reimbursed expenses associated with advisory transactions are recorded within Non-interestexpenses.

Commissions and fees. Commission and fee revenues primarily arise from agency transactions in listed andover-the-counter (“OTC”) equity securities; services related to sales and trading activities; and sales of mutualfunds, futures, insurance products and options. Commission and fee revenues are recognized in the accounts ontrade date.

Asset Management, Distribution and Administration Fees. Asset management, distribution and administrationfees are recognized over the relevant contract period. Sales commissions paid by the Company in connectionwith the sale of certain classes of shares of its open-end mutual fund products are accounted for as deferred

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commission assets. The Company periodically tests the deferred commission assets for recoverability based oncash flows expected to be received in future periods. In certain management fee arrangements, the Company isentitled to receive performance-based fees (also referred to as incentive fees) when the return on assets undermanagement exceeds certain benchmark returns or other performance targets. In such arrangements, performancefee revenues are accrued (or reversed) quarterly based on measuring account/fund performance to date versus theperformance benchmark stated in the investment management agreement. Performance-based fees are recordedwithin Investments or Asset management, distribution and administration fees depending on the nature of thearrangement. The amount of performance-based fee revenue at risk of reversing if fund performance falls belowstated investment management agreement benchmarks was approximately $489 million at December 31, 2013and approximately $205 million at December 31, 2012.

Trading and Investments. See “Financial Instruments and Fair Value” below for Trading and Investmentsrevenue recognition discussions.

Financial Instruments and Fair Value.

A significant portion of the Company’s financial instruments is carried at fair value with changes in fair valuerecognized in earnings each period. A description of the Company’s policies regarding fair value measurementand its application to these financial instruments follows.

Financial Instruments Measured at Fair Value. All of the instruments within Trading assets and Tradingliabilities are measured at fair value, either through the fair value option election (discussed below) or as requiredby other accounting guidance. These financial instruments primarily represent the Company’s trading andinvestment positions and include both cash and derivative products. In addition, debt securities classified asSecurities available for sale are measured at fair value in accordance with accounting guidance for certaininvestments in debt securities. Furthermore, Securities received as collateral and Obligation to return securitiesreceived as collateral are measured at fair value as required by other accounting guidance. Additionally, certainDeposits, certain Commercial paper and other short-term borrowings (structured notes), certain Other securedfinancings, certain Securities sold under agreements to repurchase and certain Long-term borrowings (primarilystructured notes) are measured at fair value through the fair value option election.

Gains and losses on all of these instruments carried at fair value are reflected in Trading revenues, Investmentsrevenues or Investment banking revenues in the consolidated statements of income, except for Securitiesavailable for sale (see “Securities Available for Sale” section herein and Note 5) and derivatives accounted for ashedges (see “Hedge Accounting” section herein and Note 12). Interest income and interest expense are recordedwithin the consolidated statements of income depending on the nature of the instrument and related marketconventions. When interest is included as a component of the instruments’ fair value, interest is included withinTrading revenues or Investments revenues. Otherwise, it is included within Interest income or Interest expense.Dividend income is recorded in Trading revenues or Investments revenues depending on the business activity.The fair value of OTC financial instruments, including derivative contracts related to financial instruments andcommodities, is presented in the accompanying consolidated statements of financial condition on a net-by-counterparty basis, when appropriate. Additionally, the Company nets the fair value of cash collateral paid orreceived against the fair value amounts recognized for net derivative positions executed with the samecounterparty under the same master netting agreement.

Fair Value Option. The fair value option permits the irrevocable fair value option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis ofaccounting for that instrument. The Company applies the fair value option for eligible instruments, including

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certain securities purchased under agreements to resell, certain loans and lending commitments, certain equitymethod investments, certain securities sold under agreements to repurchase, certain structured notes, certain timedeposits and certain other secured financings.

Fair Value Measurement—Definition and Hierarchy. Fair value is defined as the price that would be receivedto sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between marketparticipants at the measurement date.

In determining fair value, the Company uses various valuation approaches and establishes a hierarchy for inputsused in measuring fair value that maximizes the use of relevant observable inputs and minimizes the use ofunobservable inputs by requiring that the most observable inputs be used when available. Observable inputs areinputs that market participants would use in pricing the asset or liability that were developed based on marketdata obtained from sources independent of the Company. Unobservable inputs are inputs that reflect theCompany’s assumptions about the assumptions other market participants would use in pricing the asset orliability that were developed based on the best information available in the circumstances. The hierarchy isbroken down into three levels based on the observability of inputs as follows:

• Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that theCompany has the ability to access. Valuation adjustments and block discounts are not applied to Level 1instruments. Since valuations are based on quoted prices that are readily and regularly available in anactive market, valuation of these products does not entail a significant degree of judgment.

• Level 2—Valuations based on one or more quoted prices in markets that are not active or for which allsignificant inputs are observable, either directly or indirectly.

• Level 3—Valuations based on inputs that are unobservable and significant to the overall fair valuemeasurement.

The availability of observable inputs can vary from product to product and is affected by a wide variety offactors, including, for example, the type of product, whether the product is new and not yet established in themarketplace, the liquidity of markets and other characteristics particular to the product. To the extent thatvaluation is based on models or inputs that are less observable or unobservable in the market, the determinationof fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company indetermining fair value is greatest for instruments categorized in Level 3 of the fair value hierarchy.

The Company considers prices and inputs that are current as of the measurement date, including during periodsof market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced formany instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or Level 2to Level 3 of the fair value hierarchy (see Note 4). In addition, a downturn in market conditions could lead todeclines in the valuation of many instruments.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. Insuch cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurementfalls in its entirety is determined based on the lowest level input that is significant to the fair valuemeasurement in its entirety.

Valuation Techniques. Many cash instruments and OTC derivative contracts have bid and ask prices that can beobserved in the marketplace. Bid prices reflect the highest price that a party is willing to pay for an asset. Askprices represent the lowest price that a party is willing to accept for an asset. For financial instruments whoseinputs are based on bid-ask prices, the Company does not require that the fair value estimate always be a

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predetermined point in the bid-ask range. The Company’s policy is to allow for mid-market pricing and to adjustto the point within the bid-ask range that meets the Company’s best estimate of fair value. For offsettingpositions in the same financial instrument, the same price within the bid-ask spread is used to measure both thelong and short positions.

Fair value for many cash instruments and OTC derivative contracts is derived using pricing models. Pricingmodels take into account the contract terms (including maturity) as well as multiple inputs, including, whereapplicable, commodity prices, equity prices, interest rate yield curves, credit curves, correlation, creditworthinessof the counterparty, creditworthiness of the Company, option volatility and currency rates. Where appropriate,valuation adjustments are made to account for various factors such as liquidity risk (bid-ask adjustments), creditquality, model uncertainty and concentration risk. Adjustments for liquidity risk adjust model-derived mid-market levels of Level 2 and Level 3 financial instruments for the bid-mid or mid-ask spread required to properlyreflect the exit price of a risk position. Bid-mid and mid-ask spreads are marked to levels observed in tradeactivity, broker quotes or other external third-party data. Where these spreads are unobservable for the particularposition in question, spreads are derived from observable levels of similar positions. The Company appliescredit-related valuation adjustments to its short-term and long-term borrowings (primarily structured notes) forwhich the fair value option was elected and to OTC derivatives. The Company considers the impact of changes inits own credit spreads based upon observations of the Company’s secondary bond market spreads whenmeasuring the fair value for short-term and long-term borrowings. For OTC derivatives, the impact of changes inboth the Company’s and the counterparty’s credit standing is considered when measuring fair value. Indetermining the expected exposure, the Company simulates the distribution of the future exposure to acounterparty, then applies market-based default probabilities to the future exposure, leveraging external third-party credit default swap (“CDS”) spread data. Where CDS spread data are unavailable for a specificcounterparty, bond market spreads, CDS spread data based on the counterparty’s credit rating or CDS spread datathat reference a comparable counterparty may be utilized. The Company also considers collateral held and legallyenforceable master netting agreements that mitigate the Company’s exposure to each counterparty. Adjustmentsfor model uncertainty are taken for positions whose underlying models are reliant on significant inputs that areneither directly nor indirectly observable, hence requiring reliance on established theoretical concepts in theirderivation. These adjustments are derived by making assessments of the possible degree of variability usingstatistical approaches and market-based information where possible. The Company generally subjects allvaluations and models to a review process initially and on a periodic basis thereafter. The Company may apply aconcentration adjustment to certain of its OTC derivatives portfolios to reflect the additional cost of closing out aparticularly large risk exposure. Where possible, these adjustments are based on observablemarket information, but in many instances, significant judgment is required to estimate the costs of closingout concentrated risk exposures due to the lack of liquidity in the marketplace.

Fair value is a market-based measure considered from the perspective of a market participant rather than anentity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s ownassumptions are set to reflect those that the Company believes market participants would use in pricing the assetor liability at the measurement date. Where the Company manages a group of financial assets and financialliabilities on the basis of its net exposure to either market risks or credit risk, the Company measures the fairvalue of that group of financial instruments consistently with how market participants would price the net riskexposure at the measurement date.

See Note 4 for a description of valuation techniques applied to the major categories of financial instrumentsmeasured at fair value.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis. Certain of the Company’s assets aremeasured at fair value on a non-recurring basis. The Company incurs losses or gains for any adjustments of theseassets to fair value. A downturn in market conditions could result in impairment charges in future periods.

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

Valuation Process. The Valuation Review Group (“VRG”) within the Financial Control Group (“FCG”) isresponsible for the Company’s fair value valuation policies, processes and procedures. VRG is independent ofthe business units and reports to the Chief Financial Officer (“CFO”), who has final authority over the valuationof the Company’s financial instruments. VRG implements valuation control processes to validate the fair valueof the Company’s financial instruments measured at fair value, including those derived from pricing models.These control processes are designed to assure that the values used for financial reporting are based onobservable inputs wherever possible. In the event that observable inputs are not available, the control processesare designed to ensure that the valuation approach utilized is appropriate and consistently applied and that theassumptions are reasonable.

The Company’s control processes apply to financial instruments categorized in Level 1, Level 2 or Level 3 of thefair value hierarchy, unless otherwise noted. These control processes include:

Model Review. VRG, in conjunction with the Market Risk Department (“MRD”) and, where appropriate,the Credit Risk Management Department, both of which report to the Chief Risk Officer, independentlyreview valuation models’ theoretical soundness, the appropriateness of the valuation methodology andcalibration techniques developed by the business units using observable inputs. Where inputs are notobservable, VRG reviews the appropriateness of the proposed valuation methodology to ensure it isconsistent with how a market participant would arrive at the unobservable input. The valuationmethodologies utilized in the absence of observable inputs may include extrapolation techniques and the useof comparable observable inputs. As part of the review, VRG develops a methodology to independentlyverify the fair value generated by the business unit’s valuation models. Before trades are executed using newvaluation models, those models are required to be independently reviewed. All of the Company’s valuationmodels are subject to an independent annual VRG review.

Independent Price Verification. The business units are responsible for determining the fair value offinancial instruments using approved valuation models and valuation methodologies. Generally on amonthly basis, VRG independently validates the fair values of financial instruments determined usingvaluation models by determining the appropriateness of the inputs used by the business units and by testingcompliance with the documented valuation methodologies approved in the model review process describedabove.

VRG uses recently executed transactions, other observable market data such as exchange data, broker-dealerquotes, third-party pricing vendors and aggregation services for validating the fair values of financialinstruments generated using valuation models. VRG assesses the external sources and their valuationmethodologies to determine if the external providers meet the minimum standards expected of a third-partypricing source. Pricing data provided by approved external sources are evaluated using a number ofapproaches; for example, by corroborating the external sources’ prices to executed trades, by analyzing themethodology and assumptions used by the external source to generate a price and/or by evaluating howactive the third-party pricing source (or originating sources used by the third-party pricing source) is in themarket. Based on this analysis, VRG generates a ranking of the observable market data to ensure that thehighest-ranked market data source is used to validate the business unit’s fair value of financial instruments.

For financial instruments categorized within Level 3 of the fair value hierarchy, VRG reviews the businessunit’s valuation techniques to ensure these are consistent with market participant assumptions.

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The results of this independent price verification and any adjustments made by VRG to the fair valuegenerated by the business units are presented to management of the Company’s three business segments(i.e., Institutional Securities, Wealth Management and Investment Management), the CFO and the ChiefRisk Officer on a regular basis.

Review of New Level 3 Transactions. VRG reviews the models and valuation methodology used to priceall new material Level 3 transactions, and both FCG and MRD management must approve the fair value ofthe trade that is initially recognized.

For further information on financial assets and liabilities that are measured at fair value on a recurring and non-recurring basis, see Note 4.

Hedge Accounting.

The Company applies hedge accounting using various derivative financial instruments to hedge interest rate andforeign exchange risk arising from assets and liabilities not held at fair value as part of asset/liability andcurrency management. These financial instruments are included within Trading assets—Derivative and othercontracts or Trading liabilities—Derivative and other contracts in the consolidated statements of financialcondition.

The Company’s hedges are designated and qualify for accounting purposes as one of the following types ofhedges: hedges of changes in fair value of assets and liabilities due to the risk being hedged (fair value hedges);and hedges of net investments in foreign operations whose functional currency is different from the reportingcurrency of the parent company (net investment hedges).

For further information on derivative instruments and hedging activities, see Note 12.

Consolidated Statements of Cash Flows.

For purposes of the consolidated statements of cash flows, cash and cash equivalents consist of Cash and duefrom banks and Interest bearing deposits with banks, which are highly liquid investments with original maturitiesof three months or less, held for investment purposes, and readily convertible to known amounts of cash.

The Company’s significant non-cash activities in 2013 included assets and liabilities of approximately $3.6billion and $3.1 billion, respectively, disposed of in connection with business dispositions. The Company’ssignificant non-cash activities in 2012 included assets and liabilities of approximately $2.6 billion and $1.0billion, respectively, disposed of in connection with business dispositions, and approximately $1.1 billion of netassets received from Citigroup Inc. (“Citi”) related to Citi’s required equity contribution in connection with theretail securities joint venture between the Company and Citi (the “Wealth Management JV”) platform integration(see Notes 3 and 15). At June 30, 2011, Mitsubishi UFJ Financial Group, Inc. (“MUFG”) and the Companyconverted MUFG’s outstanding Series B Non-Cumulative Non-Voting Perpetual Convertible Preferred Stock(“Series B Preferred Stock”) in the Company with a face value of $7.8 billion (carrying value $8.1 billion) and a10% dividend into Company common stock. As a result of the adjustment to the conversion ratio, pursuant to thetransaction agreement, the Company incurred a one-time, non-cash negative adjustment of approximately $1.7billion in its calculation of basic and diluted earnings per share (“EPS”) for 2011 (see Note 16).

Transfers of Financial Assets.

Transfers of financial assets are accounted for as sales when the Company has relinquished control over thetransferred assets. Any related gain or loss on sale is recorded in Net revenues. Transfers that are not accountedfor as sales are treated as a collateralized financing, in certain cases referred to as “failed sales.”

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Securities borrowed or purchased under agreements to resell and securities loaned or sold under agreements torepurchase are treated as collateralized financings (see Note 6). Securities purchased under agreements to resell(“reverse repurchase agreements”) and Securities sold under agreements to repurchase (“repurchaseagreements”) are carried on the consolidated statements of financial condition at the amounts of cash paid orreceived, plus accrued interest, except for certain repurchase agreements for which the Company has elected thefair value option (see Note 4). Where appropriate, repurchase agreements and reverse repurchase agreementswith the same counterparty are reported on a net basis. Securities borrowed and securities loaned are recorded atthe amount of cash collateral advanced or received.

Premises, Equipment and Software Costs.

Premises and equipment consist of buildings, leasehold improvements, furniture, fixtures, computer andcommunications equipment, power plants, tugs, barges, terminals, pipelines and software (externally purchasedand developed for internal use). Premises and equipment are stated at cost less accumulated depreciation andamortization. Depreciation and amortization are provided by the straight-line method over the estimated usefullife of the asset. Estimated useful lives are generally as follows: buildings—39 years; furniture and fixtures—7years; computer and communications equipment—3 to 9 years; power plants—15 years; tugs and barges—15years; and terminals, pipelines and equipment—3 to 25 years. Estimated useful lives for software costs aregenerally 3 to 5 years.

Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or, whereapplicable, the remaining term of the lease, but generally not exceeding: 25 years for building structuralimprovements and 15 years for other improvements.

Premises, equipment and software costs are tested for impairment whenever events or changes in circumstancessuggest that an asset’s carrying value may not be fully recoverable in accordance with current accountingguidance.

Income Taxes.

The Company accounts for income tax expense (benefit) using the asset and liability method, under whichrecognition of deferred tax assets and related valuation allowance (recorded in Other assets) and liabilities for theexpected future tax consequences of events that have been included in the financial statements. Under thismethod, deferred tax assets and liabilities are determined based upon the temporary differences between thefinancial statement and income tax bases of assets and liabilities using currently enacted tax rates in effect for theyear in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assetsand liabilities is recognized in income tax expense (benefit) in the period that includes the enactment date.

The Company recognizes net deferred tax assets to the extent that it believes these assets are more likely than notto be realized. In making such a determination, the Company considers all available positive and negativeevidence, including future reversals of existing taxable temporary differences, projected future taxable income,tax-planning strategies, and results of recent operations. If the Company determines that it would be able torealize deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment tothe deferred tax asset valuation allowance, which would reduce the provision for income taxes.

Uncertain tax positions are recorded on the basis of a two-step process whereby (1) the Company determineswhether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of theposition and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company

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recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlementwith the related tax authority. Interest and penalties related to unrecognized tax benefits are classified asprovision for income taxes.

Earnings per Common Share.

Basic EPS is computed by dividing income available to Morgan Stanley common shareholders by the weightedaverage number of common shares outstanding for the period. Income available to Morgan Stanley commonshareholders represents net income applicable to Morgan Stanley reduced by preferred stock dividends andallocations of earnings to participating securities. Common shares outstanding include common stock and vestedrestricted stock units (“RSUs”) where recipients have satisfied either the explicit vesting terms or retirementeligibility requirements. Diluted EPS reflects the assumed conversion of all dilutive securities.

Under current accounting guidance, unvested share-based payment awards that contain non-forfeitable rights todividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included inthe computation of EPS pursuant to the two-class method. Share-based payment awards that pay dividendequivalents subject to vesting are not deemed participating securities and are included in diluted sharesoutstanding (if dilutive) under the treasury stock method.

The Company has granted performance-based stock units (“PSUs”) that vest and convert to shares of commonstock only if the Company satisfies predetermined performance and market goals. Since the issuance of theshares is contingent upon the satisfaction of certain conditions, the PSUs are included in diluted EPS based on thenumber of shares (if any) that would be issuable if the end of the reporting period was the end of the contingencyperiod.

Deferred Compensation.

Stock-Based Compensation. The Company accounts for stock-based compensation in accordance with theaccounting guidance for stock-based awards. This accounting guidance requires measurement of compensationcost for stock-based awards at fair value and recognition of compensation cost over the service period, net ofestimated forfeitures. The Company determines the fair value of RSUs (including RSUs with non-marketperformance conditions) based on the grant-date fair value of the Company’s common stock, measured as thevolume-weighted average price on the date of grant. RSUs with market-based conditions are valued using aMonte Carlo valuation model. The fair value of stock options is determined using the Black-Scholes valuationmodel and the single grant life method. Under the single grant life method, option awards with graded vesting arevalued using a single weighted average expected option life.

Compensation expense for stock-based compensation awards is recognized using the graded vesting attributionmethod. Compensation expense for awards with performance conditions is recognized based on the probableoutcome of the performance condition at each reporting date. At the end of the contingency period, the totalcompensation cost recognized will be the grant-date fair value of all units that actually vest based on the outcomeof the performance conditions. Compensation expense for awards with market-based conditions is recognizedirrespective of the probability of the market condition being achieved and is not reversed if the market conditionis not met.

The Company recognizes the expense for stock-based awards over the requisite service period. For anticipatedyear-end stock-based awards granted to employees expected to be retirement-eligible under award terms that donot contain a future service requirement, the Company accrues the estimated cost of these awards over the course

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of the calendar year preceding the grant date. The Company believes that this method of recognition forretirement-eligible employees is preferable because it better reflects the period over which the compensation isearned. Certain award terms after 2012 performance year introduced a new vesting requirement for employeeswho satisfy existing retirement-eligible requirements to provide a one-year advance notice of their intention toretire from the Company. As such, expense recognition for these awards begins after the grant date.

Employee Stock Trusts. The Company maintains and utilizes at its discretion, trusts, referred to as the“Employee Stock Trusts”, in connection with certain stock-based compensation plans. The assets of theEmployee Stock Trusts are consolidated, and as such, are accounted for in a manner similar to treasury stock,where the shares of common stock outstanding are offset by an equal amount in Common stock issued toEmployee Stock Trusts. The Company uses the grant-date fair value of stock-based compensation as the basis forrecognition of the assets in the Employee Stock Trusts. Subsequent changes in the fair value are not recognizedas the Company’s stock-based compensation plans do not permit diversification and must be settled by thedelivery of a fixed number of shares of the Company’s common stock.

Deferred Cash-Based Compensation. The Company also maintains various deferred cash-based compensationplans for the benefit of certain current and former employees that provide a return to the participating employeesbased upon the performance of various referenced investments. The Company often invests directly, as aprincipal, in investments or other financial instruments to economically hedge its obligations under its deferredcash-based compensation plans. Changes in value of such investments made by the Company are recorded inTrading revenues and Investment revenues.

Compensation expense for deferred cash-based compensation plans is calculated based on the notional value ofthe award granted, adjusted for upward and downward changes in the fair value of the referenced investments.For unvested awards, the expense is recognized over the service period using the graded vesting attributionmethod. Changes in compensation expense resulting from changes in the fair value of the referenced investmentswill generally be offset by changes in the fair value of investments made by the Company. However, there maybe a timing difference between the immediate revenue recognition of gains and losses on the Company’sinvestments and the deferred recognition of the related compensation expense over the vesting period. For vestedawards with only notional earnings on the referenced investments, the expense is fully recognized in the currentperiod.

Translation of Foreign Currencies.

Assets and liabilities of operations having non-U.S. dollar functional currencies are translated at year-end rates ofexchange, and amounts recognized in the income statement are translated at the rate of exchange on therespective date of recognition for each amount. Gains or losses resulting from translating foreign currencyfinancial statements, net of hedge gains or losses and related tax effects, are reflected in Accumulated othercomprehensive income (loss), a separate component of Morgan Stanley Shareholders’ equity on the consolidatedstatements of financial condition. Gains or losses resulting from remeasurement of foreign currency transactionsare included in net income.

Goodwill and Intangible Assets.

Goodwill and indefinite-lived intangible assets are not amortized and are reviewed annually (or more frequentlywhen certain events or circumstances exist) for impairment. Other intangible assets are amortized over theirestimated useful lives and reviewed for impairment. Impairment losses are recorded within Other expenses in theconsolidated statements of income.

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During the quarter ended September 30, 2012, the Company changed the brand name of the U.S. WealthManagement business from Morgan Stanley Smith Barney to Morgan Stanley Wealth Management. The SmithBarney tradename continues to be legally protected by the Company and continues to be used as stipulated byour regulators as the legal entity name for the Company’s retail broker-dealer, Morgan Stanley Smith BarneyLLC. As a result of the change in intended use of this tradename, the Company determined that the tradenameshould be reclassified from an indefinite-lived to a finite-lived intangible asset. This change required theCompany to test the intangible asset for impairment. Based on a comparison of the fair value to the carryingvalue of the tradename as of the date of the brand name change, no impairment was identified. The carryingvalue of the tradename is amortized over its remaining estimated useful life. See Note 9 for further informationabout goodwill and intangible assets.

Securities Available for Sale.

Available for sale (“AFS”) securities are reported at fair value in the consolidated statements of financialcondition with unrealized gains and losses reported in Accumulated other comprehensive income (loss), net oftax (“AOCI”). Interest and dividend income, including amortization of premiums and accretion of discounts, isincluded in Interest income in the consolidated statements of income. Realized gains and losses on AFSsecurities are reported in the consolidated statements of income (see Note 5). The Company utilizes the “first-in,first-out” method as the basis for determining the cost of AFS securities.

Other-than-temporary impairment. AFS securities with a current fair value less than their amortized cost areanalyzed as part of the Company’s periodic assessment of temporary versus other-than-temporary impairment(“OTTI”) at the individual security level. A temporary impairment is recognized in AOCI. OTTI is recognized inthe consolidated statements of income with the exception of the non-credit portion related to a debt security thatthe Company does not intend to sell and is not likely to be required to sell, which is recognized in AOCI.

For AFS debt securities that the Company either has the intent to sell or that the Company is likely to be requiredto sell before recovery of its amortized cost basis, the impairment is considered other-than-temporary.

For those AFS debt securities that the Company does not have the intent to sell or is not likely to be required tosell, the Company evaluates whether it expects to recover the entire amortized cost basis of the debt security. Ifthe Company does not expect to recover the entire amortized cost of the debt security, the impairment isconsidered other-than-temporary and the Company determines what portion of the impairment relates to a creditloss and what portion relates to non-credit factors. A credit loss exists if the present value of cash flows expectedto be collected (discounted at the implicit interest rate at acquisition of the security or discounted at the effectiveyield for securities that incorporate changes in prepayment assumptions) is less than the amortized cost basis ofthe security. Changes in prepayment assumptions alone are not considered to result in a credit loss. Whendetermining if a credit loss exists, the Company considers relevant information including the length of time andthe extent to which the fair value has been less than the amortized cost basis; adverse conditions specificallyrelated to the security, an industry, or geographic area; changes in the financial condition of the issuer of thesecurity, or in the case of an asset-backed debt security, changes in the financial condition of the underlying loanobligors; the historical and implied volatility of the fair value of the security; the payment structure of the debtsecurity and the likelihood of the issuer being able to make payments that increase in the future; failure of theissuer of the security to make scheduled interest or principal payments; any changes to the rating of the securityby a rating agency and recoveries or additional declines in fair value after the balance sheet date. Whenestimating the present value of expected cash flows, information includes the remaining payment terms of thesecurity, prepayment speeds, financial condition of the issuer(s), expected defaults and the value of anyunderlying collateral.

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For AFS equity securities, the Company considers various factors including the intent and ability to hold theequity security for a period of time sufficient to allow for any anticipated recovery in market value in evaluatingwhether an OTTI exists. If the equity security is considered other-than-temporarily impaired, the entire OTTI(i.e., the difference between the fair value recorded on the balance sheet and the cost basis) will be recognized inthe consolidated statement of income.

Loans.

The Company accounts for loans based on the following categories: loans held for investment; loans held forsale; and loans at fair value.

Loans Held for Investment

Loans held for investment are reported as outstanding principal adjusted for any charge-offs, the allowance forloan losses, any deferred fees or costs for originated loans, and any unamortized premiums or discounts forpurchased loans.

Interest Income. Interest income on performing loans held for investment is accrued and recognized as interestincome at the contractual rate of interest. Purchase price discounts or premiums, as well as net deferred loan feesor costs, are amortized into interest income over the life of the loan to produce a level rate of return.

Allowance for Loan Losses. The allowance for loan losses estimates probable losses related to loans specificallyidentified for impairment in addition to the probable losses inherent in the held for investment loan portfolio.

The Company utilizes the banking regulators’ definition of criticized exposures, which consist of the specialmention substandard and doubtful categories as credit quality indicators. Substandard loans are regularlyreviewed for impairment. Factors considered by management when determining impairment include paymentstatus, fair value of collateral, and probability of collecting scheduled principal and interest payments when due.The impairment analysis required depends on the nature and type of loans. Loans classified as Doubtful or Lossare considered impaired. When a loan is impaired, the impairment is measured based on the present value ofexpected future cash flows discounted at the loan’s effective interest rate or as a practical expedient, theobservable market price of the loan or the fair value of the collateral if the loan is collateral dependent. If thepresent value of the expected future cash flows (or alternatively, the observable market price of the loan or thefair value of the collateral) is less than the recorded investment in the loan, then the Company recognizes anallowance and a charge to the provision for loan losses within Other revenues.

Generally, inherent losses in the portfolio for non-impaired loans are estimated using statistical analysis andjudgment around the exposure at default, the probability of default and the loss given default. Qualitative andenvironmental factors such as economic and business conditions, nature and volume of the portfolio and lendingterms, and volume and severity of past due loans may also be considered in the calculations.

Troubled Debt Restructurings. The Company may modify the terms of certain loans for economic or legalreasons related to a borrower’s financial difficulties by granting one or more concessions that the Companywould not otherwise consider. Such modifications are accounted for and reported as troubled debt restructurings(“TDRs”). A loan that has been modified in a TDR is generally considered to be impaired and is evaluated for theextent of impairment using the Company’s specific allowance methodology.

Nonaccrual Loans. The Company places loans on nonaccrual status if principal or interest is past due for a periodof 90 days or more or payment of principal or interest is in doubt unless the obligation is well-secured and in theprocess of collection. A loan is considered past due when a payment due according to the contractual terms of the

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loan agreement has not been remitted by the borrower. Substandard loans, if identified as impaired, arecategorized as nonaccrual. Loans classified as Doubtful or Loss are categorized as nonaccrual.

Payments received on nonaccrual loans held for investment are applied to principal if there is doubt regarding theultimate collectability of principal (i.e., cost recovery method). If collection of the principal of nonaccrual loansheld for investment is not in doubt, interest income is recognized on a cash basis. If neither principal nor interestcollection is in doubt, loans are on accrual status and interest income is recognized using the effective interestmethod. Loans that are nonaccrual status may not be restored to accrual status until all delinquent principal and/or interest has been brought current, after a reasonable period of performance, typically a minimum ofsix months.

Charge-offs. The Company charges off a loan in the period that it is deemed uncollectible and records areduction in the allowance for loan losses and the balance of the loan. In general, any portion of the recordedinvestment in a collateral dependent loan (including any capitalized accrued interest, net deferred loan fees orcosts and unamortized premium or discount) in excess of the fair value of the collateral that can be identified asuncollectible, and is therefore deemed a confirmed loss, is charged off against the allowance for loan losses. Aloan is collateral-dependent if the repayment of the loan is expected to be provided solely by the sale or operationof the underlying collateral. A loan that is charged off is recorded as a reduction in the allowance for loan lossesand the balance of the loan. In addition, for loan transfers from loans held for investment to loans held for sale, atthe time of transfer, any reduction in the loan value is reflected as a charge-off of the recorded investment,resulting in a new cost basis.

Loan Commitments. The Company records the liability and related expense for the credit exposure related tocommitments to fund loans that will be held for investment in a manner similar to outstanding loans disclosedabove. The analysis also incorporates a credit conversion factor, which is the expected utilization of the undrawncommitment. The liability is recorded in Other liabilities and accrued expenses on the consolidated statements offinancial condition, and the expense is recorded in Other non-interest expenses in the consolidated statements ofincome. For more information regarding loan commitments, standby letters of credit and financial guarantees,see Note 13.

Loans Held for Sale

Loans held for sale are measured at the lower of cost or fair value, with valuation changes recorded in Otherrevenues. The Company determines the valuation allowance on an individual loan basis, except for residentialmortgage loans for which the valuation allowance is determined at the loan product level. Any decreases in fairvalue below the initial carrying amount and any recoveries in fair value up to the initial carrying amount arerecorded in Other revenues. However, increases in fair value above initial carrying value are not recognized.

Interest income on loans held for sale is accrued and recognized based on the contractual rate of interest. Loanorigination fees or costs and purchase price discounts or premiums are deferred in a contra loan account until therelated loan is sold. The deferred fees and discounts or premiums are an adjustment to the basis of the loan and,therefore, are included in the periodic determination of the lower of cost or fair value adjustments and/or the gainor loss recognized at the time of sale.

Loans held for sale are subject to the nonaccrual policies described above. Because loans held for sale arerecognized at the lower of cost or fair value, the allowance for loan losses and charge-off policies do not apply tothese loans.

Loans at Fair Value

Loans for which the fair value option is elected are carried at fair value, with changes in fair value recognized inearnings. Loans carried at fair value are not evaluated for purposes of recording an allowance for loan losses. Forfurther information on loans carried at fair value and classified as Trading assets and Trading liabilities, see Note 4.

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For further information on loans, see Note 8.

Noncontrolling Interests.

For consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests arereferred to as noncontrolling interests.

As a result of the modifications to the purchase agreement regarding the Wealth Management JV, the Companyhad classified Citi’s interest in the Wealth Management JV as a redeemable noncontrolling interest, as theinterest was redeemable at both the option of the Company and upon the occurrence of an event that was notsolely within the Company’s control. This interest was classified outside of the equity section in Redeemablenoncontrolling interests in the consolidated statements of financial condition at December 31, 2012. This interestwas redeemed in June 2013 (see Note 3). Noncontrolling interests that do not contain such redemption featuresare presented as Nonredeemable noncontrolling interests, a component of total equity, in the consolidatedstatements of financial condition.

Accounting Developments.

Disclosures about Offsetting Assets and Liabilities. In January 2013, the Financial Accounting Standards Board(the “FASB”) issued an accounting update that clarified the intended scope of the new balance sheet offsettingdisclosures to derivatives, repurchase agreements, and securities lending transactions to the extent that they areeither offset in the financial statements or subject to an enforceable master netting arrangement or similaragreement. These disclosure requirements became effective for the Company beginning on January 1, 2013.Since these amended principles require only additional disclosures concerning offsetting and relatedarrangements, adoption has not affected the Company’s consolidated financial statements (see Notes 6 and 12).

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. In February 2013, theFASB issued an accounting update that added new disclosure requirements requiring entities to report the effectof significant reclassifications out of accumulated other comprehensive income on the respective line items in netincome if the amount being reclassified is required under U.S. generally accepted accounting principles to bereclassified in its entirety to net income. The disclosure requirements became effective for the Companybeginning on January 1, 2013. Since these amended principles require only additional disclosures concerningamounts reclassified out of accumulated other comprehensive income, adoption has not affected the Company’sconsolidated financial statements (see Note 15).

Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap (“OIS”) Rate) as a BenchmarkInterest Rate for Hedge Accounting Purposes. In July 2013, the FASB issued an accounting update thatincluded amendments permitting the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest ratefor hedge accounting purposes, in addition to interest rates on direct Treasury obligations of the U.S. governmentand the London Interbank Offered Rate (“LIBOR”). The amendments also removed the restriction on usingdifferent benchmark rates for similar hedges. The amendments became effective for the Company for qualifyingnew or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this accountingguidance did not have a material impact on the Company’s consolidated financial statements.

3. Wealth Management JV.

On May 31, 2009, the Company and Citi consummated the combination of each institution’s respective wealthmanagement business. The combined businesses operated as the Wealth Management JV through June 2013.

Prior to September 2012, the Company owned 51% and Citi owned 49% of the Wealth Management JV. OnSeptember 17, 2012, the Company purchased an additional 14% stake in the Wealth Management JV from Citi

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for $1.89 billion, increasing the Company’s interest from 51% to 65%. The Company recorded a negativeadjustment to Paid-in-capital of approximately $107 million (net of tax) to reflect the difference between thepurchase price for the 14% interest in the Wealth Management JV and its carrying value. In addition, inSeptember 2012, the terms of the Wealth Management JV agreement regarding the purchase of the remaining35% interest were amended, which resulted in a reclassification of approximately $4.3 billion fromnonredeemable noncontrolling interests to redeemable noncontrolling interests during the third quarter of 2012.Prior to September 17, 2012, Citi’s results related to its 49% interest were reported in net income (loss)applicable to nonredeemable noncontrolling interests in the consolidated statements of income. Subsequent to thepurchase of the additional 14% stake, Citi’s results related to its 35% interest were reported in net income (loss)applicable to redeemable noncontrolling interests in the consolidated statements of income. In connection withthe Company’s acquisition of the additional 14% stake in the Wealth Management JV and pursuant to anamended deposit sweep agreement between Citi and the Company, in October 2012, $5.4 billion of deposits heldby Citi relating to customer accounts were transferred to the Company’s depository institutions at no premiumbased on a valuation agreement reached between Citi and the Company, and as such were no longer swept toCiti.

In June 2013, the Company received final regulatory approval to acquire the remaining 35% stake in the WealthManagement JV. On June 28, 2013, the Company purchased the remaining 35% interest for $4.725 billion,increasing the Company’s interest from 65% to 100%. The Company recorded a negative adjustment to retainedearnings of approximately $151 million (net of tax) to reflect the difference between the purchase price for the35% interest in the Wealth Management JV and its carrying value. This adjustment negatively impacted thecalculation of basic and diluted EPS in 2013 (see Note 16).

Additionally, in conjunction with the purchase of the remaining 35% interest, in June 2013, the Companyredeemed all of the Class A Preferred Interests in the Wealth Management JV owned by Citi and its affiliates forapproximately $2.028 billion and repaid to Citi $880 million in senior debt.

Concurrent with the acquisition of the remaining 35% stake in the Wealth Management JV, the deposit sweepagreement between Citi and the Company was terminated. In 2013, $26 billion of deposits held by Citi relating tocustomer accounts were transferred to the Company’s depository institutions. At December 31, 2013,approximately $30 billion of additional deposits are scheduled to be transferred to the Company’s depositoryinstitutions on an agreed-upon basis through June 2015 (see Note 25).

4. Fair Value Disclosures.

Fair Value Measurements.

A description of the valuation techniques applied to the Company’s major categories of assets and liabilitiesmeasured at fair value on a recurring basis follows.

Trading Assets and Trading Liabilities.

U.S. Government and Agency Securities.

• U.S. Treasury Securities. U.S. Treasury securities are valued using quoted market prices. Valuationadjustments are not applied. Accordingly, U.S. Treasury securities are generally categorized in Level 1 ofthe fair value hierarchy.

• U.S. Agency Securities. U.S. agency securities are composed of three main categories consisting ofagency-issued debt, agency mortgage pass-through pool securities and collateralized mortgageobligations. Non-callable agency-issued debt securities are generally valued using quoted market prices.Callable agency-issued debt securities are valued by benchmarking model-derived prices to quotedmarket prices and trade data for identical or comparable securities. The fair value of agency mortgage

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pass-through pool securities is model-driven based on spreads of the comparable To-be-announcedsecurity. Collateralized mortgage obligations are valued using quoted market prices and trade dataadjusted by subsequent changes in related indices for identical or comparable securities. Actively tradednon-callable agency-issued debt securities are generally categorized in Level 1 of the fair value hierarchy.Callable agency-issued debt securities, agency mortgage pass-through pool securities and collateralizedmortgage obligations are generally categorized in Level 2 of the fair value hierarchy.

Other Sovereign Government Obligations.

• Foreign sovereign government obligations are valued using quoted prices in active markets when available.These bonds are generally categorized in Level 1 of the fair value hierarchy. If the market is less active orprices are dispersed, these bonds are categorized in Level 2 of the fair value hierarchy. In instances wherethe inputs are unobservable, these bonds are categorized in Level 3 of the fair value hierarchy.

Corporate and Other Debt.

• State and Municipal Securities. The fair value of state and municipal securities is determined usingrecently executed transactions, market price quotations and pricing models that factor in, whereapplicable, interest rates, bond or credit default swap spreads and volatility. These bonds are generallycategorized in Level 2 of the fair value hierarchy.

• Residential Mortgage-Backed Securities (“RMBS”), Commercial Mortgage-Backed Securities (“CMBS”)and other Asset-Backed Securities (“ABS”). RMBS, CMBS and other ABS may be valued based onprice or spread data obtained from observed transactions or independent external parties such as vendorsor brokers. When position-specific external price data are not observable, the fair value determinationmay require benchmarking to similar instruments and/or analyzing expected credit losses, default andrecovery rates, and/or applying discounted cash flow techniques. In evaluating the fair value of eachsecurity, the Company considers security collateral-specific attributes, including payment priority, creditenhancement levels, type of collateral, delinquency rates and loss severity. In addition, for RMBSborrowers, Fair Isaac Corporation (“FICO”) scores and the level of documentation for the loan are alsoconsidered. Market standard models, such as Intex, Trepp or others, may be deployed to model thespecific collateral composition and cash flow structure of each transaction. Key inputs to these models aremarket spreads, forecasted credit losses, and default and prepayment rates for each asset category.Valuation levels of RMBS and CMBS indices are also used as an additional data point for benchmarkingpurposes or to price outright index positions.

RMBS, CMBS and other ABS are generally categorized in Level 2 of the fair value hierarchy. If externalprices or significant spread inputs are unobservable or if the comparability assessment involvessignificant subjectivity related to property type differences, cash flows, performance and other inputs,then RMBS, CMBS and other ABS are categorized in Level 3 of the fair value hierarchy.

• Corporate Bonds. The fair value of corporate bonds is determined using recently executed transactions,market price quotations (where observable), bond spreads, credit default swap spreads, at the money volatilityand/or volatility skew obtained from independent external parties such as vendors and brokers adjusted for anybasis difference between cash and derivative instruments. The spread data used are for the same maturity as thebond. If the spread data do not reference the issuer, then data that reference a comparable issuer are used. Whenposition-specific external price data are not observable, fair value is determined based on either benchmarkingto similar instruments or cash flow models with yield curves, bond or single-name credit default swap spreadsand recovery rates as significant inputs. Corporate bonds are generally categorized in Level 2 of the fair valuehierarchy; in instances where prices, spreads or any of the other aforementioned key inputs are unobservable,they are categorized in Level 3 of the fair value hierarchy.

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• Collateralized Debt and Loan Obligations. The Company holds cash collateralized debt obligations(“CDOs”)/collateralized loan obligations (“CLOs”) that typically reference a tranche of an underlyingsynthetic portfolio of single name credit default swaps collateralized by corporate bonds (“credit-linkednotes”) or cash portfolio of asset-backed securities/loans (“asset-backed CDOs/CLOs”). Creditcorrelation, a primary input used to determine the fair value of credit-linked notes, is usuallyunobservable and derived using a benchmarking technique. The other credit-linked note model inputssuch as credit spreads, including collateral spreads, and interest rates are typically observable. Asset-backed CDOs/CLOs are valued based on an evaluation of the market and model input parameters sourcedfrom similar positions as indicated by primary and secondary market activity. Each asset-backed CDO/CLO position is evaluated independently taking into consideration available comparable market levels,underlying collateral performance and pricing, and deal structures, as well as liquidity. Cash CDOs/CLOsare categorized in Level 2 of the fair value hierarchy when either the credit correlation input isinsignificant or comparable market transactions are observable. In instances where the credit correlationinput is deemed to be significant or comparable market transactions are unobservable, cash CDOs/CLOsare categorized in Level 3 of the fair value hierarchy.

• Corporate Loans and Lending Commitments. The fair value of corporate loans is determined usingrecently executed transactions, market price quotations (where observable), implied yields fromcomparable debt, and market observable credit default swap spread levels obtained from independentexternal parties such as vendors and brokers adjusted for any basis difference between cash and derivativeinstruments, along with proprietary valuation models and default recovery analysis where suchtransactions and quotations are unobservable. The fair value of contingent corporate lendingcommitments is determined by using executed transactions on comparable loans and the anticipatedmarket price based on pricing indications from syndicate banks and customers. The valuation of loans andlending commitments also takes into account fee income that is considered an attribute of the contract.Corporate loans and lending commitments are categorized in Level 2 of the fair value hierarchy except ininstances where prices or significant spread inputs are unobservable, in which case they are categorized inLevel 3 of the fair value hierarchy.

• Mortgage Loans. Mortgage loans are valued using observable prices based on transactional data orthird-party pricing for identical or comparable instruments, when available. Where position-specificexternal prices are not observable, the Company estimates fair value based on benchmarking to prices andrates observed in the primary market for similar loan or borrower types or based on the present value ofexpected future cash flows using its best estimates of the key assumptions, including forecasted creditlosses, prepayment rates, forward yield curves and discount rates commensurate with the risks involvedor a methodology that utilizes the capital structure and credit spreads of recent comparable securitizationtransactions. Mortgage loans valued based on observable market data for identical or comparableinstruments are categorized in Level 2 of the fair value hierarchy. Where observable prices are notavailable, due to the subjectivity involved in the comparability assessment related to mortgage loanvintage, geographical concentration, prepayment speed and projected loss assumptions, mortgage loansare categorized in Level 3 of the fair value hierarchy. Mortgage loans are presented within Loans andlending commitments in the fair value hierarchy table.

• Auction Rate Securities (“ARS”). The Company primarily holds investments in Student Loan AuctionRate Securities (“SLARS”) and Municipal Auction Rate Securities (“MARS”), which are floating rateinstruments for which the rates reset through periodic auctions. SLARS are ABS backed by pools ofstudent loans. MARS are municipal bonds often wrapped by municipal bond insurance. The fair value ofARS is primarily determined using recently executed transactions and market price quotations, obtainedfrom independent external parties such as vendors and brokers, where available. The Company uses an

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internally developed methodology to discount for the lack of liquidity and non-performance risk whereindependent external market data are not available.

Inputs that impact the valuation of SLARS are independent external market data, recently executed transactionsof comparable ARS, the underlying collateral types, level of seniority in the capital structure, amount ofleverage in each structure, credit rating and liquidity considerations. Inputs that impact the valuation ofMARS are recently executed transactions, the maximum rate, quality of underlying issuers/insurersand evidence of issuer calls/prepayment. ARS are generally categorized in Level 2 of the fair value hierarchyas the valuation technique relies on observable external data. SLARS and MARS are presented within Asset-backed securities and State and municipal securities, respectively, in the fair value hierarchy table.

Corporate Equities.

• Exchange-Traded Equity Securities. Exchange-traded equity securities are generally valued based onquoted prices from the exchange. To the extent these securities are actively traded, valuation adjustmentsare not applied, and they are categorized in Level 1 of the fair value hierarchy; otherwise, they arecategorized in Level 2 or Level 3 of the fair value hierarchy.

• Unlisted Equity Securities. Unlisted equity securities are valued based on an assessment of eachunderlying security, considering rounds of financing and third-party transactions, discounted cash flowanalyses and market-based information, including comparable company transactions, trading multiplesand changes in market outlook, among other factors. These securities are generally categorized in Level 3of the fair value hierarchy.

• Fund Units. Listed fund units are generally marked to the exchange-traded price or net asset value(“NAV”) and are categorized in Level 1 of the fair value hierarchy if actively traded on an exchange or inLevel 2 of the fair value hierarchy if trading is not active. Unlisted fund units are generally marked toNAV and categorized as Level 2; however, positions that are not redeemable at the measurement date orin the near future are categorized in Level 3 of the fair value hierarchy.

Derivative and Other Contracts.

• Listed Derivative Contracts. Listed derivatives that are actively traded are valued based on quotedprices from the exchange and are categorized in Level 1 of the fair value hierarchy. Listed derivatives thatare not actively traded are valued using the same approaches as those applied to OTC derivatives; they aregenerally categorized in Level 2 of the fair value hierarchy.

• OTC Derivative Contracts. OTC derivative contracts include forward, swap and option contracts related tointerest rates, foreign currencies, credit standing of reference entities, equity prices or commodity prices.

Depending on the product and the terms of the transaction, the fair value of OTC derivative products canbe either observed or modeled using a series of techniques and model inputs from comparablebenchmarks, including closed-form analytic formulas, such as the Black-Scholes option-pricing model,and simulation models or a combination thereof. Many pricing models do not entail material subjectivitybecause the methodologies employed do not necessitate significant judgment, and the pricing inputs areobserved from actively quoted markets, as is the case for generic interest rate swaps, certain optioncontracts and certain credit default swaps. In the case of more established derivative products, the pricingmodels used by the Company are widely accepted by the financial services industry. A substantialmajority of OTC derivative products valued by the Company using pricing models fall into this categoryand are categorized in Level 2 of the fair value hierarchy.

Other derivative products, including complex products that have become illiquid, require more judgmentin the implementation of the valuation technique applied due to the complexity of the valuationassumptions and the reduced observability of inputs. This includes certain types of interest rate

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derivatives with both volatility and correlation exposure and credit derivatives, including credit defaultswaps on certain mortgage-backed or asset-backed securities, basket credit default swaps and CDO-squared positions (a CDO-squared position is a special purpose vehicle that issues interests, or tranches,that are backed by tranches issued by other CDOs) where direct trading activity or quotes areunobservable. These instruments involve significant unobservable inputs and are categorized in Level 3of the fair value hierarchy.

Derivative interests in credit default swaps on certain mortgage-backed or asset-backed securities, forwhich observability of external price data is limited, are valued based on an evaluation of the market andmodel input parameters sourced from similar positions as indicated by primary and secondary marketactivity. Each position is evaluated independently taking into consideration available comparable marketlevels as well as cash-synthetic basis, or the underlying collateral performance and pricing, behavior ofthe tranche under various cumulative loss and prepayment scenarios, deal structures (e.g., non-amortizingreference obligations, call features, etc.) and liquidity. While these factors may be supported by historicaland actual external observations, the determination of their value as it relates to specific positionsnevertheless requires significant judgment.

For basket credit default swaps and CDO-squared positions, the correlation input between referencecredits is unobservable for each specific swap or position and is benchmarked to standardized proxybaskets for which correlation data are available. The other model inputs such as credit spread, interestrates and recovery rates are observable. In instances where the correlation input is deemed to besignificant, these instruments are categorized in Level 3 of the fair value hierarchy; otherwise, theseinstruments are categorized in Level 2 of the fair value hierarchy.

The Company trades various derivative structures with commodity underlyings. Depending on the type ofstructure, the model inputs generally include interest rate yield curves, commodity underlier price curves,implied volatility of the underlying commodities and, in some cases, the implied correlation betweenthese inputs. The fair value of these products is determined using executed trades and broker andconsensus data to provide values for the aforementioned inputs. Where these inputs are unobservable,relationships to observable commodities and data points, based on historic and/or implied observations,are employed as a technique to estimate the model input values. Commodity derivatives are generallycategorized in Level 2 of the fair value hierarchy; in instances where significant inputs are unobservable,they are categorized in Level 3 of the fair value hierarchy.

For further information on derivative instruments and hedging activities, see Note 12.

Investments.

• The Company’s investments include direct investments in equity securities as well as investments inprivate equity funds, real estate funds and hedge funds, which include investments made in connectionwith certain employee deferred compensation plans. Direct investments are presented in the fair valuehierarchy table as Principal investments and Other. Initially, the transaction price is generally consideredby the Company as the exit price and is the Company’s best estimate of fair value.

After initial recognition, in determining the fair value of non-exchange-traded internally and externallymanaged funds, the Company generally considers the NAV of the fund provided by the fund manager tobe the best estimate of fair value. For non-exchange-traded investments either held directly or held withininternally managed funds, fair value after initial recognition is based on an assessment of each underlyinginvestment, considering rounds of financing and third-party transactions, discounted cash flow analysesand market-based information, including comparable company transactions, trading multiples andchanges in market outlook, among other factors. Exchange-traded direct equity investments are generallyvalued based on quoted prices from the exchange.

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Exchange-traded direct equity investments that are actively traded are categorized in Level 1 of the fairvalue hierarchy. Non-exchange-traded direct equity investments and investments in private equity andreal estate funds are generally categorized in Level 3 of the fair value hierarchy. Investments in hedgefunds that are redeemable at the measurement date or in the near future are categorized in Level 2 of thefair value hierarchy; otherwise, they are categorized in Level 3 of the fair value hierarchy.

Physical Commodities.

• The Company trades various physical commodities, including crude oil and refined products, natural gas,base and precious metals, and agricultural products. Fair value for physical commodities is determinedusing observable inputs, including broker quotations and published indices. Physical commodities arecategorized in Level 2 of the fair value hierarchy; in instances where significant inputs are unobservable,they are categorized in Level 3 of the fair value hierarchy.

Securities Available for Sale.

• Securities available for sale are composed of U.S. government and agency securities (e.g., U.S. Treasurysecurities, agency-issued debt, agency mortgage pass-through securities and collateralized mortgageobligations), CMBS, Federal Family Education Loan Program (“FFELP”) student loan asset-backedsecurities, auto loan asset-backed securities, corporate bonds, collateralized loan obligations, and equitysecurities. Actively traded U.S. Treasury securities, non-callable agency-issued debt securities and equitysecurities are generally categorized in Level 1 of the fair value hierarchy. Callable agency-issued debtsecurities, agency mortgage pass-through securities, collateralized mortgage obligations, CMBS, FFELPstudent loan asset-backed securities, auto loan asset-backed securities, corporate bonds and collateralizedloan obligations are generally categorized in Level 2 of the fair value hierarchy. For further informationon securities available for sale, see Note 5.

Deposits.

• Time Deposits. The fair value of certificates of deposit is determined using third-party quotations.These deposits are generally categorized in Level 2 of the fair value hierarchy.

Commercial Paper and Other Short-Term Borrowings/Long-Term Borrowings.

• Structured Notes. The Company issues structured notes that have coupon or repayment terms linked tothe performance of debt or equity securities, indices, currencies or commodities. Fair value of structurednotes is determined using valuation models for the derivative and debt portions of the notes. Thesemodels incorporate observable inputs referencing identical or comparable securities, including prices towhich the notes are linked, interest rate yield curves, option volatility and currency, and commodity orequity prices. Independent, external and traded prices for the notes are considered as well. The impact ofthe Company’s own credit spreads is also included based on the Company’s observed secondary bondmarket spreads. Most structured notes are categorized in Level 2 of the fair value hierarchy.

Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase.

• The fair value of a reverse repurchase agreement or repurchase agreement is computed using a standardcash flow discounting methodology. The inputs to the valuation include contractual cash flows andcollateral funding spreads, which are estimated using various benchmarks, interest rate yield curvesand option volatilities. In instances where the unobservable inputs are deemed significant, reverserepurchase agreements and repurchase agreements are categorized in Level 3 of the fair value hierarchy;otherwise, they are categorized in Level 2 of the fair value hierarchy.

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The following fair value hierarchy tables present information about the Company’s assets and liabilitiesmeasured at fair value on a recurring basis at December 31, 2013 and December 31, 2012.

Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2013.

Quoted Prices inActive Markets for

Identical Assets(Level 1)

SignificantObservable

Inputs(Level 2)

SignificantUnobservable

Inputs(Level 3)

Counterpartyand CashCollateral

Netting

Balance atDecember 31,

2013

(dollars in millions)Assets at Fair ValueTrading assets:

U.S. government and agency securities:U.S. Treasury securities . . . . . . . . . . . . . $ 32,083 $ — $ — $ — $ 32,083U.S. agency securities . . . . . . . . . . . . . . 1,216 17,720 — — 18,936

Total U.S. government and agencysecurities . . . . . . . . . . . . . . . . . . 33,299 17,720 — — 51,019

Other sovereign government obligations . . . . 25,363 6,610 27 — 32,000Corporate and other debt:

State and municipal securities . . . . . . . . — 1,615 — — 1,615Residential mortgage-backed

securities . . . . . . . . . . . . . . . . . . . . . . — 2,029 47 — 2,076Commercial mortgage-backed

securities . . . . . . . . . . . . . . . . . . . . . . — 1,534 108 — 1,642Asset-backed securities . . . . . . . . . . . . . — 878 103 — 981Corporate bonds . . . . . . . . . . . . . . . . . . . — 16,592 522 — 17,114Collateralized debt and loan

obligations . . . . . . . . . . . . . . . . . . . . . — 802 1,468 — 2,270Loans and lending commitments . . . . . . — 7,483 5,129 — 12,612Other debt . . . . . . . . . . . . . . . . . . . . . . . — 6,365 27 — 6,392

Total corporate and other debt . . . . — 37,298 7,404 — 44,702Corporate equities(1) . . . . . . . . . . . . . . . . . . . 107,818 1,206 190 — 109,214Derivative and other contracts:

Interest rate contracts . . . . . . . . . . . . . . . 750 526,127 2,475 — 529,352Credit contracts . . . . . . . . . . . . . . . . . . . — 42,258 2,088 — 44,346Foreign exchange contracts . . . . . . . . . . 52 61,570 179 — 61,801Equity contracts . . . . . . . . . . . . . . . . . . . 1,215 51,656 1,234 — 54,105Commodity contracts . . . . . . . . . . . . . . . 2,396 8,595 2,380 — 13,371Other . . . . . . . . . . . . . . . . . . . . . . . . . . . — 43 — — 43Netting(2) . . . . . . . . . . . . . . . . . . . . . . . . (3,836) (606,878) (4,931) (54,906) (670,551)

Total derivative and othercontracts . . . . . . . . . . . . . . . . . . . 577 83,371 3,425 (54,906) 32,467

Investments:Private equity funds . . . . . . . . . . . . . . . . — — 2,531 — 2,531Real estate funds . . . . . . . . . . . . . . . . . . — 6 1,637 — 1,643Hedge funds . . . . . . . . . . . . . . . . . . . . . . — 377 432 — 809Principal investments . . . . . . . . . . . . . . . 43 42 2,160 — 2,245Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 202 45 538 — 785

Total investments . . . . . . . . . . . . . . 245 470 7,298 — 8,013Physical commodities . . . . . . . . . . . . . . . . . . — 3,329 — — 3,329

Total trading assets . . . . . . . . . . . . . . . . 167,302 150,004 18,344 (54,906) 280,744Securities available for sale . . . . . . . . . . . . . . . . . . 24,412 29,018 — — 53,430Securities received as collateral . . . . . . . . . . . . . . . 20,497 11 — — 20,508Federal funds sold and securities purchased under

agreements to resell . . . . . . . . . . . . . . . . . . . . . . — 866 — — 866Intangible assets(3) . . . . . . . . . . . . . . . . . . . . . . . . — — 8 — 8

Total assets measured at fair value . . . . . . . . . . . . $212,211 $ 179,899 $18,352 $(54,906) $ 355,556

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Inputs(Level 2)


Inputs(Level 3)


Netting


2013

(dollars in millions)Liabilities at Fair ValueDeposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 185 $ — $ — $ 185Commercial paper and other short-term

borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,346 1 — 1,347Trading liabilities:

U.S. government and agency securities:U.S. Treasury securities . . . . . . . . . . . . . 15,963 — — — 15,963U.S. agency securities . . . . . . . . . . . . . . 2,593 116 — — 2,709

Total U.S. government and agencysecurities . . . . . . . . . . . . . . . . . . 18,556 116 — — 18,672

Other sovereign government obligations . . . . 14,717 2,473 — — 17,190Corporate and other debt:

State and municipal securities . . . . . . . . — 15 — — 15Corporate bonds . . . . . . . . . . . . . . . . . . . — 5,033 22 — 5,055Collateralized debt and loan

obligations . . . . . . . . . . . . . . . . . . . . . — 3 — — 3Unfunded lending commitments . . . . . . — 127 2 — 129Other debt . . . . . . . . . . . . . . . . . . . . . . . — 1,144 48 — 1,192

Total corporate and other debt . . . . — 6,322 72 — 6,394Corporate equities(1) . . . . . . . . . . . . . . . . . . . 27,983 513 8 — 28,504Derivative and other contracts:

Interest rate contracts . . . . . . . . . . . . . . . 675 504,292 2,362 — 507,329Credit contracts . . . . . . . . . . . . . . . . . . . — 40,391 2,235 — 42,626Foreign exchange contracts . . . . . . . . . . 23 61,925 111 — 62,059Equity contracts . . . . . . . . . . . . . . . . . . . 1,033 57,797 2,065 — 60,895Commodity contracts . . . . . . . . . . . . . . . 2,637 8,749 1,500 — 12,886Other . . . . . . . . . . . . . . . . . . . . . . . . . . . — 72 4 — 76Netting(2) . . . . . . . . . . . . . . . . . . . . . . . . (3,836) (606,878) (4,931) (36,465) (652,110)

Total derivative and othercontracts . . . . . . . . . . . . . . . . . . . 532 66,348 3,346 (36,465) 33,761

Total trading liabilities . . . . . . . . . . . . . . 61,788 75,772 3,426 (36,465) 104,521Obligation to return securities received as

collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,549 19 — — 24,568Securities sold under agreements to repurchase . . — 407 154 — 561Other secured financings . . . . . . . . . . . . . . . . . . . . — 4,928 278 — 5,206Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . — 33,750 1,887 — 35,637

Total liabilities measured at fair value . . . . . . . . . . $86,337 $ 116,407 $ 5,746 $(36,465) $ 172,025

(1) The Company holds or sells short for trading purposes equity securities issued by entities in diverse industries and of varying size.(2) For positions with the same counterparty that cross over the levels of the fair value hierarchy, both counterparty netting and cash

collateral netting are included in the column titled “Counterparty and Cash Collateral Netting.” For contracts with the same counterparty,counterparty netting among positions classified within the same level is included within that level. For further information on derivativeinstruments and hedging activities, see Note 12.

(3) Amount represents mortgage servicing rights (“MSR”) accounted for at fair value. See Note 7 for further information on MSRs.

Transfers Between Level 1 and Level 2 During 2013.

For assets and liabilities that were transferred between Level 1 and Level 2 during the period, fair values areascribed as if the assets or liabilities had been transferred as of the beginning of the period.

In 2013, there were no material transfers between Level 1 and Level 2.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2012.




Inputs(Level 2)


Inputs(Level 3)


Netting


2012


U.S. government and agency securities:U.S. Treasury securities . . . . . . . . . . $ 24,662 $ 14 $ — $ — $ 24,676U.S. agency securities . . . . . . . . . . . . 1,451 27,888 — — 29,339

Total U.S. government andagency securities . . . . . . . . . . 26,113 27,902 — — 54,015

Other sovereign governmentobligations . . . . . . . . . . . . . . . . . . . . . . . 37,669 5,487 6 — 43,162

Corporate and other debt:State and municipal securities . . . . . . — 1,558 — — 1,558Residential mortgage-backed

securities . . . . . . . . . . . . . . . . . . . . — 1,439 45 — 1,484Commercial mortgage-backed

securities . . . . . . . . . . . . . . . . . . . . — 1,347 232 — 1,579Asset-backed securities . . . . . . . . . . . — 915 109 — 1,024Corporate bonds . . . . . . . . . . . . . . . . — 18,403 660 — 19,063Collateralized debt and loan

obligations . . . . . . . . . . . . . . . . . . . — 685 1,951 — 2,636Loans and lending commitments . . . — 12,617 4,694 — 17,311Other debt . . . . . . . . . . . . . . . . . . . . . — 4,457 45 — 4,502

Total corporate and otherdebt . . . . . . . . . . . . . . . . . . . . — 41,421 7,736 — 49,157

Corporate equities(1) . . . . . . . . . . . . . . . . 68,072 1,067 288 — 69,427Derivative and other contracts:

Interest rate contracts . . . . . . . . . . . . 446 819,581 3,774 — 823,801Credit contracts . . . . . . . . . . . . . . . . . — 63,234 5,033 — 68,267Foreign exchange contracts . . . . . . . 34 52,729 31 — 52,794Equity contracts . . . . . . . . . . . . . . . . 760 37,074 766 — 38,600Commodity contracts . . . . . . . . . . . . 4,082 14,256 2,308 — 20,646Other . . . . . . . . . . . . . . . . . . . . . . . . . — 143 — — 143Netting(2) . . . . . . . . . . . . . . . . . . . . . (4,740) (883,733) (6,947) (72,634) (968,054)

Total derivative and othercontracts . . . . . . . . . . . . . . . . 582 103,284 4,965 (72,634) 36,197

Investments:Private equity funds . . . . . . . . . . . . . — — 2,179 — 2,179Real estate funds . . . . . . . . . . . . . . . . — 6 1,370 — 1,376Hedge funds . . . . . . . . . . . . . . . . . . . — 382 552 — 934Principal investments . . . . . . . . . . . . 185 83 2,833 — 3,101Other . . . . . . . . . . . . . . . . . . . . . . . . . 199 71 486 — 756

Total investments . . . . . . . . . . . 384 542 7,420 — 8,346Physical commodities . . . . . . . . . . . . . . . . — 7,299 — — 7,299

Total trading assets . . . . . . . . . . . . . . 132,820 187,002 20,415 (72,634) 267,603Securities available for sale . . . . . . . . . . . . . . . 14,466 25,403 — — 39,869Securities received as collateral . . . . . . . . . . . . 14,232 46 — — 14,278Federal funds sold and securities purchased

under agreements to resell . . . . . . . . . . . . . . — 621 — — 621Intangible assets(3) . . . . . . . . . . . . . . . . . . . . . . — — 7 — 7

Total assets measured at fair value . . . . . . . . . . $161,518 $ 213,072 $20,422 $(72,634) $ 322,378

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Inputs(Level 2)


Inputs(Level 3)


Netting


2012

(dollars in millions)Liabilities at Fair ValueDeposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 1,485 $ — $ — $ 1,485Commercial paper and other short-term

borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . — 706 19 — 725Trading liabilities:

U.S. government and agency securities:U.S. Treasury securities . . . . . . . . . . 20,098 21 — — 20,119U.S. agency securities . . . . . . . . . . . . 1,394 107 — — 1,501

Total U.S. government andagency securities . . . . . . . . . . 21,492 128 — — 21,620

Other sovereign governmentobligations . . . . . . . . . . . . . . . . . . . . . . . 27,583 2,031 — — 29,614

Corporate and other debt:State and municipal securities . . . . . . — 47 — — 47Residential mortgage-backed

securities . . . . . . . . . . . . . . . . . . . . — — 4 — 4Corporate bonds . . . . . . . . . . . . . . . . — 3,942 177 — 4,119Collateralized debt and loan

obligations . . . . . . . . . . . . . . . . . . . — 328 — — 328Unfunded lending commitments . . . . — 305 46 — 351Other debt . . . . . . . . . . . . . . . . . . . . . — 156 49 — 205

Total corporate and otherdebt . . . . . . . . . . . . . . . . . . . . — 4,778 276 — 5,054

Corporate equities(1) . . . . . . . . . . . . . . . . 25,216 1,655 5 — 26,876Derivative and other contracts:

Interest rate contracts . . . . . . . . . . . . 533 789,715 3,856 — 794,104Credit contracts . . . . . . . . . . . . . . . . . — 61,283 3,211 — 64,494Foreign exchange contracts . . . . . . . 2 56,021 390 — 56,413Equity contracts . . . . . . . . . . . . . . . . 748 39,212 1,910 — 41,870Commodity contracts . . . . . . . . . . . . 4,530 15,702 1,599 — 21,831Other . . . . . . . . . . . . . . . . . . . . . . . . . — 54 7 — 61Netting(2) . . . . . . . . . . . . . . . . . . . . . (4,740) (883,733) (6,947) (46,395) (941,815)

Total derivative and othercontracts . . . . . . . . . . . . . . . . 1,073 78,254 4,026 (46,395) 36,958

Total trading liabilities . . . . . . . . . . . 75,364 86,846 4,307 (46,395) 120,122Obligation to return securities received as

collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,179 47 — — 18,226Securities sold under agreements to

repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . — 212 151 — 363Other secured financings . . . . . . . . . . . . . . . . . — 9,060 406 — 9,466Long-term borrowings . . . . . . . . . . . . . . . . . . . — 41,255 2,789 — 44,044

Total liabilities measured at fair value . . . . . . . $93,543 $ 139,611 $ 7,672 $(46,395) $ 194,431

(1) The Company holds or sells short for trading purposes equity securities issued by entities in diverse industries and of varying size.(2) For positions with the same counterparty that cross over the levels of the fair value hierarchy, both counterparty netting and cash

collateral netting are included in the column titled “Counterparty and Cash Collateral Netting.” For contracts with the same counterparty,counterparty netting among positions classified within the same level is included within that level. For further information on derivativeinstruments and hedging activities, see Note 12.

(3) Amount represents MSRs accounted for at fair value. See Note 7 for further information on MSRs.

Transfers Between Level 1 and Level 2 During 2012.

For assets and liabilities that were transferred between Level 1 and Level 2 during the period, fair values areascribed as if the assets or liabilities had been transferred as of the beginning of the period.

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Trading assets—Derivative and other contracts and Trading liabilities—Derivative and other contracts. During2012, the Company reclassified approximately $3.2 billion of derivative assets and approximately $2.5 billion ofderivative liabilities from Level 2 to Level 1 as these listed derivatives became actively traded and were valuedbased on quoted prices from the exchange. Also during 2012, the Company reclassified approximately $0.4 billionof derivative assets and approximately $0.3 billion of derivative liabilities from Level 1 to Level 2 as transactions inthese contracts did not occur with sufficient frequency and volume to constitute an active market.

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 ona recurring basis for 2013, 2012 and 2011, respectively. Level 3 instruments may be hedged with instrumentsclassified in Level 1 and Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilitieswithin the Level 3 category presented in the tables below do not reflect the related realized and unrealized gains(losses) on hedging instruments that have been classified by the Company within the Level 1 and/or Level 2categories.

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

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

167

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Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for 2013.

BeginningBalance at

December 31,2012

Total Realizedand Unrealized

Gains (Losses)(1) Purchases Sales Issuances Settlements Net Transfers

EndingBalance at

December 31,2013

UnrealizedGains (Losses)

for Level 3Assets/

LiabilitiesOutstanding atDecember 31,

2013(2)


Other sovereign governmentobligations . . . . . . . . . . . . . . $ 6 $ (18) $ 41 $ (7) $ — $— $ 5 $27 $ (18)

Corporate and other debt:Residential mortgage-

backed securities . . . . . . . 45 25 54 (51) — — (26) 47 (6)Commercial mortgage-

backed securities . . . . . . . 232 13 57 (187) — (7) — 108 4Asset-backed securities . . . . 109 — 6 (12) — — — 103 —Corporate bonds . . . . . . . . . 660 (20) 324 (371) — (19) (52) 522 (55)Collateralized debt and loan

obligations . . . . . . . . . . . . 1,951 363 742 (960) — (626) (2) 1,468 131Loans and lending

commitments . . . . . . . . . . 4,694 (130) 3,744 (448) — (3,096) 365 5,129 (199)Other debt . . . . . . . . . . . . . . 45 (1) 20 (36) — — (1) 27 (2)

Total corporate and otherdebt . . . . . . . . . . . . . . . 7,736 250 4,947 (2,065) — (3,748) 284 7,404 (127)

Corporate equities . . . . . . . . . . 288 (63) 113 (127) — — (21) 190 (72)Net derivative and other

contracts(3):Interest rate contracts . . . . . (82) 28 6 — (34) 135 60 113 36Credit contracts . . . . . . . . . . 1,822 (1,674) 266 — (703) (295) 437 (147) (1,723)Foreign exchange

contracts . . . . . . . . . . . . . (359) 130 — — — 281 16 68 124Equity contracts . . . . . . . . . . (1,144) 463 170 (74) (318) (11) 83 (831) 61Commodity contracts . . . . . 709 200 41 — (36) (29) (5) 880 174Other . . . . . . . . . . . . . . . . . . (7) (6) — — — 9 — (4) (7)

Total net derivative andother contracts . . . . . . . 939 (859) 483 (74) (1,091) 90 591 79 (1,335)

Investments:Private equity funds . . . . . . 2,179 704 212 (564) — — — 2,531 657Real estate funds . . . . . . . . . 1,370 413 103 (249) — — — 1,637 625Hedge funds . . . . . . . . . . . . 552 10 62 (163) — — (29) 432 10Principal investments . . . . . 2,833 110 111 (445) — — (449) 2,160 3Other . . . . . . . . . . . . . . . . . . 486 76 13 (36) — — (1) 538 77

Total investments . . . . . . 7,420 1,313 501 (1,457) — — (479) 7,298 1,372Intangible assets . . . . . . . . . . . . . 7 9 — — — (8) — 8 3

Liabilities at Fair ValueCommercial paper and other

short-term borrowings . . . . . . . $ 19 $ — $ — $ — $ — $ (1) $(17) $ 1 $—Trading liabilities:

Corporate and other debt:Residential mortgage-

backed securities . . . . . . . 4 4 — — — — — — 4Corporate bonds . . . . . . . . . 177 28 (64) 43 — — (106) 22 28Unfunded lending

commitments . . . . . . . . . . 46 44 — — — — — 2 44Other debt . . . . . . . . . . . . . . 49 2 — 5 — (6) 2 48 2

Total corporate and otherdebt . . . . . . . . . . . . . . . 276 78 (64) 48 — (6) (104) 72 78

Corporate equities . . . . . . . . . . 5 1 (26) 29 — — 1 8 3Securities sold under agreements

to repurchase . . . . . . . . . . . . . . 151 (3) — — — — — 154 (3)Other secured financings . . . . . . . 406 11 — — 19 (136) — 278 4Long-term borrowings . . . . . . . . 2,789 (162) — — 877 (606) (1,335) 1,887 (138)

(1) Total realized and unrealized gains (losses) are primarily included in Trading revenues in the consolidated statements of income exceptfor $1,313 million related to Trading assets—Investments, which is included in Investments revenues.

(2) Amounts represent unrealized gains (losses) for 2013 related to assets and liabilities still outstanding at December 31, 2013.(3) Net derivative and other contracts represent Trading assets—Derivative and other contracts net of Trading liabilities—Derivative and

other contracts. For further information on derivative instruments and hedging activities, see Note 12.

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Long-term borrowings. During 2013, the Company reclassified approximately $1.3 billion of certain long-termborrowings, primarily structured notes, from Level 3 to Level 2. The Company reclassified the structured notesas the unobservable embedded derivative component became insignificant to the overall valuation.

In 2013, there were no material transfers from Level 2 to Level 3.


BeginningBalance at

December 31,2011

Total Realizedand

UnrealizedGains

(Losses)(1) Purchases Sales Issuances Settlements Net Transfers

EndingBalance at

December 31,2012


for Level 3Assets/LiabilitiesOutstanding atDecember 31,

2012(2)


U.S. agency securities . . . . . . . . $ 8 $ — $ — $ (7) $ — $— $ (1) $— $—Other sovereign government

obligations . . . . . . . . . . . . . . 119 — 12 (125) — — — 6 (9)Corporate and other debt:

Residential mortgage-backedsecurities . . . . . . . . . . . . . . 494 (9) 32 (285) — — (187) 45 (26)

Commercial mortgage-backed securities . . . . . . . . 134 32 218 (49) — (100) (3) 232 28

Asset-backed securities . . . . . 31 1 109 (32) — — — 109 (1)Corporate bonds . . . . . . . . . . 675 22 447 (450) — — (34) 660 (7)Collateralized debt and loan

obligations . . . . . . . . . . . . 980 216 1,178 (384) — — (39) 1,951 142Loans and lending

commitments . . . . . . . . . . 9,590 37 2,648 (2,095) — (4,316) (1,170) 4,694 (91)Other debt . . . . . . . . . . . . . . . 128 2 — (95) — — 10 45 (6)

Total corporate and otherdebt . . . . . . . . . . . . . . . . 12,032 301 4,632 (3,390) — (4,416) (1,423) 7,736 39

Corporate equities . . . . . . . . . . . 417 (59) 134 (172) — — (32) 288 (83)Net derivative and other

contracts(3):Interest rate contracts . . . . . . 420 (275) 28 — (7) (217) (31) (82) 297Credit contracts . . . . . . . . . . . 5,814 (2,799) 112 — (502) (961) 158 1,822 (3,216)Foreign exchange

contracts . . . . . . . . . . . . . . 43 (279) — — — 19 (142) (359) (225)Equity contracts . . . . . . . . . . (1,234) 390 202 (9) (112) (210) (171) (1,144) 241Commodity contracts . . . . . . 570 114 16 — (41) (20) 70 709 222Other . . . . . . . . . . . . . . . . . . . (1,090) 57 — — — 236 790 (7) 53

Total net derivative andother contracts . . . . . . . 4,523 (2,792) 358 (9) (662) (1,153) 674 939 (2,628)

Investments:Private equity funds . . . . . . . 1,936 228 308 (294) — — 1 2,179 147Real estate funds . . . . . . . . . . 1,213 149 143 (136) — — 1 1,370 229Hedge funds . . . . . . . . . . . . . 696 61 81 (151) — — (135) 552 51Principal investments . . . . . . 2,937 130 160 (419) — — 25 2,833 93Other . . . . . . . . . . . . . . . . . . . 501 (45) 158 (70) — — (58) 486 (48)

Total investments . . . . . . . 7,283 523 850 (1,070) — — (166) 7,420 472Physical commodities . . . . . . . . 46 — — — — (46) — — —

Intangible assets . . . . . . . . . . . . . . 133 (39) — (83) — (4) — 7 (7)

Liabilities at Fair ValueCommercial paper and other

short-term borrowings . . . . . . . $ 2 $ (5) $ — $ — $ 3 $ (3) $12 $ 19 $ (4)Trading liabilities:

Other sovereign governmentobligations . . . . . . . . . . . . . . 8 — (8) — — — — — —

Corporate and other debt:Residential mortgage-backed

securities . . . . . . . . . . . . . . 355 (4) (355) — — — — 4 (4)Corporate bonds . . . . . . . . . . 219 (15) (129) 110 — — (38) 177 (23)Unfunded lending

commitments . . . . . . . . . . 85 39 — — — — — 46 39Other debt . . . . . . . . . . . . . . . 73 9 (1) 36 — (55) 5 49 11

Total corporate and otherdebt . . . . . . . . . . . . . . . . 732 29 (485) 146 — (55) (33) 276 23

Corporate equities . . . . . . . . . . . 1 (1) (21) 22 — — 2 5 (3)Securities sold under agreements

to repurchase . . . . . . . . . . . . . . . 340 (14) — — — — (203) 151 (14)Other secured financings . . . . . . . 570 (69) — — 21 (232) (22) 406 (67)Long-term borrowings . . . . . . . . . 1,603 (651) — — 1,050 (279) (236) 2,789 (652)

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(1) Total realized and unrealized gains (losses) are primarily included in Trading revenues in the consolidated statements of income exceptfor $523 million related to Trading assets—Investments, which is included in Investments revenues.

(2) Amounts represent unrealized gains (losses) for 2012 related to assets and liabilities still outstanding at December 31, 2012.(3) Net derivative and other contracts represent Trading assets—Derivative and other contracts, net of Trading liabilities—Derivative and


Trading assets—Corporate and other debt. During 2012, the Company reclassified approximately $1.9 billionof certain Corporate and other debt, primarily loans, from Level 3 to Level 2. The Company reclassified the loansas external prices and/or spread inputs for these instruments became observable.

The Company also reclassified approximately $0.5 billion of certain Corporate and other debt from Level 2 toLevel 3. The reclassifications were primarily related to corporate loans and were generally due to a reduction inmarket price quotations for these or comparable instruments, or a lack of available broker quotes, such thatunobservable inputs had to be utilized for the fair value measurement of these instruments.

Trading assets—Net derivative and other contracts. During 2012, the Company reclassified approximately $1.4billion of certain credit derivative assets and approximately $1.2 billion of certain credit derivative liabilitiesfrom Level 3 to Level 2. These reclassifications were primarily related to single name credit default swaps andbasket credit default swaps for which certain unobservable inputs became insignificant to the overallmeasurement.

The Company also reclassified approximately $0.6 billion of certain credit derivative assets and approximately$0.3 billion of certain credit derivative liabilities from Level 2 to Level 3. The reclassifications were primarilyrelated to basket credit default swaps for which certain unobservable inputs became significant to the overallmeasurement.

170

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BeginningBalance at

December 31,2010

Total Realizedand Unrealized

Gains (Losses)(1) Purchases Sales Issuances SettlementsNet

Transfers

EndingBalance at

December 31,2011


for Level 3Assets/

LiabilitiesOutstanding atDecember 31,

2011(2)


U.S. agency securities . . . . . . . . . . $ 13 $ — $ 66 $ (68) $ — $ — $ (3) $ 8 $ —Other sovereign government

obligations . . . . . . . . . . . . . . . . . 73 (4) 56 (2) — — (4) 119 (2)Corporate and other debt:

State and municipal securities . . 110 (1) — (96) — — (13) — —Residential mortgage-backed

securities . . . . . . . . . . . . . . . . . 319 (61) 382 (221) — (1) 76 494 (59)Commercial mortgage-backed

securities . . . . . . . . . . . . . . . . . 188 12 75 (90) — — (51) 134 (18)Asset-backed securities . . . . . . . 13 4 13 (19) — — 20 31 2Corporate bonds . . . . . . . . . . . . . 1,368 (136) 467 (661) — — (363) 675 (20)Collateralized debt and loan

obligations . . . . . . . . . . . . . . . 1,659 109 613 (1,296) — (55) (50) 980 (84)Loans and lending

commitments . . . . . . . . . . . . . 11,666 (251) 2,932 (1,241) — (2,900) (616) 9,590 (431)Other debt . . . . . . . . . . . . . . . . . . 193 42 14 (76) — (11) (34) 128 —

Total corporate and otherdebt . . . . . . . . . . . . . . . . . . . 15,516 (282) 4,496 (3,700) — (2,967) (1,031) 12,032 (610)

Corporate equities . . . . . . . . . . . . . 484 (46) 416 (360) — — (77) 417 16Net derivative and other

contracts(3):Interest rate contracts . . . . . . . . . 424 628 45 — (714) (150) 187 420 522Credit contracts . . . . . . . . . . . . . 6,594 319 1,199 — (277) (2,165) 144 5,814 1,818Foreign exchange contracts . . . . 46 (35) 2 — — 28 2 43 (13)Equity contracts . . . . . . . . . . . . . (762) 592 214 (133) (1,329) 136 48 (1,234) 564Commodity contracts . . . . . . . . . 188 708 52 — — (433) 55 570 689Other . . . . . . . . . . . . . . . . . . . . . . (913) (552) 1 — (118) 405 87 (1,090) (536)

Total net derivative and othercontracts . . . . . . . . . . . . . . . 5,577 1,660 1,513 (133) (2,438) (2,179) 523 4,523 3,044

Investments:Private equity funds . . . . . . . . . . 1,986 159 245 (513) — — 59 1,936 85Real estate funds . . . . . . . . . . . . 1,176 21 196 (171) — — (9) 1,213 251Hedge funds . . . . . . . . . . . . . . . . 901 (20) 169 (380) — — 26 696 (31)Principal investments . . . . . . . . . 3,131 288 368 (819) — — (31) 2,937 87Other . . . . . . . . . . . . . . . . . . . . . . 560 38 8 (34) — — (71) 501 23

Total investments . . . . . . . . . . 7,754 486 986 (1,917) — — (26) 7,283 415Physical commodities . . . . . . . . . . — (47) 771 — — (673) (5) 46 1

Securities received as collateral . . . . . 1 — — (1) — — — — —Intangible assets . . . . . . . . . . . . . . . . . 157 (25) 6 (1) — (4) — 133 (27)

Liabilities at Fair ValueDeposits . . . . . . . . . . . . . . . . . . . . . . . $ 16 $ 2 $ — $ — $ — $ (14) $ — $ — $ —Commercial paper and other short-

term borrowings . . . . . . . . . . . . . . . 2 — — — — — — 2 —Trading liabilities:

Other sovereign governmentobligations . . . . . . . . . . . . . . . . . — 1 — 9 — — — 8 —

Corporate and other debt:Residential mortgage-backed

securities . . . . . . . . . . . . . . . . . — (8) — 347 — — — 355 (8)Corporate bonds . . . . . . . . . . . . . 44 37 (407) 694 — — (75) 219 51Unfunded lending

commitments . . . . . . . . . . . . . 263 178 — — — — — 85 178Other debt . . . . . . . . . . . . . . . . . . 194 123 (12) 22 — (2) (6) 73 12

Total corporate and otherdebt . . . . . . . . . . . . . . . . . . . 501 330 (419) 1,063 — (2) (81) 732 233

Corporate equities . . . . . . . . . . . . . 15 (1) (15) 5 — — (5) 1 —Obligation to return securities

received as collateral . . . . . . . . . . . 1 — (1) — — — — — —Securities sold under agreements to

repurchase . . . . . . . . . . . . . . . . . . . 351 11 — — — — — 340 11Other secured financings . . . . . . . . . . 1,016 27 — — 154 (267) (306) 570 13Long-term borrowings . . . . . . . . . . . . 1,316 39 — — 769 (377) (66) 1,603 32

(1) Total realized and unrealized gains (losses) are primarily included in Trading revenues in the consolidated statements of income exceptfor $486 million related to Trading assets—Investments, which is included in Investments revenues.

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(2) Amounts represent unrealized gains (losses) for 2011 related to assets and liabilities still outstanding at December 31, 2011.(3) Net derivative and other contracts represent Trading assets—Derivative and other contracts, net of Trading liabilities—Derivative and


Trading assets—Corporate and other debt. During 2011, the Company reclassified approximately $1.8 billionof certain Corporate and other debt, primarily corporate loans, from Level 3 to Level 2. The Companyreclassified these corporate loans as external prices and/or spread inputs for these instruments becameobservable.

The Company also reclassified approximately $0.8 billion of certain Corporate and other debt from Level 2 toLevel 3. The reclassifications were primarily related to corporate loans and were generally due to a reduction inmarket price quotations for these or comparable instruments, or a lack of available broker quotes, such thatunobservable inputs had to be utilized for the fair value measurement of these instruments.

Quantitative Information about and Sensitivity of Significant Unobservable Inputs Used in RecurringLevel 3 Fair Value Measurements at December 31, 2013 and December 31, 2012.

The disclosures below provide information on the valuation techniques, significant unobservable inputs and theirranges and averages for each major category of assets and liabilities measured at fair value on a recurring basiswith a significant Level 3 balance. The level of aggregation and breadth of products cause the range of inputs tobe wide and not evenly distributed across the inventory. Further, the range of unobservable inputs may differacross firms in the financial services industry because of diversity in the types of products included in each firm’sinventory. The following disclosures also include qualitative information on the sensitivity of the fair valuemeasurements to changes in the significant unobservable inputs.

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At December 31, 2013.Balance at

December 31,2013

(dollars inmillions)

ValuationTechnique(s)

Significant Unobservable Input(s) /Sensitivity of the Fair Value to Changes

in the Unobservable Inputs Range(1) Averages(2)

AssetsTrading assets:

Corporate and other debt:

Commercial mortgage-backed securities $ 108 Comparable pricing Comparable bond price / (A) 40 to 93 points 78 points

Asset-backed securities 103 Discounted cash flow Discount rate / (C) 18 % 18 %

Corporate bonds 522 Comparable pricing Comparable bond price / (A) 1 to 159 points 85 points

Collateralized debt andloan obligations 1,468 Comparable pricing(6) Comparable bond price / (A) 18 to 99 points 73 points

Correlation model Credit correlation / (B) 29 to 59 % 43 %

Loans and lendingcommitments 5,129 Corporate loan model Credit spread / (C) 28 to 487 basis points 249 basis points

Margin loan model Credit spread / (C)(D) 10 to 265 basis points 135 basis points

Volatility skew / (C)(D) 3 to 40 % 14 %

Comparable bond price / (A)(D) 80 to 120 points 100 points

Option model Volatility skew / (C) -1 to 0 % 0 %

Comparable pricing(6) Comparable loan price / (A) 10 to 100 points 76 points

Corporate equities(3) 190 Net asset value(6) Discount to net asset value / (C) 0 to 85 % 43 %

Comparable pricing Comparable equity price / (A) 0 to 100 % 47 %

Comparable pricing Comparable price / (A) 0 to 100 points 50 points

Market approach EBITDA multiple / (A)(D) 5 to 9 times 6 times

Price/Book ratio / (A)(D) 0 to 1 times 1 times

Net derivative and othercontracts:

Interest rate contracts 113 Option model Interest rate volatility concentrationliquidity multiple / (C)(D) 0 to 6 times 2 times

Comparable bond price / (A)(D) 5 to 100 points 58 points / 65 points (4)

Interest rate—Foreign exchangecorrelation / (A)(D) 3 to 63 % 43 % / 48%(4)

Interest rate volatility skew / (A)(D) 24 to 50 % 33 % / 28%(4)

Interest rate quanto correlation /(A)(D) -11 to 34 % 8 % / 5%(4)

Interest rate curve correlation /(A)(D) 46 to 92 % 74 % / 80%(4)

Inflation volatility / (A)(D) 77 to 86 % 81 % / 80%(4)

Credit contracts (147) Comparable pricing Cash synthetic basis / (C)(D) 2 to 5 points 4 points

Comparable bond price / (C)(D) 0 to 75 points 27 points

Correlation model(6) Credit correlation / (B) 19 to 96 % 56 %

Foreign exchangecontracts(5)

68 Option model Comparable bond price / (A)(D) 5 to 100 points 58 points / 65 points (4)

Interest rate quanto correlation /(A)(D) -11 to 34 % 8 % / 5%(4)

Interest rate curve correlation /(A)(D) 46 to 92 % 74 % / 80%(4)

Interest rate—Foreign exchangecorrelation / (A)(D) 3 to 63 % 43 % / 48%(4)

Interest rate volatility skew / (A)(D) 24 to 50 % 33 % / 28%(4)

Interest rate curve / (A)(D) 0 to 1 % 1 % / 0%(4)

Equity contracts(5) (831) Option model At the money volatility / (A)(D) 20 to 53 % 31 %

Volatility skew / (A)(D) -3 to 0 % -1 %

Equity—Equity correlation / (C)(D) 40 to 99 % 69 %

Equity—Foreign exchangecorrelation / (C)(D) -50 to 9 % -20 %

Equity—Interest rate correlation /(C)(D) -4 to 70 % 39 % / 40%(4)

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2013(dollars inmillions)



in the Unobservable Inputs Range(1) Averages(2)

Commodity contracts 880 Option model Forward power price / (C)(D) $14 to $91 per $40 perMegawatt hour Megawatt hour

Commodity volatility / (A)(D) 11 to 30 % 14 %

Cross commodity correlation /(C)(D) 34 to 99 % 93 %

Investments(3):

Principal investments 2,160 Discounted cash flow Implied weighted average cost ofcapital / (C)(D) 12 % 12 %

Exit multiple / (A)(D) 9 times 9 times

Discounted cashflow(6) Capitalization rate / (C)(D) 5 to 13 % 7 %

Equity discount rate / (C)(D) 10 to 30 % 21 %

Market approach EBITDA multiple / (A) 5 to 6 times 5 times

Other 538 Discounted cash flow Implied weighted average cost ofcapital / (C)(D) 7 to 10 % 8 %

Exit multiple / (A)(D) 7 to 9 times 9 times

Market approach(6) EBITDA multiple / (A) 8 to 14 times 10 times

Liabilities

Securities sold underagreements to repurchase $ 154 Discounted cash flow Funding spread / (A) 92 to 97 basis points 95 basis points

Other secured financings 278 Comparable pricing(6) Comparable bond price / (A) 99 to 102 points 101 points

Discounted cash flow Funding spread / (A) 97 basis points 97 basis points

Long-term borrowings 1,887 Option model At the money volatility / (C)(D) 20 to 33 % 26 %

Volatility skew / (A)(D) -2 to 0 % 0 %

Equity—Equity correlation /(A)(D) 50 to 70 % 69 %

Equity—Foreign exchange correlation/ (C)(D) -60 to 0 % -23 %

EBITDA—Earnings before interest, taxes, depreciation and amortization(1) The ranges of significant unobservable inputs are represented in points, percentages, basis points, times or megawatt hours. Points are a

percentage of par; for example, 93 points would be 93% of par. A basis point equals 1/100th of 1%; for example, 487 basis points wouldequal 4.87%.

(2) Amounts represent weighted averages except where simple averages and the median of the inputs are provided (see footnote 4 below).Weighted averages are calculated by weighting each input by the fair value of the respective financial instruments except for long-termborrowings and derivative instruments where inputs are weighted by risk.

(3) Investments in funds measured using an unadjusted NAV are excluded.(4) The data structure of the significant unobservable inputs used in valuing Interest rate contracts, Foreign exchange contracts and certain

Equity contracts may be in a multi-dimensional form, such as a curve or surface, with risk distributed across the structure. Therefore, asimple average and median, together with the range of data inputs, may be more appropriate measurements than a single point weightedaverage.

(5) Includes derivative contracts with multiple risks (i.e., hybrid products).(6) This is the predominant valuation technique for this major asset or liability class.

Sensitivity of the fair value to changes in the unobservable inputs:(A) Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher (lower) fair value

measurement.(B) Significant changes in credit correlation may result in a significantly higher or lower fair value measurement. Increasing (decreasing)

correlation drives a redistribution of risk within the capital structure such that junior tranches become less (more) risky and seniortranches become more (less) risky.

(C) Significant increase (decrease) in the unobservable input in isolation would result in a significantly lower (higher) fair valuemeasurement.

(D) There are no predictable relationships between the significant unobservable inputs.

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At December 31, 2012.





in the Unobservable Inputs Range(1)WeightedAverage

Assets

Trading assets:


Commercial mortgage-backedsecurities $ 232 Comparable pricing Comparable bond price / (A) 46 to 100 points 76 points

Asset-backed securities 109 Discounted cash flow Discount rate / (C) 21 % 21 %

Corporate bonds 660 Comparable pricing Comparable bond price / (A) 0 to 143 points 24 points

Collateralized debt and loanobligations 1,951 Comparable pricing Comparable bond price / (A) 15 to 88 points 59 points

Correlation model Credit correlation / (B) 15 to 45 % 40 %

Loans and lending commitments 4,694 Corporate loan model Credit spread / (C) 17 to 1,004 basis points 281 basis points

Comparable pricing Comparable bond price / (A) 80 to 120 points 104 points

Comparable pricing Comparable loan price / (A) 55 to 100 points 88 points

Corporate equities(2) 288 Net asset value Discount to net asset value / (C) 0 to 37 % 8 %

Comparable pricing Discount to comparableequity price / (C) 0 to 27 points 14 points

Market approach EBITDA multiple / (A) 6 times 6 times

Net derivative and other contracts:

Interest rate contracts (82) Option model Interest rate volatility concentrationliquidity multiple / (C)(D) 0 to 8 times

See (3)

Comparable bond price / (A)(D) 5 to 98 points

Interest rate—Foreign exchangecorrelation / (A)(D) 2 to 63 %

Interest rate volatility skew / (A)(D) 9 to 95 %

Interest rate quanto correlation /(A)(D) -53 to 33 %

Interest rate curve correlation / (A)(D) 48 to 99 %

Inflation volatility / (A)(D) 49 to 100 %

Discounted cashflow

Forward commercial paper rate-LIBOR basis / (A) -18 to 95 basis points

Credit contracts 1,822 Comparable pricing Cash synthetic basis / (C) 2 to 14 points See (4)

Comparable bond price / (C) 0 to 80 points

Correlation model Credit correlation / (B) 14 to 94 %

Foreign exchange contracts(5) (359) Option model Comparable bond price / (A)(D) 5 to 98 points See (6)

Interest rate quanto correlation /(A)(D) -53 to 33 %

Interest rate—Credit spread correlation/ (A)(D) -59 to 65 %

Interest rate—Foreign exchangecorrelation / (A)(D) 2 to 63 %

Interest rate volatility skew / (A)(D) 9 to 95 %

Equity contracts(5) (1,144) Option model At the money volatility / (C)(D) 7 to 24 % See (7)

Volatility skew / (C)(D) -2 to 0 %

Equity—Equity correlation / (C)(D) 40 to 96 %

Equity—Foreign exchange correlation/ (C)(D) -70 to 38 %

Equity—Interest ratecorrelation / (C)(D) 18 to 65 %

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in the Unobservable Inputs Range(1)WeightedAverage

Commodity contracts 709 Option model Forward power price / (C)(D) $28 to $84 perMegawatt hour

Commodity volatility / (A)(D) 17 to 29 %

Cross commodity correlation / (C)(D) 43 to 97 %

Investments(2):

Principal investments2,833

Discounted cashflow

Implied weighted average cost ofcapital / (C)(D) 8 to 15 % 9 %

Exit multiple / (A)(D) 5 to 10 times 9 times

Discounted cashflow Capitalization rate / (C)(D) 6 to 10 % 7 %

Equity discount rate / (C)(D) 15 to 35 % 23 %


Other 486 Discounted cashflow

Implied weighted average cost ofcapital / (C)(D) 11 % 11 %

Exit multiple / (A)(D) 6 times 6 times


Liabilities

Trading liabilities:


Corporate bonds $ 177 Comparable pricing Comparable bond price / (A) 0 to 150 points 50 points

Securities sold under agreements torepurchase

151 Discounted cashflow Funding spread / (A) 110 to 184 basis points 166 basis points

Other secured financings 406 Comparable pricing Comparable bond price / (A) 55 to 139 points 102 points

Discounted cashflow Funding spread / (A) 183 to 186 basis points 184 basis points

Long-term borrowings 2,789 Option model At the money volatility / (A)(D) 20 to 24 % 24 %

Volatility skew / (A)(D) -1 to 0 % 0 %

Equity—Equity correlation / (A)(D) 50 to 90 % 77 %

Equity—Foreign exchangecorrelation / (A)(D) -70 to 36 % -15 %

(1) The ranges of significant unobservable inputs are represented in points, percentages, basis points, times or megawatt hours. Points are apercentage of par; for example, 100 points would be 100% of par. A basis point equals 1/100th of 1%; for example, 1,004 basis pointswould equal 10.04%.

(2) Investments in funds measured using an unadjusted NAV are excluded.(3) See Note 4 to the consolidated financial statements for the year ended December 31, 2012 included in the Form 10-K for a qualitative

discussion of the wide unobservable input ranges for comparable bond prices, interest rate volatility skew, interest rate quanto correlationand forward commercial paper rate–LIBOR basis.

(4) See Note 4 to the consolidated financial statements for the year ended December 31, 2012 included in the Form 10-K for a qualitativediscussion of the wide unobservable input ranges for comparable bond prices and credit correlation.

(5) Includes derivative contracts with multiple risks (i.e., hybrid products).(6) See Note 4 to the consolidated financial statements for the year ended December 31, 2012 included in the Form 10-K for a qualitative

discussion of the wide unobservable input ranges for comparable bond prices, interest rate quanto correlation, interest rate-credit spreadcorrelation and interest rate volatility skew.

(7) See Note 4 to the consolidated financial statements for the year ended December 31, 2012 included in the Form 10-K for a qualitativediscussion of the wide unobservable input range for equity-foreign exchange correlation.

Sensitivity of the fair value to changes in the unobservable inputs:(A) Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher (lower) fair value

measurement.(B) Significant changes in credit correlation may result in a significantly higher or lower fair value measurement. Increasing (decreasing)

correlation drives a redistribution of risk within the capital structure such that junior tranches become less (more) risky and seniortranches become more (less) risky.

(C) Significant increase (decrease) in the unobservable input in isolation would result in a significantly lower (higher) fair valuemeasurement.

(D) There are no predictable relationships between the significant unobservable inputs.

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The following provides a description of significant unobservable inputs included in the December 31, 2013 andDecember 31, 2012 tables above for all major categories of assets and liabilities:

• Comparable bond price—a pricing input used when prices for the identical instrument are not available.Significant subjectivity may be involved when fair value is determined using pricing data available forcomparable instruments. Valuation using comparable instruments can be done by calculating an impliedyield (or spread over a liquid benchmark) from the price of a comparable bond, then adjusting that yield(or spread) to derive a value for the bond. The adjustment to yield (or spread) should account for relevantdifferences in the bonds such as maturity or credit quality. Alternatively, a price-to-price basis can beassumed between the comparable instrument and bond being valued in order to establish the value of thebond. Additionally, as the probability of default increases for a given bond (i.e., as the bond becomesmore distressed), the valuation of that bond will increasingly reflect its expected recovery level assumingdefault. The decision to use price-to-price or yield/spread comparisons largely reflects trading marketconvention for the financial instruments in question. Price-to-price comparisons are primarily employedfor CMBS, CDOs, CLOs, mortgage loans and distressed corporate bonds. Implied yield (or spread over aliquid benchmark) is utilized predominately for non-distressed corporate bonds, loans and creditcontracts.

• Correlation—a pricing input where the payoff is driven by more than one underlying risk. Correlation is ameasure of the relationship between the movements of two variables (i.e., how the change in one variableinfluences a change in the other variable). Credit correlation, for example, is the factor that describes therelationship between the probability of individual entities to default on obligations and the jointprobability of multiple entities to default on obligations.

• Credit spread—the difference in yield between different securities due to differences in credit quality.The credit spread reflects the additional net yield an investor can earn from a security with more creditrisk relative to one with less credit risk. The credit spread of a particular security is often quoted inrelation to the yield on a credit risk-free benchmark security or reference rate, typically either U.S.Treasury or LIBOR.

• Volatility skew—the measure of the difference in implied volatility for options with identical underliersand expiry dates but with different strikes. The implied volatility for an option with a strike price that isabove or below the current price of an underlying asset will typically deviate from the implied volatilityfor an option with a strike price equal to the current price of that same underlying asset.

• EBITDA multiple / Exit multiple—is the Enterprise Value to EBITDA ratio, where the Enterprise Value isthe aggregate value of equity and debt minus cash and cash equivalents. The EBITDA multiple reflectsthe value of the company in terms of its full-year EBITDA, whereas the exit multiple reflects the value ofthe company in terms of its full-year expected EBITDA at exit. Either multiple allows comparisonbetween companies from an operational perspective as the effect of capital structure, taxation anddepreciation/amortization is excluded.

• Price / Book ratio—the ratio used to compare a stock’s market value to its book value. It is calculated bydividing the current closing price of the stock by the latest book value per share. This multiple allowscomparison between companies from an operational perspective.

• Volatility—the measure of the variability in possible returns for an instrument given how much thatinstrument changes in value over time. Volatility is a pricing input for options and, generally, the lowerthe volatility, the less risky the option. The level of volatility used in the valuation of a particular optiondepends on a number of factors, including the nature of the risk underlying that option (e.g., the volatility

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of a particular underlying equity security may be significantly different from that of a particularunderlying commodity index), the tenor and the strike price of the option.

• Forward commercial paper rate–LIBOR basis—the basis added to the LIBOR rate when the commercialpaper yield is expressed as a spread over the LIBOR rate. The basis to LIBOR is dependent on a numberof factors, including, but not limited to, collateralization of the commercial paper, credit rating of theissuer, and the supply of commercial paper. The basis may become negative, i.e., the return for highlyrated commercial paper, such as asset-backed commercial paper, may be less than LIBOR.

• Cash synthetic basis—the measure of the price differential between cash financial instruments (“cashinstruments”) and their synthetic derivative-based equivalents (“synthetic instruments”). The rangedisclosed in the table above signifies the number of points by which the synthetic bond equivalent price ishigher than the quoted price of the underlying cash bonds.

• Interest rate curve—the term structure of interest rates (relationship between interest rates and the time tomaturity) and a market’s measure of future interest rates at the time of observation. An interest rate curveis used to set interest rate derivative cash flows and is a pricing input used in the discounting of any OTCderivative cash flow.

• Implied weighted average cost of capital (“WACC”)—the WACC implied by the current value of equityin a discounted cash flow model. The model assumes that the cash flow assumptions, includingprojections, are fully reflected in the current equity value while the debt to equity ratio is held constant.The WACC theoretically represents the required rate of return to debt and equity investors, respectively.

• Capitalization rate—the ratio between net operating income produced by an asset and its market value atthe projected disposition date.

• Funding spread—the difference between the general collateral rate (which refers to the rate applicable toa broad class of U.S. Treasury issuances) and the specific collateral rate (which refers to the rateapplicable to a specific type of security pledged as collateral, such as a municipal bond). Repurchaseagreements are discounted based on collateral curves. The curves are constructed as spreads over thecorresponding OIS/LIBOR curves, with the short end of the curve representing spreads over thecorresponding OIS curves and the long end of the curve representing spreads over LIBOR.

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Fair Value of Investments That Calculate Net Asset Value.

The Company’s Investments measured at fair value were $8,013 million and $8,346 million at December 31,2013 and December 31, 2012, respectively. The following table presents information solely about the Company’sinvestments in private equity funds, real estate funds and hedge funds measured at fair value based on NAV atDecember 31, 2013 and December 31, 2012, respectively:

At December 31, 2013 At December 31, 2012

Fair ValueUnfunded

Commitment Fair ValueUnfunded

Commitment


Private equity funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,531 $559 $2,179 $644Real estate funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,643 124 1,376 221Hedge funds(1):

Long-short equity hedge funds . . . . . . . . . . . . . . . . . . . . . 469 — 475 —Fixed income/credit-related hedge funds . . . . . . . . . . . . . 82 — 86 —Event-driven hedge funds . . . . . . . . . . . . . . . . . . . . . . . . . 38 — 52 —Multi-strategy hedge funds . . . . . . . . . . . . . . . . . . . . . . . . 220 3 321 3

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,983 $686 $4,489 $868

(1) Fixed income/credit-related hedge funds, event-driven hedge funds, and multi-strategy hedge funds are redeemable at least on a three-month period basis primarily with a notice period of 90 days or less. At December 31, 2013, approximately 42% of the fair value amountof long-short equity hedge funds is redeemable at least quarterly, 42% is redeemable every six months and 16% of these funds have aredemption frequency of greater than six months. The notice period for long-short equity hedge funds at December 31, 2013 is primarilygreater than six months. At December 31, 2012, approximately 36% of the fair value amount of long-short equity hedge funds isredeemable at least quarterly, 38% is redeemable every six months and 26% of these funds have a redemption frequency of greater thansix months. The notice period for long-short equity hedge funds at December 31, 2012 is primarily greater than six months.

Private Equity Funds. Amount includes several private equity funds that pursue multiple strategies includingleveraged buyouts, venture capital, infrastructure growth capital, distressed investments, and mezzanine capital.In addition, the funds may be structured with a focus on specific domestic or foreign geographic regions. Theseinvestments are generally not redeemable with the funds. Instead, the nature of the investments in this category isthat distributions are received through the liquidation of the underlying assets of the fund. At December 31, 2013,it was estimated that 9% of the fair value of the funds will be liquidated in the next five years, another 55% of thefair value of the funds will be liquidated between five to 10 years and the remaining 36% of the fair value of thefunds have a remaining life of greater than 10 years.

Real Estate Funds. Amount includes several real estate funds that invest in real estate assets such ascommercial office buildings, retail properties, multi-family residential properties, developments or hotels. Inaddition, the funds may be structured with a focus on specific geographic domestic or foreign regions. Theseinvestments are generally not redeemable with the funds. Distributions from each fund will be received as theunderlying investments of the funds are liquidated. At December 31, 2013, it was estimated that 4% of the fairvalue of the funds will be liquidated within the next five years, another 52% of the fair value of the funds will beliquidated between five to 10 years and the remaining 44% of the fair value of the funds have a remaining life ofgreater than 10 years.

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Hedge Funds. Investments in hedge funds may be subject to initial period lock-up restrictions or gates. A hedgefund lock-up provision is a provision that provides that, during a certain initial period, an investor may not makea withdrawal from the fund. The purpose of a gate is to restrict the level of redemptions that an investor in aparticular hedge fund can demand on any redemption date.

• Long-Short Equity Hedge Funds. Amount includes investments in hedge funds that invest, long orshort, in equities. Equity value and growth hedge funds purchase stocks perceived to be undervalued andsell stocks perceived to be overvalued. Investments representing approximately 12% of the fair value ofthe investments in this category cannot be redeemed currently because the investments include certaininitial period lock-up restrictions. The remaining restriction period for these investments subject to lock-up restrictions was primarily two years or less at December 31, 2013. Investments representingapproximately 19% of the fair value of the investments in long-short equity hedge funds cannot beredeemed currently because an exit restriction has been imposed by the hedge fund manager. Therestriction period for these investments subject to an exit restriction was primarily indefinite atDecember 31, 2013.

• Fixed Income/Credit-Related Hedge Funds. Amount includes investments in hedge funds that employlong-short, distressed or relative value strategies in order to benefit from investments in undervalued orovervalued securities that are primarily debt or credit related. Investments representing approximately 7%of the fair value of the investments in this category cannot be redeemed currently because the investmentsinclude certain initial period lock-up restrictions. The remaining restriction period for these investmentssubject to lock-up restrictions was primarily over three years at December 31, 2013.

• Event-Driven Hedge Funds. Amount includes investments in hedge funds that invest in event-drivensituations such as mergers, hostile takeovers, reorganizations, or leveraged buyouts. This may involve thesimultaneous purchase of stock in companies being acquired and the sale of stock in its acquirer, with theexpectation to profit from the spread between the current market price and the ultimate purchase price ofthe target company. At December 31, 2013, there were no restrictions on redemptions.

• Multi-strategy Hedge Funds. Amount includes investments in hedge funds that pursue multiplestrategies to realize short- and long-term gains. Management of the hedge funds has the ability tooverweight or underweight different strategies to best capitalize on current investment opportunities. AtDecember 31, 2013, investments representing approximately 50% of the fair value of the investments inthis category cannot be redeemed currently because the investments include certain initial period lock-uprestrictions. The remaining restriction period for these investments subject to lock-up restrictions wasprimarily two years or less at December 31, 2013. Investments representing approximately 8% of the fairvalue of the investments in multi-strategy hedge funds cannot be redeemed currently because an exitrestriction has been imposed by the hedge fund manager. The restriction period for these investmentssubject to an exit restriction was indefinite at December 31, 2013.

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Fair Value Option.

The Company elected the fair value option for certain eligible instruments that are risk managed on a fair valuebasis to mitigate income statement volatility caused by measurement basis differences between the electedinstruments and their associated risk management transactions or to eliminate complexities of applying certainaccounting models. The following table presents net gains (losses) due to changes in fair value for itemsmeasured at fair value pursuant to the fair value option election for 2013, 2012 and 2011, respectively:

Trading

InterestIncome

(Expense)

Gains (Losses)Included in

Net Revenues


Year Ended December 31, 2013Federal funds sold and securities purchased under agreements to resell . . . . . $ (1) $ 6 $ 5Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 (60) (8)Commercial paper and other short-term borrowings(1) . . . . . . . . . . . . . . . . . . 181 (8) 173Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . (3) (6) (9)Long-term borrowings(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 664 (971) (307)

Year Ended December 31, 2012Federal funds sold and securities purchased under agreements to resell . . . . . $ 8 $ 5 $ 13Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 (86) (29)Commercial paper and other short-term borrowings(1) . . . . . . . . . . . . . . . . . . (31) — (31)Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . (15) (4) (19)Long-term borrowings(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,687) (1,321) (7,008)

Year Ended December 31, 2011Federal funds sold and securities purchased under agreements to resell . . . . . $ 12 $ — $ 12Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 (117) (51)Commercial paper and other short-term borrowings(1) . . . . . . . . . . . . . . . . . . 567 — 567Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . 3 (7) (4)Long-term borrowings(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,204 (1,075) 3,129

(1) Of the total gains (losses) recorded in Trading revenues for short-term and long-term borrowings for 2013, 2012 and 2011, $(681)million, $(4,402) million and $3,681 million, respectively, are attributable to changes in the credit quality of the Company, and therespective remainder is attributable to changes in foreign currency rates or interest rates or movements in the reference price or index forstructured notes before the impact of related hedges.

In addition to the amounts in the above table, as discussed in Note 2, all of the instruments within Trading assetsor Trading liabilities are measured at fair value, either through the election of the fair value option or as requiredby other accounting guidance. The amounts in the above table are included within Net revenues and do notreflect gains or losses on related hedging instruments, if any.

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

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At December 31, 2013 and December 31, 2012, a breakdown of the short-term and long-term borrowingsmeasured at fair value on a recurring basis by business unit responsible for risk-managing each borrowing isshown in the table below:

Short-Term and Long-TermBorrowings

Business UnitAt December 31,

2013At December 31,

2012


Interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,933 $23,330Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,945 17,326Credit and foreign exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,561 3,337Commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 545 776

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,984 $44,769

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

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

2013 2012 2011


Short-term and long-term borrowings(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(681) $(4,402) $3,681Loans(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 340 (585)Unfunded lending commitments(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 1,026 (787)

(1) The change in the fair value of short-term and long-term borrowings (primarily structured notes) includes an adjustment to reflect thechange in credit quality of the Company based upon observations of the Company’s secondary bond market spreads.

(2) Instrument-specific credit gains (losses) were determined by excluding the non-credit components of gains and losses, such as those dueto changes in interest rates.

(3) Gains (losses) were generally determined based on the differential between estimated expected client yields and contractual yields ateach respective period-end.

Net Difference between Contractual Principal Amount and Fair Value.

Contractual Principal AmountExceeds Fair Value

At December 31,2013

At December 31,2012


Short-term and long-term borrowings(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,409) $ (436)Loans(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,248 25,249Loans 90 or more days past due and/or on nonaccrual status(2)(3) . . . . . . . . . . . 15,113 20,456

(1) These amounts do not include structured notes where the repayment of the initial principal amount fluctuates based on changes in thereference price or index.

(2) The majority of this difference between principal and fair value amounts emanates from the Company’s distressed debt trading business,which purchases distressed debt at amounts well below par.

(3) The aggregate fair value of loans that were in nonaccrual status, which includes all loans 90 or more days past due, was $1,205 millionand $1,360 million at December 31, 2013 and December 31, 2012, respectively. The aggregate fair value of loans that were 90 or moredays past due was $655 million and $840 million at December 31, 2013 and December 31, 2012, respectively.

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

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

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

The following tables present, by caption on the consolidated statements of financial condition, the fair valuehierarchy for those assets measured at fair value on a non-recurring basis for which the Company recognized anon-recurring fair value adjustment for 2013, 2012 and 2011, respectively.

2013.

Fair Value Measurements Using:

Carrying Valueat December 31,

2013



SignificantObservable Inputs

(Level 2)


Inputs(Level 3)

TotalGains

(Losses) for2013(1)


Loans(2) . . . . . . . . . . . . . . . . . . . . . . . . $1,822 $— $1,616 $206 $ (71)Other investments(3) . . . . . . . . . . . . . . . 46 — — 46 (38)Premises, equipment and software

costs(3) . . . . . . . . . . . . . . . . . . . . . . . 8 — — 8 (133)Intangible assets(3) . . . . . . . . . . . . . . . . 92 — — 92 (44)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,968 $— $1,616 $352 $(286)

(1) Fair value adjustments related to Loans and losses related to Other investments are recorded within Other revenues whereas lossesrelated to Premises, equipment and software costs and Intangible assets are recorded within Other expenses in the consolidatedstatements of income.

(2) Non-recurring changes in the fair value of loans held for investment or held for sale were calculated using recently executed transactions;market price quotations; valuation models that incorporate market observable inputs where possible, such as comparable loan or debtprices and credit default swap spread levels adjusted for any basis difference between cash and derivative instruments; or defaultrecovery analysis where such transactions and quotations are unobservable.

(3) Losses recorded were determined primarily using discounted cash flow models.

There were no significant liabilities measured at fair value on a non-recurring basis during 2013.

2012.



2012

Quoted Prices inActive Markets

for Identical Assets(Level 1)


(Level 2)


Inputs(Level 3)

TotalGains

(Losses) for2012(1)


Loans(2) . . . . . . . . . . . . . . . . . . . . . . . . $1,821 $— $277 $1,544 $ (60)Other investments(3) . . . . . . . . . . . . . . . 90 — — 90 (37)Premises, equipment and software

costs(4) . . . . . . . . . . . . . . . . . . . . . . . 33 — — 33 (170)Intangible assets(3) . . . . . . . . . . . . . . . . — — — — (4)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,944 $— $277 $1,667 $(271)

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(1) Losses are recorded within Other expenses in the consolidated statements of income except for fair value adjustments related to Loansand losses related to Other investments, which are included in Other revenues.

(2) Non-recurring changes in the fair value of loans held for investment or held for sale were calculated using recently executed transactions;market price quotations; valuation models that incorporate market observable inputs where possible, such as comparable loan or debtprices and credit default swap spread levels adjusted for any basis difference between cash and derivative instruments; or defaultrecovery analysis where such transactions and quotations are unobservable.

(3) Losses recorded were determined primarily using discounted cash flow models.(4) Losses were determined using discounted cash flow models and primarily represented the write-off of the carrying value of certain

premises and software that were abandoned during 2012 in association with the Wealth Management JV integration.

In addition to the losses included in the table above, there was a pre-tax gain of approximately $51 million(related to Other assets) included in discontinued operations in the year ended December 31, 2012 in connectionwith the disposition of Saxon (see Note 1). This pre-tax gain was primarily due to the subsequent increase in thefair value of Saxon, which had incurred impairment losses of $98 million in the quarter ended December 31,2011. The fair value of Saxon was determined based on the revised purchase price agreed upon with the buyer.

There were no liabilities measured at fair value on a non-recurring basis during 2012.

2011.



2011




(Level 2)


Inputs(Level 3)

TotalGains

(Losses) for2011(1)


Loans(2) . . . . . . . . . . . . . . . . . . . . . . . . $ 70 $— $— $ 70 $ 5Other investments(3) . . . . . . . . . . . . . . . 71 — — 71 (52)Premises, equipment and software

costs(4) . . . . . . . . . . . . . . . . . . . . . . . 4 — — 4 (7)Intangible assets(3) . . . . . . . . . . . . . . . . — — — — (7)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $145 $— $— $145 $(61)

(1) Losses are recorded within Other expenses in the consolidated statements of income except for fair value adjustments related to Loansand losses related to Other investments, which are included in Other revenues.

(2) Non-recurring changes in the fair value of loans held for investment were calculated using valuation models that incorporate marketobservable inputs or default recovery analyses or collateral appraisal values where such inputs were unobservable; or discounted cashflow techniques.

(3) Losses recorded were determined primarily using discounted cash flow models.(4) Losses were determined primarily using discounted cash flow models or a valuation technique incorporating an observable market index.

In addition to the losses included in the table above, impairment losses of approximately $98 million (of which$83 million related to Other assets and $15 million related to Premises, equipment and software costs) wereincluded in discontinued operations related to Saxon (see Note 1). These losses were determined using thepurchase price agreed upon with the buyer.

There were no liabilities measured at fair value on a non-recurring basis during 2011.

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Financial Instruments Not Measured at Fair Value.

The tables below present the carrying value, fair value and fair value hierarchy category of certain financialinstruments that are not measured at fair value in the consolidated statements of financial condition. The tablesbelow exclude certain financial instruments such as equity method investments and all non-financial assets andliabilities such as the value of the long-term relationships with our deposit customers.

The carrying value of cash and cash equivalents, including Interest bearing deposits with banks, and other short-term financial instruments such as Federal funds sold and securities purchased under agreements to resell;Securities borrowed; Securities sold under agreements to repurchase; Securities loaned; certain Customer andother receivables and Customer and other payables arising in the ordinary course of business; certain Deposits;Commercial paper and other short-term borrowings; and Other secured financings approximate fair valuebecause of the relatively short period of time between their origination and expected maturity.

For longer-dated Federal funds sold and securities purchased under agreements to resell, Securities borrowed,Securities sold under agreements to repurchase, Securities loaned and Other secured financings, fair value isdetermined using a standard cash flow discounting methodology. The inputs to the valuation include contractualcash flows and collateral funding spreads, which are estimated using various benchmarks and interest rate yieldcurves.

For consumer and residential real estate loans and lending commitments where position-specific external pricedata are not observable, the fair value is based on the credit risks of the borrower using a probability of defaultand loss given default method, discounted at the estimated external cost of funding level. The fair value ofcorporate loans and lending commitments is determined using recently executed transactions, market pricequotations (where observable), implied yields from comparable debt, and market observable credit default swapspread levels along with proprietary valuation models and default recovery analysis where such transactions andquotations are unobservable.

The fair value of long-term borrowings is generally determined based on transactional data or third-party pricingfor identical or comparable instruments, when available. Where position-specific external prices are notobservable, fair value is determined based on current interest rates and credit spreads for debt instruments withsimilar terms and maturity.

185

MORGAN STANLEY


Financial Instruments Not Measured at Fair Value at December 31, 2013 and December 31, 2012.


At December 31, 2013 Fair Value Measurements Using:

Carrying Value Fair Value




Inputs(Level 2)


Inputs(Level 3)


Financial Assets:Cash and due from banks . . . . . . . . . . . . . . $ 16,602 $ 16,602 $16,602 $ — $ —Interest bearing deposits with banks . . . . . 43,281 43,281 43,281 — —Cash deposited with clearing organizations

or segregated under federal and otherregulations or requirements . . . . . . . . . . 39,203 39,203 39,203 — —

Federal funds sold and securitiespurchased under agreements to resell . . . 117,264 117,263 — 116,584 679

Securities borrowed . . . . . . . . . . . . . . . . . . 129,707 129,705 — 129,374 331Customer and other receivables(1) . . . . . . . 53,112 53,031 — 47,525 5,506Loans(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,874 42,765 — 11,288 31,477Financial Liabilities:Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . $112,194 $112,273 $ — $112,273 $ —Commercial paper and other short-term

borrowings . . . . . . . . . . . . . . . . . . . . . . . 795 795 — 787 8Securities sold under agreements to

repurchase . . . . . . . . . . . . . . . . . . . . . . . . 145,115 145,157 — 138,161 6,996Securities loaned . . . . . . . . . . . . . . . . . . . . . 32,799 32,826 — 31,731 1,095Other secured financings . . . . . . . . . . . . . . 9,009 9,034 — 5,845 3,189Customer and other payables(1) . . . . . . . . . 154,654 154,654 — 154,654 —Long-term borrowings . . . . . . . . . . . . . . . . 117,938 123,133 — 122,099 1,034

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

The fair value of the Company’s unfunded lending commitments, primarily related to corporate lending in theInstitutional Securities business segment, that are not carried at fair value at December 31, 2013 was $853million, of which $669 million and $184 million would be categorized in Level 2 and Level 3 of the fair valuehierarchy, respectively. The carrying value of these commitments, if fully funded, would be $75.4 billion.

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At December 31, 2012 Fair Value Measurements Using:

Carrying Value Fair Value




Inputs(Level 2)


Inputs(Level 3)


Financial Assets:Cash and due from banks . . . . . . . . . . . . . . $ 20,878 $ 20,878 $20,878 $ — $ —Interest bearing deposits with banks . . . . . 26,026 26,026 26,026 — —Cash deposited with clearing organizations

or segregated under federal and otherregulations or requirements . . . . . . . . . . 30,970 30,970 30,970 — —

Federal funds sold and securitiespurchased under agreements to resell . . . 133,791 133,792 — 133,035 757

Securities borrowed . . . . . . . . . . . . . . . . . . 121,701 121,705 — 121,691 14Customer and other receivables(1) . . . . . . . 59,702 59,634 — 53,532 6,102Loans(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,046 27,263 — 5,307 21,956Financial Liabilities:Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 81,781 $ 81,781 $ — $ 81,781 $ —Commercial paper and other short-term

borrowings . . . . . . . . . . . . . . . . . . . . . . . 1,413 1,413 — 1,107 306Securities sold under agreements to

repurchase . . . . . . . . . . . . . . . . . . . . . . . . 122,311 122,389 — 111,722 10,667Securities loaned . . . . . . . . . . . . . . . . . . . . . 36,849 37,163 — 35,978 1,185Other secured financings . . . . . . . . . . . . . . 6,261 6,276 — 3,649 2,627Customer and other payables(1) . . . . . . . . . 125,037 125,037 — 125,037 —Long-term borrowings . . . . . . . . . . . . . . . . 125,527 126,683 — 116,511 10,172

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

The fair value of the Company’s unfunded lending commitments, primarily related to corporate lending in theInstitutional Securities business segment, that are not carried at fair value at December 31, 2012 was $755million, of which $543 million and $212 million would be categorized in Level 2 and Level 3 of the fair valuehierarchy, respectively. The carrying value of these commitments, if fully funded, would be $50.0 billion.

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5. Securities Available for Sale.

The following tables present information about the Company’s available for sale securities:At December 31, 2013

AmortizedCost

GrossUnrealized

Gains

GrossUnrealized

Losses

Other-than-TemporaryImpairment

FairValue

(dollars in millions)Debt securities available for sale:

U.S. government and agency securities:U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . $24,486 $ 51 $139 $— $24,398U.S. agency securities . . . . . . . . . . . . . . . . . . . . . . 15,813 26 234 — 15,605

Total U.S. government and agencysecurities . . . . . . . . . . . . . . . . . . . . . . . . . . 40,299 77 373 — 40,003

Corporate and other debt:Commercial mortgage-backed securities:

Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,482 — 84 — 2,398Non-Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,333 1 18 — 1,316

Auto loan asset-backed securities . . . . . . . . . . . . . 2,041 2 1 — 2,042Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . 3,415 3 61 — 3,357Collateralized loan obligations . . . . . . . . . . . . . . . 1,087 — 20 — 1,067FFELP student loan asset-backed securities(1) . . . 3,230 12 8 — 3,234

Total Corporate and other debt . . . . . . . . . . . 13,588 18 192 — 13,414

Total debt securities available for sale . . . . . . . . . . . . . 53,887 95 565 — 53,417

Equity securities available for sale . . . . . . . . . . . . . . . . 15 — 2 — 13

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $53,902 $ 95 $567 $— $53,430


AmortizedCost

GrossUnrealized

Gains

GrossUnrealized

Losses

Other-than-TemporaryImpairment

FairValue

(dollars in millions)Debt securities available for sale:

U.S. government and agency securities:U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . $14,351 $109 $ 2 $— $14,458U.S. agency securities . . . . . . . . . . . . . . . . . . . . . . 15,330 122 3 — 15,449

Total U.S. government and agencysecurities . . . . . . . . . . . . . . . . . . . . . . . . . . 29,681 231 5 — 29,907


Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,197 6 4 — 2,199Non-Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 — — — 160

Auto loan asset-backed securities . . . . . . . . . . . . . 1,993 4 1 — 1,996Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . 2,891 13 3 — 2,901FFELP student loan asset-backed securities(1) . . . 2,675 23 — — 2,698

Total Corporate and other debt . . . . . . . . . . . 9,916 46 8 — 9,954

Total debt securities available for sale . . . . . . . . . . . . . 39,597 277 13 — 39,861

Equity securities available for sale . . . . . . . . . . . . . . . . 15 — 7 — 8

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $39,612 $277 $ 20 $— $39,869

(1) Amounts are backed by a guarantee from the U.S. Department of Education of at least 95% of the principal balance and interest on suchloans.

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MORGAN STANLEY


The tables below present the fair value of investments in securities available for sale that are in an unrealized lossposition:

Less than 12 Months 12 Months or Longer Total

At December 31, 2013 Fair Value

GrossUnrealized

Losses Fair Value

GrossUnrealized

Losses Fair Value

GrossUnrealized

Losses


Debt securities available for sale:U.S. government and agency securities:

U.S. Treasury securities . . . . . . . . . . . $13,266 $139 $ — $— $13,266 $139U.S. agency securities . . . . . . . . . . . . . 8,438 211 651 23 9,089 234

Total U.S. government and agencysecurities . . . . . . . . . . . . . . . . . . . 21,704 350 651 23 22,355 373

Corporate and other debt:Commercial mortgage-backed

securities:Agency . . . . . . . . . . . . . . . . . . . . . . 958 15 1,270 69 2,228 84Non-Agency . . . . . . . . . . . . . . . . . . 841 16 86 2 927 18

Auto loan asset-backed securities . . . . 557 1 85 — 642 1Corporate bonds . . . . . . . . . . . . . . . . . 2,350 52 383 9 2,733 61Collateralized loan obligations . . . . . . 1,067 20 — — 1,067 20FFELP student loan asset-backed

securities . . . . . . . . . . . . . . . . . . . . . 1,388 7 76 1 1,464 8

Total Corporate and other debt . . . . 7,161 111 1,900 81 9,061 192

Total debt securities available for sale . . . . 28,865 461 2,551 104 31,416 565

Equity securities available for sale . . . . . . . 13 2 — — 13 2

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28,878 $463 $2,551 $104 $31,429 $567

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Less than 12 Months12 Months or

Longer Total

At December 31, 2012 Fair Value

GrossUnrealized

LossesFair

Value

GrossUnrealized

LossesFair

Value

GrossUnrealized

Losses


Debt securities available for sale:U.S. government and agency securities:

U.S. Treasury securities . . . . . . . . . . . . . . . . $1,012 $ 2 $— $— $1,012 $ 2U.S. agency securities . . . . . . . . . . . . . . . . . . 1,534 3 27 — 1,561 3

Total U.S. government and agencysecurities . . . . . . . . . . . . . . . . . . . . . . . . 2,546 5 27 — 2,573 5


Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,057 4 — — 1,057 4Auto loan asset-backed securities . . . . . . . . . 710 1 — — 710 1Corporate bonds . . . . . . . . . . . . . . . . . . . . . . 934 3 — — 934 3

Total Corporate and other debt . . . . . . . . . 2,701 8 — — 2,701 8

Total debt securities available for sale . . . . . . . . . 5,247 13 27 — 5,274 13

Equity securities available for sale . . . . . . . . . . . . 8 7 — — 8 7

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,255 $20 $ 27 $— $5,282 $20

Gross unrealized gains and losses are recorded in Accumulated other comprehensive income.

As discussed in Note 2, AFS securities with a current fair value less than their amortized cost are analyzed as partof the Company’s ongoing assessment of temporary versus OTTI at the individual security level. The unrealizedlosses reported above on debt securities available for sale are primarily due to rising interest rates during 2013.While the securities in an unrealized loss position greater than twelve months have increased, the risk of creditloss is considered minimal because all of the Company’s agency securities as well as the Company’s ABS,CMBS and CLOs are highly rated and the Company’s corporate bonds are all investment grade. The Companydoes not intend to sell these securities and is not likely to be required to sell these securities prior to recovery ofthe amortized cost basis. The Company does not expect to experience a credit loss on these securities based onconsideration of the relevant information (as discussed in Note 2), including for U.S. government and agencysecurities, the existence of the explicit and implicit guarantee provided by the U.S. government. The Companybelieves that the debt securities with an unrealized loss position were not other-than-temporarily impaired atDecember 31, 2013 and 2012. For more information, see the Other-than-temporary impairment discussion inNote 2.

For equity securities available for sale in an unrealized loss position, the Company does not intend to sell thesesecurities or expect to be required to sell these securities prior to the recovery of the amortized cost basis. TheCompany believes that the equity securities with an unrealized loss in Accumulated other comprehensive incomewere not other-than-temporarily impaired at December 31, 2013 and 2012.

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The following table presents the amortized cost and fair value of debt securities available for sale by contractualmaturity dates at December 31, 2013:

At December 31, 2013 Amortized Cost Fair ValueAnnualized

Average Yield

(dollars in millions)U.S. government and agency securities:

U.S. Treasury securities:Due within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,759 $ 1,767 0.7%After 1 year through 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,594 21,514 0.7%After 5 years through 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,133 1,117 2.2%

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,486 24,398

U.S. agency securities:After 1 year through 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 111 1.2%After 5 years through 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,202 2,199 1.2%After 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,500 13,295 1.3%

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,813 15,605

Total U.S. government and agency securities . . . . . . . . . . . . . . 40,299 40,003 0.9%


Agency:After 1 year through 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 533 528 0.9%After 5 years through 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 645 634 0.9%After 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,304 1,236 1.5%

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,482 2,398

Non-Agency:After 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,333 1,316 1.6%

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,333 1,316

Auto loan asset-backed securities:Due within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 9 0.5%After 1 year through 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,985 1,985 0.7%After 5 years through 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 48 1.3%

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,041 2,042

Corporate bonds:Due within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 60 0.6%After 1 year through 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,613 2,582 1.2%After 5 years through 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 742 715 2.3%

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,415 3,357

Collateralized loan obligations:After 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,087 1,067 1.4%

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,087 1,067

FFELP student loan asset-backed securities:After 1 year through 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 87 0.7%After 5 years through 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 576 576 0.9%After 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,567 2,571 1.0%

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,230 3,234

Total Corporate and other debt . . . . . . . . . . . . . . . . . . . . . . . . . 13,588 13,414 1.2%

Total debt securities available for sale . . . . . . . . . . . . . . . . . . . $53,887 $53,417 1.0%

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See Note 7 for additional information on securities issued by VIEs, including U.S. agency mortgage-backedsecurities, non-agency CMBS, auto loan asset-backed securities, CLO and FFELP student loan asset-backedsecurities.

The following table presents information pertaining to sales of securities available for sale during 2013, 2012 and2011:

2013 2012 2011


Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $49 $88 $145

Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4 $10 $ 2

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

6. Collateralized Transactions.

The Company enters into reverse repurchase agreements, repurchase agreements, securities borrowed andsecurities loaned transactions to, among other things, acquire securities to cover short positions and settle othersecurities obligations, to accommodate customers’ needs and to finance the Company’s inventory positions. TheCompany manages credit exposure arising from such transactions by, in appropriate circumstances, entering intomaster netting agreements and collateral agreements with counterparties that provide the Company, in the eventof a counterparty default (such as bankruptcy or a counterparty’s failure to pay or perform), with the right to net acounterparty’s rights and obligations under such agreement and liquidate and set off collateral held by theCompany against the net amount owed by the counterparty. The Company’s policy is generally to takepossession of securities purchased under agreements to resell and securities borrowed, and to receive securitiesand cash posted as collateral (with rights of rehypothecation), although in certain cases, the Company may agreefor such collateral to be posted to a third-party custodian under a tri-party arrangement that enables the Companyto take control of such collateral in the event of a counterparty default. The Company also monitors the fair valueof the underlying securities as compared with the related receivable or payable, including accrued interest, and,as necessary, requests additional collateral as provided under the applicable agreement to ensure suchtransactions are adequately collateralized. The following tables present information about the offsetting of theseinstruments and related collateral amounts. For information related to offsetting of derivatives, see Note 12.


GrossAmounts(1)

Amounts Offsetin the

ConsolidatedStatements of

FinancialCondition(2)

Net AmountsPresented

in theConsolidatedStatements of

FinancialCondition

FinancialInstruments Not

Offset in theConsolidatedStatements of

FinancialCondition(3) Net Exposure

(dollars in millions)AssetsFederal funds sold and securities

purchased under agreements toresell . . . . . . . . . . . . . . . . . . . . . . . . . . $183,015 $(64,885) $118,130 $(106,828) $11,302

Securities borrowed . . . . . . . . . . . . . . . . 137,082 (7,375) 129,707 (113,339) 16,368

LiabilitiesSecurities sold under agreements to

repurchase . . . . . . . . . . . . . . . . . . . . . $210,561 $(64,885) $145,676 $(111,599) $34,077Securities loaned . . . . . . . . . . . . . . . . . . 40,174 (7,375) 32,799 (32,543) 256

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(1) Amounts include $11.1 billion of Federal funds sold and securities purchased under agreements to resell, $13.2 billion of Securitiesborrowed and $33.3 billion of Securities sold under agreements to repurchase, which are either not subject to master netting agreementsor collateral agreements or are subject to such agreements but the Company has not determined the agreements to be legally enforceable.

(2) Amounts relate to master netting agreements and collateral agreements, which have been determined by the Company to be legallyenforceable in the event of default and where certain other criteria are met in accordance with applicable offsetting accounting guidance.

(3) Amounts relate to master netting agreements and collateral agreements, which have been determined by the Company to be legallyenforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accountingguidance.


GrossAmounts(1)




Net AmountsPresented

in theConsolidatedStatements of

FinancialCondition

FinancialInstruments Not

Offset in theConsolidatedStatements of

FinancialCondition(3) Net Exposure


AssetsFederal funds sold and securities

purchased under agreements toresell . . . . . . . . . . . . . . . . . . . . . . . . . . $203,448 $(69,036) $134,412 $(126,303) $ 8,109

Securities borrowed . . . . . . . . . . . . . . . . 127,002 (5,301) 121,701 (105,849) 15,852

LiabilitiesSecurities sold under agreements to

repurchase . . . . . . . . . . . . . . . . . . . . . $191,710 $(69,036) $122,674 $(103,521) $19,153Securities loaned . . . . . . . . . . . . . . . . . . 42,150 (5,301) 36,849 (30,395) 6,454

(1) Amounts include $7.4 billion of Federal funds sold and securities purchased under agreements to resell, $8.6 billion of Securitiesborrowed, $17.5 billion of Securities sold under agreements to repurchase and $0.6 billion of Securities loaned, which are either notsubject to master netting agreements or collateral agreements or are subject to such agreements but the Company has not determined theagreements to be legally enforceable.



The Company also engages in margin lending to clients that allows the client to borrow against the value ofqualifying securities and is included within Customer and other receivables in the consolidated statement offinancial condition. Under these agreements and transactions, the Company either receives or provides collateral,including U.S. government and agency securities, other sovereign government obligations, corporate and otherdebt, and corporate equities. Customer receivables generated from margin lending activity are collateralized bycustomer-owned securities held by the Company. The Company monitors required margin levels and establishedcredit limits daily and, pursuant to such guidelines, requires customers to deposit additional collateral, or reducepositions, when necessary. Margin loans are extended on a demand basis and are not committed facilities.Factors considered in the review of margin loans are the amount of the loan, the intended purpose, the degree ofleverage being employed in the account, and overall evaluation of the portfolio to ensure proper diversificationor, in the case of concentrated positions, appropriate liquidity of the underlying collateral or potential hedgingstrategies to reduce risk. Additionally, transactions relating to concentrated or restricted positions require areview of any legal impediments to liquidation of the underlying collateral. Underlying collateral for marginloans is reviewed with respect to the liquidity of the proposed collateral positions, valuation of securities, historictrading range, volatility analysis and an evaluation of industry concentrations. For these transactions, adherence

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to the Company’s collateral policies significantly limits the Company’s credit exposure in the event of customerdefault. The Company may request additional margin collateral from customers, if appropriate, and, if necessary,may sell securities that have not been paid for or purchase securities sold but not delivered from customers. AtDecember 31, 2013 and December 31, 2012, there were approximately $29.2 billion and $24.0 billion,respectively, of customer margin loans outstanding.

Other secured financings include the liabilities related to transfers of financial assets that are accounted for asfinancings rather than sales, consolidated VIEs where the Company is deemed to be the primary beneficiary, andcertain equity-linked notes and other secured borrowings. These liabilities are generally payable from the cashflows of the related assets accounted for as Trading assets (see Notes 7 and 11).

The Company pledges its trading assets to collateralize repurchase agreements and other secured financings.Pledged financial instruments that can be sold or repledged by the secured party are identified as Trading assets(pledged to various parties) in the consolidated statements of financial condition. The carrying value andclassification of Trading assets by the Company that have been loaned or pledged to counterparties where thosecounterparties do not have the right to sell or repledge the collateral were as follows:

AtDecember 31,

2013

AtDecember 31,

2012


Trading assets:U.S. government and agency securities . . . . . . . . . . . . . . . . . . . . . . . $21,589 $15,273Other sovereign government obligations . . . . . . . . . . . . . . . . . . . . . . 5,748 3,278Corporate and other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,388 11,980Corporate equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,713 26,377

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $43,438 $56,908

The Company receives collateral in the form of securities in connection with reverse repurchase agreements,securities borrowed and derivative transactions, customer margin loans and securities-based lending. In manycases, the Company is permitted to sell or repledge these securities held as collateral and use the securities tosecure repurchase agreements, to enter into securities lending and derivative transactions or for delivery tocounterparties to cover short positions. The Company additionally receives securities as collateral in connectionwith certain securities-for-securities transactions in which the Company is the lender. In instances where theCompany is permitted to sell or repledge these securities, the Company reports the fair value of the collateralreceived and the related obligation to return the collateral in the consolidated statements of financial condition.At December 31, 2013 and December 31, 2012, the fair value of financial instruments received as collateralwhere the Company is permitted to sell or repledge the securities was $533 billion and $560 billion, respectively,and the fair value of the portion that had been sold or repledged was $381 billion and $397 billion, respectively.

The Company is subject to concentration risk by holding large positions in certain types of securities, loans orcommitments to purchase securities of a single issuer, including sovereign governments and other entities, issuerslocated in a particular country or geographic area, public and private issuers involving developing countries orissuers engaged in a particular industry. Trading assets owned by the Company include U.S. government andagency securities and securities issued by other sovereign governments (principally Japan, the U.K., Brazil,Canada and Hong Kong), which, in the aggregate, represented approximately 10% of the Company’s total assetsat December 31, 2013. In addition, substantially all of the collateral held by the Company for resale agreementsor bonds borrowed, which together represented approximately 20% of the Company’s total assets atDecember 31, 2013, consists of securities issued by the U.S. government, federal agencies or other sovereigngovernment obligations. Positions taken and commitments made by the Company, including positions taken and

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underwriting and financing commitments made in connection with its private equity, principal investment andlending activities, often involve substantial amounts and significant exposure to individual issuers andbusinesses, including non-investment grade issuers. In addition, the Company may originate or purchase certainresidential and commercial mortgage loans that could contain certain terms and features that may result inadditional credit risk as compared with more traditional types of mortgages. Such terms and features may includeloans made to borrowers subject to payment increases or loans with high loan-to-value ratios.

At December 31, 2013 and December 31, 2012, cash and securities deposited with clearing organizations orsegregated under federal and other regulations or requirements were as follows:

AtDecember 31,

2013

AtDecember 31,

2012


Cash deposited with clearing organizations or segregated under federaland other regulations or requirements . . . . . . . . . . . . . . . . . . . . . . . . . . $39,203 $30,970

Securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,586 13,424

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $54,789 $44,394

(1) Securities deposited with clearing organizations or segregated under federal and other regulations or requirements are sourced fromFederal funds sold and securities purchased under agreements to resell and Trading assets in the consolidated statements of financialcondition.

7. Variable Interest Entities and Securitization Activities.

The Company is involved with various special purpose entities (“SPE”) in the normal course of business. In mostcases, these entities are deemed to be VIEs.

The Company applies accounting guidance for consolidation of VIEs to certain entities in which equity investorsdo not have the characteristics of a controlling financial interest. Except for certain asset management entities,the primary beneficiary of a VIE is the party that both (1) has the power to direct the activities of a VIE that mostsignificantly affect the VIE’s economic performance and (2) has an obligation to absorb losses or the right toreceive benefits that in either case could potentially be significant to the VIE. The Company consolidates entitiesof which it is the primary beneficiary.

The Company’s variable interests in VIEs include debt and equity interests, commitments, guarantees, derivativeinstruments and certain fees. The Company’s involvement with VIEs arises primarily from:

• Interests purchased in connection with market-making activities, securities held in its available for saleportfolio and retained interests held as a result of securitization activities, including re-securitizationtransactions.

• Guarantees issued and residual interests retained in connection with municipal bond securitizations.

• Servicing of residential and commercial mortgage loans held by VIEs.

• Loans made to and investments in VIEs that hold debt, equity, real estate or other assets.

• Derivatives entered into with VIEs.

• Structuring of credit-linked notes (“CLN”) or other asset-repackaged notes designed to meet theinvestment objectives of clients.

• Other structured transactions designed to provide tax-efficient yields to the Company or its clients.

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The Company determines whether it is the primary beneficiary of a VIE upon its initial involvement with theVIE and reassesses whether it is the primary beneficiary on an ongoing basis as long as it has any continuinginvolvement with the VIE. This determination is based upon an analysis of the design of the VIE, including theVIE’s structure and activities, the power to make significant economic decisions held by the Company and byother parties, and the variable interests owned by the Company and other parties.

The power to make the most significant economic decisions may take a number of different forms in differenttypes of VIEs. The Company considers servicing or collateral management decisions as representing the powerto make the most significant economic decisions in transactions such as securitizations or CDOs. As a result, theCompany does not consolidate securitizations or CDOs for which it does not act as the servicer or collateralmanager unless it holds certain other rights to replace the servicer or collateral manager or to require theliquidation of the entity. If the Company serves as servicer or collateral manager, or has certain other rightsdescribed in the previous sentence, the Company analyzes the interests in the VIE that it holds and consolidatesonly those VIEs for which it holds a potentially significant interest of the VIE.

The structure of securitization vehicles and CDOs is driven by several parties, including loan seller(s) insecuritization transactions, the collateral manager in a CDO, one or more rating agencies, a financial guarantor insome transactions and the underwriter(s) of the transactions, who serve to reflect specific investor demand. Inaddition, subordinate investors, such as the “B-piece” buyer (i.e., investors in most subordinated bond classes) incommercial mortgage-backed securitizations or equity investors in CDOs, can influence whether specific loansare excluded from a CMBS transaction or investment criteria in a CDO.

For many transactions, such as re-securitization transactions, CLNs and other asset-repackaged notes, there areno significant economic decisions made on an ongoing basis. In these cases, the Company focuses its analysis ondecisions made prior to the initial closing of the transaction and at the termination of the transaction. Based uponfactors, which include an analysis of the nature of the assets, including whether the assets were issued in atransaction sponsored by the Company and the extent of the information available to the Company and toinvestors, the number, nature and involvement of investors, other rights held by the Company and investors, thestandardization of the legal documentation and the level of the continuing involvement by the Company,including the amount and type of interests owned by the Company and by other investors, the Companyconcluded in most of these transactions that decisions made prior to the initial closing were shared between theCompany and the initial investors. The Company focused its control decision on any right held by the Companyor investors related to the termination of the VIE. Most re-securitization transactions, CLNs and other asset-repackaged notes have no such termination rights.

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

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

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As part of the Company’s Institutional Securities business segment’s securitization and related activities, theCompany has provided, or otherwise agreed to be responsible for, representations and warranties regardingcertain assets transferred in securitization transactions sponsored by the Company (see Note 13).

The following tables present information at December 31, 2013 and December 31, 2012 about VIEs that theCompany consolidates. Consolidated VIE assets and liabilities are presented after intercompany eliminations andinclude assets financed on a non-recourse basis:


Mortgage andAsset-Backed

Securitizations

CollateralizedDebt

Obligations

ManagedReal Estate

Partnerships

OtherStructuredFinancings Other


VIE assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $643 $— $2,313 $1,202 $1,294VIE liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $368 $— $ 42 $ 67 $ 175



Securitizations

CollateralizedDebt

Obligations

ManagedReal Estate

Partnerships



VIE assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $978 $52 $2,394 $983 $1,676VIE liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $646 $16 $ 83 $ 65 $ 313

In general, the Company’s exposure to loss in consolidated VIEs is limited to losses that would be absorbed onthe VIE’s assets recognized in its financial statements, net of losses absorbed by third-party holders of the VIE’sliabilities. At December 31, 2013 and December 31, 2012, managed real estate partnerships reflectednonredeemable noncontrolling interests in the Company’s consolidated financial statements of $1,771 millionand $1,804 million, respectively. The Company also had additional maximum exposure to losses ofapproximately $101 million and $58 million at December 31, 2013 and December 31, 2012, respectively. Thisadditional exposure related primarily to certain derivatives (e.g., instead of purchasing senior securities, theCompany has sold credit protection to synthetic CDOs through credit derivatives that are typically related to themost senior tranche of the CDO) and commitments, guarantees and other forms of involvement.

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The following tables present information about certain non-consolidated VIEs in which the Company hadvariable interests at December 31, 2013 and December 31, 2012. The tables include all VIEs in which theCompany has determined that its maximum exposure to loss is greater than specific thresholds or meets certainother criteria. Most of the VIEs included in the tables below are sponsored by unrelated parties; the Company’sinvolvement generally is the result of the Company’s secondary market-making activities and securities held inits available for sale portfolio (see Note 5):



Securitizations

CollateralizedDebt

Obligations

MunicipalTenderOptionBonds



VIE assets that the Company does not consolidate(unpaid principal balance)(1) . . . . . . . . . . . . . . . . . . $177,153 $29,513 $3,079 $1,874 $10,119

Maximum exposure to loss:Debt and equity interests(2) . . . . . . . . . . . . . . . . . $ 13,514 $ 2,498 $ 31 $1,142 $ 3,693Derivative and other contracts . . . . . . . . . . . . . . . 15 23 1,935 — 146Commitments, guarantees and other . . . . . . . . . . — 272 — 649 527

Total maximum exposure to loss . . . . . . . . . $ 13,529 $ 2,793 $1,966 $1,791 $ 4,366

Carrying value of exposure to loss—Assets:Debt and equity interests(2) . . . . . . . . . . . . . . . . . $ 13,514 $ 2,498 $ 31 $ 731 $ 3,693Derivative and other contracts . . . . . . . . . . . . . . . 15 3 4 — 53

Total carrying value of exposure to loss—Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,529 $ 2,501 $ 35 $ 731 $ 3,746

Carrying value of exposure to loss—Liabilities:Derivative and other contracts . . . . . . . . . . . . . . . $ — $ 2 $ — $ — $ 57Commitments, guarantees and other . . . . . . . . . . — — — 7 —

Total carrying value of exposure to loss—Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 2 $ — $ 7 $ 57

(1) Mortgage and asset-backed securitizations include VIE assets as follows: $16.9 billion of residential mortgages; $78.4 billion ofcommercial mortgages; $31.5 billion of U.S. agency collateralized mortgage obligations; and $50.4 billion of other consumer orcommercial loans.

(2) Mortgage and asset-backed securitizations include VIE debt and equity interests as follows: $1.3 billion of residential mortgages; $2.0billion of commercial mortgages; $5.3 billion of U.S. agency collateralized mortgage obligations; and $4.9 billion of other consumer orcommercial loans.

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Securitizations

CollateralizedDebt

Obligations

MunicipalTenderOptionBonds



VIE assets that the Company does not consolidate(unpaid principal balance)(1) . . . . . . . . . . . . . . . . . . $251,689 $13,178 $3,390 $1,811 $14,029

Maximum exposure to loss:Debt and equity interests(2) . . . . . . . . . . . . . . . . . $ 22,280 $ 1,173 $ — $1,053 $ 3,387Derivative and other contracts . . . . . . . . . . . . . . . 154 51 2,158 — 562Commitments, guarantees and other . . . . . . . . . . 66 — — 679 384

Total maximum exposure to loss . . . . . . . . . $ 22,500 $ 1,224 $2,158 $1,732 $ 4,333

Carrying value of exposure to loss—Assets:Debt and equity interests(2) . . . . . . . . . . . . . . . . . $ 22,280 $ 1,173 $ — $ 663 $ 3,387Derivative and other contracts . . . . . . . . . . . . . . . 156 8 4 — 174

Total carrying value of exposure to loss—Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,436 $ 1,181 $ 4 $ 663 $ 3,561

Carrying value of exposure to loss—Liabilities:Derivative and other contracts . . . . . . . . . . . . . . . $ 11 $ 2 $ — $ — $ 172Commitments, guarantees and other . . . . . . . . . . — — — 12 —

Total carrying value of exposure to loss—Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . $ 11 $ 2 $ — $ 12 $ 172

(1) Mortgage and asset-backed securitizations include VIE assets as follows: $18.3 billion of residential mortgages; $53.8 billion ofcommercial mortgages; $126.3 billion of U.S. agency collateralized mortgage obligations; and $53.3 billion of other consumer orcommercial loans.

(2) Mortgage and asset-backed securitizations include VIE debt and equity interests as follows: $1.0 billion of residential mortgages; $1.5billion of commercial mortgages; $14.8 billion of U.S. agency collateralized mortgage obligations; and $5.0 billion of other consumer orcommercial loans.

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

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

Securitization transactions generally involve VIEs. Primarily as a result of its secondary market-makingactivities, the Company owned additional securities issued by securitization SPEs for which the maximumexposure to loss is less than specific thresholds. These additional securities totaled $12.5 billion at December 31,2013. These securities were either retained in connection with transfers of assets by the Company, acquired inconnection with secondary market-making activities or held in the Company’s available for sale portfolio (see

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Note 5). Securities issued by securitization SPEs consist of $1.1 billion of securities backed primarily byresidential mortgage loans, $8.4 billion of securities backed by U.S. agency collateralized mortgage obligations,$1.3 billion of securities backed by commercial mortgage loans, $0.7 billion of securities backed by CDOs orCLOs and $1.0 billion backed by other consumer loans, such as credit card receivables, automobile loans andstudent loans. The Company’s primary risk exposure is to the securities issued by the SPE owned by theCompany, with the risk highest on the most subordinate class of beneficial interests. These securities generallyare included in Trading assets—Corporate and other debt or Securities available for sale and are measured at fairvalue (see Note 4). The Company does not provide additional support in these transactions through contractualfacilities, such as liquidity facilities, guarantees or similar derivatives. The Company’s maximum exposure toloss generally equals the fair value of the securities owned.

The Company’s transactions with VIEs primarily include securitizations, municipal tender option bond trusts, creditprotection purchased through CLNs, other structured financings, collateralized loan and debt obligations, equity-linked notes, managed real estate partnerships and asset management investment funds. The Company’s continuinginvolvement in VIEs that it does not consolidate can include ownership of retained interests in Company-sponsoredtransactions, interests purchased in the secondary market (both for Company-sponsored transactions andtransactions sponsored by third parties), derivatives with securitization SPEs (primarily interest rate derivatives incommercial mortgage and residential mortgage securitizations and credit derivatives in which the Company haspurchased protection in synthetic CDOs), and as servicer in residential mortgage securitizations in the U.S. andEurope and commercial mortgage securitizations in Europe. Such activities are further described below.

Securitization Activities. In a securitization transaction, the Company transfers assets (generally commercial orresidential mortgage loans or U.S. agency securities) to an SPE, sells to investors most of the beneficial interests,such as notes or certificates, issued by the SPE, and in many cases, retains other beneficial interests. In manysecuritization transactions involving commercial mortgage loans, the Company transfers a portion of the assets tothe SPE with unrelated parties transferring the remaining assets.

The purchase of the transferred assets by the SPE is financed through the sale of these interests. In some of thesetransactions, primarily involving residential mortgage loans in the U.S. and Europe and commercial mortgageloans in Europe, the Company serves as servicer for some or all of the transferred loans. In many securitizations,particularly involving residential mortgage loans, the Company also enters into derivative transactions, primarilyinterest rate swaps or interest rate caps, with the SPE.

Although not obligated, the Company generally makes a market in the securities issued by SPEs in thesetransactions. As a market maker, the Company offers to buy these securities from, and sell these securities to,investors. Securities purchased through these market-making activities are not considered to be retained interests,although these beneficial interests generally are included in Trading assets—Corporate and other debt and aremeasured at fair value.

The Company enters into derivatives, generally interest rate swaps and interest rate caps with a senior paymentpriority in many securitization transactions. The risks associated with these and similar derivatives with SPEs areessentially the same as similar derivatives with non-SPE counterparties and are managed as part of theCompany’s overall exposure.

See Note 12 for further information on derivative instruments and hedging activities.

Available for Sale Securities. In its available for sale portfolio, the Company holds securities issued by VIEsnot sponsored by the Company. These securities include government guaranteed securities issued in transactionssponsored by the federal mortgage agencies and the most senior securities issued by VIEs in which the securitiesare backed by student loans, automobile loans, commercial mortgage loans or CLOs. See Note 5.

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Municipal Tender Option Bond Trusts. In a municipal tender option bond transaction, the Company, generallyon behalf of a client, transfers a municipal bond to a trust. The trust issues short-term securities that theCompany, as the remarketing agent, sells to investors. The client retains a residual interest. The short-termsecurities are supported by a liquidity facility pursuant to which the investors may put their short-term interests.In some programs, the Company provides this liquidity facility; in most programs, a third-party provider willprovide such liquidity facility. The Company may purchase short-term securities in its role either as remarketingagent or liquidity provider. The client can generally terminate the transaction at any time. The liquidity providercan generally terminate the transaction upon the occurrence of certain events. When the transaction is terminated,the municipal bond is generally sold or returned to the client. Any losses suffered by the liquidity provider uponthe sale of the bond are the responsibility of the client. This obligation generally is collateralized. Liquidityfacilities provided to municipal tender option bond trusts are classified as derivatives. The Company consolidatesany municipal tender option bond trusts in which it holds the residual interest. No such trusts were consolidatedat either December 31, 2013 or December 31, 2012.

Credit Protection Purchased through CLNs. In a CLN transaction, the Company transfers assets (generallyhigh-quality securities or money market investments) to an SPE, enters into a derivative transaction in which theSPE writes protection on an unrelated reference asset or group of assets, through a credit default swap, a totalreturn swap or similar instrument, and sells to investors the securities issued by the SPE. In some transactions,the Company may also enter into interest rate or currency swaps with the SPE. Upon the occurrence of a creditevent related to the reference asset, the SPE will deliver collateral securities as the payment to the Company. TheCompany is generally exposed to price changes on the collateral securities in the event of a credit event andsubsequent sale. These transactions are designed to provide investors with exposure to certain credit risk on thereference asset. In some transactions, the assets and liabilities of the SPE are recognized in the Company’sconsolidated financial statements. In other transactions, the transfer of the collateral securities is accounted for asa sale of assets, and the SPE is not consolidated. The structure of the transaction determines the accountingtreatment. CLNs are included in Other in the above VIE tables.

The derivatives in CLN transactions consist of total return swaps, credit default swaps or similar contracts inwhich the Company has purchased protection on a reference asset or group of assets. Payments by the SPE arecollateralized. The risks associated with these and similar derivatives with SPEs are essentially the same assimilar derivatives with non-SPE counterparties and are managed as part of the Company’s overall exposure.

Other Structured Financings. The Company primarily invests in equity interests issued by entities that developand own low-income communities (including low-income housing projects) and entities that construct and ownfacilities that will generate energy from renewable resources. The equity interests entitle the Company to itsshare of tax credits and tax losses generated by these projects. In addition, the Company has issued guarantees toinvestors in certain low-income housing funds. The guarantees are designed to return an investor’s contributionto a fund and the investor’s share of tax losses and tax credits expected to be generated by the fund. TheCompany is also involved with entities designed to provide tax-efficient yields to the Company or its clients.

Collateralized Loan and Debt Obligations. A CLO or a CDO is an SPE that purchases a pool of assets,consisting of corporate loans, corporate bonds, asset-backed securities or synthetic exposures on similar assetsthrough derivatives, and issues multiple tranches of debt and equity securities to investors. The Companyunderwrites the securities issued in CLO transactions on behalf of unaffiliated sponsors and provides advisoryservices to these unaffiliated sponsors. The Company sells corporate loans to many of these SPEs, in some casesrepresenting a significant portion of the total assets purchased. If necessary, the Company may retain unsoldsecurities issued in these transactions. Although not obligated, the Company generally makes a market in thesecurities issued by SPEs in these transactions. These beneficial interests are included in Trading assets and aremeasured at fair value.

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Equity-Linked Notes. In an equity-linked note transaction included in the tables above, the Company typicallytransfers to an SPE either (1) a note issued by the Company, the payments on which are linked to theperformance of a specific equity security, equity index or other index or (2) debt securities issued by othercompanies and a derivative contract, the terms of which will relate to the performance of a specific equitysecurity, equity index or other index. These transactions are designed to provide investors with exposure tocertain risks related to the specific equity security, equity index or other index. Equity-linked notes are includedin Other in the above VIE tables.

Managed Real Estate Partnerships. The Company sponsors funds that invest in real estate assets. Certain ofthese funds are classified as VIEs primarily because the Company has provided financial support through lendingfacilities and other means. The Company also serves as the general partner for these funds and owns limitedpartnership interests in them. These funds were consolidated at December 31, 2013 and December 31, 2012.

Investment Management Investment Funds. The tables above do not include certain investments made by theCompany held by entities qualifying for accounting purposes as investment companies.

Transfers of Assets with Continuing Involvement.

The following tables present information at December 31, 2013 regarding transactions with SPEs in which theCompany, acting as principal, transferred financial assets with continuing involvement and received salestreatment:


ResidentialMortgage

Loans

CommercialMortgage

Loans

U.S. AgencyCollateralized

MortgageObligations

Credit-LinkedNotes

and Other


SPE assets (unpaid principal balance)(1) . . . . . . . . . . . . . . . . . . $29,723 $60,698 $19,155 $11,736Retained interests (fair value):

Investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 $ 102 $ 524 $ —Non-investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 95 — 1,319

Total retained interests (fair value) . . . . . . . . . . . . . . $ 137 $ 197 $ 524 $ 1,319

Interests purchased in the secondary market (fair value):Investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14 $ 170 $ 21 $ 350Non-investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 97 — 68

Total interests purchased in the secondary market(fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55 $ 267 $ 21 $ 418

Derivative assets (fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 $ 672 $ — $ 121Derivative liabilities (fair value) . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 1 $ — $ 120

(1) Amounts include assets transferred by unrelated transferors.

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Level 1 Level 2 Level 3 Total


Retained interests (fair value):Investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $626 $ 1 $ 627Non-investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 164 1,386 1,550

Total retained interests (fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . $— $790 $1,387 $2,177

Interests purchased in the secondary market (fair value):Investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $547 $ 8 $ 555Non-investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 182 24 206

Total interests purchased in the secondary market (fair value) . . . . . $— $729 $ 32 $ 761

Derivative assets (fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $615 $ 179 $ 794Derivative liabilities (fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $110 $ 11 $ 121

The following tables present information at December 31, 2012 regarding transactions with SPEs in which theCompany, acting as principal, transferred assets with continuing involvement and received sales treatment:


ResidentialMortgage

Loans

CommercialMortgage

Loans

U.S. AgencyCollateralized

MortgageObligations

Credit-LinkedNotes

and Other


SPE assets (unpaid principal balance)(1) . . . . . . . . . . . . . . . . . . $36,750 $70,824 $17,787 $14,701Retained interests (fair value):

Investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 $ 77 $ 1,468 $ —Non-investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 109 — 1,503

Total retained interests (fair value) . . . . . . . . . . . . . . $ 55 $ 186 $ 1,468 $ 1,503

Interests purchased in the secondary market (fair value):Investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11 $ 124 $ 99 $ 389Non-investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 34 — 31

Total interests purchased in the secondary market(fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 124 $ 158 $ 99 $ 420

Derivative assets (fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2 $ 948 $ — $ 177Derivative liabilities (fair value) . . . . . . . . . . . . . . . . . . . . . . . . $ 22 $ — $ — $ 303

(1) Amounts include assets transferred by unrelated transferors.

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Level 1 Level 2 Level 3 Total


Retained interests (fair value):Investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $1,476 $ 70 $1,546Non-investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 84 1,582 1,666

Total retained interests (fair value) . . . . . . . . . . . . . . . . . . . . . . . . . $— $1,560 $1,652 $3,212

Interests purchased in the secondary market (fair value):Investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $ 617 $ 6 $ 623Non-investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 139 39 178

Total interests purchased in the secondary market (fair value) . . . . $— $ 756 $ 45 $ 801

Derivative assets (fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $ 774 $ 353 $1,127Derivative liabilities (fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $ 295 $ 30 $ 325

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

In addition, in connection with its underwriting of CLO transactions for unaffiliated sponsors, in 2013 theCompany sold corporate loans with an unpaid principal balance of $2.4 billion to those SPEs.

Net gains on sales of assets in securitization transactions at the time of the sale were not material in 2013, 2012and 2011.

During 2013, 2012 and 2011, the Company received proceeds from new securitization transactions of $24.9billion, $17.0 billion and $22.6 billion, respectively. During 2013, 2012 and 2011, the Company receivedproceeds from cash flows from retained interests in securitization transactions of $4.6 billion, $4.3 billion and$6.5 billion, respectively.

The Company has provided, or otherwise agreed to be responsible for, representations and warranties regardingcertain assets transferred in securitization transactions sponsored by the Company (see Note 13).

Failed Sales.

In order to be treated as a sale of assets for accounting purposes, a transaction must meet all of the criteriastipulated in the accounting guidance for the transfer of financial assets. If the transfer fails to meet these criteria,that transfer of financial assets is treated as a failed sale. In such case for transfers to VIEs and securitizations, theCompany continues to recognize the assets in Trading assets, and the Company recognizes the associatedliabilities in Other secured financings in the consolidated statements of financial condition (see Note 11).

The assets transferred to many unconsolidated VIEs in transactions accounted for as failed sales cannot beremoved unilaterally by the Company and are not generally available to the Company. The related liabilitiesissued by many unconsolidated VIEs are non-recourse to the Company. In certain other failed sale transactions,

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the Company has the unilateral right to remove assets or provide additional recourse through derivatives such astotal return swaps, guarantees or other forms of involvement.

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

At December 31, 2013 At December 31, 2012

Carrying Value of Carrying Value of

Assets Liabilities Assets Liabilities


Credit-linked notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48 $ 41 $283 $222Equity-linked transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 35 422 405Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 156 29 28

Mortgage Servicing Activities.

Mortgage Servicing Rights. The Company may retain servicing rights to certain mortgage loans that are sold.These transactions create an asset referred to as MSRs, which totaled approximately $8 million and $7 million atDecember 31, 2013 and December 31, 2012, respectively, and are included within Intangible assets and carried atfair value in the consolidated statements of financial condition.

SPE Mortgage Servicing Activities. The Company services residential mortgage loans in the U.S. and in Europeand commercial mortgage loans in Europe owned by SPEs, including SPEs sponsored by the Company and SPEsnot sponsored by the Company. The Company generally holds retained interests in Company-sponsored SPEs. Insome cases, as part of its market-making activities, the Company may own some beneficial interests issued byboth Company-sponsored and non-Company sponsored SPEs.

The Company provides no credit support as part of its servicing activities. The Company is required to makeservicing advances to the extent that it believes that such advances will be reimbursed. Reimbursement ofservicing advances is a senior obligation of the SPE, senior to the most senior beneficial interests outstanding.Outstanding advances are included in Other assets and are recorded at cost, net of allowances. Advances atDecember 31, 2013 and December 31, 2012 totaled approximately $110 million and $49 million, respectively.There were no allowances at December 31, 2013 and December 31, 2012.

The following tables present information about the Company’s mortgage servicing activities for SPEs to whichthe Company transferred loans at December 31, 2013 and December 31, 2012:


ResidentialMortgage

UnconsolidatedSPEs

ResidentialMortgage

ConsolidatedSPEs

CommercialMortgage

UnconsolidatedSPEs


Assets serviced (unpaid principal balance) . . . . . . . . . . . . . . . . . . . . . $785 $775 $4,114Amounts past due 90 days or greater (unpaid principal

balance)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66 $ 44 $ —Percentage of amounts past due 90 days or greater(1) . . . . . . . . . . . . 8.5% 5.6% —Credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 $ 17 $ —

(1) Amounts include loans that are at least 90 days contractually delinquent, loans for which the borrower has filed for bankruptcy, loans inforeclosure and real estate owned.

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ResidentialMortgage

UnconsolidatedSPEs

ResidentialMortgage

ConsolidatedSPEs

CommercialMortgage

UnconsolidatedSPEs


Assets serviced (unpaid principal balance) . . . . . . . . . . . . . . . . . . . . . $ 821 $1,141 $4,760Amounts past due 90 days or greater (unpaid principal

balance)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86 $ 43 $ —Percentage of amounts past due 90 days or greater(1) . . . . . . . . . . . . 10.4% 3.8% —Credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3 $ 2 $ —

(1) Amounts include loans that are at least 90 days contractually delinquent, loans for which the borrower has filed for bankruptcy, loans inforeclosure and real estate owned.

8. Financing Receivables and Allowance for Credit Losses.

Loans.

The Company’s loans held for investment are recorded at amortized cost, and its loans held for sale are recordedat lower of cost or fair value in the consolidated statements of financial condition. A description of theCompany’s loan portfolio is described below.

• Corporate. Corporate loans primarily include commercial and industrial lending used for generalcorporate purposes, working capital and liquidity, “event-driven” loans and lending commitments andasset-backed lending products. “Event-driven” loans support client merger, acquisition or recapitalizationactivities. Corporate lending is structured as revolving lines of credit, letter of credit facilities, term loansand bridge loans. Risk factors considered in determining the allowance for corporate loans include theborrower’s financial strength, seniority of the loan, collateral type, volatility of collateral value, debtcushion, covenants, counterparty type and, for lending commitments, the probability of drawdown.

• Consumer. Consumer loans include unsecured loans and securities-based lending that allows clients toborrow money against the value of qualifying securities for any suitable purpose other than purchasing,trading, or carrying securities or refinancing margin debt. The majority of consumer loans are structuredas revolving lines of credit and letter of credit facilities and are primarily offered through the Company’sPortfolio Loan Account program. The allowance methodology for unsecured loans considers the specificattributes of the loan as well as the borrower’s source of repayment. The allowance methodology forsecurities-based lending considers the collateral type underlying the loan (e.g., diversified securities,concentrated securities or restricted stock).

• Residential Real Estate. Residential real estate loans mainly include non-conforming loans and homeequity lines of credit. The allowance methodology for non-conforming residential mortgage loansconsiders several factors, including, but not limited to, loan-to-value ratio, FICO score, home price index,and delinquency status. The methodology for home equity lines of credit considers credit limits andutilization rates in addition to the factors considered for non-conforming residential mortgages.

• Wholesale Real Estate. Wholesale real estate loans include owner-occupied loans and income-producingloans. The principal risk factors for determining the allowance for wholesale real estate loans are theunderlying collateral type, loan-to-value ratio and debt service ratio.

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The Company’s outstanding loans at December 31, 2013 and December 31, 2012 included the following:


Loans by Product Type

Loans HeldFor

InvestmentLoans Held

For Sale Total Loans

Loans HeldFor

InvestmentLoans Held

For Sale Total Loans


Corporate loans . . . . . . . . . . . . . . . . . . . . $13,263 $6,168 $19,431 $ 9,449 $4,987 $14,436Consumer loans . . . . . . . . . . . . . . . . . . . . 11,577 — 11,577 7,618 — 7,618Residential real estate loans . . . . . . . . . . . 10,006 112 10,118 6,630 142 6,772Wholesale real estate loans . . . . . . . . . . . 1,855 49 1,904 326 — 326

Total loans, gross of allowance forloan losses . . . . . . . . . . . . . . . . . . 36,701 6,329 43,030 24,023 5,129 29,152

Allowance for loan losses . . . . . . . . . . . . (156) — (156) (106) — (106)

Total loans, net of allowance for loanlosses(1)(2) . . . . . . . . . . . . . . . . . . . . . . $36,545 $6,329 $42,874 $23,917 $5,129 $29,046

(1) Amounts include loans that are made to foreign borrowers of $4,729 million and $4,531 million at December 31, 2013 and December 31,2012, respectively.

(2) See Note 13 for further information related to unfunded lending commitments.

The above table does not include loans held at fair value of $12,612 million and $17,311 million at December 31,2013 and December 31, 2012, respectively. At December 31, 2013, loans held at fair value consisted of $9,774million of Corporate loans, $1,434 million of Residential real estate loans and $1,404 million of Wholesale realestate loans. At December 31, 2012, loans held at fair value consisted of $13,350 million of Corporate loans,$1,870 million of Residential real estate loans and $2,091 million of Wholesale real estate loans. Loans held atfair value are recorded as Trading Assets in the Company’s consolidated statement of financial condition. SeeNote 4 for further information.

Credit Quality.

The Company’s Credit Risk Management department evaluates new obligors before credit transactions areinitially approved, and at least annually thereafter for corporate and wholesale real estate loans. For corporateloans, credit evaluations typically involve the evaluation of financial statements, assessment of leverage,liquidity, capital strength, asset composition and quality, market capitalization and access to capital markets, cashflow projections and debt service requirements, and the adequacy of collateral, if applicable. Credit RiskManagement will also evaluate strategy, market position, industry dynamics, obligor’s management and otherfactors that could affect the obligor’s risk profile. For wholesale real estate loans, the credit evaluation is focusedon property and transaction metrics including property type, loan-to-value ratio, occupancy levels, debt serviceratio, prevailing capitalization rates, and market dynamics. For residential real estate and consumer loans, theinitial credit evaluation typically includes, but is not limited to, review of the obligor’s income, net worth,liquidity, collateral, loan-to-value ratio, and credit bureau information. Subsequent credit monitoring forresidential real estate loans is performed at the portfolio level. Consumer loan collateral values are monitored onan ongoing basis.

The Company utilizes the following credit quality indicators which are consistent with banking regulators’definitions of criticized exposures, in its credit monitoring process for loans held for investment.

• Pass. A credit exposure rated pass has a continued expectation of timely repayment, all obligations of theborrower are current, and the obligor complies with material terms and conditions of the lendingagreement.

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• Special Mention. Extensions of credit that have potential weakness that deserve management’s closeattention, and if left uncorrected may, at some future date, result in the deterioration of the repaymentprospects or collateral position.

• Substandard. Obligor has a well-defined weakness that jeopardizes the repayment of the debt and has ahigh probability of payment default with the distinct possibility that the Company will sustain some lossif noted deficiencies are not corrected.

• Doubtful. Inherent weakness in the exposure makes the collection or repayment in full, based on existingfacts, conditions and circumstances, highly improbable, and the amount of loss is uncertain.

• Loss. Extensions of credit classified as loss are considered uncollectible and are charged off.

The following tables present credit quality indicators for the Company’s loans held for investment, gross ofallowance for loan losses, by product type, at December 31, 2013 and December 31, 2012.

December 31, 2013

Loans by Credit Quality Indicators Corporate ConsumerResidentialReal Estate

WholesaleReal Estate Total


Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,893 $11,577 $ 9,992 $1,829 $36,291Special Mention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 — — 16 205Substandard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 — 14 — 188Doubtful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 — — 10 17Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — —

Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,263 $11,577 $10,006 $1,855 $36,701

December 31, 2012

Loans by Credit Quality Indicators Corporate ConsumerResidentialReal Estate



Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,410 $7,618 $6,629 $302 $23,959Special Mention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 — — 24 30Substandard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 — 1 — 8Doubtful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 — — — 26Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — —

Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,449 $7,618 $6,630 $326 $24,023

Allowance for Loan Losses and Impaired Loans.

The allowance for loan losses estimates probable losses related to loans specifically identified for impairment inaddition to the probable losses inherent in the held for investment loan portfolio.

There are two components of the allowance for loan losses: the inherent allowance component and the specificallowance component.

The inherent allowance component of the allowance for loan losses is used to estimate the probable lossesinherent in the loan portfolio and includes non-homogeneous loans that have not been identified as impaired andportfolios of smaller balance homogeneous loans. The Company maintains methodologies by loan product for

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calculating an allowance for loan losses that estimates the inherent losses in the loan portfolio. Qualitative andenvironmental factors such as economic and business conditions, nature and volume of the portfolio and lendingterms, and volume and severity of past due loans may also be considered in the calculations. The allowance forloan losses is maintained at a level reasonable to ensure that it can adequately absorb the estimated probablelosses inherent in the portfolio.

The specific allowance component of the allowance for loan losses is used to estimate probable losses for non-homogeneous exposures, including loans modified in a TDR, which have been specifically identified forimpairment analysis by the Company and determined to be impaired. As of December 31, 2013 and 2012 theCompany’s TDRs were not significant. For further information on allowance for loan losses, see Note 2.

The tables below provide detail on impaired loans, past due loans and allowances for the Company’s held forinvestment loans:

December 31, 2013

Loans by Product Type Corporate ConsumerResidentialReal Estate



Impaired loans with allowance . . . . . . . . . . . . . . . . . . . . . . $63 $— $— $ 10 $73Impaired loans without allowance(1) . . . . . . . . . . . . . . . . . 6 — 11 — 17Impaired loans unpaid principal balance . . . . . . . . . . . . . . . 69 — 11 10 90Past due 90 days loans and on nonaccrual . . . . . . . . . . . . . . 7 — 11 10 28

December 31, 2012

Loans by Product Type Corporate ConsumerResidentialReal Estate



Impaired loans with allowance . . . . . . . . . . . . . . . . . . . . . . . $19 $— $ 1 $— $20Impaired loans without allowance(1) . . . . . . . . . . . . . . . . . . 14 — — — 14Impaired loans unpaid principal balance . . . . . . . . . . . . . . . 33 — 1 — 34Past due 90 days loans and on nonaccrual . . . . . . . . . . . . . . 25 — 1 — 26

December 31, 2013

Loans by Region Americas EMEA Asia Others Total


Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90 $— $— $— $ 90Past due 90 days loans and on nonaccrual . . . . . . . . . . . . . . . 28 — — — 28Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 28 3 2 156

December 31, 2012

Loans by Region Americas EMEA Asia Others Total


Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34 $— $— $— $ 34Past due 90 days loans and on nonaccrual . . . . . . . . . . . . . . . 26 — — — 26Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 52 2 — 106

EMEA—Europe, Middle East and Africa.(1) At December 31, 2013 and 2012, no allowance was outstanding for these loans as the fair value of the collateral held exceeded

or equaled the carrying value.

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

Corporate ConsumerResidentialReal Estate


(dollars in millions)Allowance for loan losses:

Balance at December 31, 2012 . . . . . . . . . . . . . . . . $ 96 $ 3 $ 5 $ 2 $ 106Gross charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . (13) — (2) — (15)Gross recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — —

Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . (13) — (2) — (15)

Provision for loan losses(1) . . . . . . . . . . . . . . . . . . 54 (2) 1 12 65

Balance at December 31, 2013 . . . . . . . . . . . . . . . . $ 137 $ 1 $ 4 $ 14 $ 156

Allowance for loan losses by impairment methodology:Inherent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 126 $ 1 $ 4 $ 10 $ 141Specific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 — — 4 15

Total allowance for loan losses atDecember 31, 2013 . . . . . . . . . . . . . . . $ 137 $ 1 $ 4 $ 14 $ 156

Loans evaluated by impairment methodology(2):Inherent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,194 $11,577 $ 9,995 $1,845 $36,611Specific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 — 11 10 90

Total loans evaluated at December 31,2013 . . . . . . . . . . . . . . . . . . . . . . . . . . $13,263 $11,577 $10,006 $1,855 $36,701

Allowance for lending-related commitments:Balance at December 31, 2012 . . . . . . . . . . . . . . . . $ 91 $ — $ — $ 1 $ 92Provision for lending-related commitments(3) . . . . 44 — — 1 45Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10) — — — (10)

Balance at December 31, 2013 . . . . . . . . . . . . . . . . $ 125 $ — $ — $ 2 $ 127

Allowance for lending-related commitments byimpairment methodology:

Inherent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 125 $ — $ — $ 2 $ 127Specific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — —

Total allowance for lending-relatedcommitments at December 31,2013 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 125 $ — $ — $ 2 $ 127

Lending-related commitments evaluated by impairmentmethodology:

Inherent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $63,427 $ 2,151 $ 1,423 $ 207 $67,208Specific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — —

Total lending-related commitmentsevaluated at December 31, 2013 . . . . . $63,427 $ 2,151 $ 1,423 $ 207 $67,208

(1) The Company recorded $65 million of provision for loan losses within Other revenues for the year ended December 31, 2013.(2) Balances are gross of the allowance and represent recorded investment in the loans.(3) The Company recorded $45 million of provision for lending-related commitments within Other non-interest expenses for the year ended

December 31, 2013.

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Corporate ConsumerResidentialReal Estate



Allowance for loan losses:Balance at December 31, 2011 . . . . . . . . . . . . . . $ 14 $ 1 $ 1 $ 1 $ 17Gross charge-offs . . . . . . . . . . . . . . . . . . . . . . . . (11) — — — (11)Gross recoveries . . . . . . . . . . . . . . . . . . . . . . . . . — — — 13 13

Net charge-offs . . . . . . . . . . . . . . . . . . . . . . (11) — — 13 2

Provision for loan losses(1) . . . . . . . . . . . . . . . . 93 2 4 (12) 87

Balance at December 31, 2012 . . . . . . . . . . . . . . $ 96 $ 3 $ 5 $ 2 $ 106

Allowance for loan losses by impairmentmethodology:

Inherent . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 94 $ 3 $ 5 $ 2 $ 104Specific . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 — — — 2

Total allowance for loan losses atDecember 31, 2012 . . . . . . . . . . . . . $ 96 $ 3 $ 5 $ 2 $ 106

Loans evaluated by impairment methodology(2):Inherent . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,416 $7,618 $6,629 $326 $23,989Specific . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 — 1 — 34

Total loan evaluated at December 31,2012 . . . . . . . . . . . . . . . . . . . . . . . . $ 9,449 $7,618 $6,630 $326 $24,023

Allowance for lending-related commitments:Balance at December 31, 2011 . . . . . . . . . . . . . . $ 19 $ 3 $ — $ 2 $ 24Provision for lending-related

commitments(3) . . . . . . . . . . . . . . . . . . . . . . . 72 (3) — (1) 68

Balance at December 31, 2012 . . . . . . . . . . . . . . $ 91 $ — $ — $ 1 $ 92

Allowance for lending-related commitments byimpairment methodology:

Inherent . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87 $ — $ — $ 1 $ 88Specific . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 — — — 4

Total allowance for lending-relatedcommitments at December 31,2012 . . . . . . . . . . . . . . . . . . . . . . . . $ 91 $ — $ — $ 1 $ 92

Lending-related commitments evaluated byimpairment methodology:

Inherent . . . . . . . . . . . . . . . . . . . . . . . . . . . . $44,079 $1,406 $ 712 $101 $46,298Specific . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 — — — 47

Total lending-related commitmentsevaluated at December 31, 2012 . . . $44,126 $1,406 $ 712 $101 $46,345

(1) The Company recorded $87 million of provision for loan losses within Other revenues for the year ended December 31, 2012.(2) Balances are gross of the allowance and represent recorded investment in the loans.(3) The Company recorded $67 million of provision for lending-related commitments within Other non-interest expenses for the year ended

December 31, 2012.

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Employee Loans.

Employee loans are granted primarily in conjunction with a program established in the Wealth Managementbusiness segment to retain and recruit certain employees. These loans are recorded in Customer and otherreceivables in the consolidated statements of financial condition. These loans are full recourse, generally requireperiodic payments and have repayment terms ranging from one to 12 years. The Company establishes a reservefor loan amounts it does not consider recoverable, which is recorded in Compensation and benefits expense. AtDecember 31, 2013, the Company had $5,487 million of employee loans, net of an allowance of approximately$109 million. At December 31, 2012, the Company had $5,998 million of employee loans, net of an allowance ofapproximately $131 million.

The Company has also granted loans to other employees primarily in conjunction with certain after-tax leveragedinvestment arrangements. At December 31, 2013, the balance of these loans was $100 million, net of anallowance of approximately $51 million. At December 31, 2012, the balance of these loans was $172 million, netof an allowance of approximately $108 million. The Company establishes a reserve for non-recourse loanamounts not recoverable from employees, which is recorded in Other expense.

Collateralized Transactions.

In certain instances, the Company enters into reverse repurchase agreements and securities borrowed transactionsto acquire securities to cover short positions, to settle other securities obligations and to accommodate clients’needs. The Company also engages in margin lending to clients that allows the client to borrow against the valueof the qualifying securities and is included within Customer and other receivables in the consolidated statementsof financial condition (see Note 6).

Servicing Advances.

As part of its servicing activities, the Company may make servicing advances to the extent that it believes thatsuch advances will be reimbursed (see Note 7).

9. Goodwill and Net Intangible Assets.

The Company tests goodwill for impairment on an annual basis and on an interim basis when certain events orcircumstances exist. The Company tests for impairment at the reporting unit level, which is generally at the levelof or one level below its business segments. For both the annual and interim tests, the Company has the option tofirst assess qualitative factors to determine whether the existence of events or circumstances leads to adetermination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.If after assessing the totality of events or circumstances, the Company determines it is more likely than not thatthe fair value of a reporting unit is greater than its carrying amount, then performing the two-step impairment testis not required. However, if the Company concludes otherwise, then it is required to perform the first step of thetwo-step impairment test. Goodwill impairment is determined by comparing the estimated fair value of areporting unit with its respective carrying value. If the estimated fair value exceeds the carrying value, goodwillat the reporting unit level is not deemed to be impaired. If the estimated fair value is below carrying value,however, further analysis is required to determine the amount of the impairment. Additionally, if the carryingvalue of a reporting unit is zero or a negative value and it is determined that it is more likely than not thegoodwill is impaired, further analysis is required. The estimated fair values of the reporting units are derivedbased on valuation techniques the Company believes market participants would use for each of the reportingunits.

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The estimated fair values are generally determined by utilizing a discounted cash flow methodology ormethodologies that incorporate price-to-book and price-to-earnings multiples of certain comparable companies.

The Company completed its annual goodwill impairment testing at July 1, 2013 and July 1, 2012. TheCompany’s impairment testing for each period did not indicate any goodwill impairment as each of theCompany’s reporting units with goodwill had a fair value that was substantially in excess of its carrying value.Adverse market or economic events could result in impairment charges in future periods.

Goodwill.

Changes in the carrying amount of the Company’s goodwill, net of accumulated impairment losses for 2013 and2012, were as follows:

InstitutionalSecurities(1)

WealthManagement(1)



Goodwill at December 31, 2011(2) . . . . . . . . . . . . . . . . . . . . $343 $5,603 $740 $6,686Foreign currency translation adjustments and other . . . . . . . . (6) 35 — 29Goodwill disposed of during the period(3) . . . . . . . . . . . . . . . — (65) — (65)

Goodwill at December 31, 2012(2) . . . . . . . . . . . . . . . . . . . . $337 $5,573 $740 $6,650Foreign currency translation adjustments and other . . . . . . . . (27) — — (27)Goodwill disposed of during the period(4)(5) . . . . . . . . . . . . . (17) (11) — (28)

Goodwill at December 31, 2013(2) . . . . . . . . . . . . . . . . . . . . $293 $5,562 $740 $6,595

(1) On January 1, 2013, the International Wealth Management business was transferred from the Wealth Management business segment tothe Equity division within the Institutional Securities business segment. Accordingly, prior period amounts have been recast to reflect theInternational Wealth Management business as part of the Institutional Securities business segment.

(2) The amount of the Company’s goodwill before accumulated impairments of $700 million, which included $673 million related to theInstitutional Securities business segment and $27 million related to the Investment Management business segment, was $7,295 millionand $7,350 million at December 31, 2013 and December 31, 2012, respectively.

(3) The Wealth Management business segment activity represents goodwill disposed of in connection with the sale of Quilter (see Note 1).(4) In 2011, the Company announced that it had reached an agreement with the employees of its in-house quantitative proprietary trading

unit, Process Driven Trading (“PDT”), within the Institutional Securities business segment, whereby PDT employees will acquire certainassets from the Company and launch an independent advisory firm. This transaction closed on January 1, 2013.

(5) The Wealth Management business segment sold the U.K. operations of the Global Stock Plan Services business on May 31, 2013.

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Net Intangible Assets.

Changes in the carrying amount of the Company’s intangible assets for 2013 and 2012 were as follows:


WealthManagement


(dollars in millions)Amortizable net intangible assets at December 31, 2011 . . . . $ 229 $3,641 $ 2 $3,872Mortgage servicing rights (see Note 7) . . . . . . . . . . . . . . . . . . . . 122 11 — 133Indefinite-lived intangible assets (see Note 2) . . . . . . . . . . . . . . — 280 — 280

Net intangible assets at December 31, 2011 . . . . . . . . . . . . . . . $ 351 $3,932 $ 2 $4,285

Amortizable net intangible assets at December 31, 2011 . . . . $ 229 $3,641 $ 2 $3,872Foreign currency translation adjustments and other . . . . . . . . . . 5 1 — 6Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17) (322) (1) (340)Impairment losses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) — — (4)Increase due to Smith Barney tradename(2) . . . . . . . . . . . . . . . . — 280 — 280Intangible assets acquired during the period . . . . . . . . . . . . . . . . 4 — — 4Intangible assets disposed of during the period(3) . . . . . . . . . . . (42) — — (42)

Amortizable net intangible assets at December 31, 2012 . . . . $ 175 $3,600 $ 1 $3,776Mortgage servicing rights (see Note 7) . . . . . . . . . . . . . . . . . . . . — 7 — 7


Amortizable net intangible assets at December 31, 2012 . . . . $ 175 $3,600 $ 1 $3,776Foreign currency translation adjustments and other . . . . . . . . . . — (1) — (1)Amortization expense(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (117) (336) — (453)Impairment losses(1)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) (42) — (44)

Amortizable net intangible assets at December 31, 2013 . . . . 56 3,221 1 3,278Mortgage servicing rights (see Note 7) . . . . . . . . . . . . . . . . . . . . — 8 — 8


(1) Impairment losses are recorded within Other expenses in the consolidated statements of income.(2) The Wealth Management business segment activity represents the reclassification of $280 million from an indefinite-lived to a finite-

lived intangible asset (see Note 2).(3) The Institutional Securities business segment activity represents intangible assets disposed of in connection with the sale of a principal

investment.(4) The Institutional Securities business segment activity primarily represents accelerated recovery of related intangible costs.(5) The Wealth Management business segment activity primarily represents an impairment charge related to management contracts

associated with alternative investment funds.At December 31, 2013 At December 31, 2012

GrossCarryingAmount

AccumulatedAmortization

GrossCarryingAmount

AccumulatedAmortization

(dollars in millions)Amortizable intangible assets:

Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7 $ 3 $ 7 $ 3Tradename . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280 12 280 2Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,058 1,177 4,058 923Management contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268 146 313 116Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 176 176 126Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 189 192 80

Total amortizable intangible assets . . . . . . . . . . . . . . . . $4,981 $1,703 $5,026 $1,250

Amortization expense associated with intangible assets is estimated to be approximately $286 million per yearover the next five years.

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10. Deposits.

Deposits were as follows:

AtDecember 31,

2013(1)

AtDecember 31,

2012(1)


Savings and demand deposits(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $109,908 $80,058Time deposits(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,471 3,208

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $112,379 $83,266

(1) Total deposits subject to the Federal Deposit Insurance Corporation (the “FDIC”) at December 31, 2013 and December 31, 2012 were$84 billion and $62 billion, respectively.

(2) Amounts include non-interest bearing deposits of $1,037 million at December 31, 2012. There were no non-interest bearing deposits atDecember 31, 2013.

(3) Certain time deposit accounts are carried at fair value under the fair value option (see Note 4).

The weighted average interest rates of interest bearing deposits outstanding during 2013, 2012 and 2011 were0.2%, 0.3% and 0.4%, respectively.

Interest-bearing deposits maturing over the next five years are as follows: $112,329 million in 2014 and $50million in 2015. The amount for 2014 includes $109,908 million of saving deposits, which have no statedmaturity, and $2,421 million of time deposits.

At December 31, 2013 and December 31, 2012, the Company had $2,283 million and $1,718 million,respectively, of time deposits in denominations of $100,000 or more.

11. Borrowings and Other Secured Financings.

Commercial Paper and Other Short-Term Borrowings.

The table below summarizes certain information regarding commercial paper and other short-term borrowings:

December 31,2013

December 31,2012


Commercial Paper:Balance at period-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8 $ 306Average balance(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 155 $ 479Weighted average interest rate on period-end balance(2) . . . . . . . . . . . . . . . . . . . . . . . 10.4% 10.1%

Other Short-Term Borrowings(3)(4):Balance at period-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,134 $1,832Average balance(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,872 $1,461

(1) Average balances are calculated based upon weekly balances.(2) The weighted average interest rates at December 31, 2013 and 2012 were driven primarily by commercial paper issued in a foreign

country in which typical funding rates are significantly higher than in the U.S.(3) These borrowings included bank loans, bank notes and structured notes with original maturities of 12 months or less.(4) Certain structured short-term borrowings are carried at fair value under the fair value option. See Note 4 for additional information.

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Long-Term Borrowings.

Maturities and Terms. Long-term borrowings consisted of the following (dollars in millions):

Parent Company Subsidiaries AtDecember 31,

2013(3)(4)

AtDecember 31,

2012FixedRate

VariableRate(1)(2)

FixedRate

VariableRate(1)(2)

Due in 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $— $ — $ — $ 25,303Due in 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,665 10,830 18 1,680 24,193 21,751Due in 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,962 5,760 17 1,351 21,090 24,653Due in 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,521 9,621 43 1,959 23,144 19,984Due in 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,227 8,231 18 1,819 26,295 28,137Due in 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,689 2,886 18 1,715 15,308 7,733Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,748 7,165 440 1,192 43,545 42,010

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $98,812 $44,493 $554 $9,716 $153,575 $169,571

Weighted average coupon at period-end(5) . . . . . . 5.1% 1.0% 6.5% 0.7% 4.4% 4.4%

(1) Variable rate borrowings bear interest based on a variety of money market indices, including LIBOR and Federal Funds rates.(2) Amounts include borrowings that are equity-linked, credit-linked, commodity-linked or linked to some other index.(3) Amounts include an increase of approximately $2.2 billion at December 31, 2013, to the carrying amount of certain of the Company’s

long-term borrowings associated with fair value hedges. The increase to the carrying value associated with fair value hedges by year duewas approximately less than $0.1 billion due in 2014, $0.4 billion due in 2015, $0.5 billion due in 2016, $1.0 billion due in 2017, $0.3billion due in 2018 and $(0.1) billion due thereafter.

(4) Amounts include an increase of approximately $2.4 billion at December 31, 2013 to the carrying amounts of certain of the Company’slong-term borrowings for which the fair value option was elected (see Note 4).

(5) Weighted average coupon was calculated utilizing U.S. and non-U.S. dollar interest rates and excludes financial instruments for whichthe fair value option was elected.

The Company’s long-term borrowings included the following components:

At December 31,2013

At December 31,2012


Senior debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $139,451 $158,899Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,275 5,845Junior subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,849 4,827

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $153,575 $169,571

During 2013, the Company issued and reissued notes with a principal amount of approximately $28 billion. Thisamount included the Company’s issuances of $2.0 billion in subordinated debt on November 22, 2013, $2.0billion in subordinated debt on May 21, 2013, $3.7 billion in senior unsecured debt on April 25, 2013 and $4.5billion in senior unsecured debt on February 25, 2013. During 2013, approximately $39 billion of notes maturedor were retired.

During 2012, the Company issued and reissued notes with a principal amount of approximately $24 billion.During 2012, approximately $43 billion of notes matured or were retired.

Senior debt securities often are denominated in various non-U.S. dollar currencies and may be structured toprovide a return that is equity-linked, credit-linked, commodity-linked or linked to some other index (e.g., the

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consumer price index). Senior debt also may be structured to be callable by the Company or extendible at theoption of holders of the senior debt securities. Debt containing provisions that effectively allow the holders to putor extend the notes aggregated $1,175 million at December 31, 2013 and $1,131 million at December 31, 2012.In addition, separate agreements are entered into by the Company’s subsidiaries that effectively allow the holdersto put the notes aggregated $353 million at December 31, 2013 and $1,895 million at December 31, 2012.Subordinated debt and junior subordinated debentures generally are issued to meet the capital requirements of theCompany or its regulated subsidiaries and primarily are U.S. dollar denominated.

Senior Debt—Structured Borrowings. The Company’s index-linked, equity-linked or credit-linked borrowingsinclude various structured instruments whose payments and redemption values are linked to the performance of aspecific index (e.g., Standard & Poor’s 500), a basket of stocks, a specific equity security, a credit exposure orbasket of credit exposures. To minimize the exposure resulting from movements in the underlying index, equity,credit or other position, the Company has entered into various swap contracts and purchased options thateffectively convert the borrowing costs into floating rates based upon LIBOR. These instruments are included inthe preceding table at their redemption values based on the performance of the underlying indices, baskets ofstocks, or specific equity securities, credit or other position or index. The Company carries either the entirestructured borrowing at fair value or bifurcates the embedded derivative and carries it at fair value. The swapsand purchased options used to economically hedge the embedded features are derivatives and also are carried atfair value. Changes in fair value related to the notes and economic hedges are reported in Trading revenues. SeeNote 4 for further information on structured borrowings.

Subordinated Debt and Junior Subordinated Debentures. Included in the Company’s long-term borrowings aresubordinated notes of $9,275 million having a contractual weighted average coupon of 4.69% at December 31, 2013and $5,845 million having a weighted average coupon of 4.81% at December 31, 2012. Junior subordinateddebentures outstanding by the Company were $4,849 million at December 31, 2013 and $4,827 million atDecember 31, 2012 having a contractual weighted average coupon of 6.37% at both December 31, 2013 andDecember 31, 2012. Maturities of the subordinated and junior subordinated notes range from 2014 to 2067.Maturities of certain junior subordinated debentures can be extended to 2052 at the Company’s option.

Asset and Liability Management. In general, securities inventories that are not financed by secured fundingsources and the majority of the Company’s assets are financed with a combination of deposits, short-termfunding, floating rate long-term debt or fixed rate long-term debt swapped to a floating rate. Fixed assets aregenerally financed with fixed rate long-term debt. The Company uses interest rate swaps to more closely matchthese borrowings to the duration, holding period and interest rate characteristics of the assets being funded and tomanage interest rate risk. These swaps effectively convert certain of the Company’s fixed rate borrowings intofloating rate obligations. In addition, for non-U.S. dollar currency borrowings that are not used to fund assets inthe same currency, the Company has entered into currency swaps that effectively convert the borrowings intoU.S. dollar obligations. The Company’s use of swaps for asset and liability management affected its effectiveaverage borrowing rate as follows:

2013 2012 2011

Weighted average coupon of long-term borrowings at period-end(1) . . . . . . . . . . . . . . . . . . . 4.4% 4.4% 4.0%Effective average borrowing rate for long-term borrowings after swaps at period-end(1) . . . . 2.2% 2.3% 1.9%

(1) Included in the weighted average and effective average calculations are non-U.S. dollar interest rates.

Other. The Company, through several of its subsidiaries, maintains funded and unfunded committed creditfacilities to support various businesses, including the collateralized commercial and residential mortgage wholeloan, derivative contracts, warehouse lending, emerging market loan, structured product, corporate loan,investment banking and prime brokerage businesses.

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Other Secured Financings.

Other secured financings include the liabilities related to transfers of financial assets that are accounted for asfinancings rather than sales, consolidated VIEs where the Company is deemed to be the primary beneficiary,pledged commodities, certain equity-linked notes and other secured borrowings. See Note 7 for furtherinformation on other secured financings related to VIEs and securitization activities.

The Company’s other secured financings consisted of the following:

AtDecember 31,

2013

AtDecember 31,

2012


Secured financings with original maturities greater than one year . . . . . . . . . . . . . . . . $ 9,750 $14,431Secured financings with original maturities one year or less(1) . . . . . . . . . . . . . . . . . . 4,233 641Failed sales(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 655

Total(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,215 $15,727

(1) At December 31, 2013, amount includes approximately $3,899 million of variable rate financings and approximately $334 million infixed rate financings.

(2) For more information on failed sales, see Note 7.(3) Amounts include $5,206 million and $9,466 million at fair value at December 31, 2013 and December 31, 2012, respectively.

Maturities and Terms: Secured financings with original maturities greater than one year consisted of thefollowing:

FixedRate

VariableRate(1)(2)

AtDecember 31,

2013

AtDecember 31,

2012


Due in 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $ — $ — $ 8,528Due in 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 466 3,034 3,500 2,868Due in 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 1,877 1,906 960Due in 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216 2,726 2,942 429Due in 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 160 160 181Due in 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 675 675 667Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 338 567 798

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $940 $8,810 $9,750 $14,431

Weighted average coupon rate at period-end(3) . . . . . . . . . . . . . . . 2.4% 1.3% 1.4% 1.4%

(1) Variable rate borrowings bear interest based on a variety of indices, including LIBOR.(2) Amounts include borrowings that are equity-linked, credit-linked, commodity-linked or linked to some other index.(3) Weighted average coupon was calculated utilizing U.S. and non-U.S. dollar interest rates and excludes secured financings that are linked

to non-interest indices.

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Maturities and Terms: Failed sales consisted of the following:

AtDecember 31,

2013

AtDecember 31,

2012


Due in 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $479Due in 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 17Due in 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 7Due in 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 136Due in 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 14Due in 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $232 $655

For more information on failed sales, see Note 7.

12. Derivative Instruments and Hedging Activities.

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

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

In connection with its derivative activities, the Company generally enters into master netting agreements andcollateral agreements with its counterparties. These agreements provide the Company with the right, in the eventof a default by the counterparty (such as bankruptcy or a failure to pay or perform), to net a counterparty’s rightsand obligations under the agreement and to liquidate and set off collateral against any net amount owed by thecounterparty. However, in certain circumstances: the Company may not have such an agreement in place; therelevant insolvency regime (which is based on the type of counterparty entity and the jurisdiction of organizationof the counterparty) may not support the enforceability of the agreement; or the Company may not have soughtlegal advice to support the enforceability of the agreement. In cases where the Company has not determined anagreement to be enforceable, the related amounts are not offset in the tabular disclosures below. The Company’spolicy is generally to receive securities and cash posted as collateral (with rights of rehypothecation), irrespectiveof the enforceability determination regarding the master netting and collateral agreement. In certain cases, theCompany may agree for such collateral to be posted to a third-party custodian under a control agreement thatenables the Company to take control of such collateral in the event of a counterparty default. The enforceabilityof the master netting agreement is taken into account in the Company’s risk management practices andapplication of counterparty credit limits. The following tables present information about the offsetting ofderivative instruments and related collateral amounts. See information related to offsetting of certaincollateralized transactions in Note 6.

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Gross Amounts(1)




Net AmountsPresented in the


FinancialCondition

Amounts Not Offset in theConsolidated Statements of Financial

Condition(3)

Net Exposure

FinancialInstrumentsCollateral

Other CashCollateral

(dollars in millions)Derivative assets

Bilateral OTC . . . . . . . . . $404,352 $(378,459) $25,893 $(8,785) $(132) $16,976Cleared OTC(4) . . . . . . . 267,057 (266,419) 638 — — 638Exchange traded . . . . . . . 31,609 (25,673) 5,936 — — 5,936

Total derivativeassets . . . . . . . . . . $703,018 $(670,551) $32,467 $(8,785) $(132) $23,550

Derivative liabilitiesBilateral OTC . . . . . . . . . $386,199 $(361,059) $25,140 $(5,365) $(136) $19,639Cleared OTC(4) . . . . . . . 266,559 (265,378) 1,181 — (372) 809Exchange traded . . . . . . . 33,113 (25,673) 7,440 (651) — 6,789

Total derivativeliabilities . . . . . . . $685,871 $(652,110) $33,761 $(6,016) $(508) $27,237

(1) Amounts include $8.7 billion of derivative assets and $7.3 billion of derivative liabilities, which are either not subject to master nettingagreements or collateral agreements or are subject to such agreements but the Company has not determined the agreements to be legallyenforceable. See also “Fair Value and Notional of Derivative Instruments” for additional disclosure about gross fair values and notionalsfor derivative instruments by risk type.



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


Gross Amounts(1)




Net AmountsPresented in the


FinancialCondition

Amounts Not Offset in theConsolidated Statements of

Financial Condition(3)

NetExposure

FinancialInstrumentsCollateral

Other CashCollateral

(dollars in millions)Derivative assets

Bilateral OTC . . . . . . . . . . . . $ 604,713 $(573,844) $30,869 $(7,691) $(232) $22,946Cleared OTC(4) . . . . . . . . . . 375,233 (374,546) 687 — — 687Exchange traded . . . . . . . . . . 24,305 (19,664) 4,641 — — 4,641

Total derivativeassets . . . . . . . . . . . . $1,004,251 $(968,054) $36,197 $(7,691) $(232) $28,274

Derivative LiabilitiesBilateral OTC . . . . . . . . . . . . $ 578,018 $(547,285) $30,733 $(7,871) $ (64) $22,798Cleared OTC(4) . . . . . . . . . . 374,960 (374,866) 94 — (23) 71Exchange traded . . . . . . . . . . 25,795 (19,664) 6,131 (1,028) — 5,103

Total derivativeliabilities . . . . . . . . . . $ 978,773 $(941,815) $36,958 $(8,899) $ (87) $27,972

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(1) Amounts include $7.2 billion of derivative assets and $7.3 billion of derivative liabilities, which are either not subject to master nettingagreements or collateral agreements or are subject to such agreements but the Company has not determined the agreements to be legallyenforceable. See also “Fair Value and Notional of Derivative Instruments” for additional disclosure about gross fair values and notionalsfor derivative instruments by risk type.



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

The Company incurs credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instrumentsarises from the failure of a counterparty to perform according to the terms of the contract. The Company’sexposure to credit risk at any point in time is represented by the fair value of the derivative contracts reported asassets. The fair value of a derivative represents the amount at which the derivative could be exchanged in anorderly transaction between market participants and is further described in Notes 2 and 4.

The tables below present a summary by counterparty credit rating and remaining contract maturity of the fairvalue of OTC derivatives in a gain position at December 31, 2013 and December 31, 2012, respectively. Fairvalue is presented in the final column, net of collateral received (principally cash and U.S. government andagency securities):

OTC Derivative Products—Trading Assets at December 31, 2013(1)

Years to Maturity

Cross-Maturity and

Cash CollateralNetting(3)

Net ExposurePost-CashCollateral

Net ExposurePost-

CollateralCredit Rating(2) Less than 1 1-3 3-5 Over 5


AAA . . . . . . . . . . . . . . . . $ 300 $ 752 $ 1,073 $ 3,664 $ (3,721) $ 2,068 $ 1,673AA . . . . . . . . . . . . . . . . . 2,687 3,145 3,377 9,791 (13,515) 5,485 3,927A . . . . . . . . . . . . . . . . . . . 7,382 8,428 9,643 17,184 (35,644) 6,993 4,970BBB . . . . . . . . . . . . . . . . 2,617 3,916 3,228 13,693 (16,191) 7,263 4,870Non-investment grade . . 2,053 2,980 1,372 2,922 (4,737) 4,590 2,174

Total . . . . . . . . . . . . $15,039 $19,221 $18,693 $47,254 $(73,808) $26,399 $17,614

(1) Fair values shown represent the Company’s net exposure to counterparties related to the Company’s OTC derivative products. Amountsinclude centrally cleared OTC derivatives. The table does not include exchange-traded derivatives and the effect of any related hedgesutilized by the Company.

(2) Obligor credit ratings are determined by the Company’s Credit Risk Management Department.(3) Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity categories.

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

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OTC Derivative Products—Trading Assets at December 31, 2012(1)

Years to Maturity

Cross-Maturityand CashCollateralNetting(3)

Net ExposurePost-CashCollateral

Net ExposurePost-CollateralCredit Rating(2) Less than 1 1-3 3-5 Over 5


AAA . . . . . . . . . . . . . . . . $ 353 $ 551 $ 1,299 $ 6,121 $ (4,851) $ 3,473 $ 3,088AA . . . . . . . . . . . . . . . . . . 2,125 3,635 2,958 10,270 (12,761) 6,227 4,428A . . . . . . . . . . . . . . . . . . . 6,643 9,596 14,228 29,729 (50,722) 9,474 7,638BBB . . . . . . . . . . . . . . . . . 2,673 3,970 3,704 18,586 (21,713) 7,220 5,754Non-investment grade . . . 2,091 2,855 2,142 4,538 (6,696) 4,930 2,725

Total . . . . . . . . . . . . $13,885 $20,607 $24,331 $69,244 $(96,743) $31,324 $23,633

(1) Fair values shown represent the Company’s net exposure to counterparties related to the Company’s OTC derivative products. Amountsinclude centrally cleared OTC derivatives. The table does not include exchange-traded derivatives and the effect of any related hedgesutilized by the Company.

(2) Obligor credit ratings are determined by the Company’s Credit Risk Management Department.(3) Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity categories.

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

Hedge Accounting.

The Company applies hedge accounting using various derivative financial instruments to hedge interest rate andforeign exchange risk arising from assets and liabilities not held at fair value as part of asset and liabilitymanagement and foreign currency exposure management.

The Company’s hedges are designated and qualify for accounting purposes as one of the following types ofhedges: hedges of exposure to changes in fair value of assets and liabilities being hedged (fair value hedges) andhedges of net investments in foreign operations whose functional currency is different from the reportingcurrency of the parent company (net investment hedges).

For all hedges where hedge accounting is being applied, effectiveness testing and other procedures to ensure theongoing validity of the hedges are performed at least monthly.

Fair Value Hedges—Interest Rate Risk. The Company’s designated fair value hedges consisted primarily ofinterest rate swaps designated as fair value hedges of changes in the benchmark interest rate of fixed rate seniorlong-term borrowings. The Company uses regression analysis to perform an ongoing prospective andretrospective assessment of the effectiveness of these hedging relationships (i.e., the Company applies the “long-haul” method of hedge accounting). A hedging relationship is deemed effective if the fair values of the hedginginstrument (derivative) and the hedged item (debt liability) change inversely within a range of 80% to 125%. TheCompany considers the impact of valuation adjustments related to the Company’s own credit spreads andcounterparty credit spreads to determine whether they would cause the hedging relationship to be ineffective.

For qualifying fair value hedges of benchmark interest rates, the changes in the fair value of the derivative andthe changes in the fair value of the hedged liability provide offset of one another and, together with any resultingineffectiveness, are recorded in Interest expense. When a derivative is de-designated as a hedge, any basisadjustment remaining on the hedged liability is amortized to Interest expense over the remaining life of theliability using the effective interest method.

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Net Investment Hedges. The Company may utilize forward foreign exchange contracts to manage the currencyexposure relating to its net investments in non-U.S. dollar functional currency operations. No hedgeineffectiveness is recognized in earnings since the notional amounts of the hedging instruments equal the portionof the investments being hedged and the currencies being exchanged are the functional currencies of the parentand investee. The gain or loss from revaluing hedges of net investments in foreign operations at the spot rate isdeferred and reported within AOCI. The forward points on the hedging instruments are recorded in Interestincome.

During 2012, the Company recognized an out-of-period pre-tax gain of approximately $109 million in theInstitutional Securities business segment’s Other sales and trading net revenues related to the reversal of amountsrecorded in cumulative other comprehensive income due to the incorrect application of hedge accounting oncertain derivative contracts previously designated as net investment hedges of certain non-U.S. dollar-denominated subsidiaries. The Company has evaluated the effects of the incorrect application of hedgeaccounting, both qualitatively and quantitatively, and concluded that it did not have a material impact on anyprior annual or quarterly consolidated financial statements. Subsequent to the identification of the incorrectapplication of net investment hedge accounting, the Company has appropriately redesignated the forward foreignexchange contracts and reapplied hedge accounting (see Note 15 for further information).

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Fair Value and Notional of Derivative Instruments. The following tables summarize the fair value ofderivative instruments designated as accounting hedges and the fair value of derivative instruments notdesignated as accounting hedges by type of derivative contract and the platform on which these instruments aretraded or cleared on a gross basis. Fair values of derivative contracts in an asset position are included in Tradingassets, and fair values of derivative contracts in a liability position are reflected in Trading liabilities in theconsolidated statements of financial condition (see Note 4):

Derivative Assets


Fair Value Notional

Bilateral OTCClearedOTC(1)

ExchangeTraded Total Bilateral OTC

ClearedOTC(1)

ExchangeTraded Total

(dollars in millions)Derivatives designated as accounting

hedges:Interest rate contracts . . . . . . . . $ 4,729 $ 287 $ — $ 5,016 $ 54,696 $ 14,685 $ — $ 69,381Foreign exchange contracts . . . 236 — — 236 6,694 — — 6,694

Total derivativesdesignated asaccounting hedges . . . . . 4,965 287 — 5,252 61,390 14,685 — 76,075

Derivatives not designated asaccounting hedges(2):

Interest rate contracts . . . . . . . . 262,697 261,348 291 524,336 6,206,450 11,854,610 856,137 18,917,197Credit contracts . . . . . . . . . . . . . 39,054 5,292 — 44,346 1,244,004 240,781 — 1,484,785Foreign exchange contracts . . . 61,383 130 52 61,565 1,818,429 9,634 9,783 1,837,846Equity contracts . . . . . . . . . . . . 26,104 — 28,001 54,105 294,524 — 437,842 732,366Commodity contracts . . . . . . . . 10,106 — 3,265 13,371 144,981 — 139,433 284,414Other . . . . . . . . . . . . . . . . . . . . . 43 — — 43 3,198 — — 3,198

Total derivatives notdesignated asaccounting hedges . . . . . 399,387 266,770 31,609 697,766 9,711,586 12,105,025 1,443,195 23,259,806

Total derivatives . . . . . . . . . . . . . . . . $ 404,352 $ 267,057 $ 31,609 $ 703,018 $9,772,976 $12,119,710 $1,443,195 $23,335,881Cash collateral netting . . . . . . . . . . . (48,540) (3,462) — (52,002) — — — —Counterparty netting . . . . . . . . . . . . . (329,919) (262,957) (25,673) (618,549) — — — —

Total derivative assets . . . . . . . $ 25,893 $ 638 $ 5,936 $ 32,467 $9,772,976 $12,119,710 $1,443,195 $23,335,881

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Derivative Liabilities


Fair Value Notional



BilateralOTC

ClearedOTC(1)



hedges:Interest rate contracts . . . . . . . . . . . $ 570 $ 614 $ — $ 1,184 $ 2,642 $ 12,667 $ — $ 15,309Foreign exchange contracts . . . . . . . 258 5 — 263 5,970 503 — 6,473

Total derivatives designated asaccounting hedges . . . . . . . . 828 619 — 1,447 8,612 13,170 — 21,782

Derivatives not designated as accountinghedges(2):

Interest rate contracts . . . . . . . . . . . 244,906 261,011 228 506,145 6,035,757 11,954,325 1,067,894 19,057,976Credit contracts . . . . . . . . . . . . . . . . 37,835 4,791 — 42,626 1,099,483 213,900 — 1,313,383Foreign exchange contracts . . . . . . . 61,635 138 23 61,796 1,897,400 10,505 3,106 1,911,011Equity contracts . . . . . . . . . . . . . . . . 31,483 — 29,412 60,895 341,232 — 464,622 805,854Commodity contracts . . . . . . . . . . . 9,436 — 3,450 12,886 138,784 — 120,556 259,340Other . . . . . . . . . . . . . . . . . . . . . . . . 76 — — 76 4,659 — — 4,659

Total derivatives notdesignated as accountinghedges . . . . . . . . . . . . . . . . . 385,371 265,940 33,113 684,424 9,517,315 12,178,730 1,656,178 23,352,223

Total derivatives . . . . . . . . . . . . . . . . . . . $ 386,199 $ 266,559 $ 33,113 $ 685,871 $9,525,927 $12,191,900 $1,656,178 $23,374,005Cash collateral netting . . . . . . . . . . . . . . . (31,139) (2,422) — (33,561) — — — —Counterparty netting . . . . . . . . . . . . . . . . (329,920) (262,956) (25,673) (618,549) — — — —

Total derivative liabilities . . . . . . . . $ 25,140 $ 1,181 $ 7,440 $ 33,761 $9,525,927 $12,191,900 $1,656,178 $23,374,005

(1) Amounts include OTC derivatives that are centrally cleared in accordance with certain regulatory requirements.(2) Notional amounts include gross notionals related to open long and short futures contracts of $426 billion and $729 billion, respectively.

The unsettled fair value on these futures contracts (excluded from the table above) of $879 million and $27 million is included inCustomer and other receivables and Customer and other payables, respectively, on the consolidated statements of financial condition.

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Derivative Assets


Fair Value Notional



BilateralOTC

ClearedOTC(1)



hedges:Interest rate contracts . . . . . . . . . . $ 8,046 $ 301 $ — $ 8,347 $ 66,916 $ 8,199 $ — $ 75,115Foreign exchange contracts . . . . . 367 — — 367 10,291 — — 10,291

Total derivatives designatedas accounting hedges . . . . 8,413 301 — 8,714 77,207 8,199 — 85,406

Derivatives not designated asaccounting hedges(2):

Interest rate contracts . . . . . . . . . . 443,523 371,789 142 815,454 8,029,510 10,096,252 776,130 18,901,892Credit contracts . . . . . . . . . . . . . . 65,168 3,099 — 68,267 1,734,907 197,879 — 1,932,786Foreign exchange contracts . . . . . 52,349 44 34 52,427 1,831,385 3,834 5,967 1,841,186Equity contracts . . . . . . . . . . . . . . 19,916 — 18,684 38,600 258,484 — 329,216 587,700Commodity contracts . . . . . . . . . . 15,201 — 5,445 20,646 164,842 — 176,714 341,556Other . . . . . . . . . . . . . . . . . . . . . . 143 — — 143 4,908 — — 4,908

Total derivatives notdesignated as accountinghedges . . . . . . . . . . . . . . . . 596,300 374,932 24,305 995,537 12,024,036 10,297,965 1,288,027 23,610,028

Total derivatives . . . . . . . . . . . . . . . . . $ 604,713 $ 375,233 $ 24,305 $1,004,251 $12,101,243 $10,306,164 $1,288,027 $23,695,434Cash collateral netting . . . . . . . . . . . . . (68,024) (1,224) — (69,248) — — — —Counterparty netting . . . . . . . . . . . . . . (505,820) (373,322) (19,664) (898,806) — — — —

Total derivative assets . . . . . . . . . $ 30,869 $ 687 $ 4,641 $ 36,197 $12,101,243 $10,306,164 $1,288,027 $23,695,434

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Derivative Liabilities


Fair Value Notional

BilateralOTC

ClearedOTC(1)


BilateralOTC

ClearedOTC(1)



hedges:Interest rate contracts . . . . . . . . . . . . . . . $ 167 $ 1 $ — $ 168 $ 2,000 $ 660 $ — $ 2,660Foreign exchange contracts . . . . . . . . . . 319 — — 319 17,156 — — 17,156

Total derivatives designated as accountinghedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . 486 1 — 487 19,156 660 — 19,816

Derivatives not designated as accountinghedges(2):

Interest rate contracts . . . . . . . . . . . . . . . 422,864 370,856 216 793,936 7,726,241 9,945,979 1,994,947 19,667,167Credit contracts . . . . . . . . . . . . . . . . . . . 60,420 4,074 — 64,494 1,645,464 222,343 — 1,867,807Foreign exchange contracts . . . . . . . . . . 56,062 29 3 56,094 1,878,597 3,473 4,003 1,886,073Equity contracts . . . . . . . . . . . . . . . . . . . 22,239 — 19,631 41,870 257,340 — 329,858 587,198Commodity contracts . . . . . . . . . . . . . . 15,886 — 5,945 21,831 169,189 — 155,912 325,101Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 — — 61 5,161 — — 5,161

Total derivatives not designated asaccounting hedges . . . . . . . . . . . 577,532 374,959 25,795 978,286 11,681,992 10,171,795 2,484,720 24,338,507

Total derivatives . . . . . . . . . . . . . . . . . . . . . . $ 578,018 $ 374,960 $ 25,795 $ 978,773 $11,701,148 $10,172,455 $2,484,720 $24,358,323Cash collateral netting . . . . . . . . . . . . . . . . . . (41,465) (1,544) — (43,009) — — — —Counterparty netting . . . . . . . . . . . . . . . . . . . (505,820) (373,322) (19,664) (898,806) — — — —

Total derivative liabilities . . . . . . . . . . . . . . . $ 30,733 $ 94 $ 6,131 $ 36,958 $11,701,148 $10,172,455 $2,484,720 $24,358,323

(1) Amounts include OTC derivatives that are centrally cleared in accordance with certain regulatory requirements.(2) Notional amounts include gross notionals related to open long and short futures contracts of $368 billion and $1,476 billion, respectively.

The unsettled fair value on these futures contracts (excluded from the table above) of $1,073 million and $24 million is included inCustomer and other receivables and Customer and other payables, respectively, on the consolidated statements of financial condition.

The following tables summarize the gains or losses reported on derivative instruments designated and qualifyingas accounting hedges for 2013, 2012 and 2011.

Derivatives Designated as Fair Value Hedges.

The following table presents gains (losses) reported on derivative instruments and the related hedge item as wellas the hedge ineffectiveness included in Interest expense in the consolidated statements of income from interestrate contracts:

Gains (Losses) Recognized

Product Type 2013 2012 2011


Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(4,332) $ 29 $ 3,415Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,604 703 (2,549)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,272 $732 $ 866

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Derivatives Designated as Net Investment Hedges.

Gains (Losses)Recognized in

OCI (effective portion)

Product Type 2013 2012(1) 2011


Foreign exchange contracts(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $448 $102 $180

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $448 $102 $180

(1) A gain of $77 million, net of tax, related to net investment hedges was reclassified from other comprehensive income into income during2012. The amount primarily related to the reversal of amounts recorded in cumulative other comprehensive income due to the incorrectapplication of hedge accounting on certain derivative contracts (see above for further information).

(2) Losses of $154 million, $235 million and $220 million were recognized in income related to amounts excluded from hedge effectivenesstesting during 2013, 2012 and 2011.

The table below summarizes gains (losses) on derivative instruments not designated as accounting hedges for2013, 2012 and 2011:

Gains (Losses)Recognized in Income(1)(2)

Product Type 2013 2012 2011


Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (608) $ 2,930 $ 5,538Credit contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 (722) 38Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,546 (340) (2,982)Equity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,193) (1,794) 3,880Commodity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 772 387 500Other contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (90) 1 (51)

Total derivative instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(4,499) $ 462 $ 6,923

(1) Gains (losses) on derivative contracts not designated as hedges are primarily included in Trading revenues in the consolidated statementsof income.

(2) Gains (losses) associated with certain derivative contracts that have physically settled are excluded from the table above. Gains (losses)on these contracts are reflected with the associated cash instruments, which are also included in Trading revenues in the consolidatedstatements of income.

The Company also has certain embedded derivatives that have been bifurcated from the related structuredborrowings. Such derivatives are classified in Long-term borrowings and had a net fair value of $32 million and$53 million at December 31, 2013 and December 31, 2012, respectively, and a notional value of $2,140 millionand $2,178 million at December 31, 2013 and December 31, 2012, respectively. The Company recognized lossesof $27 million, gains of $12 million and losses of $21 million related to changes in the fair value of its bifurcatedembedded derivatives for 2013, 2012 and 2011, respectively.

At December 31, 2013 and December 31, 2012, the amount of payables associated with cash collateral receivedthat was netted against derivative assets was $52.0 billion and $69.2 billion, respectively, and the amount ofreceivables in respect of cash collateral paid that was netted against derivative liabilities was $33.6 billion and$43.0 billion, respectively. Cash collateral receivables and payables of $10 million and $13 million, respectively,at December 31, 2013 and $158 million and $34 million, respectively, at December 31, 2012, were not offsetagainst certain contracts that did not meet the definition of a derivative.

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Credit-Risk-Related Contingencies.

In connection with certain OTC trading agreements, the Company may be required to provide additionalcollateral or immediately settle any outstanding liability balances with certain counterparties in the event of acredit ratings downgrade. At December 31, 2013, the aggregate fair value of OTC derivative contracts thatcontain credit-risk-related contingent features that are in a net liability position totaled $21,176 million, for whichthe Company has posted collateral of $18,714 million, in the normal course of business. The additional collateralor termination payments which may be called in the event of a future credit rating downgrade vary by contractand can be based on ratings by either or both of Moody’s Investor Services, Inc. (“Moody’s”) and Standard &Poor’s Ratings Services (“S&P”). At December 31, 2013, for such OTC trading agreements, the future potentialcollateral amounts and termination payments that could be called or required by counterparties or exchange andclearing organizations in the event of one-notch or two-notch downgrade scenarios based on the relevantcontractual downgrade triggers were $1,244 million and an incremental $2,924 million, respectively. Of theseamounts, $2,771 million at December 31, 2013 related to bilateral arrangements between the Company and otherparties where upon the downgrade of one party, the downgraded party must deliver collateral to the other party.These bilateral downgrade arrangements are a risk management tool used extensively by the Company as creditexposures are reduced if counterparties are downgraded.

Credit Derivatives and Other Credit Contracts.

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

The tables below summarize the notional and fair value of protection sold and protection purchased throughcredit default swaps at December 31, 2013 and December 31, 2012:


Maximum Potential Payout/Notional

Protection Sold Protection Purchased

NotionalFair Value

(Asset)/Liability NotionalFair Value

(Asset)/Liability


Single name credit default swaps . . . . . . . . . . . . . . . . $ 799,838 $ (9,349) $ 758,536 $ 8,564Index and basket credit default swaps . . . . . . . . . . . . . 454,355 (3,756) 361,961 2,827Tranched index and basket credit default swaps . . . . . 146,597 (3,889) 276,881 3,883

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,400,790 $(16,994) $1,397,378 $ 15,274


Maximum Potential Payout/Notional

Protection Sold Protection Purchased

NotionalFair Value

(Asset)/Liability NotionalFair Value

(Asset)/Liability


Single name credit default swaps . . . . . . . . . . . . . . . . $1,069,474 $ 2,889 $1,029,543 $ (2,456)Index and basket credit default swaps . . . . . . . . . . . . . 551,630 5,664 454,800 (5,124)Tranched index and basket credit default swaps . . . . . 272,088 2,330 423,058 (7,076)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,893,192 $ 10,883 $1,907,401 $(14,656)

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The table below summarizes the credit ratings and maturities of protection sold through credit default swaps andother credit contracts at December 31, 2013:

Protection Sold

Maximum Potential Payout/NotionalFair Value

(Asset)/Liability(1)(2)

Years to Maturity

Credit Ratings of the Reference Obligation Less than 1 1-3 3-5 Over 5 Total


Single name credit default swaps:AAA . . . . . . . . . . . . . . . . . . . . . . . $ 1,546 $ 8,661 $ 12,128 $ 1,282 $ 23,617 $ (145)AA . . . . . . . . . . . . . . . . . . . . . . . . 9,443 24,158 25,310 4,317 63,228 (845)A . . . . . . . . . . . . . . . . . . . . . . . . . 45,663 53,755 44,428 4,666 148,512 (2,704)BBB . . . . . . . . . . . . . . . . . . . . . . . 103,143 122,382 112,950 20,491 358,966 (4,294)Non-investment grade . . . . . . . . . 60,254 77,393 61,088 6,780 205,515 (1,361)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,049 286,349 255,904 37,536 799,838 (9,349)

Index and basket credit defaultswaps(3):

AAA . . . . . . . . . . . . . . . . . . . . . . . 14,890 40,522 30,613 2,184 88,209 (1,679)AA . . . . . . . . . . . . . . . . . . . . . . . . 3,751 4,127 4,593 6,006 18,477 (275)A . . . . . . . . . . . . . . . . . . . . . . . . . 2,064 2,263 11,633 36 15,996 (418)BBB . . . . . . . . . . . . . . . . . . . . . . . 5,974 29,709 74,982 3,847 114,512 (2,220)Non-investment grade . . . . . . . . . 67,108 157,149 122,516 16,985 363,758 (3,053)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,787 233,770 244,337 29,058 600,952 (7,645)

Total credit default swaps sold . . . . . . $313,836 $520,119 $500,241 $66,594 $1,400,790 $(16,994)

Other credit contracts(4)(5) . . . . . . . . . $ 75 $ 441 $ 529 $ 816 $ 1,861 $ (457)

Total credit derivatives and othercredit contracts . . . . . . . . . . . . . . . . . $313,911 $520,560 $500,770 $67,410 $1,402,651 $(17,451)

(1) Fair value amounts are shown on a gross basis prior to cash collateral or counterparty netting.(2) Fair value amounts of certain credit default swaps where the Company sold protection have an asset carrying value because credit

spreads of the underlying reference entity or entities tightened during the terms of the contracts.(3) Credit ratings are calculated internally.(4) Other credit contracts include CLNs, CDOs and credit default swaps that are considered hybrid instruments.(5) Fair value amount shown represents the fair value of the hybrid instruments.

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The table below summarizes the credit ratings and maturities of protection sold through credit default swaps andother credit contracts at December 31, 2012:

Protection Sold

Maximum Potential Payout/NotionalFair Value

(Asset)/Liability(1)(2)

Years to Maturity

Credit Ratings of the Reference Obligation Less than 1 1-3 3-5 Over 5 Total


Single name credit default swaps:AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,368 $ 6,592 $ 19,848 $ 5,767 $ 34,575 $ (204)AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,984 16,804 34,280 7,193 69,261 (325)A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,635 72,796 67,285 10,760 217,476 (2,740)BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124,662 145,462 142,714 34,396 447,234 (492)Non-investment grade . . . . . . . . . . . . . . 91,743 98,515 92,143 18,527 300,928 6,650

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296,392 340,169 356,270 76,643 1,069,474 2,889

Index and basket credit default swaps(3):AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,652 36,005 45,789 3,240 103,686 (1,377)AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,255 9,479 12,026 8,343 31,103 (55)A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,684 5,423 5,440 125 13,672 (155)BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,720 105,870 143,562 29,101 306,253 (862)Non-investment grade . . . . . . . . . . . . . . 97,389 86,703 153,858 31,054 369,004 10,443

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,700 243,480 360,675 71,863 823,718 7,994

Total credit default swaps sold . . . . . . . . . . . $444,092 $583,649 $716,945 $148,506 $1,893,192 $10,883

Other credit contracts(4)(5) . . . . . . . . . . . . . . $ 796 $ 125 $ 155 $ 1,323 $ 2,399 $ (745)

Total credit derivatives and other creditcontracts . . . . . . . . . . . . . . . . . . . . . . . . . . . $444,888 $583,774 $717,100 $149,829 $1,895,591 $10,138

(1) Fair value amounts are shown on a gross basis prior to cash collateral or counterparty netting.(2) Fair value amounts of certain credit default swaps where the Company sold protection have an asset carrying value because credit

spreads of the underlying reference entity or entities tightened during the terms of the contracts.(3) Credit ratings are calculated internally.(4) Other credit contracts include CLNs, CDOs and credit default swaps that are considered hybrid instruments.(5) Fair value amount shown represents the fair value of the hybrid instruments.

Single Name Credit Default Swaps. A credit default swap protects the buyer against the loss of principal on abond or loan in case of a default by the issuer. The protection buyer pays a periodic premium (generally quarterly)over the life of the contract and is protected for the period. The Company in turn will have to perform under a creditdefault swap if a credit event as defined under the contract occurs. Typical credit events include bankruptcy,dissolution or insolvency of the referenced entity, failure to pay and restructuring of the obligations of thereferenced entity. In order to provide an indication of the current payment status or performance risk of the creditdefault swaps, the external credit ratings of the underlying reference entity of the credit default swaps are disclosed.

Index and Basket Credit Default Swaps. Index and basket credit default swaps are credit default swaps thatreference multiple names through underlying baskets or portfolios of single name credit default swaps. Generally, inthe event of a default on one of the underlying names, the Company will have to pay a pro rata portion of the totalnotional amount of the credit default index or basket contract. In order to provide an indication of the currentpayment status or performance risk of these credit default swaps, the weighted average external credit ratings of theunderlying reference entities comprising the basket or index were calculated and disclosed.

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The Company also enters into index and basket credit default swaps where the credit protection provided is basedupon the application of tranching techniques. In tranched transactions, the credit risk of an index or basket isseparated into various portions of the capital structure, with different levels of subordination. The most juniortranches cover initial defaults, and once losses exceed the notional of the tranche, they are passed on to the nextmost senior tranche in the capital structure.

When external credit ratings are not available, credit ratings were determined based upon an internal methodology.

Credit Protection Sold through CLNs and CDOs. The Company has invested in CLNs and CDOs, which arehybrid instruments containing embedded derivatives, in which credit protection has been sold to the issuer of thenote. If there is a credit event of a reference entity underlying the instrument, the principal balance of the notemay not be repaid in full to the Company.

Purchased Credit Protection with Identical Underlying Reference Obligations. For single name credit defaultswaps and non-tranched index and basket credit default swaps, the Company has purchased protection with anotional amount of approximately $1.1 trillion and $1.5 trillion at December 31, 2013 and December 31, 2012,respectively, compared with a notional amount of approximately $1.3 trillion and $1.6 trillion at December 31,2013 and December 31, 2012, respectively, of credit protection sold with identical underlying referenceobligations. In order to identify purchased protection with the same underlying reference obligations, the notionalamount for individual reference obligations within non-tranched indices and baskets was determined on a prorata basis and matched off against single name and non-tranched index and basket credit default swaps wherecredit protection was sold with identical underlying reference obligations.

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

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13. Commitments, Guarantees and Contingencies.

Commitments.

The Company’s commitments associated with outstanding letters of credit and other financial guaranteesobtained to satisfy collateral requirements, investment activities, corporate lending and financing arrangements,and mortgage lending at December 31, 2013 are summarized below by period of expiration. Since commitmentsassociated with these instruments may expire unused, the amounts shown do not necessarily reflect the actualfuture cash funding requirements:

Years to Maturity Total atDecember 31,

2013Less

than 1 1-3 3-5 Over 5


Letters of credit and other financial guarantees obtained tosatisfy collateral requirements . . . . . . . . . . . . . . . . . . . . $ 389 $ 1 $ — $ 1 $ 391

Investment activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 518 70 30 447 1,065Primary lending commitments—investment grade(1) . . . . 7,695 14,674 36,224 798 59,391Primary lending commitments—non-investment

grade(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,657 5,402 10,066 2,119 19,244Secondary lending commitments(2) . . . . . . . . . . . . . . . . . . 44 38 10 72 164Commitments for secured lending transactions . . . . . . . . . 1,094 166 — — 1,260Forward starting reverse repurchase agreements and

securities borrowing agreements(3)(4) . . . . . . . . . . . . . . 44,890 — — — 44,890Commercial and residential mortgage-related

commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,199 48 301 313 1,861Underwriting commitments . . . . . . . . . . . . . . . . . . . . . . . . 588 — — — 588Other lending commitments . . . . . . . . . . . . . . . . . . . . . . . . 2,660 340 193 128 3,321

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60,734 $20,739 $46,824 $3,878 $132,175

(1) This amount includes $49.4 billion of investment grade and $12 billion of non-investment grade unfunded commitments accounted for asheld for investment and $3.5 billion of investment grade and $4.6 billion of non-investment grade unfunded commitments accounted foras held for sale at December 31, 2013. The remainder of these lending commitments is carried at fair value.

(2) These commitments are recorded at fair value within Trading assets and Trading liabilities in the consolidated statements of financialcondition (see Note 4).

(3) The Company enters into forward starting reverse repurchase and securities borrowing agreements (agreements that have a trade date ator prior to December 31, 2013 and settle subsequent to period-end) that are primarily secured by collateral from U.S. government agencysecurities and other sovereign government obligations. These agreements primarily settle within three business days and of the totalamount at December 31, 2013, $42.9 billion settled within three business days.

(4) The Company also has a contingent obligation to provide financing to a clearinghouse through which it clears certain transactions. Thefinancing is required only upon the default of a clearinghouse member. The financing takes the form of a reverse repurchase facility, witha maximum amount of approximately $1.1 billion.

Letters of Credit and Other Financial Guarantees Obtained to Satisfy Collateral Requirements. The Companyhas outstanding letters of credit and other financial guarantees issued by third-party banks to certain of theCompany’s counterparties. The Company is contingently liable for these letters of credit and other financialguarantees, which are primarily used to provide collateral for securities and commodities borrowed and to satisfyvarious margin requirements in lieu of depositing cash or securities with these counterparties.

Investment Activities. The Company enters into commitments associated with its real estate, private equity andprincipal investment activities, which include alternative products.

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Lending Commitments. Primary lending commitments are those that are originated by the Company whereassecondary lending commitments are purchased from third parties in the market. The commitments includelending commitments that are made to investment grade and non-investment grade companies in connection withcorporate lending and other business activities.

Commitments for Secured Lending Transactions. Secured lending commitments are extended by the Companyto companies and are secured by real estate or other physical assets of the borrower. Loans made under thesearrangements typically are at variable rates and generally provide for over-collateralization based upon thecreditworthiness of the borrower.

Forward Starting Reverse Repurchase Agreements. The Company has entered into forward starting securitiespurchased under agreements to resell (agreements that have a trade date at or prior to December 31, 2013 andsettle subsequent to period-end) that are primarily secured by collateral from U.S. government agency securitiesand other sovereign government obligations.

Commercial and Residential Mortgage-Related Commitments. The Company enters into forward purchasecontracts involving residential mortgage loans, residential mortgage lending commitments to individuals andresidential home equity lines of credit. In addition, the Company enters into commitments to originatecommercial and residential mortgage loans.

Underwriting Commitments. The Company provides underwriting commitments in connection with its capitalraising sources to a diverse group of corporate and other institutional clients.

Other Lending Commitments. Other commitments generally include commercial lending commitments to smallbusinesses and commitments related to securities-based lending activities in connection with the Company’sWealth Management business segment.

The Company sponsors several non-consolidated investment funds for third-party investors where the Companytypically acts as general partner of, and investment advisor to, these funds and typically commits to invest aminority of the capital of such funds, with subscribing third-party investors contributing the majority. TheCompany’s employees, including its senior officers, as well as the Company’s Directors, may participate on thesame terms and conditions as other investors in certain of these funds that the Company forms primarily forclient investment, except that the Company may waive or lower applicable fees and charges for itsemployees. The Company has contractual capital commitments, guarantees, lending facilities and counterpartyarrangements with respect to these investment funds.

Premises and Equipment. The Company has non-cancelable operating leases covering premises and equipment(excluding commodities operating leases, shown separately). At December 31, 2013, future minimum rentalcommitments under such leases (net of subleases, principally on office rentals) were as follows(dollars in millions):

Year Ended

OperatingPremisesLeases

2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6722015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6562016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6212017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5542018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,712

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The total of minimum rentals to be received in the future under non-cancelable operating subleases atDecember 31, 2013 was $107 million.

Occupancy lease agreements, in addition to base rentals, generally provide for rent and operating expenseescalations resulting from increased assessments for real estate taxes and other charges. Total rent expense, net ofsublease rental income, was $742 million, $765 million and $781 million in 2013, 2012 and 2011, respectively.

In connection with its commodities business, the Company enters into operating leases for both crude oil andrefined products storage and for vessel charters. At December 31, 2013, future minimum rental commitmentsunder such leases were as follows (dollars in millions):

Year Ended

OperatingEquipment

Leases

2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2392015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1492016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 922017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 872018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

Guarantees.

The table below summarizes certain information regarding the Company’s obligations under guaranteearrangements at December 31, 2013:

Maximum Potential Payout/Notional CarryingAmount(Asset)/Liability

Collateral/Recourse

Years to Maturity

Type of Guarantee Less than 1 1-3 3-5 Over 5 Total

(dollars in millions)Credit derivative contracts(1) . . . . $ 313,836 $520,119 $500,241 $ 66,594 $1,400,790 $(16,994) $ —Other credit contracts . . . . . . . . . . 75 441 529 816 1,861 (457) —Non-credit derivative

contracts(1) . . . . . . . . . . . . . . . . 1,249,932 794,776 353,559 474,921 2,873,188 54,098 —Standby letters of credit and other

financial guaranteesissued(2)(3) . . . . . . . . . . . . . . . . 1,024 812 1,205 5,652 8,693 (208) 7,016

Market value guarantees . . . . . . . . — 112 83 515 710 7 106Liquidity facilities . . . . . . . . . . . . 2,328 — — — 2,328 (4) 3,042Whole loan sales representations

and warranties . . . . . . . . . . . . . — — — 23,755 23,755 56 —Securitization representations and

warranties . . . . . . . . . . . . . . . . . — — — 67,249 67,249 82 —General partner guarantees . . . . . . 42 41 62 301 446 73 —

(1) Carrying amounts of derivative contracts are shown on a gross basis prior to cash collateral or counterparty netting. For furtherinformation on derivative contracts, see Note 12.

(2) Approximately $2.0 billion of standby letters of credit are also reflected in the “Commitments” table above in primary and secondarylending commitments. Standby letters of credit are recorded at fair value within Trading assets or Trading liabilities in the consolidatedstatements of financial condition.

(3) Amounts include guarantees issued by consolidated real estate funds sponsored by the Company of approximately $13.8 million. Theseguarantees relate to obligations of the fund’s investee entities, including guarantees related to capital expenditures and principal andinterest debt payments.

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The Company has obligations under certain guarantee arrangements, including contracts and indemnificationagreements that contingently require a guarantor to make payments to the guaranteed party based on changes inan underlying measure (such as an interest or foreign exchange rate, security or commodity price, an index or theoccurrence or non-occurrence of a specified event) related to an asset, liability or equity security of a guaranteedparty. Also included as guarantees are contracts that contingently require the guarantor to make payments to theguaranteed party based on another entity’s failure to perform under an agreement, as well as indirect guaranteesof the indebtedness of others. The Company’s use of guarantees is described below by type of guarantee:

Derivative Contracts. Certain derivative contracts meet the accounting definition of a guarantee, includingcertain written options, contingent forward contracts and credit default swaps (see Note 12 regarding creditderivatives in which the Company has sold credit protection to the counterparty). Although the Company’sderivative arrangements do not specifically identify whether the derivative counterparty retains the underlyingasset, liability or equity security, the Company has disclosed information regarding all derivative contracts thatcould meet the accounting definition of a guarantee. The maximum potential payout for certain derivativecontracts, such as written interest rate caps and written foreign currency options, cannot be estimated, asincreases in interest or foreign exchange rates in the future could possibly be unlimited. Therefore, in order toprovide information regarding the maximum potential amount of future payments that the Company could berequired to make under certain derivative contracts, the notional amount of the contracts has been disclosed. Incertain situations, collateral may be held by the Company for those contracts that meet the definition of aguarantee. Generally, the Company sets collateral requirements by counterparty so that the collateral coversvarious transactions and products and is not allocated specifically to individual contracts. Also, the Companymay recover amounts related to the underlying asset delivered to the Company under the derivative contract.

The Company records all derivative contracts at fair value. Aggregate market risk limits have been established,and market risk measures are routinely monitored against these limits. The Company also manages its exposureto these derivative contracts through a variety of risk mitigation strategies, including, but not limited to, enteringinto offsetting economic hedge positions. The Company believes that the notional amounts of the derivativecontracts generally overstate its exposure.

Standby Letters of Credit and Other Financial Guarantees Issued. In connection with its corporate lendingbusiness and other corporate activities, the Company provides standby letters of credit and other financialguarantees to counterparties. Such arrangements represent obligations to make payments to third parties if thecounterparty fails to fulfill its obligation under a borrowing arrangement or other contractual obligation. A majorityof the Company’s standby letters of credit is provided on behalf of counterparties that are investment grade.

Market Value Guarantees. Market value guarantees are issued to guarantee timely payment of a specifiedreturn to investors in certain affordable housing tax credit funds. These guarantees are designed to return aninvestor’s contribution to a fund and the investor’s share of tax losses and tax credits expected to be generated bya fund. From time to time, the Company may also guarantee return of principal invested, potentially including aspecified rate of return, to fund investors.

Liquidity Facilities. The Company has entered into liquidity facilities with SPEs and other counterparties,whereby the Company is required to make certain payments if losses or defaults occur. Primarily, the Companyacts as liquidity provider to municipal bond securitization SPEs and for standalone municipal bonds in which theholders of beneficial interests issued by these SPEs or the holders of the individual bonds, respectively, have theright to tender their interests for purchase by the Company on specified dates at a specified price. The Companyoften may have recourse to the underlying assets held by the SPEs in the event payments are required under suchliquidity facilities as well as make-whole or recourse provisions with the trust sponsors. Primarily all of theunderlying assets in the SPEs are investment grade. Liquidity facilities provided to municipal tender option bondtrusts are classified as derivatives.

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Whole Loan Sale Guarantees. The Company has provided, or otherwise agreed to be responsible for,representations and warranties regarding certain whole loan sales. Under certain circumstances, the Companymay be required to repurchase such assets or make other payments related to such assets if such representationsand warranties were breached. The Company’s maximum potential payout related to such representations andwarranties is equal to the current unpaid principal balance (“UPB”) of such loans. The Company has informationon the current UPB only when it services the loans. The amount included in the above table for the maximumpotential payout of $23.8 billion includes the current UPB where known ($4.8 billion) and the UPB at the time ofsale ($18.9 billion) when the current UPB is not known. The UPB at the time of the sale of all loans covered bythese representations and warranties was approximately $44.9 billion. The related liability primarily relates tosales of loans to the federal mortgage agencies.

Securitization Representations and Warranties. As part of the Company’s Institutional Securities businesssegment’s securitization and related activities, the Company has provided, or otherwise agreed to be responsiblefor, representations and warranties regarding certain assets transferred in securitization transactions sponsored bythe Company. The extent and nature of the representations and warranties, if any, vary among differentsecuritizations. Under certain circumstances, the Company may be required to repurchase such assets or makeother payments related to such assets if such representations and warranties were breached. The maximumpotential amount of future payments the Company could be required to make would be equal to the currentoutstanding balances of, or losses associated with, the assets subject to breaches of such representations andwarranties. The amount included in the above table for the maximum potential payout includes the current UPBwhere known and the UPB at the time of sale when the current UPB is not known.

Between 2004 and 2013, the Company sponsored approximately $148.0 billion of RMBS primarily containingU.S. residential loans that are outstanding at December 31, 2013. Of that amount, the Company maderepresentations and warranties concerning approximately $47.0 billion of loans and agreed to be responsible forthe representations and warranties made by third-party sellers, many of which are now insolvent, onapproximately $21.0 billion of loans. At December 31, 2013, the Company had recorded $82 million in theconsolidated financial statements for payments owed as a result of breach of representations and warranties madein connection with these residential mortgages. At December 31, 2013, the current UPB for all the residentialassets subject to such representations and warranties was approximately $17.2 billion and the cumulative lossesassociated with U.S. RMBS were approximately $13.5 billion. The Company did not make, or otherwise agree tobe responsible for the representations and warranties made by third party sellers on approximately $79.9 billionof residential loans that it securitized during that time period. The Company has not sponsored any U.S. RMBStransactions since 2007.

The Company also made representations and warranties in connection with its role as an originator of certaincommercial mortgage loans that it securitized in CMBS. Between 2004 and 2013, the Company originatedapproximately $50.6 billion and $13.0 billion of U.S. and non-U.S. commercial mortgage loans, respectively,that were placed into CMBS sponsored by the Company that are outstanding at December 31, 2013. AtDecember 31, 2013, the Company had not accrued any amounts in the consolidated financial statements forpayments owed as a result of breach of representations and warranties made in connection with these commercialmortgages. At December 31, 2013, the current UPB for all U.S. commercial mortgage loans subject to suchrepresentations and warranties was $33.0 billion. For the non-U.S. commercial mortgage loans, the amountincluded in the above table for the maximum potential payout includes the current UPB when known of $3.0billion and the UPB at the time of sale when the current UPB is not known of $0.4 billion.

General Partner Guarantees. As a general partner in certain private equity and real estate partnerships, theCompany receives certain distributions from the partnerships related to achieving certain return hurdles

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according to the provisions of the partnership agreements. The Company, from time to time, may be required toreturn all or a portion of such distributions to the limited partners in the event the limited partners do not achievea certain return as specified in various partnership agreements, subject to certain limitations.

Other Guarantees and Indemnities.

In the normal course of business, the Company provides guarantees and indemnifications in a variety ofcommercial transactions. These provisions generally are standard contractual terms. Certain of these guaranteesand indemnifications are described below.

• Trust Preferred Securities. The Company has established Morgan Stanley Capital Trusts for the limitedpurpose of issuing trust preferred securities to third parties and lending the proceeds to the Company inexchange for junior subordinated debentures. The Company has directly guaranteed the repayment of thetrust preferred securities to the holders thereof to the extent that the Company has made payments to aMorgan Stanley Capital Trust on the junior subordinated debentures. In the event that the Company doesnot make payments to a Morgan Stanley Capital Trust, holders of such series of trust preferred securitieswould not be able to rely upon the guarantee for payment of those amounts. The Company has notrecorded any liability in the consolidated financial statements for these guarantees and believes that theoccurrence of any events (i.e., non-performance on the part of the paying agent) that would triggerpayments under these contracts is remote. See Note 11.

• Indemnities. The Company provides standard indemnities to counterparties for certain contingentexposures and taxes, including U.S. and foreign withholding taxes, on interest and other payments madeon derivatives, securities and stock lending transactions, certain annuity products and other financialarrangements. These indemnity payments could be required based on a change in the tax laws or a changein interpretation of applicable tax rulings or a change in factual circumstances. Certain contracts containprovisions that enable the Company to terminate the agreement upon the occurrence of such events. Themaximum potential amount of future payments that the Company could be required to make under theseindemnifications cannot be estimated.

• Exchange/Clearinghouse Member Guarantees. The Company is a member of various U.S. and non-U.S.exchanges and clearinghouses that trade and clear securities and/or derivative contracts. Associated withits membership, the Company may be required to pay a proportionate share of the financial obligations ofanother member who may default on its obligations to the exchange or the clearinghouse. While the rulesgoverning different exchange or clearinghouse memberships vary, in general the Company’s guaranteeobligations would arise only if the exchange or clearinghouse had previously exhausted its resources. Themaximum potential payout under these membership agreements cannot be estimated. The Company hasnot recorded any contingent liability in the consolidated financial statements for these agreements andbelieves that any potential requirement to make payments under these agreements is remote.

• Merger and Acquisition Guarantees. The Company may, from time to time, in its role as investmentbanking advisor be required to provide guarantees in connection with certain European merger andacquisition transactions. If required by the regulating authorities, the Company provides a guarantee thatthe acquirer in the merger and acquisition transaction has or will have sufficient funds to complete thetransaction and would then be required to make the acquisition payments in the event the acquirer’s fundsare insufficient at the completion date of the transaction. These arrangements generally cover the timeframe from the transaction offer date to its closing date and, therefore, are generally short term in nature.The maximum potential amount of future payments that the Company could be required to make cannotbe estimated. The Company believes the likelihood of any payment by the Company under thesearrangements is remote given the level of the Company’s due diligence associated with its role asinvestment banking advisor.

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In the ordinary course of business, the Company guarantees the debt and/or certain trading obligations (includingobligations 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 ortrading counterparties. The activities of the subsidiaries covered by these guarantees (including any related debtor trading obligations) are included in the Company’s consolidated financial statements.

Contingencies.

Legal. In the normal course of business, the Company has been named, from time to time, as a defendant invarious legal actions, including arbitrations, class actions and other litigation, arising in connection with itsactivities as a global diversified financial services institution. Certain of the actual or threatened legal actionsinclude claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts ofdamages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankruptor are in financial distress. These actions have included, but are not limited to, residential mortgage and creditcrisis related matters. Over the last several years, the level of litigation and investigatory activity (both formaland informal) by government and self-regulatory agencies has increased materially in the financial servicesindustry. As a result, the Company expects that it may become the subject of increased claims for damages andother relief and, while the Company has identified below any individual proceedings where the Companybelieves a material loss to be reasonably possible and reasonably estimable, there can be no assurance thatmaterial losses will not be incurred from claims that have not yet been asserted or are not yet determined to beprobable or possible and reasonably estimable losses.

The Company contests liability and/or the amount of damages as appropriate in each pending matter. Whereavailable information indicates that it is probable a liability had been incurred at the date of the consolidatedfinancial statements and the Company can reasonably estimate the amount of that loss, the Company accrues theestimated loss by a charge to income. The Company expects future litigation accruals in general to continue to beelevated and the changes in accruals from period to period may fluctuate significantly, given the currentenvironment regarding government investigations and private litigation affecting global financial services firms,including the Company.

The Company incurred litigation expenses of approximately $1,952 million in 2013, $513 million in 2012 and$151 million in 2011. The litigation expenses incurred in 2013 were primarily due to settlements and reserveadditions related to various matters, including the Company’s February 7, 2014 agreement to settle the FederalHousing Finance Agency, as Conservator v. Morgan Stanley et al. litigation for $1,250 million, the Company’sJanuary 30, 2014 agreement in principle with the Staff of the Enforcement Division of the U.S. Securities andExchange Commission (the “SEC”) to resolve an investigation related to certain subprime RMBS transactionsfor $275 million, the Company’s February 11, 2014 agreement to settle the Cambridge Place InvestmentManagement Inc. v. Morgan Stanley & Co., Inc., et al. litigation, and the Company’s January 23, 2014 agreementin principle to settle the Metropolitan Life Insurance Company, et al. v. Morgan Stanley, et al. litigation, whichwere reflected within the Institutional Securities business segment.

In many proceedings and investigations, however, it is inherently difficult to determine whether any loss isprobable or even possible or to estimate the amount of any loss. In addition, even where loss is possible or anexposure to loss exists in excess of the liability already accrued with respect to a previously recognized losscontingency, 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 Company cannot reasonably estimate such losses,particularly for proceedings and investigations where the factual record is being developed or contested or whereplaintiffs or governmental entities seek substantial or indeterminate damages, restitution, disgorgement orpenalties. Numerous issues may need to be resolved, including through potentially lengthy discovery and

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determination of important factual matters, determination of issues related to class certification and thecalculation of damages or other relief, and by addressing novel or unsettled legal questions relevant to theproceedings or investigations in question, before a loss or additional loss or range of loss or additional loss can bereasonably estimated for a proceeding or investigation.

For certain other legal proceedings and investigations, the Company 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 adverseeffect on the Company’s consolidated financial statements as a whole, other than the matters referred to in thefollowing paragraphs.

On March 15, 2010, the Federal Home Loan Bank of San Francisco filed two complaints against the Companyand other defendants in the Superior Court of the State of California. These actions are styled Federal HomeLoan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al., and Federal Home Loan Bank ofSan Francisco v. Deutsche Bank Securities Inc. et al., respectively. Amended complaints filed on June 10, 2010allege that defendants made untrue statements and material omissions in connection with the sale to plaintiff of anumber of mortgage pass-through certificates backed by securitization trusts containing residential mortgageloans. The amount of certificates allegedly sold to plaintiff by the Company in these cases was approximately$704 million and $276 million, respectively. The complaints raise claims under both the federal securities lawsand California law and seek, among other things, to rescind the plaintiff’s purchase of such certificates. OnAugust 11, 2011, plaintiff’s Securities Act claims were dismissed with prejudice. The defendants filed answers tothe amended complaints on October 7, 2011. On February 9, 2012, defendants’ demurrers with respect to allother claims were overruled. On December 20, 2013, plaintiff’s negligent misrepresentation claims weredismissed with prejudice. A bellwether trial is currently scheduled to begin in September 2014. The Company isnot a defendant in connection with the securitizations at issue in that trial. At December 25, 2013, the currentunpaid balance of the mortgage pass-through certificates at issue in these cases was approximately $316 million,and the certificates had incurred actual losses of approximately $5 million. Based on currently availableinformation, the Company believes it could incur a loss for this action up to the difference between the $316million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of ajudgment against the Company, plus pre- and post-judgment interest, fees and costs. The Company may beentitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to ajudgment.

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

On October 15, 2010, the Federal Home Loan Bank of Chicago filed a complaint against the Company and otherdefendants in the Circuit Court of the State of Illinois styled Federal Home Loan Bank of Chicago v. Bank of

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America Funding Corporation et al. The complaint alleges that defendants made untrue statements and materialomissions in the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trustscontaining residential mortgage loans. The total amount of certificates allegedly sold to plaintiff by the Companyin this action was approximately $203 million. The complaint raises claims under Illinois law and seeks, amongother things, to rescind the plaintiff’s purchase of such certificates. On March 24, 2011, the court grantedplaintiff leave to file an amended complaint. The Company filed its answer on December 21, 2012. OnDecember 13, 2013, the court entered an order dismissing all claims related to one of the securitizations at issue.At December 25, 2013, the current unpaid balance of the mortgage pass-through certificates at issue in this actionwas approximately $94 million and certain certificates had incurred actual losses of approximately $1 million.Based on currently available information, the Company believes it could incur a loss in this action up to thedifference between the $94 million unpaid balance of these certificates (plus any losses incurred) and their fairmarket value at the time of a judgment against the Company, plus pre- and post-judgment interest, fees and costs.The Company may be entitled to be indemnified for some of these losses and to an offset for interest received bythe plaintiff prior to a judgment.

On July 18, 2011, the Western and Southern Life Insurance Company and certain affiliated companies filed acomplaint against the Company and other defendants in the Court of Common Pleas in Ohio, styled Western andSouthern Life Insurance Company, et al. v. Morgan Stanley Mortgage Capital Inc., et al. An amended complaintwas filed on April 2, 2012 and alleges that defendants made untrue statements and material omissions in the saleto plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residentialmortgage loans. The amount of the certificates allegedly sold to plaintiffs by the Company was approximately$153 million. The amended complaint raises claims under the Ohio Securities Act, federal securities laws, andcommon law and seeks, among other things, to rescind the plaintiffs’ purchases of such certificates. TheCompany filed its answer on August 17, 2012. Trial is currently scheduled to begin in May 2015. AtDecember 25, 2013, the current unpaid balance of the mortgage pass-through certificates at issue in this actionwas approximately $116 million, and the certificates had incurred actual losses of approximately $1 million.Based on currently available information, the Company believes it could incur a loss in this action up to thedifference between the $116 million unpaid balance of these certificates (plus any losses incurred) and their fairmarket value at the time of a judgment against the Company, plus post-judgment interest, fees and costs. TheCompany may be entitled to an offset for interest received by the plaintiff prior to a judgment.

On April 25, 2012, The Prudential Insurance Company of America and certain affiliates filed a complaint againstthe Company and certain affiliates in the Superior Court of the State of New Jersey styled The PrudentialInsurance Company of America, et al. v. Morgan Stanley, et al. The complaint alleges that defendants madeuntrue statements and material omissions in connection with the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount ofcertificates allegedly sponsored, underwritten and/or sold by the Company is approximately $1 billion. Thecomplaint raises claims under the New Jersey Uniform Securities Law, as well as common law claims ofnegligent misrepresentation, fraud and tortious interference with contract and seeks, among other things,compensatory damages, punitive damages, rescission and rescissionary damages associated with plaintiffs’purchases of such certificates. On October 16, 2012, plaintiffs filed an amended complaint which, among otherthings, increases the total amount of the certificates at issue by approximately $80 million, adds causes of actionfor fraudulent inducement, equitable fraud, aiding and abetting fraud, and violations of the New Jersey RICOstatute, and includes a claim for treble damages. On March 15, 2013, the court denied the defendants’ motion todismiss the amended complaint. On April 26, 2013, the defendants filed an answer to the amended complaint. AtDecember 25, 2013, the current unpaid balance of the mortgage pass-through certificates at issue in this actionwas approximately $648 million, and the certificates had not yet incurred actual losses. Based on currentlyavailable information, the Company believes it could incur a loss in this action up to the difference between the

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$648 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the timeof a judgment against the Company, plus pre- and post-judgment interest, fees and costs. The Company may beentitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to ajudgment.

On April 20, 2011, the Federal Home Loan Bank of Boston filed a complaint against the Company and otherdefendants in the Superior Court of the Commonwealth of Massachusetts styled Federal Home Loan Bank ofBoston v. Ally Financial, Inc. F/K/A GMAC LLC et al. An amended complaint was filed on June 19, 2012 andalleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgagepass-through certificates backed by securitization trusts containing residential mortgage loans. The total amountof certificates allegedly issued by the Company or sold to plaintiff by the Company was approximately $385million. The amended complaint raises claims under the Massachusetts Uniform Securities Act, theMassachusetts Consumer Protection Act and common law and seeks, among other things, to rescind theplaintiff’s purchase of such certificates. On May 26, 2011, defendants removed the case to the United StatesDistrict Court for the District of Massachusetts. On October 11, 2012, defendants filed motions to dismiss theamended complaint, which was granted in part and denied in part on September 30, 2013. The defendants filedan answer to the amended complaint on December 16, 2013. At December 25, 2013, the current unpaid balanceof the mortgage pass-through certificates at issue in this action was approximately $79 million, and thecertificates had incurred actual losses of $0.7 million. Based on currently available information, the Companybelieves it could incur a loss in this action up to the difference between the $79 million unpaid balance of thesecertificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company,plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some ofthese losses and to an offset for interest received by the plaintiff prior to a judgment.

On August 8, 2012, U.S. Bank, in its capacity as Trustee, filed a complaint on behalf of Morgan StanleyMortgage Loan Trust 2006-14SL, Mortgage Pass-Through Certificates, Series 2006-14SL, Morgan StanleyMortgage Loan Trust 2007-4SL and Mortgage Pass-Through Certificates, Series 2007-4SL against the Company.The complaint is styled Morgan Stanley Mortgage Loan Trust 2006-14SL, et al. v. Morgan Stanley MortgageCapital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc. and is pending in theSupreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, thatthe loans in the trusts, which had original principal balances of approximately $354 million and $305 millionrespectively, breached various representations and warranties. On October 9, 2012, the Company filed a motionto dismiss the complaint. On August 16, 2013, the court granted in part and denied in part the Company’s motionto dismiss the complaint. On September 17, 2013, the Company filed its answer to the complaint. OnSeptember 26, 2013, and October 7, 2013, the Company and the plaintiffs, respectively, filed notices of appealwith respect to the court’s August 16, 2013 decision. The plaintiff is seeking, among other relief, rescission of themortgage loan purchase agreements underlying the transactions, specific performance and unspecified damagesand interest. Based on currently available information, the Company believes that it could incur a loss in thisaction of up to approximately $527 million, plus pre- and post-interest, fees and costs.

On September 23, 2013, plaintiffs in National Credit Union Administration Board v. Morgan Stanley & Co. Inc.,et al. filed a complaint against the Company and certain affiliates in the United States District Court for theSouthern District of New York. The complaint alleges that defendants made untrue statements of material fact oromitted to state material facts in the sale to plaintiffs of certain mortgage pass-through certificates issued bysecuritization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored,underwritten and/or sold by the Company to plaintiffs was approximately $417 million. The complaint allegescauses of action against the Company for violations of Section 11 and Section 12(a)(2) of the Securities Act of1933, violations of the Texas Securities Act, and violations of the Illinois Securities Law of 1953 and seeks,among other things, rescissory and compensatory damages. The defendants filed a motion to dismiss the

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complaint on November 13, 2013. On January 22, 2014 the court granted defendants’ motion to dismiss withrespect to claims arising under the Securities Act of 1933 and denied defendants’ motion to dismiss with respectto claims arising under Texas Securities Act and the Illinois Securities Law of 1953. At December 25, 2013, thecurrent unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $225million, and the certificates had incurred actual losses of $23 million. Based on currently available information,the Company believes it could incur a loss in this action up to the difference between the $225 million unpaidbalance of these certificates (plus any losses incurred) and their fair market value at the time of a judgmentagainst the Company, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to beindemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

14. Regulatory Requirements.

Morgan Stanley. The Company is a financial holding company under the Bank Holding Company Act of 1956,as amended, and is subject to the regulation and oversight of the Federal Reserve. The Federal Reserveestablishes capital requirements for the Company, including well-capitalized standards, and evaluates theCompany’s compliance with such capital requirements. The Office of the Comptroller of the Currencyestablishes similar capital requirements and standards for MSBNA and MSPBNA.

As of December 31, 2013, the Company calculated its capital ratios and risk-weighted assets (“RWAs”) inaccordance with the existing capital adequacy standards for financial holding companies adopted by the FederalReserve. These existing capital standards are based upon a framework described in the “InternationalConvergence of Capital Measurement and Capital Standards,” July 1988, as amended, also referred to as Basel I.In December 2007, the U.S. banking regulators published final regulations incorporating the Basel II Accord,which requires internationally active U.S. banking organizations, as well as certain of their U.S. banksubsidiaries, to implement Basel II standards over the next several years.

In December 2010, the Basel Committee reached an agreement on Basel III. In July 2013, the U.S. bankingregulators promulgated final rules to implement many aspects of Basel III (the “U.S. Basel III final rule”). The U.S.Basel III final rule contains new capital standards that raise capital requirements, strengthen counterparty credit riskcapital requirements, introduce a leverage ratio as a supplemental measure to the risk-based ratio and replace the useof externally developed credit ratings with alternatives such as the Organisation for Economic Co-operation andDevelopment’s country risk classifications. Under the U.S. Basel III final rule, the Company is subject, on a fullyphased in basis, to a minimum Common Equity Tier 1 risk-based capital ratio of 4.5%, a minimum Tier 1 risk-basedcapital ratio of 6% and a minimum total risk-based capital ratio of 8%. The Company is also subject to a 2.5%Common Equity Tier 1 capital conservation buffer and, if deployed, up to a 2.5% Common Equity Tier 1countercyclical buffer on a fully phased-in basis by 2019. Failure to maintain such buffers will result in restrictionson the Company’s ability to make capital distributions, including the payment of dividends and the repurchase ofstock, and to pay discretionary bonuses to executive officers. In addition, certain new items will be deducted fromCommon Equity Tier 1 capital and certain existing deductions will be modified. The majority of these capitaldeductions is subject to a phase-in schedule and will be fully phased-in by 2018. Under the U.S. Basel III final rule,unrealized gains and losses on available-for-sale securities will be reflected in Common Equity Tier 1 capital,subject to a phase-in schedule. The U.S. Basel III final rule also subjects certain banking organizations, includingthe Company, to a minimum supplementary leverage ratio of 3%. The Company became subject to the U.S. BaselIII final rule beginning on January 1, 2014. Certain requirements in the U.S. Basel III final rule, including theminimum risk-based capital ratios and new capital buffers, will be phased in over several years.

U.S. banking regulators have published final regulations implementing a provision of the Dodd-Frank Actrequiring that certain institutions supervised by the Federal Reserve, including the Company, be subject tominimum capital requirements that are not less than the generally applicable risk-based capital

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requirements. Currently, this minimum “capital floor” is based on Basel I. Beginning on January 1, 2015, theU.S. Basel III final rule will replace the current Basel I-based “capital floor” with a standardized approach that,among other things, modifies the existing risk weights for certain types of asset classes. The “capital floor”applies to the calculation of minimum risk-based capital requirements as well as the capital conservation bufferand, if deployed, the countercyclical capital buffer. Accordingly, the methods for calculating the Company’scapital ratios will change as the U.S. Basel III final rule’s revisions to the numerator and denominator are phasedin and following the Company’s completion of the U.S. Basel III advanced approach parallel run period. Theseongoing methodological changes may result in differences in the Company’s reported capital ratios from onereporting period to the next that are independent of changes to the Company’s capital base, asset composition,off-balance sheet exposures or risk profile.

On January 1, 2013, the U.S. banking regulators’ rules to implement the Basel Committee’s market risk capitalframework amendment, commonly referred to as “Basel 2.5”, became effective, which increased the capitalrequirements for securitizations and correlation trading within the Company’s trading book as well asincorporated add-ons for stressed Value-at-Risk (“VaR”) and incremental risk requirements (“market risk capitalframework amendment”).

At December 31, 2013, the Company’s capital levels calculated under Basel I, inclusive of the market risk capitalframework amendment, were in excess of well-capitalized levels with ratios of Tier 1 capital to RWAs of 15.7%and total capital to RWAs of 16.9% (6% and 10% being well-capitalized for regulatory purposes, respectively).The Company’s ratio of Tier 1 common capital to RWAs was 12.8% (5% under stressed conditions is the currentminimum under the Federal Reserve’s Comprehensive Capital Analysis and Review (“CCAR”) framework).Financial holding companies, including the Company, are subject to a Tier 1 leverage ratio defined by theFederal Reserve. Consistent with the Federal Reserve’s definition, the Company calculated its Tier 1 leverageratio as Tier 1 capital divided by adjusted average total assets (which reflects adjustments for disallowedgoodwill, certain intangible assets, deferred tax assets and financial and non-financial equity investments). Theadjusted average total assets are derived using weekly balances for the period. At December 31, 2013, theCompany was in compliance with the Federal Reserve’s Tier 1 leverage requirement, with a Tier 1 leverage ratioof 7.6% (5% is the current well-capitalized standard for regulatory purposes).

The following table summarizes the capital measures for the Company:


Balance Ratio Balance Ratio


Tier 1 common capital(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,917 12.8% $ 44,794 14.6%Tier 1 capital(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,007 15.7% 54,360 17.7%Total capital(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,000 16.9% 56,626 18.5%RWAs(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389,675 — 306,746 —Adjusted average total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 805,838 — 769,495 —Tier 1 leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 7.6% — 7.1%

(1) Effective January 1, 2013, in accordance with the U.S. banking regulators’ rules the Company implemented the Basel Committee’smarket risk capital framework amendment, commonly referred to as “Basel 2.5”, which increased the capital requirement forsecuritizations and correlation trading within the Company’s trading book as well as incorporated add-ons for stressed VaR andincremental risk requirements. Under the market risk capital framework amendment, total RWAs would have been approximately $424billion at December 31, 2012. At December 31, 2012, the capital ratios would have been approximately as follows: Total capital ratio13.4%, Tier 1 common capital ratio 10.6% and Tier 1 capital ratio 12.8%.

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The Company’s U.S. Bank Operating Subsidiaries. The Company’s U.S. bank operating subsidiaries aresubject to various regulatory capital requirements as administered by U.S. federal banking agencies. Failure tomeet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, ifundertaken, could have a direct material effect on the Company’s U.S. bank operating subsidiaries’ financialstatements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, theCompany’s U.S. bank operating subsidiaries must meet specific capital guidelines that involve quantitativemeasures of the Company’s U.S. bank operating subsidiaries’ assets, liabilities and certain off-balance sheetitems as calculated under regulatory accounting practices.

At December 31, 2013, the Company’s U.S. bank operating subsidiaries met all capital adequacy requirements towhich they are subject and exceeded all regulatory mandated and targeted minimum regulatory capitalrequirements to be well-capitalized. There are no conditions or events that management believes have changedthe Company’s U.S. bank operating subsidiaries’ category.

The table below sets forth the capital information for the Company’s U.S. bank operating subsidiaries, which areU.S. depository institutions, calculated in a manner consistent with the guidelines described under Basel I in2012. In 2013, the RWAs disclosed reflect the implementation of the market risk capital framework amendment,commonly referred to as “Basel 2.5”, which became effective on January 1, 2013.


Amount Ratio Amount Ratio


Total capital (to RWAs):MSBNA(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,468 16.5% $11,509 16.7%MSPBNA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,184 26.6% $ 1,673 28.8%

Tier 1 capital (to RWAs):MSBNA(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,805 14.3% $ 9,918 14.4%MSPBNA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,177 26.5% $ 1,665 28.7%

Tier 1 leverage:MSBNA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,805 10.6% $ 9,918 13.3%MSPBNA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,177 9.7% $ 1,665 10.6%

(1) MSBNA’s Tier 1 capital ratio and Total capital ratio at December 31, 2012 were each reduced by approximately 50 basis points due toan approximate $2.0 billion adjustment to notional value of derivatives contracts, which resulted in an increase to MSBNA’s RWAs bysuch amount.

Under regulatory capital requirements adopted by the U.S. federal banking agencies, U.S. depository institutions, inorder to be considered well-capitalized, must maintain a ratio of total capital to RWAs of 10%, a capital ratio of Tier 1capital to RWAs of 6%, and a ratio of Tier 1 capital to average total assets (leverage ratio) of 5%. Each U.S. depositoryinstitution subsidiary of the Company must be well-capitalized in order for the Company to continue to qualify as afinancial holding company and to continue to engage in the broadest range of financial activities permitted for financialholding companies. At December 31, 2013 and December 31, 2012, the Company’s U.S. depository institutionsmaintained capital at levels in excess of the universally mandated well-capitalized levels. These subsidiary depositoryinstitutions maintain capital at levels sufficiently in excess of the “well-capitalized” requirements to address anyadditional capital needs and requirements identified by the federal banking regulators.

MS&Co. and Other Broker-Dealers. MS&Co. is a registered broker-dealer and registered futures commissionmerchant and, accordingly, is subject to the minimum net capital requirements of the SEC, the Financial IndustryRegulatory Authority, Inc. and the U.S. Commodity Futures Trading Commission (the “CFTC”). MS&Co. hasconsistently operated with capital in excess of its regulatory capital requirements. MS&Co.’s net capital totaled$7,201 million and $7,820 million at December 31, 2013 and December 31, 2012, respectively, which exceededthe amount required by $5,627 million and $6,453 million, respectively. MS&Co. is required to hold tentative net

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capital in excess of $1 billion and net capital in excess of $500 million in accordance with the market and creditrisk standards of Appendix E of SEC Rule 15c3-1. MS&Co. is also required to notify the SEC in the event thatits tentative net capital is less than $5 billion. At December 31, 2013, MS&Co. had tentative net capital in excessof the minimum and the notification requirements.

MSSB LLC is a registered broker-dealer and registered futures commission merchant and, accordingly, is subjectto the minimum net capital requirements of the SEC, the Financial Industry Regulatory Authority, Inc. and theCFTC. MSSB LLC has consistently operated with capital in excess of its regulatory capital requirements. MSSBLLC’s net capital totaled $3,489 million and $2,167 million at December 31, 2013 and December 31, 2012,respectively, which exceeded the amount required by $3,308 million and $2,017 million, respectively.

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

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

Morgan Stanley Derivative Products Inc. (“MSDP”), a derivative products subsidiary rated A3 by Moody’s andAA- by S&P, maintains certain operating restrictions that have been reviewed by Moody’s and S&P. MSDP isoperated such that creditors of the Company should not expect to have any claims on the assets of MSDP, unlessand until the obligations to its own creditors are satisfied in full. Creditors of MSDP should not expect to haveany claims on the assets of the Company or any of its affiliates, other than the respective assets of MSDP.

The regulatory capital requirements referred to above, and certain covenants contained in various agreementsgoverning indebtedness of the Company, may restrict the Company’s ability to withdraw capital from itssubsidiaries. At December 31, 2013 and 2012, approximately $21.9 billion and $17.6 billion, respectively, of netassets of consolidated subsidiaries may be restricted as to the payment of cash dividends and advances to theparent company.

15. Redeemable Noncontrolling Interests and Total Equity.

Redeemable Noncontrolling Interests.

Redeemable noncontrolling interests related to the Wealth Management JV (see Note 3). Changes in redeemablenoncontrolling interests for 2013 and 2012 were as follows:

2013 2012


Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,309 $ —Reclassification from nonredeemable noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . — 4,288Net income applicable to redeemable noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . 222 124Net change in AOCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (2)Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38) (97)Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11) (4)Carrying value of additional stake in Wealth Management JV purchased from Citi . . . . . (4,482) —

Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $4,309

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Total Equity.

Morgan Stanley Shareholders’ Equity.

Common Stock. Changes in shares of common stock outstanding for 2013, 2012 and 2011 were as follows(share data in millions):

2013 2012 2011

Shares outstanding at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,974 1,927 1,512Public offerings and other issuances of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . — — 385Net impact of other share activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) 60 41Treasury stock purchases(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27) (13) (11)

Shares outstanding at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,945 1,974 1,927

(1) Treasury stock purchases include repurchases of common stock for employee tax withholding.

Treasury Shares. In July 2013, the Company received no objection from the Federal Reserve to repurchasethrough March 31, 2014 up to $500 million of the Company’s outstanding common stock under rules relating toannual capital distributions (Title 12 of the Code of Federal Regulations, Section 225.8, Capital Planning). Sharerepurchases are made pursuant to the share repurchase program previously authorized by the Company’s Boardof Directors and are exercised from time to time at prices the Company deems appropriate subject to variousfactors, including the Company’s capital position and market conditions. The share repurchases may be effectedthrough open market purchases or privately negotiated transactions, including through Rule 10b5-1 plans, andmay be suspended at any time (see “Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities” in Part II, Item 5).

During 2013, the Company repurchased approximately $350 million of the Company’s outstanding commonstock as part of its share repurchase program. During 2012, the Company did not repurchase common stock aspart of its share repurchase program. At December 31, 2013, the Company had approximately $1.2 billionremaining under its share repurchase program out of the $6 billion authorized by the Board of Directors inDecember 2006. The share repurchase program considers, among other things, business segment capital needs, aswell as equity-based compensation and benefit plan requirements. Share repurchases by the Company are subjectto regulatory approval.

MUFG Stock Conversion. On June 30, 2011, the Company’s outstanding Series B Preferred Stock owned byMUFG with a face value of $7.8 billion (carrying value $8.1 billion) and a 10% dividend was converted into385,464,097 shares of Company common stock, including approximately 75 million shares resulting from theadjustment to the conversion ratio pursuant to the transaction agreement. As a result of the adjustment to theconversion ratio, the Company incurred a one-time, non-cash negative adjustment of approximately $1.7 billionin its calculation of basic and diluted earnings per share during 2011.

Employee Stock Trusts. The Company has established Employee Stock Trusts to provide common stock votingrights to certain employees who hold outstanding RSUs, excluding the awards granted for 2012 performanceyear. The assets of the Employee Stock Trusts are consolidated with those of the Company, and the value of theCompany’s stock held in the Employee Stock Trusts is classified in Morgan Stanley shareholders’ equity andgenerally accounted for in a manner similar to treasury stock.

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Preferred Stock. The Company is authorized to issue 30 million shares of preferred stock and the Company’spreferred stock outstanding consisted of the following:

SharesOutstanding atDecember 31,

2013

LiquidationPreferenceper Share

Carrying Value

Series

AtDecember 31,

2013

AtDecember 31,

2012


A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,000 $25,000 $1,100 $1,100C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519,882 1,000 408 408E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,500 25,000 862 —F . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,000 25,000 850 —

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,220 $1,508

The Company’s preferred stock qualifies as Tier 1 capital in accordance with regulatory capital requirements (seeNote 14).

Series A Preferred Stock. In July 2006, the Company issued 44,000,000 Depositary Shares in an aggregateof $1,100 million. Each Depositary Share represents 1/1,000th of a Share of Floating Rate Non-CumulativePreferred Stock, Series A, $0.01 par value (“Series A Preferred Stock”). The Series A Preferred Stock isredeemable at the Company’s option, in whole or in part, on or after July 15, 2011 at a redemption price of$25,000 per share (equivalent to $25.00 per Depositary Share). The Series A Preferred Stock also has apreference over the Company’s common stock upon liquidation. In December 2013, the Company declared aquarterly dividend of $255.56 per share of Series A Preferred Stock that was paid on January 15, 2014 topreferred shareholders of record on December 31, 2013.

Series B and Series C Preferred Stock. On October 13, 2008, the Company issued to MUFG 7,839,209 sharesof Series B Preferred Stock and 1,160,791 shares of Series C Preferred Stock for an aggregate purchase price of$9 billion.

The Series C Preferred Stock is redeemable by the Company, in whole or in part, on or after October 15, 2011 ata redemption price of $1,100 per share. Dividends on the Series C Preferred Stock are payable, on a non-cumulative basis, as and if declared by the Board of Directors of the Company, in cash, at the rate of 10% perannum of the liquidation preference of $1,000 per share. In December 2013, the Company declared a quarterlydividend of $25.00 per share of Series C Preferred Stock that was paid on January 15, 2014 to preferredshareholders of record on December 31, 2013.

The $9 billion in proceeds was allocated to the Series B Preferred Stock and the Series C Preferred Stock basedon their relative fair values at issuance (approximately $8.1 billion was allocated to the Series B Preferred Stockand approximately $0.9 billion to the Series C Preferred Stock). Upon redemption by the Company, the excess ofthe redemption value of $1,100 per share over the carrying value of the Series C Preferred Stock ($0.9 billionallocated at inception or approximately $784 per share) will be charged to Retained earnings (i.e., treated in amanner similar to the treatment of dividends paid). The amount charged to Retained earnings will be deductedfrom the numerator in calculating basic and diluted earnings per share during the related reporting period inwhich the Series C Preferred Stock is redeemed by the Company (see Note 16 for additional details).

During 2009, 640,909 shares of the Series C Preferred Stock were redeemed with an aggregate price equal to theaggregate price exchanged by MUFG for approximately $0.7 billion of common stock.

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During 2011, the Company and MUFG completed the conversion of MUFG Series B Preferred Stock (see“MUFG Stock Conversion” above).

Series E Preferred Stock. On September 30, 2013, the Company issued 34,500,000 Depositary Shares, for anaggregate price of $862 million. Each Depositary Share represents a 1/1,000th interest in a share of perpetualSeries E Fixed-to-Floating Rate Non-Cumulative Preferred Stock, $0.01 par value (“Series E Preferred Stock”).The Series E Preferred Stock is redeemable at the Company’s option, (i) in whole or in part, from time to time,on any dividend payment date on or after October 15, 2023 or (ii) in whole but not in part at any time within 90days following a regulatory capital treatment event (as described in the terms of that series), in each case at aredemption price of $25,000 per share (equivalent to $25.00 per Depository Share). The Series E Preferred Stockalso has a preference over the Company’s common stock upon liquidation. The Series E Preferred Stock offering(net of related issuance costs) resulted in proceeds of approximately $854 million. In December 2013, theCompany declared a quarterly dividend of $519.53 per share of Series E Preferred Stock that was paid onJanuary 15, 2014 to preferred shareholders of record on December 31, 2013.

Series F Preferred Stock. On December 10, 2013, the Company issued 34,000,000 Depositary Shares, for anaggregate price of $850 million. Each Depositary Share represents a 1/1,000th interest in a share of perpetualSeries F Fixed-to-Floating Rate Non-Cumulative Preferred Stock, $0.01 par value (“Series F Preferred Stock”).The Series F Preferred Stock is redeemable at the Company’s option, (i) in whole or in part, from time to time,on any dividend payment date on or after January 15, 2024 or (ii) in whole but not in part at any time within 90days following a regulatory capital treatment event (as described in the terms of that series), in each case at aredemption price of $25,000 per share (equivalent to $25.00 per Depositary Share). The Series F Preferred Stockalso has a preference over the Company’s common stock upon liquidation. The Series F Preferred Stock offering(net of related issuance costs) resulted in proceeds of approximately $842 million. In December 2013, theCompany declared the initial quarterly dividend of $167.10 per share of Series F Preferred Stock that was paid onJanuary 15, 2014 to preferred shareholders of record on December 31, 2013.

Accumulated Other Comprehensive Loss.

The following table presents changes in AOCI by component, net of noncontrolling interests, in 2013 (dollars inmillions):

ForeignCurrency

TranslationAdjustments

NetChange inCash Flow

Hedges

Change inNet Unrealized

Gains (Losses) onSecurities

Available for Sale

Pension,Postretirement

and Other RelatedAdjustments Total

Balance at December 31, 2012 . . . . . . . . . $(123) $ (5) $ 151 $(539) $ (516)

Other comprehensive income (loss)before reclassifications . . . . . . . . . (143) — (406) (16) (565)

Amounts reclassified from AOCI . . . — 4 (27) 11 (12)

Net other comprehensive income (loss)during the period . . . . . . . . . . . . . . . . . . (143) 4 (433) (5) (577)

Balance at December 31, 2013 . . . . . . . . . $(266) $ (1) $(282) $(544) $(1,093)

The Company had no significant reclassifications out of AOCI for 2013.

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Cumulative Foreign Currency Translation Adjustments. Cumulative foreign currency translation adjustmentsinclude gains or losses resulting from translating foreign currency financial statements from their respectivefunctional currencies to U.S. dollars, net of hedge gains or losses and related tax effects. The Company usesforeign currency contracts to manage the currency exposure relating to its net investments in non-U.S. dollarfunctional currency subsidiaries. Increases or decreases in the value of the Company’s net foreign investmentsgenerally are tax deferred for U.S. purposes, but the related hedge gains and losses are taxable currently. TheCompany attempts to protect its net book value from the effects of fluctuations in currency exchange rates on itsnet investments in non-U.S. dollar subsidiaries by selling the appropriate non-U.S. dollar currency in the forwardmarket. Under some circumstances, however, the Company may elect not to hedge its net investments in certainforeign operations due to market conditions, including the availability of various currency contracts at acceptablecosts. Information at December 31, 2013 and December 31, 2012 relating to the effects on cumulative foreigncurrency translation adjustments resulting from translation of foreign currency financial statements and fromgains and losses from hedges of the Company’s net investments in non-U.S. dollar functional currencysubsidiaries is summarized below:

AtDecember 31,

2013

AtDecember 31,

2012


Net investments in non-U.S. dollar functional currency subsidiaries subject tohedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,708 $13,811

Cumulative foreign currency translation adjustments resulting from net investmentsin subsidiaries with a non-U.S. dollar functional currency . . . . . . . . . . . . . . . . . . . . $ (259) $ 348

Cumulative foreign currency translation adjustments resulting from realized orunrealized losses on hedges, net of tax(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) (471)

Total cumulative foreign currency translation adjustments, net of tax . . . . . . . . . . . . . $ (266) $ (123)

(1) A gain of $77 million, net of tax, related to net investment hedges was reclassified from other comprehensive income into income during2012. The amount primarily related to the reversal of amounts recorded in cumulative other comprehensive income due to the incorrectapplication of hedge accounting on certain derivative contracts (see Note 12 for further information).


Changes in nonredeemable noncontrolling interests in 2013 primarily resulted from distributions related toMSMS of $292 million and a real estate fund of $214 million. In September 2012, the Company reclassifiedapproximately $4.3 billion from nonredeemable noncontrolling interests to redeemable noncontrolling interestsfor Citi’s remaining 35% interest in the Wealth Management JV (see Note 3). Changes in nonredeemablenoncontrolling interests in 2012 also included distributions related to MSMS of $151 million.

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16. Earnings per Common Share.

Basic EPS is computed by dividing earnings (loss) applicable to Morgan Stanley common shareholders by theweighted average number of common shares outstanding for the period. Common shares outstanding includecommon stock and vested RSUs where recipients have satisfied either the explicit vesting terms or retirementeligibility requirements. Diluted EPS reflects the assumed conversion of all dilutive securities. The Companycalculates EPS using the two-class method and determines whether instruments granted in share-based paymenttransactions are participating securities (see Note 2). The following table presents the calculation of basic anddiluted EPS (in millions, except for per share data):

2013 2012 2011

Basic EPS:Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,656 $ 757 $ 4,696Net gain (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43) (41) (51)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,613 716 4,645Net income applicable to redeemable noncontrolling interests . . . . . . . . . . . . . . 222 124 —Net income applicable to nonredeemable noncontrolling interests . . . . . . . . . . . 459 524 535

Net income applicable to Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,932 68 4,110Less: Preferred dividends (Series A Preferred Stock) . . . . . . . . . . . . . . . . . . . . . (44) (44) (44)Less: Preferred dividends (Series B Preferred Stock) . . . . . . . . . . . . . . . . . . . . . — — (196)Less: MUFG stock conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (1,726)Less: Preferred dividends (Series C Preferred Stock) . . . . . . . . . . . . . . . . . . . . . (52) (52) (52)Less: Preferred dividends (Series E Preferred Stock) . . . . . . . . . . . . . . . . . . . . . . (18) — —Less: Preferred dividends (Series F Preferred Stock) . . . . . . . . . . . . . . . . . . . . . . (6) — —Less: Wealth Management JV redemption value adjustment (see Note 3) . . . . . (151) — —Less: Allocation of (earnings) loss to participating RSUs(1):

From continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) (2) (26)From discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 1

Earnings (loss) applicable to Morgan Stanley common shareholders . . . . . . . . . $2,655 $ (30) $ 2,067

Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . 1,906 1,886 1,655

Earnings (loss) per basic common share:Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.42 $ 0.02 $ 1.28Net gain (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.03) (0.04) (0.03)

Earnings (loss) per basic common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.39 $ (0.02) $ 1.25

Diluted EPS:Earnings (loss) applicable to Morgan Stanley common shareholders . . . . . . . . . $2,655 $ (30) $ 2,067Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . 1,906 1,886 1,655Effect of dilutive securities:

Stock options and RSUs(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 33 20

Weighted average common shares outstanding and common stockequivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,957 1,919 1,675

Earnings (loss) per diluted common share:Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.38 $ 0.02 $ 1.27Net gain (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.02) (0.04) (0.04)

Earnings (loss) per diluted common share . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.36 $ (0.02) $ 1.23

(1) RSUs that are considered participating securities participate in all of the earnings of the Company in the computation of basic EPS, and,therefore, such RSUs are not included as incremental shares in the diluted calculation.

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The following securities were considered antidilutive and, therefore, were excluded from the computation ofdiluted EPS:

Number of Antidilutive Securities Outstanding at End of Period: 2013 2012 2011

(shares in millions)

RSUs and performance-based stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 8 21Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 42 57

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 50 78

17. Interest Income and Interest Expense.

Details of Interest income and Interest expense were as follows:

2013 2012 2011


Interest income(1):Trading assets(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,292 $2,736 $3,593Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 343 348Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,121 643 356Interest bearing deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 124 186Federal funds sold and securities purchased under agreements to resell and

Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20) 364 886Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,240 1,482 1,865

Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,209 $5,692 $7,234

Interest expense(1):Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 159 $ 181 $ 236Commercial paper and other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . 20 38 41Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,758 4,622 4,912Securities sold under agreements to repurchase and Securities loaned . . . . . . . . . 1,469 1,805 1,925Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (975) (749) (231)

Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,431 $5,897 $6,883

Net interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 778 $ (205) $ 351

(1) Interest income and expense are recorded within the consolidated statements of income depending on the nature of the instrument andrelated market conventions. When interest is included as a component of the instrument’s fair value, interest is included within Tradingrevenues or Investments revenues. Otherwise, it is included within Interest income or Interest expense.

(2) Interest expense on Trading liabilities is reported as a reduction to Interest income on Trading assets.

18. Deferred Compensation Plans.

The Company maintains various deferred compensation plans for the benefit of its employees. The two principalforms of deferred compensation are granted under several stock-based compensation and cash-basedcompensation plans.

Stock-Based Compensation Plans. The accounting guidance for stock-based compensation requiresmeasurement of compensation cost for stock-based awards at fair value and recognition of compensation costover the service period, net of estimated forfeitures (see Note 2).

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The components of the Company’s stock-based compensation expense (net of cancellations) are presented below:

2013 2012 2011


Restricted stock units(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,140 $864 $1,057Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4 24Performance-based stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 29 32

Total(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,184 $897 $1,113

(1) Amounts for 2013, 2012 and 2011 include $25 million, $31 million and $186 million, respectively, related to stock-based awards thatwere granted in 2014, 2013 and 2012, respectively, to employees who satisfied retirement-eligible requirements under award terms thatdo not contain a service period.

(2) Annual expense fluctuations are primarily due to the introduction in 2012 of a new vesting requirement for certain employees who satisfyexisting retirement-eligible requirements to provide a one-year advance notice of their intention to retire from the Company. As such,expense recognition for these awards begins after the grant date (see Note 2).

The table above excludes stock-based compensation expense recorded in discontinued operations, which wasapproximately $3 million in 2012. See Note 1 for additional information on discontinued operations.

The tax benefit related to stock-based compensation expense was $371 million, $306 million and $383 millionfor 2013, 2012 and 2011, respectively. The tax benefit for stock-based compensation expense included indiscontinued operations was $1 million in 2012.

At December 31, 2013, the Company had $749 million of unrecognized compensation cost related to unvestedstock-based awards. Absent estimated or actual forfeitures or cancellations, this amount of unrecognizedcompensation cost will be recognized as $470 million in 2014, $205 million in 2015 and $74 million thereafter.These amounts do not include 2013 performance year awards granted in January 2014, which will begin to beamortized in 2014.

In connection with awards under its stock-based compensation plans, the Company is authorized to issue sharesof its common stock held in treasury or newly issued shares. At December 31, 2013, approximately 107 millionshares were available for future grant under these plans.

The Company generally uses treasury shares, if available, to deliver shares to employees and has an ongoingrepurchase authorization that includes repurchases in connection with awards granted under its stock-basedcompensation plans. Share repurchases by the Company are subject to regulatory approval. See Note 15 foradditional information on the Company’s share repurchase program.

Restricted Stock Units. The Company has granted restricted stock unit awards pursuant to several stock-basedcompensation plans. The plans provide for the deferral of a portion of certain employees’ incentive compensationwith awards made in the form of restricted common stock or in the right to receive unrestricted shares ofcommon stock in the future. Awards under these plans are generally subject to vesting over time contingent uponcontinued employment and to restrictions on sale, transfer or assignment until the end of a specified period,generally one to three years from the date of grant. All or a portion of an award may be canceled if employmentis terminated before the end of the relevant restriction period. All or a portion of a vested award also may becanceled in certain limited situations, including termination for cause during the relevant restriction period.Recipients of stock-based awards may have voting rights, at the Company’s discretion, and generally receivedividend equivalents.

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The following table sets forth activity relating to the Company’s vested and unvested RSUs (share data inmillions):

2013

Number ofShares

Weighted AverageGrant Date Fair

Value

RSUs at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 $24.29Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 22.72Conversions to common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (41) 28.51Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) 22.21

RSUs at end of period(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 $22.41

(1) At December 31, 2013, approximately 121 million RSUs with a weighted average grant date fair value of $22.47 were vested orexpected to vest.

The weighted average price for RSUs granted during 2012 and 2011 was $18.09 and $28.94, respectively. AtDecember 31, 2013, the weighted average remaining term until delivery for the Company’s outstanding RSUswas approximately 1.3 years.

At December 31, 2013, the intrinsic value of outstanding RSUs was $4,130 million.

The total fair market value of RSUs converted to common stock during 2013, 2012 and 2011 was $939 million,$660 million and $935 million, respectively.

The following table sets forth activity relating to the Company’s unvested RSUs (share data in millions):

2013

Number ofShares

Weighted AverageGrant Date Fair

Value

Unvested RSUs at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 $23.83Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 22.72Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36) 26.67Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) 22.19

Unvested RSUs at end of period(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 $22.29

(1) Unvested RSUs represent awards where recipients have yet to satisfy either the explicit vesting terms or retirement-eligible requirements.At December 31, 2013, approximately 87 million unvested RSUs with a weighted average grant date fair value of $22.35 were expectedto vest.

The aggregate fair value of awards that vested during 2013, 2012 and 2011 was $842 million, $753 million and$870 million, respectively.

Stock Options. The Company has granted stock option awards pursuant to several stock-based compensationplans. The plans provide for the deferral of a portion of certain key employees’ incentive compensation with awardsmade in the form of stock options generally having an exercise price not less than the fair value of the Company’scommon stock on the date of grant. Such stock option awards generally become exercisable over a three-year periodand expire five to 10 years from the date of grant, subject to accelerated expiration upon termination of

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employment. Stock option awards have vesting, restriction and cancellation provisions that are generally similar tothose in restricted stock units. The weighted average fair value of the Company’s options granted during 2013 and2011 were $5.41 and $8.24, respectively, utilizing the following weighted average assumptions:

Grant YearRisk-Free Interest

Rate Expected LifeExpected StockPrice Volatility

Expected DividendYield

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6% 3.9 years 32.0% 0.9%2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1% 5.0 years 32.7% 1.5%

No options were granted during 2012.

The Company’s expected option life has been determined based upon historical experience. The expected stockprice volatility assumption was determined using the implied volatility of exchange-traded options, in accordancewith accounting guidance for share-based payments. The risk-free interest rate was determined based on theyields available on U.S. Treasury zero-coupon issues.

The following table sets forth activity relating to the Company’s stock options (options data in millions):

2013

Number ofOptions

WeightedAverage

Exercise Price

Options outstanding at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 $48.37Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 22.98Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12) 39.93

Options outstanding at end of period(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 49.40

Options exercisable at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 52.09

(1) At December 31, 2013, approximately 30 million options with a weighted average exercise price of $51.50 were vested.

There were no stock options exercised during 2013, 2012 or 2011. At December 31, 2013, the intrinsic value ofin-the-money exercisable stock options was $7 million.

The following table presents information relating to the Company’s stock options outstanding at December 31,2013 (options data in millions):

At December 31, 2013 Options Outstanding Options Exercisable

Range of Exercise PricesNumber

OutstandingWeighted Average

Exercise Price

AverageRemaining Life

(Years)Number

ExercisableWeighted Average

Exercise Price

AverageRemaining Life

(Years)

$22.00 – $39.99 6 $26.88 4.0 3 $28.94 4.0$40.00 – $49.99 15 46.51 0.2 15 46.51 0.2$50.00 – $59.99 1 52.08 2.0 1 52.08 2.0$60.00 – $76.99 11 66.75 2.9 11 66.75 2.9

Total . . . . . . . . . . . . . . . . 33 30

Performance-Based Stock Units. The Company has granted PSUs to certain senior executives. These PSUswill vest and convert to shares of common stock at the end of the performance period only if the Companysatisfies predetermined performance and market goals over the three-year performance period that began on

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January 1 of the grant year and ends three years later on December 31. Under the terms of the grant, the numberof PSUs that will actually vest and convert to shares will be based on the extent to which the Company achievesthe specified performance goals during the performance period. Performance-based stock unit awards havevesting, restriction and cancellation provisions that are generally similar to those in restricted stock units.

One-half of the award will be earned based on the Company’s return on average common shareholders’ equity,excluding the impact of the fluctuation in the Company’s credit spreads and other credit factors for certain of theCompany’s long-term and short-term borrowings, primarily structured notes, that are accounted for at fair value(“MS Average ROE”). For PSUs granted after 2011, the MS Average ROE also excludes certain gains or lossesassociated with the sale of specified businesses, specified goodwill impairments, certain gains or lossesassociated with specified legal settlements related to business activities conducted prior to January 1, 2011 andspecified cumulative catch-up adjustments resulting from changes in an existing, or application of a new,accounting principle that is not applied on a fully retrospective basis. The number of PSUs ultimately earned forthis portion of the awards will be applied by a multiplier as follows:

Minimum Maximum

Grant Year MS Average ROE Multiplier MS Average ROE Multiplier

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less than 5% 0.0 13% or more 2.02012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less than 6% 0.0 12% or more 1.52011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less than 7.5% 0.0 18% or more 2.0

The fair value per share of this portion of the award for 2013, 2012 and 2011 was $22.85, $18.16 and $29.89,respectively.

One-half of the award will be earned based on the Company’s total shareholder return (“TSR”), relative to theS&P Financial Sectors Index (for the 2013 and 2012 awards) and to members of a comparison peer group (for the2011 award). The number of PSUs ultimately earned for this portion of the awards will be applied by a multiplieras follows:

Minimum Maximum

Year Metrics TSR Multiplier TSR Multiplier

2013 Comparison of TSR Below Down to 0.0 Above Up to 2.02012 Comparison of TSR Below Down to 0.0 Above Up to 1.52011 Ranking within the comparison group Rank 9 or 10 0.0 Rank 1 2.0

The fair value per share of this portion of the award for 2013, 2012 and 2011 was $34.65, $20.42 and $43.14,respectively, estimated on the date of grant using a Monte Carlo simulation and the following assumptions:

Grant YearRisk-Free Interest

RateExpected StockPrice Volatility

Expected DividendYield

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4% 45.4% 0.0%2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4% 56.0% 1.1%2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0% 89.0% 1.5%

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Because the payout depends on the Company’s total shareholder return relative to a comparison group, thevaluation also depended on the performance of the stocks in the comparison group as well as estimates of thecorrelations among their performance. The expected stock price volatility assumption was determined usinghistorical volatility because correlation coefficients can only be developed through historical volatility. Theexpected dividend yield was based on historical dividend payments. The risk-free interest rate was determinedbased on the yields available on U.S. Treasury zero-coupon issues.

2013

Number of Shares

(in millions)

PSUs at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2)

PSUs at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Deferred Cash-Based Compensation Plans. The Company maintains various deferred cash-basedcompensation plans for the benefit of certain current and former employees that provide a return to the planparticipants based upon the performance of various referenced investments. The Company often invests directly,as a principal, in investments or other financial instruments to economically hedge its obligations under itsdeferred cash-based compensation plans. Changes in value of such investments made by the Company arerecorded in Trading revenues and Investments revenues.

The components of the Company’s deferred compensation expense (net of cancellations) are presented below:

2013 2012 2011


Deferred cash-based awards(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,490 $1,815 $1,809Return on referenced investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 772 435 132

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,262 $2,250 $1,941

(1) Amounts for 2013, 2012 and 2011 include $78 million, $93 million and $113 million, respectively, related to deferred cash-based awardsthat were granted in 2014, 2013 and 2012, respectively, to employees who satisfied retirement-eligible requirements under award termsthat do not contain a service period.

The table above excludes deferred cash-based compensation expense recorded in discontinued operations, whichwas approximately $7 million in 2012 and $7 million in 2011. See Note 1 for additional information ondiscontinued operations.

At December 31, 2013, the Company had approximately $672 million of unrecognized compensation cost relatedto unvested deferred cash-based awards (excluding unrecognized expense for returns on referenced investments).Absent actual cancellations and any future return on referenced investments, this amount of unrecognizedcompensation cost will be recognized as $361 million in 2014, $162 million in 2015 and $149 million thereafter.These amounts do not include 2013 performance year awards granted in January 2014, which will begin to beamortized in 2014.

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2013 Performance Year Deferred Compensation Awards. In January 2014, the Company grantedapproximately $1.2 billion of stock-based awards and $1.4 billion of deferred cash-based awards related to the2013 performance year that contain a future service requirement. Absent estimated or actual forfeitures orcancellations or accelerations, and any future return on referenced investments, the annual compensation cost forthese awards will be recognized as follows:

2014 2015 Thereafter Total


Stock-based awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 749 $309 $169 $1,227Deferred cash-based awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 990 259 142 1,391

$1,739 $568 $311 $2,618

19. Employee Benefit Plans.

The Company sponsors various pension plans for the majority of its U.S. and non-U.S. employees. The Companyprovides certain other postretirement benefits, primarily health care and life insurance, to eligible U.S.employees. The Company also provides certain postemployment benefits to certain former employees or inactiveemployees prior to retirement.

Pension and Other Postretirement Plans. Substantially all of the U.S. employees of the Company and its U.S.affiliates who were hired before July 1, 2007 are covered by the U.S. pension plan, a non-contributory, definedbenefit pension plan that is qualified under Section 401(a) of the Internal Revenue Code (the “U.S. QualifiedPlan”). Unfunded supplementary plans (the “Supplemental Plans”) cover certain executives. In addition, certainof the Company’s non-U.S. subsidiaries also have defined benefit pension plans covering substantially all of theiremployees. These pension plans generally provide pension benefits that are based on each employee’s years ofcredited service and on compensation levels specified in the plans. The Company’s policy is to fund at least theamounts sufficient to meet minimum funding requirements under applicable employee benefit and tax laws.Liabilities for benefits payable under the Supplemental Plans are accrued by the Company and are funded whenpaid to the participants and beneficiaries. The Company’s U.S. Qualified Plan ceased future benefit accruals afterDecember 31, 2010.

The Company also has an unfunded postretirement benefit plan that provides medical and life insurance foreligible U.S. retirees and medical insurance for their dependents.

Net Periodic Benefit Expense.

The following table presents the components of the net periodic benefit expense (income) for 2013, 2012 and2011:

Pension Postretirement

2013 2012 2011 2013 2012 2011


Service cost, benefits earned during the period . . . . . . . . . . . . . . . $ 23 $ 26 $ 27 $ 4 $ 4 $ 4Interest cost on projected benefit obligation . . . . . . . . . . . . . . . . . . 151 156 158 7 7 8Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . (114) (110) (131) — — —Net amortization of prior service cost (credit) . . . . . . . . . . . . . . . . — — — (13) (14) (14)Net amortization of actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . 36 27 17 3 2 2Settlement loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 — 1 — — —

Net periodic benefit expense (income) . . . . . . . . . . . . . . . . . . $ 97 $ 99 $ 72 $ 1 $ (1) $—

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MORGAN STANLEY


Other changes in plan assets and benefit obligations recognized in other comprehensive loss (income) on a pre-tax basis in 2013, 2012 and 2011 were as follows:


2013 2012 2011 2013 2012 2011


Net loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87 $416 $(401) $ (52) $ 16 $ (5)Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3 2 — — —Amortization of prior service credit . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 13 14 14Amortization of net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37) (27) (18) (3) (2) (2)

Total recognized in other comprehensive loss (income) . . . . . . . . . . $ 53 $392 $(417) $ (42) $ 28 $ 7

The Company, for most plans, amortizes (as a component of net periodic benefit expense) unrecognized net gainsand losses over the average future service of active participants to the extent that the gain (loss) exceeds 10% ofthe greater of the projected benefit obligation or the market-related value of plan assets. Effective January 1,2011, the U.S. Qualified Plan amortizes the unrecognized net gains and losses using the average life expectancyof participants.

The following table presents the weighted average assumptions used to determine net periodic benefit expensefor 2013, 2012 and 2011:


2013 2012 2011 2013 2012 2011

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.95% 4.57% 5.44% 3.88% 4.56% 5.41%Expected long-term rate of return on plan assets . . . . . . . . . . . . . . . . 3.73 3.78 4.78 N/A N/A N/ARate of future compensation increases . . . . . . . . . . . . . . . . . . . . . . . . 0.98 2.14 2.28 N/A N/A N/A

N/A—Not Applicable.

The expected long-term rate of return on plan assets represents the Company’s best estimate of the long-termreturn on plan assets. For the U.S. Qualified Plan, the expected long-term rate of return was estimated bycomputing a weighted average return of the underlying long-term expected returns on the plan’s fixed incomeassets based on the investment managers’ target allocations within this asset class. The expected long-term returnon assets is a long-term assumption that generally is expected to remain the same from one year to the nextunless there is a significant change in the target asset allocation, the fees and expenses paid by the plan or marketconditions. The U.S. Qualified Plan is 100% invested in fixed income securities and related derivativeinstruments, including interest rate swap contracts. This asset allocation is expected to help protect the plan’sfunded status and limit volatility of the Company’s contributions. Total U.S. Qualified Plan investment portfolioperformance is assessed by comparing actual investment performance to changes in the estimated present valueof the U.S. Qualified Plan’s benefit obligation.

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Benefit Obligations and Funded Status.

The following table provides a reconciliation of the changes in the benefit obligation and fair value of plan assetsfor 2013 and 2012:



Reconciliation of benefit obligation:Benefit obligation at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,517 $154Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 7Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 405 15Plan settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) —Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (147) (6)Other, including foreign currency exchange rate changes . . . . . . . . . . . . . . . . . . . . . . (72) —

Benefit obligation at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,883 $174Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 7Actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (537) (52)Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 —Plan settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) —Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (186) (6)Other, including foreign currency exchange rate changes . . . . . . . . . . . . . . . . . . . . . . 1 1

Benefit obligation at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,330 $128

Reconciliation of fair value of plan assets:Fair value of plan assets at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,604 $—Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 —Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 6Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (147) (6)Plan settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) —Other, including foreign currency exchange rate changes . . . . . . . . . . . . . . . . . . . . . . (61) —

Fair value of plan assets at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,519 $—Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (512) —Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 6Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (186) (6)Plan settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) —Other, including foreign currency exchange rate changes . . . . . . . . . . . . . . . . . . . . . . 11 —

Fair value of plan assets at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,867 $—

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MORGAN STANLEY


The following table presents a summary of the funded status at December 31, 2013 and December 31, 2012:


December 31,2013

December 31,2012

December 31,2013

December 31,2012


Funded (unfunded) status . . . . . . . . . . . . . . . . . . . . . . . . . $(463) $(364) $(128) $(174)

Amounts recognized in the consolidated statements offinancial condition consist of:

Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60 $ 97 $ — $ —Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (523) (461) (128) (174)

Net amount recognized . . . . . . . . . . . . . . . . . . . $(463) $(364) $(128) $(174)

Amounts recognized in accumulated othercomprehensive loss consist of:

Prior-service cost (credit) . . . . . . . . . . . . . . . . . . . . . $ 1 $ (2) $ (11) $ (24)Net loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 871 821 (14) 41

Net loss (gain) recognized . . . . . . . . . . . . . . . . $ 872 $ 819 $ (25) $ 17

The estimated prior-service cost (credit) that will be amortized from accumulated other comprehensive loss intonet periodic benefit expense over 2014 is $11 million for postretirement plans. The estimated net loss that will beamortized from accumulated other comprehensive loss into net periodic benefit expense over 2014 isapproximately $21 million for defined benefit pension plans.

The accumulated benefit obligation for all defined benefit pension plans was $3,309 million and $3,858 millionat December 31, 2013 and December 31, 2012, respectively.

The following table contains information for pension plans with projected benefit obligations in excess of the fairvalue of plan assets at period-end:

December 31,2013

December 31,2012


Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,127 $552Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,603 90

The following table contains information for pension plans with accumulated benefit obligations in excess of thefair value of plan assets at period-end:

December 31,2013

December 31,2012


Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,089 $527Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,586 90

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MORGAN STANLEY


The following table presents the weighted average assumptions used to determine benefit obligations at period-end:


December 31,2013

December 31,2012

December 31,2013

December 31,2012

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.74% 3.95% 4.75% 3.88%Rate of future compensation increase . . . . . . . . . . . . . . . . 1.06 0.98 N/A N/A

N/A—Not Applicable.

The discount rates used to determine the benefit obligations for the U.S. pension, U.S. postretirement and theU.K. pension plans’ liabilities were selected by the Company, in consultation with its independent actuaries,using a pension discount yield curve based on the characteristics of the plans, each determined independently.The pension discount yield curve represents spot discount yields based on duration implicit in a representativebroad-based Aa rated corporate bond universe of high-quality fixed income investments. For all other non-U.S.pension plans, the Company set the assumed discount rates based on the nature of liabilities, local economicenvironments and available bond indices.

The following table presents assumed health care cost trend rates used to determine the U.S. postretirementbenefit obligations at period-end:

December 31,2013

December 31,2012

Health care cost trend rate assumed for next year:Medical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.90-7.38% 6.93-7.53%Prescription . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.25% 8.66%

Rate to which the cost trend rate is assumed to decline (ultimate trend rate) . . . . . . . . 4.50% 4.50%Year that the rate reaches the ultimate trend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2029 2029

Assumed health care cost trend rates can have a significant effect on the amounts reported for the Company’spostretirement benefit plan. A one-percentage point change in assumed health care cost trend rates would havethe following effects:

One-PercentagePoint Increase

One-PercentagePoint (Decrease)


Effect on total postretirement service and interest cost . . . . . . . . . . . . . . . . . . . . . $ 2 $ (1)Effect on postretirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 (11)

No impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 has been reflected inthe Company’s consolidated statements of income as Medicare prescription drug coverage was deemed to haveno material effect on the Company’s postretirement benefit plan.

Plan Assets. The U.S. Qualified Plan assets represent 87% of the Company’s total pension plan assets. TheU.S. Qualified Plan uses a combination of active and risk-controlled fixed income investment strategies. Thefixed income asset allocation consists primarily of fixed income securities designed to approximate the expectedcash flows of the plan’s liabilities in order to help reduce plan exposure to interest rate variation and to betteralign assets with obligations. The longer duration fixed income allocation is expected to help protect the plan’sfunded status and maintain the stability of plan contributions over the long run.

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MORGAN STANLEY


The allocation among investment managers of the Company’s U.S. Qualified Plan is reviewed by the MorganStanley Retirement Plan Investment Committee (the “Investment Committee”) on a regular basis. When theexposure to a given investment manager reaches a minimum or maximum allocation level, an asset allocationreview process is initiated, and the portfolio will be rebalanced toward the target allocation unless the InvestmentCommittee determines otherwise.

Derivative instruments are permitted in the U.S. Qualified Plan’s investment portfolio only to the extent that theycomply with all of the plan’s policy guidelines and are consistent with the plan’s risk and return objectives. Inaddition, any investment in derivatives must meet the following conditions:

• Derivatives may be used only if they are deemed by the investment manager to be more attractive than asimilar direct investment in the underlying cash market or if the vehicle is being used to manage risk ofthe portfolio.

• Derivatives may not be used in a speculative manner or to leverage the portfolio under any circumstances.

• Derivatives may not be used as short-term trading vehicles. The investment philosophy of the U.S.Qualified Plan is that investment activity is undertaken for long-term investment rather than short-termtrading.

• Derivatives may be used in the management of the U.S. Qualified Plan’s portfolio only when theirpossible effects can be quantified, shown to enhance the risk-return profile of the portfolio, and reportedin a meaningful and understandable manner.

As a fundamental operating principle, any restrictions on the underlying assets apply to a respective derivativeproduct. This includes percentage allocations and credit quality. Derivatives will be used solely for the purposeof enhancing investment in the underlying assets and not to circumvent portfolio restrictions.

Plan assets are measured at fair value using valuation techniques that are consistent with the valuation techniquesapplied to the Company’s major categories of assets and liabilities as described in Note 4. Quoted market pricesin active markets are the best evidence of fair value and are used as the basis for the measurement, if available. Ifa quoted market price is available, the fair value is the product of the number of trading units multiplied by themarket price. If a quoted market price is not available, the estimate of fair value is based on the valuationapproaches that maximize use of observable inputs and minimize use of unobservable inputs.

The fair value of OTC derivative contracts is derived primarily using pricing models, which may require multiplemarket input parameters. Derivative contracts are presented on a gross basis prior to cash collateral orcounterparty netting. Derivatives consist of investments in interest rate swap contracts and are categorized asLevel 2 of the fair value hierarchy.

Commingled trust funds are privately offered funds available to institutional clients that are regulated, supervisedand subject to periodic examination by a U.S. federal or state agency. The trust must be maintained for thecollective investment or reinvestment of assets contributed to it from employee benefit plans maintained by morethan one employer or a controlled group of corporations. The sponsor of the commingled trust funds values thefunds’ NAV based on the fair value of the underlying securities. The underlying securities of the commingledtrust funds consist of mainly long-duration fixed income instruments. Commingled trust funds that areredeemable at the measurement date or in the near future are categorized in Level 2 of the fair value hierarchy,otherwise they are categorized in Level 3 of the fair value hierarchy.

Some non-U.S.-based plans hold foreign funds that consist of investments in foreign corporate equity funds,foreign corporate bond funds, foreign target cash flow funds and foreign liquidity funds. Foreign corporate equity

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MORGAN STANLEY


funds and foreign corporate bond funds invest in individual securities quoted on a recognized stock exchange ortraded in a regulated market and certain bond funds that aim to produce returns as close as possible to certainFinancial Times Stock Exchange indexes. Foreign target cash flow funds are designed to provide a series of fixedannual cash flows over five or 10 years achieved by investing in government bonds and derivatives. Foreignliquidity funds place a high priority on capital preservation, stable value and a high liquidity of assets. Foreignfunds are generally categorized in Level 2 of the fair value hierarchy as they are readily redeemable at theirNAV. Corporate equity funds traded on a recognized exchange are categorized in Level 1 of the fair valuehierarchy.

Other investments held by non-U.S. based plans consist of real estate funds, hedge funds and insurance annuitycontracts. These real estate and hedge funds are categorized in Level 2 of the fair value hierarchy to the extentthat they are readily redeemable at their NAV, otherwise they are categorized in Level 3 of the fair valuehierarchy. The insurance annuity contracts are valued based on the premium reserve of the insurer for a guaranteethat the insurer has given to the employee benefit plan that approximates fair value. The insurance annuitycontracts are categorized in Level 3 of the fair value hierarchy.

The following table presents the fair value of the net pension plan assets at December 31, 2013. There were notransfers between levels during 2013:




(Level 2)


Inputs (Level 3) Total

(dollars in millions)Assets:Investments:

Cash and cash equivalents(1) . . . . . . . . . . . . . . . . . . . $ 91 $ — $ — $ 91U.S. government and agency securities:

U.S. Treasury securities . . . . . . . . . . . . . . . . . . . 1,047 — — 1,047U.S. agency securities . . . . . . . . . . . . . . . . . . . . — 204 — 204

Total U.S. government and agency securities . . 1,047 204 — 1,251Corporate and other debt:

State and municipal securities . . . . . . . . . . . . . . — 2 — 2Collateralized debt obligations . . . . . . . . . . . . . — 76 — 76

Total corporate and other debt . . . . . . . . . . . . . . — 78 — 78Derivative contracts(2) . . . . . . . . . . . . . . . . . . . . . . . — 122 — 122Derivative-related cash collateral receivable . . . . . . . — 37 — 37Commingled trust funds(3) . . . . . . . . . . . . . . . . . . . . — 1,004 — 1,004Foreign funds(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 291 — 312Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . — 10 38 48

Total investments . . . . . . . . . . . . . . . . . . . . . . . . 1,159 1,746 38 2,943Receivables:

Other receivables(1) . . . . . . . . . . . . . . . . . . . . . . . . . . — 20 — 20

Total receivables . . . . . . . . . . . . . . . . . . . . . . . . — 20 — 20

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,159 $1,766 $ 38 $2,963

Liabilities:Derivative contracts(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 92 $ — $ 92Derivative-related cash collateral payable . . . . . . . . . . . . . — 2 — 2Other liabilities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2 — 2

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 96 — 96

Net pension assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,159 $1,670 $ 38 $2,867

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MORGAN STANLEY


(1) Cash and cash equivalents, other receivables and other liabilities are valued at their carrying value, which approximates fair value.(2) Derivative contracts in an asset position consist of investments in interest rate swaps of $122 million.(3) Commingled trust funds consist of investments in fixed income funds of $1,004 million.(4) Foreign funds include investments in corporate bond funds, targeted cash flow funds, liquidity funds, corporate equity funds and

diversified funds of $157 million, $77 million, $56 million, $21 million and $1 million, respectively.(5) Derivative contracts in a liability position consist of investments in interest rate swaps of $92 million.

The following table presents the fair value of the net pension plan assets at December 31, 2012. There were notransfers between levels during 2012:

Quoted Prices inActive Markets

for IdenticalAssets (Level 1)


(Level 2)


Inputs (Level 3) Total

(dollars in millions)Assets:Investments:

Cash and cash equivalents(1) . . . . . . . . . . . . . . . . . . . . $ 80 $ — $ — $ 80U.S. government and agency securities:

U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . 1,354 — — 1,354U.S. agency securities . . . . . . . . . . . . . . . . . . . . . . — 241 — 241

Total U.S. government and agency securities . . . . 1,354 241 — 1,595Corporate and other debt:

State and municipal securities . . . . . . . . . . . . . . . . — 2 — 2Collateralized debt obligations . . . . . . . . . . . . . . . — 71 — 71

Total corporate and other debt . . . . . . . . . . . . . . . . — 73 — 73Corporate equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 — — 20Derivative contracts(2) . . . . . . . . . . . . . . . . . . . . . . . . . — 224 — 224Derivative-related cash collateral receivable . . . . . . . . — 3 — 3Commingled trust funds(3) . . . . . . . . . . . . . . . . . . . . . . — 1,275 — 1,275Foreign funds(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 282 — 282Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 11 30 41

Total investments . . . . . . . . . . . . . . . . . . . . . . . . . 1,454 2,109 30 3,593Receivables:

Other receivables(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . — 71 — 71

Total receivables . . . . . . . . . . . . . . . . . . . . . . . . . . — 71 — 71

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,454 $2,180 $ 30 $3,664

Liabilities:Derivative contracts(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 57 $ — $ 57Derivative-related cash collateral payable . . . . . . . . . . . . . . — 28 — 28Other liabilities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 60 — 60

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 145 — 145

Net pension assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,454 $2,035 $ 30 $3,519

(1) Cash and cash equivalents, other receivables and other liabilities are valued at their carrying value, which approximates fair value.(2) Derivative contracts in an asset position consist of investments in interest rate swaps of $224 million.(3) Commingled trust funds consist of investments in fixed income funds of $1,275 million.(4) Foreign funds include investments in corporate bond funds, targeted cash flow funds, liquidity funds and diversified funds of $141

million, $85 million, $55 million and $1 million, respectively.(5) Derivative contracts in a liability position consist of investments in interest rate swaps of $57 million.

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The following table presents changes in Level 3 pension assets measured at fair value for 2013:

BeginningBalance atJanuary 1,

2013

ActualReturn onPlan AssetsRelated toAssets Still

Held atDecember 31,

2013

ActualReturnon Plan

Assets Relatedto Assets Soldduring 2013

Purchases,Sales,Other

Settlementsand Issuances,

net

Net TransfersIn and/or (Out)

of Level 3

EndingBalance

at December 31,2013


InvestmentsOther investments . . . . . . . . $30 $2 $— $4 $2 $38

Total investments . . . . . $30 $2 $— $4 $2 $38

The following table presents changes in Level 3 pension assets measured at fair value for 2012:

BeginningBalance atJanuary 1,

2012

ActualReturn onPlan AssetsRelated toAssets Still

Held atDecember 31,

2012

Actual Returnon Plan

Assets Relatedto Assets Soldduring 2012

Purchases,Sales,Other

Settlementsand

Issuances,net

Net TransfersIn and/or (Out)

of Level 3

EndingBalance

at December 31,2012


InvestmentsOther investments . . . . . . . . . . $26 $— $— $4 $— $30

Total investments . . . . . . . . $26 $— $— $4 $— $30

Cash Flows.

At December 31, 2013, the Company expects to contribute approximately $50 million to its pension andpostretirement benefit plans in 2014 based upon the plans’ current funded status and expected asset returnassumptions for 2014, as applicable.

Expected benefit payments associated with the Company’s pension and postretirement benefit plans for the nextfive years and in aggregate for the five years thereafter at December 31, 2013 are as follows:



2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $129 $ 62015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 62016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 62017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 72018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 72019-2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 788 40

Morgan Stanley 401(k) Plan. U.S. employees meeting certain eligibility requirements may participate in theMorgan Stanley 401(k) Plan. Eligible U.S. employees receive 401(k) matching cash contributions representing a$1 for $1 Company match up to 4% of eligible pay, up to the Internal Revenue Service (“IRS”) limit. Matchingcontributions for 2013 and 2012 were allocated according to participants’ current investment direction. EligibleU.S. employees with eligible pay less than or equal to $100,000 also receive a fixed contribution under the

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401(k) Plan that equals 2% of eligible pay. A transition contribution is allocated to participants who received a2010 accrual in the U.S. Qualified Plan or a 2010 retirement contribution in the 401(k) Plan and who met certainage and service requirements as of December 31, 2010.

A separate transition contribution is allocated to certain eligible legacy Smith Barney employees. The Companymatch, fixed contribution and transition contributions are included in the Company’s 401(k) expense. The pre-tax401(k) expense for 2013, 2012 and 2011 was $242 million, $246 million and $257 million, respectively.

Defined Contribution Pension Plans. The Company maintains separate defined contribution pension plans thatcover substantially all employees of certain non-U.S. subsidiaries. Under such plans, benefits are determinedbased on a fixed rate of base salary with certain vesting requirements. In 2013, 2012 and 2011, the Company’sexpense related to these plans was $111 million, $126 million and $136 million, respectively.

Other Postemployment Benefits. Postemployment benefits may include, but are not limited to, salarycontinuation, severance benefits, disability-related benefits, and continuation of health care and life insurancecoverage provided to former employees or inactive employees after employment but before retirement. Thepostemployment benefit obligations were not material at December 31, 2013 and December 31, 2012.

20. Income Taxes.

The provision for (benefit from) income taxes from continuing operations consisted of:

2013 2012 2011

(dollars in millions)Current:

U.S. federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 153 $(178) $ 35U.S. state and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 140 276Non-U.S.:

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178 (16) 169Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 90 19Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 16 (3)Other(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301 355 378

$ 920 $ 407 $ 874

Deferred:U.S. federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3) $(748) $ 508U.S. state and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (64) (49)Non-U.S.:

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (75) 77 32Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262 170 41Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14) 35 27Other(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (265) (114) (19)

$ (94) $(644) $ 540

Provision for (benefit from) income taxes from continuing operations . . . . . . . . . . . . . . $ 826 $(237) $1,414

Provision for (benefit from) income taxes from discontinued operations . . . . . . . . . . . . . $ (29) $ (7) $ (119)

(1) Results for 2013 Non-U.S. other jurisdictions included significant total tax provisions (benefits) of $59 million, $54 million, and $(156)million from Brazil, India, and Luxembourg, respectively. Results for 2012 Non-U.S. other jurisdictions included significant total taxprovisions (benefits) of $43 million, $36 million, $36 million, $33 million, $32 million, and $(31) million from India, Brazil, Spain,Canada, Singapore, and Netherlands, respectively. Results for 2011 Non-U.S. other jurisdictions included significant total tax provisionsof $98 million, $78 million, $68 million, and $27 million from Brazil, Netherlands, Spain, and India, respectively.

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The following table reconciles the provision for (benefit from) income taxes to the U.S. federal statutory incometax rate:

2013 2012(1) 2011

U.S. federal statutory income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% 35.0%U.S. state and local income taxes, net of U.S. federal income tax benefits . . . . . . . . 2.4 8.6 2.6Domestic tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.3) (42.7) (3.9)Tax exempt income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.5) (29.9) (0.3)Non-U.S. earnings:

Foreign Tax Rate Differential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6.1) (14.0) 0.7Change in Reinvestment Assertion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.4) 4.8 (2.2)Change in Foreign Tax Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 (0.3) 1.6

Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (7.3)Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.8) (7.1) (3.1)

Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.4% (45.6)% 23.1%

(1) 2012 percentages are reflective of the lower level of income from continuing operations before income taxes on a comparative basis dueto the change in the fair value of certain of the Company’s long-term and short-term borrowings resulting from fluctuations in its creditspreads and other credit factors.

The Company’s effective tax rate from continuing operations for 2013 included an aggregate discrete net taxbenefit of $407 million. This included discrete tax benefits of: $161 million related to the remeasurement ofreserves and related interest associated with new information regarding the status of certain tax authorityexaminations; $92 million related to the establishment of a previously unrecognized deferred tax asset from alegal entity reorganization; $73 million that is attributable to tax planning strategies to optimize foreign tax creditutilization as a result of the anticipated repatriation of earnings from certain non-U.S. subsidiaries; and $81million due to the retroactive effective date of the American Taxpayer Relief Act of 2012 (the “Relief Act”). TheRelief Act that was enacted on January 2, 2013, among other things, extended with retroactive effect toJanuary 1, 2012 a provision of U.S. tax law that defers the imposition of tax on certain active financial servicesincome of certain foreign subsidiaries earned outside the U.S. until such income is repatriated to the U.S. as adividend. Excluding the aggregate discrete net tax benefit noted above, the effective tax rate from continuingoperations in 2013 would have been 27.5%.

The Company’s effective tax rate from continuing operations for 2012 included an aggregate net tax benefit of$142 million. This included a discrete tax benefit of $299 million related to the remeasurement of reserves andrelated interest associated with either the expiration of the applicable statute of limitations or new informationregarding the status of certain IRS examinations and an aggregate out-of-period net tax provision of $157million, to adjust the overstatement of deferred tax assets associated with partnership investments, principally inthe Company’s Investment Management business segment and repatriated earnings of foreign subsidiariesrecorded in prior years. The Company has evaluated the effects of the understatement of the income tax provisionboth qualitatively and quantitatively and concluded that it did not have a material impact on any prior annual orquarterly consolidated financial statements. Excluding the aggregate net tax benefit noted above, the effective taxrate from continuing operations in 2012 would have been a benefit of 18.3%.

The Company’s effective tax rate from continuing operations for 2011 included an aggregate discrete net taxbenefit of $484 million. This included a $447 million discrete net tax benefit from the remeasurement of adeferred tax asset and the reversal of a related valuation allowance. The deferred tax asset and valuationallowance were recognized in income from discontinued operations in 2010 in connection with the recognition ofa $1.2 billion loss due to writedowns and related costs following the Company’s commitment to a plan to dispose

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of Revel. The Company recorded the valuation allowance because the Company did not believe it was morelikely than not that it would have sufficient future net capital gain to realize the benefit of the expected capitalloss to be recognized upon the disposal of Revel. During the quarter ended March 31, 2011, the disposal of Revelwas restructured as a tax-free like kind exchange and the disposal was completed. The restructured transactionchanged the character of the future taxable loss to ordinary. The Company reversed the valuation allowancebecause the Company believes it is more likely than not that it will have sufficient future ordinary taxable incometo recognize the recorded deferred tax asset. In accordance with the applicable accounting literature, this reversalof a previously established valuation allowance due to a change in circumstances was recognized in income fromcontinuing operations during the quarter ended March 31, 2011. Additionally, in 2011 the Company recognized adiscrete tax benefit of $137 million related to the reversal of U.S. deferred tax liabilities associated with prior-years’ undistributed earnings of certain non-U.S. subsidiaries that were determined to be indefinitely reinvestedabroad, and a discrete tax cost of $100 million related to the remeasurement of Japanese deferred tax assets as aresult of a decrease in the local statutory income tax rates starting in 2012. Excluding the aggregate net discretetax benefit noted above, the effective tax rate from continuing operations in 2011 would have been 31.0%.

The Company had $6,675 million and $7,191 million of cumulative earnings at December 31, 2013 andDecember 31, 2012, respectively, attributable to foreign subsidiaries for which no U.S. provision has beenrecorded for income tax that could occur upon repatriation. Except to the extent such earnings can be repatriatedtax efficiently, they are permanently invested abroad. Accordingly, $736 million and $719 million of deferred taxliabilities were not recorded with respect to these earnings at December 31, 2013 and December 31, 2012,respectively.

Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and taxbases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect whensuch differences are expected to reverse. Significant components of the Company’s deferred tax assets andliabilities at December 31, 2013 and December 31, 2012 were as follows:

December 31,2013

December 31,2012


Gross deferred tax assets:Tax credits and loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,130 $6,193Employee compensation and benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,417 2,173Valuation and liability allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,122 529Valuation of inventory, investments and receivables . . . . . . . . . . . . . . . . . . . . . . 418 —Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 158

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,087 9,053Valuation allowance(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 48

Deferred tax assets after valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . $9,049 $9,005

Gross deferred tax liabilities:Non-U.S. operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,293 $1,253Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275 115Valuation of inventory, investments and receivables . . . . . . . . . . . . . . . . . . . . . . — 351Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253 —

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,821 $1,719

Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,228 $7,286

(1) The valuation allowance reduces the benefit of certain separate Company federal net operating loss and state capital loss carryforwards tothe amount that will more likely than not be realized.

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During 2013, the valuation allowance was decreased by $10 million related to the ability to utilize certain statecapital losses.

The Company had tax credit carryforwards for which a related deferred tax asset of $4,932 million and $5,705million was recorded at December 31, 2013 and December 31, 2012, respectively. These carryforwards aresubject to annual limitations on utilization, with a significant amount scheduled to expire in 2020, if not utilized.

The Company believes the recognized net deferred tax asset (after valuation allowance) of $7,228 million ismore likely than not to be realized based on expectations as to future taxable income in the jurisdictions in whichit operates.

The Company recorded net income tax provision to Paid-in capital related to employee stock-basedcompensation transactions of $121 million, $114 million, and $76 million in 2013, 2012, and 2011, respectively.

Cash payments for income taxes were $930 million, $388 million, and $892 million in 2013, 2012, and 2011,respectively.

The following table presents the U.S. and non-U.S. components of income from continuing operations beforeincome tax expense (benefit) for 2013, 2012, and 2011, respectively:

2013 2012 2011


U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,662 $(1,241) $3,250Non-U.S.(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,820 1,761 2,860

$4,482 $ 520 $6,110

(1) Non-U.S. income is defined as income generated from operations located outside the U.S.

The total amount of unrecognized tax benefits was approximately $4.1 billion, $4.1 billion, and $4.0 billion atDecember 31, 2013, December 31, 2012, and December 31, 2011, respectively. Of this total, approximately $1.4billion, $1.6 billion, and $1.8 billion, respectively (net of federal benefit of state issues, competent authority andforeign tax credit offsets) represent the amount of unrecognized tax benefits that, if recognized, would favorablyaffect the effective tax rate in future periods.

Interest and penalties related to unrecognized tax benefits are classified as provision for income taxes. TheCompany recognized $50 million, $(10) million, and $56 million of interest expense (benefit) (net of federal andstate income tax benefits) in the consolidated statements of income for 2013, 2012, and 2011, respectively.Interest expense accrued at December 31, 2013, December 31, 2012, and December 31, 2011 was approximately$293 million, $243 million, and $330 million, respectively, net of federal and state income tax benefits. Penaltiesrelated to unrecognized tax benefits for the years mentioned above were immaterial.

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The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefitsfor 2013, 2012 and 2011 (dollars in millions):

Unrecognized Tax Benefits

Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,711Increase based on tax positions related to the current period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 412Increase based on tax positions related to prior periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70Decreases based on tax positions related to prior periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (79)Decreases related to settlements with taxing authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (56)Decreases related to a lapse of applicable statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13)

Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,045

Increase based on tax positions related to the current period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 299Increase based on tax positions related to prior periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127Decreases based on tax positions related to prior periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21)Decreases related to settlements with taxing authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (260)Decreases related to a lapse of applicable statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (125)


Increase based on tax positions related to the current period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51Increase based on tax positions related to prior periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267Decreases based on tax positions related to prior periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (141)Decreases related to settlements with taxing authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (146)


The Company is under continuous examination by the IRS and other tax authorities in certain countries, such asJapan and the U.K., and in states in which the Company has significant business operations, such as New York.The Company is currently under review by the IRS Appeals Office for the remaining issues covering tax years1999 – 2005. Also, the Company is currently at various levels of field examination with respect to audits by theIRS, as well as New York State and New York City, for tax years 2006 – 2008 and 2007 – 2009, respectively.During 2014, the Company expects to reach a conclusion with the U.K. tax authorities on substantially all issuesthrough tax year 2010.

The Company believes that the resolution of tax matters will not have a material effect on the consolidatedstatements of financial condition of the Company, although a resolution could have a material impact on theCompany’s consolidated statements of income for a particular future period and on the Company’s effectiveincome tax rate for any period in which such resolution occurs. The Company has established a liability forunrecognized tax benefits that the Company believes is adequate in relation to the potential for additionalassessments. Once established, the Company adjusts unrecognized tax benefits only when more information isavailable or when an event occurs necessitating a change.

The Company periodically evaluates the likelihood of assessments in each taxing jurisdiction resulting from theexpiration of the applicable statute of limitations or new information regarding the status of current andsubsequent years’ examinations. As part of the Company’s periodic review, federal and state unrecognized taxbenefits were released or remeasured. As a result of this remeasurement, the income tax provision included adiscrete tax benefit of $161 million and $299 million in 2013 and 2012, respectively.

It is reasonably possible that the gross balance of unrecognized tax benefits of approximately $4.1 billion as ofDecember 31, 2013 may decrease significantly within the next 12 months due to an expected completion of the

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field examination in connection with the audit by the IRS for tax years 2006 – 2008. At this time, however, it isnot possible to reasonably estimate the decrease to the net balance of unrecognized tax benefits, as well as theimpact on the effective tax rate and the potential benefit to Income from continuing operations due to theforward-looking nature of such analysis.

The following are the major tax jurisdictions in which the Company and its affiliates operate and the earliest taxyear subject to examination:

Jurisdiction Tax Year

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1999New York State and City . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012

21. Segment and Geographic Information.

Segment Information.

The Company structures its segments primarily based upon the nature of the financial products and servicesprovided to customers and the Company’s management organization. The Company provides a wide range offinancial products and services to its customers in each of its business segments: Institutional Securities, WealthManagement and Investment Management. For further discussion of the Company’s business segments, seeNote 1.

Revenues and expenses directly associated with each respective segment are included in determining itsoperating results. Other revenues and expenses that are not directly attributable to a particular segment areallocated based upon the Company’s allocation methodologies, generally based on each segment’s respective netrevenues, non-interest expenses or other relevant measures.

As a result of revenues and expenses from transactions with other operating segments being treated astransactions with external parties, the Company includes an Intersegment Eliminations category to reconcile thebusiness segment results to the Company’s consolidated results. Intersegment Eliminations also reflect the effectof fees paid by the Institutional Securities business segment to the Wealth Management business segment relatedto the bank deposit program.

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Selected financial information for the Company’s segments is presented below:

2013Institutional

SecuritiesWealth

ManagementInvestment

ManagementIntersegmentEliminations Total


Total non-interest revenues . . . . . . . . . . . . . . . . . $16,544 $12,334 $2,994 $(233) $31,639Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . 3,572 2,100 9 (472) 5,209Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . 4,673 220 15 (477) 4,431

Net interest . . . . . . . . . . . . . . . . . . . . . . . . . (1,101) 1,880 (6) 5 778

Net revenues . . . . . . . . . . . . . . . . . . . . $15,443 $14,214 $2,988 $(228) $32,417

Income from continuing operations beforeincome taxes . . . . . . . . . . . . . . . . . . . . . . . . . . $ 869 $ 2,629 $ 984 $ — $ 4,482

Provision for income taxes . . . . . . . . . . . . . . . . . (393) 920 299 — 826

Income from continuing operations . . . . . . . . . . 1,262 1,709 685 — 3,656

Discontinued operations(1):Gain (loss) from discontinued

operations . . . . . . . . . . . . . . . . . . . . . . . . (81) (1) 9 1 (72)Provision for (benefit from) income

taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29) — — — (29)

Net gain (loss) on discontinuedoperations . . . . . . . . . . . . . . . . . . . . (52) (1) 9 1 (43)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,210 1,708 694 1 3,613Net income applicable to redeemable

noncontrolling interests . . . . . . . . . . . . . . 1 221 — — 222Net income applicable to nonredeemable

noncontrolling interests . . . . . . . . . . . . . . 277 — 182 — 459

Net income applicable to Morgan Stanley . . . . . $ 932 $ 1,487 $ 512 $ 1 $ 2,932

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2012InstitutionalSecurities(3)

WealthManagement(3)

InvestmentManagement

IntersegmentEliminations Total


Total non-interest revenues . . . . . . . . . . . $12,772 $11,467 $2,243 $(175) $26,307Interest income . . . . . . . . . . . . . . . . . . . . 4,224 1,886 10 (428) 5,692Interest expense . . . . . . . . . . . . . . . . . . . . 5,971 319 34 (427) 5,897

Net interest . . . . . . . . . . . . . . . . . . . . (1,747) 1,567 (24) (1) (205)

Net revenues . . . . . . . . . . . . . . $11,025 $13,034 $2,219 $(176) $26,102

Income (loss) from continuing operationsbefore income taxes . . . . . . . . . . . . . . . $ (1,688) $ 1,622 $ 590 $ (4) $ 520

Provision for (benefit from) incometaxes(2) . . . . . . . . . . . . . . . . . . . . . . . . (1,061) 557 267 — (237)

Income (loss) from continuingoperations . . . . . . . . . . . . . . . . . . . . . . (627) 1,065 323 (4) 757


operations . . . . . . . . . . . . . . . . . . (158) 94 13 3 (48)Provision for (benefit from) income

taxes . . . . . . . . . . . . . . . . . . . . . . . (36) 26 4 (1) (7)

Net gain (loss) on discontinuedoperations . . . . . . . . . . . . . . (122) 68 9 4 (41)

Net income (loss) . . . . . . . . . . . . . . . . . . . (749) 1,133 332 — 716Net income applicable to

redeemable noncontrollinginterests . . . . . . . . . . . . . . . . . . . . 4 120 — — 124

Net income applicable tononredeemable noncontrollinginterests . . . . . . . . . . . . . . . . . . . . 170 167 187 — 524

Net income (loss) applicable to MorganStanley . . . . . . . . . . . . . . . . . . . . . . . . . $ (923) $ 846 $ 145 $ — $ 68

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2011InstitutionalSecurities(3)

WealthManagement(3)

InvestmentManagement

IntersegmentEliminations Total


Total non-interest revenues(4) . . . . . . . . . . . . . $18,723 $11,340 $1,928 $(115) $31,876Interest income . . . . . . . . . . . . . . . . . . . . . . . . 5,860 1,719 10 (355) 7,234Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 6,900 287 51 (355) 6,883

Net interest . . . . . . . . . . . . . . . . . . . . . . . . (1,040) 1,432 (41) — 351

Net revenues . . . . . . . . . . . . . . . . . . $17,683 $12,772 $1,887 $(115) $32,227

Income from continuing operationsbefore income taxes . . . . . . . . . . . . . . . . . . . $ 4,550 $ 1,307 $ 253 $ — $ 6,110

Provision for income taxes . . . . . . . . . . . . . . . 880 461 73 — 1,414

Income from continuing operations . . . . . . . . . 3,670 846 180 — 4,696


operations . . . . . . . . . . . . . . . . . . . . . . (216) 21 24 1 (170)Provision for (benefit from) income

taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . (110) 7 (17) 1 (119)

Net gain (loss) from discontinuedoperations . . . . . . . . . . . . . . . . . . (106) 14 41 — (51)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,564 860 221 — 4,645Net income applicable to nonredeemable

noncontrolling interests . . . . . . . . . . . . 220 170 145 — 535

Net income applicable to Morgan Stanley . . . $ 3,344 $ 690 $ 76 $ — $ 4,110

(1) See Note 1 for discussion of discontinued operations.(2) Results for 2012 included an out-of-period net tax provision of $107 million, attributable to the Investment Management business

segment, related to the overstatement of deferred tax assets associated with partnership investments in prior years and an out-of-periodnet tax provision of $50 million, attributable to the Institutional Securities business segment, related to the overstatement of deferred taxassets associated with repatriated earnings of a foreign subsidiary recorded in prior years (see Note 20).

(3) On January 1, 2013, the International Wealth Management business was transferred from the Wealth Management business segment tothe Equity division within the Institutional Securities business segment. Accordingly, prior-period amounts have been recast to reflect theInternational Wealth Management business as part of the Institutional Securities business segment.

(4) In the fourth quarter of 2011, the Company recognized a pre-tax loss of approximately $108 million, in net revenues upon application ofthe OIS curve within the Institutional Securities business segment (see Note 4).

Total Assets(1)InstitutionalSecurities(2)

WealthManagement(2)



At December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $668,596 $156,711 $7,395 $832,702

At December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $648,049 $125,565 $7,346 $780,960

(1) Corporate assets have been fully allocated to the Company’s business segments.(2) Prior-period amounts have been recast to reflect the transfer of the International Wealth Management business from the Wealth

Management business segment to the Institutional Securities business segment.

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Geographic Information.

The Company operates in both U.S. and non-U.S. markets. The Company’s non-U.S. business activities areprincipally conducted and managed through European and Asian locations. The net revenues disclosed in thefollowing table reflect the regional view of the Company’s consolidated net revenues on a managed basis, basedon the following methodology:

• Institutional Securities: advisory and equity underwriting—client location, debt underwriting—revenuerecording location, sales and trading—trading desk location.

• Wealth Management: wealth management representative coverage location.

• Investment Management: client location, except for Merchant Banking and Real Estate Investingbusinesses, which are based on asset location.

Net Revenues 2013 2012 2011


Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,282 $20,200 $22,306EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,542 3,078 6,619Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,593 2,824 3,302

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,417 $26,102 $32,227

Total AssetsAt December 31,

2013At December 31,

2012


Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $632,255 $587,993EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,008 122,152Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,439 70,815

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $832,702 $780,960

22. Equity Method Investments.

The Company has investments accounted for under the equity method of accounting (see Note 1) of $4,746million and $4,682 million at December 31, 2013 and December 31, 2012, respectively, included in Otherinvestments in the consolidated statements of financial condition. Income (losses) from these investments were$375 million, $(23) million and $(995) million for 2013, 2012 and 2011, respectively, and are included in Otherrevenues in the consolidated statements of income. The gains (losses) for 2013, 2012 and 2011 were primarilyrelated to the gains and losses related to the Company’s 40% stake in Mitsubishi UFJ Morgan Stanley SecuritiesCo., Ltd. (“MUMSS”), as described below.

The following presents certain equity method investees at December 31, 2013 and 2012:

Book Value(1)

PercentOwnership

December 31,2013

December 31,2012


Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. . . . . . . . . . . . . . . . . . 40% $1,610 $1,428Lansdowne Partners(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.8% 221 221Avenue Capital Group(2)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 198 224

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(1) Book value of these investees exceeds the Company’s share of net assets, reflecting equity method intangible assets and equity methodgoodwill.

(2) The Company’s ownership interest represents limited partnership interests. The Company is deemed to have significant influence inthese limited partnerships, as the Company’s limited partnership interests were above the 3% to 5% threshold for interests that should beaccounted for under the equity method.

(3) The Company’s ownership interest represents limited partnership interests in a number of different entities within the Avenue CapitalGroup.

Japanese Securities Joint Venture.

The Company holds a 40% voting interest and MUFG holds a 60% voting interest in MUMSS. The Companyaccounts for its interest in MUMSS as an equity method investment within the Institutional Securities businesssegment (see Note 15). During 2013, 2012 and 2011, the Company recorded income (loss) of $570 million, $152million and $(783) million, respectively, within Other revenues in the consolidated statements of income, arisingfrom the Company’s 40% stake in MUMSS.

To the extent that losses incurred by MUMSS result in a requirement to restore its capital, MUFG is solelyresponsible for providing this additional capital to a minimum level, whereas the Company is not obligated tocontribute additional capital to MUMSS. To the extent that MUMSS is required to increase its capital level dueto factors other than losses, such as changes in regulatory requirements, both MUFG and the Company arerequired to contribute the necessary capital based upon their economic interest as set forth above.


The following presents summarized financial data for MUMSS:

At December 31,

2013 2012


Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $118,108 $141,635Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114,648 138,742Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 41

2013 2012 2011


Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,305 $2,365 $ 735Income (loss) from continuing operations before income taxes . . . . . . . . . . . . . . . . . . 1,325 333 (1,746)Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,459 405 (1,976)Net income (loss) applicable to MUMSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,441 397 (1,976)

Huaxin Securities Joint Venture.

In June 2011, the Company and Huaxin Securities Co., Ltd. (“Huaxin Securities”) (also known as China FortuneSecurities Co., Ltd.) jointly announced the operational commencement of their securities joint venture in China.During 2011, the Company recorded initial costs of $130 million related to the formation of this new Chinesesecurities joint venture in Other expenses in the consolidated statement of income. The joint venture, MorganStanley Huaxin Securities Company Limited, is registered and principally located in Shanghai. Huaxin Securitiesholds a two-thirds interest in the joint venture, while the Company owns a one-third interest. The establishmentof the joint venture allows the Company to further build on its established onshore businesses in China. The joint

277

MORGAN STANLEY


venture’s business includes underwriting and sponsorship of shares in the domestic China market (including Ashares and foreign investment shares), as well as underwriting, sponsorship and principal trading of bonds(including government and corporate bonds).

Other.

Lansdowne Partners is a London-based investment manager. Avenue Capital Group is a New York-basedinvestment manager. The investments are accounted for within the Investment Management business segment.

The Company also invests in certain structured transactions and other investments not integral to the operationsof the Company accounted for under the equity method of accounting amounting to $2.7 billion and $2.8 billionat December 31, 2013 and 2012, respectively.

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MORGAN STANLEY


23. Parent Company.

Parent Company OnlyCondensed Statements of Financial Condition

(dollars in millions, except share data)

December 31,2013

December 31,2012

AssetsCash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,296 $ 1,342Deposits with banking subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,070 8,222Interest bearing deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,846 4,165Trading assets, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,704 2,930Securities purchased under agreement to resell with affiliate . . . . . . . . . . . . . . . . . . . . 33,748 48,493Advances to subsidiaries:

Bank and bank holding company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,015 16,731Non-bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114,833 115,949

Equity investments in subsidiaries:Bank and bank holding company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,144 23,511Non-bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,968 32,591

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,508 7,201

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $258,132 $261,135

LiabilitiesCommercial paper and other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 506 $ 228Trading liabilities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,135 1,117Payables to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,420 36,733Other liabilities and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,312 3,132Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143,838 157,816

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,211 199,026

Commitments and contingent liabilitiesEquity

Preferred stock (see Note 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,220 1,508Common stock, $0.01 par value:

Shares authorized: 3,500,000,000 at December 31, 2013 and December 31,2012;

Shares issued: 2,038,893,979 at December 31, 2013 and December 31,2012;

Shares outstanding: 1,944,868,751 at December 31, 2013 and1,974,042,123 at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 20

Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,570 23,426Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,172 39,912Employee stock trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,718 2,932Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,093) (516)Common stock held in treasury, at cost, $0.01 par value; 94,025,228 shares at

December 31, 2013 and 64,851,856 shares at December 31, 2012 . . . . . . . . . . (2,968) (2,241)Common stock issued to employee stock trusts . . . . . . . . . . . . . . . . . . . . . . . . . . (1,718) (2,932)

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,921 62,109

Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $258,132 $261,135

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MORGAN STANLEY


Parent Company OnlyCondensed Statements of Income and Comprehensive Income


2013 2012 2011

Revenues:Dividends from non-bank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,113 $ 545 $ 7,153Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (635) (3,400) 4,772Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2 —Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 36 (241)

Total non-interest revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505 (2,817) 11,684

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,783 3,316 3,251Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,053 5,190 5,600

Net interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,270) (1,874) (2,349)

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (765) (4,691) 9,335Non-interest expenses:

Non-interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 114 120

Income (loss) before provision for (benefit from) income taxes . . . . . . . . . . . . . . . . (950) (4,805) 9,215Provision for (benefit from) income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (354) (1,088) 1,825

Net income (loss) before undistributed gain (loss) subsidiaries . . . . . . . . . . . . . . . . (596) (3,717) 7,390Undistributed gain (loss) of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,528 3,785 (3,280)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,932 68 4,110Other comprehensive income (loss), net of tax:

Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (143) (128) (35)Amortization of cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6 7Change in net unrealized gains (losses) on securities available for sale . . . . . . (433) 28 87Pension, postretirement and other related adjustments . . . . . . . . . . . . . . . . . . . (5) (265) 251

Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,355 $ (291) $ 4,420

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,932 $ 68 $ 4,110Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 98 2,043

Earnings (loss) applicable to Morgan Stanley common shareholders . . . . . . . . . . . $ 2,655 $ (30) $ 2,067

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MORGAN STANLEY


Parent Company OnlyCondensed Statements of Cash Flows


2013 2012 2011

CASH FLOWS FROM OPERATING ACTIVITIESNet income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,932 $ 68 $ 4,110

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

Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (303) (1,653) 279Compensation payable in common stock and options . . . . . . . . . . . . . . . . . . . . . . 1,180 891 1,300Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (47) 23 22Undistributed (gain) loss of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,528) (3,785) 3,280Other non-cash adjustments to net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (29) (155)

Change in assets and liabilities:Trading assets, net of Trading liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,332) 9,587 81Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (165) 1,235 681Other liabilities and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,192) 6,637 (4,242)

Net cash provided by (used for) operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,455) 12,974 5,356

CASH FLOWS FROM INVESTING ACTIVITIESAdvances to and investments in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,458 6,461 10,290Securities purchased under agreement to resell with affiliate . . . . . . . . . . . . . . . . . 14,745 1,864 (726)

Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,203 8,325 9,564

CASH FLOWS FROM FINANCING ACTIVITIESNet proceeds from (payments for) short-term borrowings . . . . . . . . . . . . . . . . . . . 279 (872) (253)

Proceeds from:Excess tax benefits associated with stock-based awards . . . . . . . . . . . . . . . . . . . . 10 42 —Issuance of preferred stock, net of issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . 1,696 — —Issuance of long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,944 20,582 28,106

Payments for:Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31,928) (41,914) (35,805)Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (691) (227) (317)Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (475) (469) (834)

Net cash used for financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,165) (22,858) (9,103)

Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . (100) (32) 113

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,483 (1,591) 5,930Cash and cash equivalents, at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,729 15,320 9,390

Cash and cash equivalents, at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,212 $ 13,729 $ 15,320

Cash and cash equivalents include:Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,296 $ 1,342 $ 1,804Deposits with banking subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,070 8,222 10,131Interest bearing deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,846 4,165 3,385

Cash and cash equivalents, at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,212 $ 13,729 $ 15,320

Supplemental Disclosure of Cash Flow Information.

Cash payments for interest were $3,733 million, $4,254 million and $4,617 million for 2013, 2012 and 2011,respectively.

Cash payments (refunds) for income taxes were $268 million, $(13) million and $57 million for 2013, 2012 and2011, respectively.

281

MORGAN STANLEY


Transactions with Subsidiaries.

The Parent Company has transactions with its consolidated subsidiaries determined on an agreed-upon basis andhas guaranteed certain unsecured lines of credit and contractual obligations of certain of its consolidatedsubsidiaries. Certain reclassifications have been made to prior-period amounts to conform to the current year’spresentation.

Guarantees.

In the normal course of its business, the Parent Company guarantees certain of its subsidiaries’ obligations underderivative and other financial arrangements. The Parent Company records Trading assets and Trading liabilities,which include derivative contracts, at fair value on its condensed statements of financial condition.

The Parent Company also, in the normal course of its business, provides standard indemnities to counterpartieson behalf of its subsidiaries for taxes, including U.S. and foreign withholding taxes, on interest and otherpayments made on derivatives, securities and stock lending transactions, and certain annuity products. Theseindemnity payments could be required based on a change in the tax laws or change in interpretation of applicabletax rulings. Certain contracts contain provisions that enable the Parent Company to terminate the agreement uponthe occurrence of such events. The maximum potential amount of future payments that the Parent Companycould be required to make under these indemnifications cannot be estimated. The Parent Company has notrecorded any contingent liability in the condensed financial statements for these indemnifications and believesthat the occurrence of any events that would trigger payments under these contracts is remote.

The Parent Company has issued guarantees on behalf of its subsidiaries to various U.S. and non-U.S. exchangesand clearinghouses that trade and clear securities and/or futures contracts. Under these guarantee arrangements,the Parent Company may be required to pay the financial obligations of its subsidiaries related to businesstransacted on or with the exchanges and clearinghouses in the event of a subsidiary’s default on its obligations tothe exchange or the clearinghouse. The Parent Company has not recorded any contingent liability in thecondensed financial statements for these arrangements and believes that any potential requirements to makepayments under these arrangements are remote.

The Parent Company guarantees certain debt instruments and warrants issued by subsidiaries. The debtinstruments and warrants totaled $12.0 billion and $8.9 billion at December 31, 2013 and 2012, respectively. Inconnection with subsidiary lease obligations, the Parent Company has issued guarantees to various lessors. AtDecember 31, 2013 and 2012, the Parent Company had $1.4 billion and $1.4 billion of guarantees outstanding,respectively, under subsidiary lease obligations, primarily in the U.K.

282

MORGAN STANLEY


24. Quarterly Results (unaudited).2013 Quarter 2012 Quarter

First Second Third Fourth(1) First Second(2) Third(3) Fourth(3)

(dollars in millions, except per share data)Total non-interest revenues . . . . . . . . . . . . . . . . . . . . $7,972 $8,297 $7,822 $7,548 $6,981 $7,100 $ 5,436 $6,790Net interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 204 110 282 (59) (161) (158) 173

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,154 8,501 7,932 7,830 6,922 6,939 5,278 6,963

Total non-interest expenses . . . . . . . . . . . . . . . . . . . . 6,572 6,725 6,591 8,047 6,719 6,001 6,760 6,102

Income (loss) from continuing operations beforeincome taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,582 1,776 1,341 (217) 203 938 (1,482) 861

Provision for (benefit from) income taxes . . . . . . . . 332 556 339 (401) 54 225 (525) 9

Income (loss) from continuing operations . . . . . . . . 1,250 1,220 1,002 184 149 713 (957) 852

Discontinued operations(4):Gain (loss) from discontinued operations . . . . . (30) (42) 14 (14) 27 51 (13) (113)Provision for (benefit from) income taxes . . . . (11) (13) (2) (3) 42 14 (14) (49)

Net gain (loss) from discontinued operations . . . . . . (19) (29) 16 (11) (15) 37 1 (64)

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,231 1,191 1,018 173 134 750 (956) 788Net income applicable to redeemable noncontrolling

interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 100 — — — — 8 116Net income applicable to nonredeemable

noncontrolling interests . . . . . . . . . . . . . . . . . . . . . 147 111 112 89 228 159 59 78

Net income (loss) applicable to Morgan Stanley . . . $ 962 $ 980 $ 906 $ 84 $ (94) $ 591 $(1,023) $ 594Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . 26 177 26 48 25 27 24 26

Earnings (loss) applicable to Morgan Stanleycommon shareholders . . . . . . . . . . . . . . . . . . . . . . $ 936 $ 803 $ 880 $ 36 $ (119) $ 564 $(1,047) $ 568

Earnings (loss) per basic common share(5):Income (loss) from continuing operations . . . . $ 0.50 $ 0.44 $ 0.45 $ 0.02 $ (0.05) $ 0.28 $ (0.55) $ 0.34Net gain (loss) from discontinued

operations . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.01) (0.02) 0.01 — (0.01) 0.02 — (0.04)

Earnings (loss) per basic commonshare . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.49 $ 0.42 $ 0.46 $ 0.02 $ (0.06) $ 0.30 $ (0.55) $ 0.30

Earnings (loss) per diluted common share(5):Income (loss) from continuing operations . . . . $ 0.49 $ 0.43 $ 0.44 $ 0.02 $ (0.05) $ 0.28 $ (0.55) $ 0.33Net gain (loss) from discontinued

operations . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.01) (0.02) 0.01 — (0.01) 0.01 — (0.04)

Earnings (loss) per diluted commonshare . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.48 $ 0.41 $ 0.45 $ 0.02 $ (0.06) $ 0.29 $ (0.55) $ 0.29

Dividends declared per common share . . . . . . . . . . . $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.05Book value per common share . . . . . . . . . . . . . . . . . $31.21 $31.48 $32.13 $32.24 $30.74 $31.02 $ 30.53 $30.70

(1) The fourth quarter of 2013 included a discrete tax benefit of $192 million, consisting of $100 million related to the remeasurement ofreserves and related interest and $92 million related to the establishment of a previously unrecognized deferred tax asset associated withthe reorganization of certain non-U.S. legal entities (see Note 20). The fourth quarter of 2013 included litigation expenses of $1.4 billionrelated to settlements and reserve additions (see Note 13).

(2) The second quarter of 2012 included an out-of-period pre-tax gain of approximately $300 million related to the reversal of amountsrecorded in cumulative other comprehensive income due to the incorrect application of hedge accounting on certain derivative contractspreviously designated as net investment hedges of certain foreign, non-U.S. dollar denominated subsidiaries. This amount included a pre-tax gain of approximately $191 million related to the first quarter of 2012, with the remainder impacting prior periods (see Note 12).

(3) The third quarter of 2012 included an out-of-period net tax provision of $82 million primarily related to the overstatement of tax benefitsassociated with repatriated earnings of a foreign subsidiary in prior periods, while the fourth quarter of 2012 included an out-of-periodnet tax provision of $75 million primarily related to the overstatement of deferred tax assets associated with partnership investments inprior periods (see Note 20).

(4) See Note 1 for more information on discontinued operations.(5) Summation of the quarters’ earnings per common share may not equal the annual amounts due to the averaging effect of the number of

shares and share equivalents throughout the year.

283

MORGAN STANLEY


25. Subsequent Events.

The Company has evaluated subsequent events for adjustment to or disclosure in the consolidated financialstatements through the date of this report and the Company has not identified any recordable or disclosableevents, not otherwise reported in these consolidated financial statements or the notes thereto, except for thefollowing:

Common Dividend.

On January 17, 2014, the Company announced that its Board of Directors declared a quarterly dividend percommon share of $0.05. The dividend is payable on February 14, 2014 to common shareholders of record onJanuary 31, 2014.

Long-Term Borrowings.

Subsequent to December 31, 2013 and through February 10, 2014, the Company’s long-term borrowings (net ofissuances) decreased by approximately $2.2 billion. This amount includes the Company’s issuance of $2.8 billionin senior debt on January 24, 2014.

Legal Matters.

On February 4, 2014, and subsequent to the release of the Company’s 2013 earnings on January 17, 2014, legalreserves were increased within the Institutional Securities business segment, related to the settlement with theFederal Housing Finance Agency (see Note 13).

284

FINANCIAL DATA SUPPLEMENT (Unaudited)Average Balances and Interest Rates and Net Interest Income

2013

AverageWeeklyBalance Interest

AverageRate

(dollars in millions)AssetsInterest earning assets:

Trading assets(1):U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $119,549 $ 1,948 1.6%Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103,774 344 0.3

Securities available for sale:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,112 447 1.0

Loans:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,939 1,052 3.1Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 489 69 14.1

Interest bearing deposits with banks:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,636 86 0.2Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,609 43 0.6

Federal funds sold and securities purchased under agreements to resell andSecurities borrowed:

U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203,742 (217) (0.1)Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,713 197 0.3

Other:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,028 751 1.2Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,077 489 2.6

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $706,668 $ 5,209 0.7%

Non-interest earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,793

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $828,461

Liabilities and EquityInterest bearing liabilities:

Deposits:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 91,713 $ 159 0.2%Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260 — —

Commercial paper and other short-term borrowings:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 964 2 0.2Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,063 18 1.7

Long-term debt:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152,532 3,696 2.4Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,857 62 0.6

Trading liabilities(1):U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,861 — —Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,200 — —

Securities sold under agreements to repurchase and Securities loaned:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,896 681 0.6Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,697 788 1.2

Other:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,335 (1,117) (1.1)Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,679 142 0.4

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $659,057 $ 4,431 0.7

Non-interest bearing liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169,404

Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $828,461

Net interest income and net interest rate spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 778 —%

(1) Interest expense on Trading liabilities is reported as a reduction of Interest income on Trading assets.

285

FINANCIAL DATA SUPPLEMENT (Unaudited)—(Continued)Average Balances and Interest Rates and Net Interest Income

2012


AverageRate


Trading assets(1):U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $133,615 $ 2,247 1.7%Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,019 489 0.6

Securities available for sale:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,141 343 1.0

Loans:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,996 597 2.8Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363 46 12.7

Interest bearing deposits with banks:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,905 58 0.2Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,612 66 0.6

Federal funds sold and securities purchased under agreements to resell and Securitiesborrowed:

U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189,186 (315) (0.2)Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,851 679 0.7

Other:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,651 471 0.9Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,404 1,011 6.6

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $659,743 $ 5,692 0.9%

Non-interest earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,428

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $782,171


Deposits:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 69,265 $ 181 0.3%Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 — —

Commercial paper and other short-term borrowings:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 557 5 0.9Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,383 33 2.4

Long-term debt:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163,961 4,544 2.8Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,552 78 1.0

Trading liabilities(1):U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,125 — —Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,834 — —

Securities sold under agreements to repurchase and Securities loaned:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101,210 522 0.5Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,932 1,283 2.1

Other:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,881 (1,475) (1.8)Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,992 726 2.1

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $610,857 $ 5,897 1.0

Non-interest bearing liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171,314

Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $782,171

Net interest income and net interest rate spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (205) (0.1)%


286

FINANCIAL DATA SUPPLEMENT (Unaudited)—(Continued)Average Balances and Interest Rates and Net Interest Income

2011


AverageRate


Trading assets(1):U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $122,704 $ 2,636 2.1%Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114,445 957 0.8

Securities available for sale:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,712 348 1.3

Loans:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,294 326 2.7Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420 30 7.1

Interest bearing deposits with banks:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,256 49 0.1Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,558 137 0.8

Federal funds sold and securities purchased under agreements to resell and Securitiesborrowed:

U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191,843 (79) —Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,682 965 0.9

Other:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,336 1,335 2.9Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,454 530 3.4

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $698,704 $ 7,234 1.0%

Non-interest earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,131

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $838,835


Deposits:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,559 $ 236 0.4%Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 — —

Commercial paper and other short-term borrowings:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 874 7 0.8Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,163 34 1.6

Long-term debt:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184,623 4,880 2.6Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,701 32 0.4

Trading liabilities(1):U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,070 — —Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,313 — —

Securities sold under agreements to repurchase and Securities loaned:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,270 649 0.6Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,276 1,276 1.8

Other:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,193 (1,094) (1.2)Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,139 863 2.3

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $659,272 $ 6,883 1.0

Non-interest bearing liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179,563

Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $838,835

Net interest income and net interest rate spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 351 — %


287

FINANCIAL DATA SUPPLEMENT (Unaudited)—(Continued)Rate/Volume Analysis

The following tables set forth an analysis of the effect on net interest income of volume and rate changes:

2013 versus 2012

Increase (decrease) due to change in:

Volume Rate Net Change


Interest earning assetsTrading assets:

U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(237) $ (62) $ (299)Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 (275) (145)

Securities available for sale:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 16 104

Loans:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368 87 455Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 7 23

Interest bearing deposits with banks:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8 28Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19) (4) (23)

Federal funds sold and securities purchased underagreements to resell and Securities borrowed:

U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24) 122 98Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (105) (377) (482)

Other:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 216 280Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 (763) (522)

Change in interest income . . . . . . . . . . . . . . . . . . . . . . . . . $ 542 $(1,025) $ (483)

Interest bearing liabilitiesDeposits:

U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59 $ (81) $ (22)Commercial paper and other short-term borrowings:

U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (7) (3)Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) (7) (15)

Long-term debt:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (317) (531) (848)Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 (40) (16)

Securities sold under agreements to repurchase andSecurities loaned:

U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 119 159Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 (640) (495)

Other:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (276) 634 358Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 (663) (584)

Change in interest expense . . . . . . . . . . . . . . . . . . . . . . . . . $(250) $(1,216) $(1,466)

Change in net interest income . . . . . . . . . . . . . . . . . . . . . . $ 792 $ 191 $ 983

288

FINANCIAL DATA SUPPLEMENT (Unaudited)—(Continued)Rate/Volume Analysis

2012 versus 2011

Increase (decrease) due to change in:

Volume Rate Net Change


Interest earning assetsTrading assets:

U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 234 $ (623) $ (389)Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (271) (197) (468)

Securities available for sale:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 (98) (5)

Loans:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231 40 271Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) 20 16

Interest bearing deposits with banks:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18) 27 9Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (49) (22) (71)

Federal funds sold and securities purchased underagreements to resell and Securities borrowed:

U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (237) (236)Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (164) (122) (286)

Other:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274 (1,138) (864)Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) 483 481

Change in interest income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 325 $(1,867) $(1,542)

Interest bearing liabilitiesDeposits:

U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17 $ (72) $ (55)Commercial paper and other short-term borrowings:

U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) 1 (2)Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12) 11 (1)

Long-term debt:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (546) 210 (336)Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) 47 46

Securities sold under agreements to repurchase andSecurities loaned:

U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (53) (74) (127)Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (172) 179 7

Other:U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 (470) (381)Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (94) (43) (137)

Change in interest expense . . . . . . . . . . . . . . . . . . . . . . . . . $ (775) $ (211) $ (986)

Change in net interest income . . . . . . . . . . . . . . . . . . . . . . . $1,100 $(1,656) $ (556)

289

FINANCIAL DATA SUPPLEMENT (Unaudited)—(Continued)

Deposits

Average Deposits(1)

2013 2012 2011

AverageAmount(1)

AverageRate

AverageAmount(1)

AverageRate

AverageAmount(1)

AverageRate


Deposits(2):Savings deposits . . . . . . . . . . . . . . . . . . . . . . $90,447 0.1% $66,073 0.1% $61,258 0.2%Time deposits . . . . . . . . . . . . . . . . . . . . . . . . 1,526 3.9% 3,357 2.6% 3,392 3.5%

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $91,973 0.2% $69,430 0.3% $64,650 0.4%

(1) The Company calculates its average balances based upon weekly amounts, except where weekly balances are unavailable, month-endbalances are used.

(2) Deposits are primarily located in U.S. offices.

Ratios

2013 2012 2011

Net income to average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4% N/M 0.5%Return on average common equity(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3% N/M 3.8%Return on total equity(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6% 0.1% 6.9%Dividend payout ratio(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.7% N/M 16.3%Total average common equity to average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5% 7.8% 6.5%Total average equity to average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.7% 8.0% 7.1%

N/M—Not meaningful.(1) Percentage is based on net income applicable to Morgan Stanley less preferred dividends as a percentage of average common equity.(2) Percentage is based on net income as a percentage of average total equity.(3) Percentage is based on dividends declared per common share as a percentage of net income per diluted share.

Short-term Borrowings

2013 2012 2011


Securities sold under repurchase agreements:Period-end balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $145,676 $122,674 $104,800Average balance(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,151 125,465 142,784Maximum balance at any month-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,676 139,962 164,511Weighted average interest rate during the period(3) . . . . . . . . . . . . . . . . . 0.7% 0.9% 0.9%Weighted average interest rate on period-end balance(4) . . . . . . . . . . . . . 0.4% 0.8% 0.8%

Securities loaned:Period-end balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,799 $ 36,849 $ 30,462Average balance(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,442 35,677 36,762Maximum balance at any month-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,182 39,881 50,709Weighted average interest rate during the period(3) . . . . . . . . . . . . . . . . . 1.2% 1.9% 1.9%Weighted average interest rate on period-end balance(4) . . . . . . . . . . . . . 1.2% 1.5% 1.8%

(1) The Company calculates its average balances based upon weekly amounts, except where weekly balances are unavailable, month-endbalances are used.

(2) In 2011, the period-end balance was lower than the annual average primarily due to a decrease in the overall balance sheet during theyear.

290


(3) The approximated weighted average interest rate was calculated using (a) interest expense incurred on all securities sold underrepurchase agreements and securities loaned transactions, whether or not such transactions were reported on the consolidated statementsof financial condition and (b) average balances that were reported on a net basis where certain criteria were met in accordance withapplicable offsetting guidance. In addition, securities-for-securities transactions in which the Company was the borrower were notincluded in the average balances since they were not reported on the consolidated statements of financial condition.

(4) The approximated weighted average interest rate was calculated using (a) interest expense for all securities sold under repurchaseagreements and securities loaned transactions, whether or not such transactions were reported on the consolidated statements of financialcondition and (b) period-end balances that were reported on a net basis where certain criteria were met in accordance with applicableoffsetting guidance. In addition, securities-for-securities transactions in which the Company was the borrower were not included in theperiod-end balances since they were not reported on the consolidated statements of financial condition.

Cross-border Outstandings

Cross-border outstandings are based upon the Federal Financial Institutions Examination Council’s (“FFIEC”)regulatory guidelines for reporting cross-border risk. Claims include cash, customer and other receivables,securities purchased under agreements to resell, securities borrowed and cash trading instruments, but excludecommitments. Securities purchased under agreements to resell and securities borrowed are presented based onthe domicile of the counterparty, without reduction for related securities collateral held. Effective December 31,2013, the regulatory guidelines for reporting cross-border risk were updated and prospectively require thereporting of, among other items, cross-border exposure to Non-banking financial institutions. Cross-border risk atDecember 31, 2012 and December 31, 2011 was not recast to reflect the new requirements. For purposes ofcomparability, exposure to Non-banking financial institutions as of December 31, 2013 is reported in Other in thetables below. For information regarding the Company’s country risk exposure, see “Quantitative and QualitativeDisclosures about Market Risk—Risk Management—Credit Risk—Country Risk Exposure” in Part II, Item 7A.

The following tables set forth cross-border outstandings for each country in which cross-border outstandingsexceed 1% of the Company’s consolidated assets or 20% of the Company’s total capital, whichever is less, atDecember 31, 2013, December 31, 2012 and December 31, 2011, respectively, in accordance with the FFIECguidelines (dollars in millions):


Country Banks Governments Other(1) Total

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,874 $ 911 $57,594 $70,379Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,251 3,622 26,426 57,299Cayman Islands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 — 45,041 45,042Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,844 10,312 10,613 29,769France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,408 264 6,247 28,919Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,988 2,012 7,108 12,108Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,474 — 10,015 11,489Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 4,307 3,376 7,748


Country Banks Governments Other Total

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,504 $ 6 $100,090 $117,600Cayman Islands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 10 41,628 41,643France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,699 149 3,915 32,763Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,935 148 2,967 28,050Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,084 3,014 4,192 22,290Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,700 — 10,920 12,620Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,651 1,310 2,893 10,854Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 6,812 2,311 9,155Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,319 242 5,483 9,044Luxembourg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 223 7,952 8,396

291



Country Banks Governments Other Total

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,852 $ 2 $89,585 $103,439Cayman Islands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 766 — 31,169 31,935France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,561 1,096 4,196 28,853Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,542 436 2,821 26,799Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,674 3,485 1,859 24,018Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,508 23 8,826 12,357Luxembourg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,619 94 6,137 7,850Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 3,398 2,165 5,712Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,008 557 1,414 3,979Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 881 1,463 539 2,883

(1) Other includes Non-banking financial institutions and others in the 2013 presentation.

For cross-border exposure that exceeds 0.75% but does not exceed 1% of the Company’s consolidated assets,Ireland, Switzerland and China had a total cross-border exposure of $20,534 million at December 31, 2013,Saudi Arabia and Singapore had a total cross-border exposure of $12,848 million at December 31, 2012, andKorea, Singapore, Canada and certain other countries had a total cross-border exposure of $26,908 million atDecember 31, 2011.

292

Item 9. Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure.

None.

Item 9A. Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer andour Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such termis defined under Exchange Act Rule 13a-15(e). Based on this evaluation, our Chief Executive Officer and ourChief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of theperiod covered by this annual report.

Management’s Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financialreporting. The Company’s internal control over financial reporting is designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.

Our internal control over financial reporting includes those policies and procedures that:

• Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the Company;

• Provide reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles, and that our receiptsand expenditures are being made only in accordance with authorizations of the Company’s managementand directors; and

• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use ordisposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as ofDecember 31, 2013. In making this assessment, management used the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework(1992). Based on management’s assessment and those criteria, management believes that the Companymaintained effective internal control over financial reporting as of December 31, 2013.

The Company’s independent registered public accounting firm has audited and issued a report on the Company’sinternal control over financial reporting, which appears below.

293

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Morgan Stanley:

We have audited the internal control over financial reporting of Morgan Stanley and subsidiaries (the“Company”) as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’smanagement is responsible for maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting, included in the accompanyingManagement’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinionon the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance aboutwhether effective internal control over financial reporting was maintained in all material respects. Our auditincluded obtaining an understanding of internal control over financial reporting, assessing the risk that a materialweakness exists, testing and evaluating the design and operating effectiveness of internal control based on theassessed risk, and performing such other procedures as we considered necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, thecompany’s principal executive and principal financial officers, or persons performing similar functions, andeffected by the company’s board of directors, management, and other personnel to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company’s internal control over financial reportingincludes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation of financial statements in accordancewith generally accepted accounting principles, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility ofcollusion or improper management override of controls, material misstatements due to error or fraud may not beprevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internalcontrol over financial reporting to future periods are subject to the risk that the controls may become inadequatebecause of changes in conditions, or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financialreporting as of December 31, 2013, based on the criteria established in Internal Control—Integrated Framework(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements of the Company as of December 31, 2013, and for the yearthen ended, and our report dated February 25, 2014 expressed an unqualified opinion on those financialstatements.

/s/ Deloitte & Touche LLPNew York, New YorkFebruary 25, 2014

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Changes in Internal Control Over Financial Reporting.

No change in the Company’s internal control over financial reporting (as such term is defined in Exchange ActRule 13a-15(f)) occurred during the quarter ended December 31, 2013 that materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information.

Not applicable.

295

Part III

Item 10. Directors, Executive Officers and Corporate Governance.

Information relating to the Company’s directors and nominees under the following captions in the Company’sdefinitive proxy statement for its 2014 annual meeting of shareholders (“Morgan Stanley’s Proxy Statement”) isincorporated by reference herein.

• “Item 1—Election of Directors—Director Nominees”

• “Item 1—Election of Directors—Corporate Governance—Board Meetings and Committees”

• “Item 1—Election of Directors—Beneficial Ownership of Company Common Stock—Section 16(a)Beneficial Ownership Reporting Compliance”

Information relating to the Company’s executive officers is contained in Part I, Item 1 of this report under“Executive Officers of Morgan Stanley.”

Morgan Stanley’s Code of Ethics and Business Conduct applies to all directors, officers and employees,including its Chief Executive Officer, Chief Financial Officer and Deputy Chief Financial Officer. You can findour Code of Ethics and Business Conduct on our internet site, www.morganstanley.com/about/company/governance/ethics.html. We will post any amendments to the Code of Ethics and Business Conduct, and anywaivers that are required to be disclosed by the rules of either the SEC or the NYSE, on our internet site.

Item 11. Executive Compensation.

Information relating to director and executive officer compensation under the following captions inMorgan Stanley’s Proxy Statement is incorporated by reference herein.

• “Item 1—Election of Directors—Executive Compensation”

• “Item 1—Election of Directors—Corporate Governance—Director Compensation”

296

Item 12. Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters.

Equity Compensation Plan Information. The following table provides information about outstanding awardsand shares of common stock available for future awards under all of Morgan Stanley’s equity compensationplans as of December 31, 2013. Morgan Stanley has not made any grants of common stock outside of its equitycompensation plans.

(a) (b) (c)

Plan Category

Number of securities to be issuedupon exercise of

outstanding options, warrantsand rights

(#)(1)

Weighted-average exerciseprice of outstanding options,

warrants and rights($)(2)

Number of securitiesremaining available forfuture issuance underequity compensation

plans (excluding securitiesreflected in column (a))

(#)

Equity compensation plansapproved by securityholders . . . . . . . . . . . . . . . . . 169,757,711 49.3974 107,080,353(3)

Equity compensation plans notapproved by securityholders . . . . . . . . . . . . . . . . . 1,482,390 — — (4)

Total . . . . . . . . . . . . . . . . . 171,240,101 49.3974 107,080,353

(1) Amounts include outstanding stock option, restricted stock unit and performance stock unit awards. The number of outstandingperformance stock unit awards is based on the target number of units granted to senior executives.

(2) Amounts reflect the weighted-average exercise price with respect to outstanding stock options and does not take into account outstandingrestricted stock units and performance stock units, which do not provide for an exercise price.

(3) Amount includes the following:

(a) 39,182,870 shares available under the Morgan Stanley Employee Stock Purchase Plan (“ESPP”). Pursuant to this plan, which isqualified under Section 423 of the Internal Revenue Code, eligible employees were permitted to purchase shares of common stockat a discount to market price through regular payroll deduction. The Compensation, Management Development and Succession(“CMDS”) Committee approved the discontinuation of the ESPP, effective June 1, 2009, such that no further contributions to theplan will be permitted following such date, until such time as the CMDS Committee determines to recommence contributions underthe plan.

(b) 61,388,699 shares available under the 2007 Equity Incentive Compensation Plan. Awards may consist of stock options, stockappreciation rights, restricted stock, restricted stock units to be settled by the delivery of shares of common stock (or the valuethereof), performance-based units, other awards that are valued by reference to or otherwise based on the fair market value ofcommon stock, and other equity-based or equity-related awards approved by the CMDS Committee.

(c) 5,579,314 shares available under the Employee Equity Accumulation Plan, which includes 732,857 shares available for awards ofrestricted stock and restricted stock units. Awards may consist of stock options, stock appreciation rights, restricted stock, restrictedstock units to be settled by the delivery of shares of common stock (or the value thereof), other awards that are valued by referenceto or otherwise based on the fair market value of common stock, and other equity-based or equity-related awards approved by theCMDS Committee.

(d) 355,243 shares available under the Tax Deferred Equity Participation Plan. Awards consist of restricted stock units, which aresettled by the delivery of shares of common stock.

(e) 574,227 shares available under the Directors’ Equity Capital Accumulation Plan. This plan provides for periodic awards of shares ofcommon stock and stock units to non-employee directors and also allows non-employee directors to defer the cash fees they earn forservices as a director in the form of stock units.

(4) As of December 31, 2013, no shares remained available for future issuance under the Financial Advisor and Investment RepresentativeCompensation Plan (“FAIRCP”), which was terminated effective December 31, 2011, and the Morgan Stanley 2009 Replacement EquityIncentive Compensation Plan for Morgan Stanley Smith Barney Employees (“REICP”), which was terminated effective December 31,2012. However, awards remained outstanding under these plans as of December 31, 2013. The material features of the FAIRCP and theREICP, which were not approved by shareholders under SEC rules, are as follows:

(a) FAIRCP: Financial advisors and investment representatives in the Wealth Management business segment were eligible to receiveawards under FAIRCP in the form of cash, restricted stock and restricted stock units settled by the delivery of shares of commonstock.

297

(b) REICP: REICP was adopted in connection with the Wealth Management JV and without stockholder approval pursuant to theemployment inducement award exception under the New York Stock Exchange Corporate Governance Listing Standards. Theequity awards granted pursuant to the REICP were limited to awards to induce certain Citigroup Inc. (“Citi”) employees to join thenew Wealth Management JV by replacing the value of Citi awards that were forfeited in connection with the employees’ transfer ofemployment to the Wealth Management business segment. Awards under the REICP were authorized in the form of restricted stockunits, stock appreciation rights, stock options and restricted stock and other forms of stock-based awards.

The foregoing descriptions do not purport to be complete and are qualified in their entirety by reference to theFAIRCP and REICP plan documents which, along with all plans under which awards were available for grant in2013, are included as exhibits to this Annual Report on Form 10-K.

* * *

Other information relating to security ownership of certain beneficial owners and management is set forth underthe caption “Item 1—Election of Directors—Beneficial Ownership of Company Common Stock” in MorganStanley’s Proxy Statement and such information is incorporated by reference herein.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Information regarding certain relationships and related transactions under the following caption in MorganStanley’s Proxy Statement is incorporated by reference herein.

• “Item 1—Election of Directors—Corporate Governance—Related Person Transactions Policy”

• “Item 1—Election of Directors—Corporate Governance—Certain Transactions”

Information regarding director independence under the following caption in Morgan Stanley’s Proxy Statementis incorporated by reference herein.

• “Item 1—Election of Directors—Corporate Governance—Director Independence”

Item 14. Principal Accountant Fees and Services.

Information regarding principal accountant fees and services under the following caption in Morgan Stanley’sProxy Statement is incorporated by reference herein.

• “Item 2—Ratification of Appointment of Morgan Stanley’s Independent Auditor” (excluding theinformation under the subheading “Audit Committee Report”)

298

Part IV

Item 15. Exhibits and Financial Statement Schedules.

Documents filed as part of this report.

• The consolidated financial statements required to be filed in this Annual Report on Form 10-K areincluded in Part II, Item 8 hereof.

• An exhibit index has been filed as part of this report beginning on page E-1 and is incorporated herein byreference.

299

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 25,2014.

MORGAN STANLEY

(REGISTRANT)By: /s/ JAMES P. GORMAN

(James P. Gorman)Chairman of the Board and Chief ExecutiveOfficer

POWER OF ATTORNEY

We, the undersigned, hereby severally constitute Ruth Porat, Eric F. Grossman and Martin M. Cohen, and eachof them singly, our true and lawful attorneys with full power to them and each of them to sign for us, and in ournames in the capacities indicated below, any and all amendments to the Annual Report on Form 10-K filed withthe Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signedby our said attorneys to any and all amendments to said Annual Report on Form 10-K.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities indicated on the 25th day of February, 2014.

Signature Title

/S/ JAMES P. GORMAN

(James P. Gorman)Chairman of the Board and Chief Executive Officer

(Principal Executive Officer)

/S/ RUTH PORAT

(Ruth Porat)Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

/S/ PAUL C. WIRTH

(Paul C. Wirth)Deputy Chief Financial Officer(Principal Accounting Officer)

/S/ ERSKINE B. BOWLES

(Erskine B. Bowles)Director

/S/ HOWARD J. DAVIES

(Howard J. Davies)Director

/S/ THOMAS H. GLOCER

(Thomas H. Glocer)Director

/S/ ROBERT H. HERZ

(Robert H. Herz)Director

/S/ C. ROBERT KIDDER

(C. Robert Kidder)Director

/S/ KLAUS KLEINFELD

(Klaus Kleinfeld)Director

S-1

Signature Title

/S/ DONALD T. NICOLAISEN

(Donald T. Nicolaisen)

Director

/S/ HUTHAM S. OLAYAN

(Hutham S. Olayan)

Director

/S/ JAMES W. OWENS

(James W. Owens)

Director

/S/ O. GRIFFITH SEXTON

(O. Griffith Sexton)

Director

/S/ RYOSUKE TAMAKOSHI

(Ryosuke Tamakoshi)

Director

/S/ MASAAKI TANAKA

(Masaaki Tanaka)

Director

/S/ LAURA D’ANDREA TYSON

(Laura D’Andrea Tyson)

Director

/S/ RAYFORD WILKINS, JR.

(Rayford Wilkins, Jr.)

Director

S-2

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

EXHIBITS TO FORM 10-K

For the year ended December 31, 2013Commission File No. 1-11758

Exhibit Index

Certain of the following exhibits, as indicated parenthetically, were previously filed as exhibits to registrationstatements filed by Morgan Stanley or its predecessor companies under the Securities Act or to reports orregistration statements filed by Morgan Stanley or its predecessor companies under the Exchange Act and arehereby incorporated by reference to such statements or reports. Morgan Stanley’s Exchange Act file number is1-11758. The Exchange Act file number of Morgan Stanley Group Inc., a predecessor company (“MSG”), was1-9085.1

ExhibitNo. Description

2.1 Amended and Restated Joint Venture Contribution and Formation Agreement dated as of May 29,2009 by and among Citigroup Inc. and Morgan Stanley and Morgan Stanley Smith Barney HoldingsLLC (Exhibit 10.1 to Morgan Stanley’s Current Report on Form 8-K dated May 29, 2009).

2.2 Integration and Investment Agreement dated as of March 30, 2010 by and between Mitsubishi UFJFinancial Group, Inc. and Morgan Stanley (Exhibit 2.2 to Morgan Stanley’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2011).

3.1 Amended and Restated Certificate of Incorporation of Morgan Stanley, as amended to date (Exhibit 3to Morgan Stanley’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009), as amendedby the Certificate of Elimination of Series B Non-Cumulative Non-Voting Perpetual ConvertiblePreferred Stock (Exhibit 3.1 Morgan Stanley’s Current Report on Form 8-K dated July 20, 2011), asamended by the Certificate of Merger of Domestic Corporations dated December 29, 2011 (Exhibit 3.3to Morgan Stanley’s Annual Report on Form 10-K for the year ended December 31, 2012), asamended by the Certificate of Designation of Preferences and Rights of the Fixed-to-Floating RateNon-Cumulative Preferred Stock, Series E (Exhibit 2.5 to Morgan Stanley’s Registration Statement onForm 8-A dated September 27, 2013), as amended by the Certificate of Designation of Preferences andRights of the Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series F (Exhibit 2.3 to MorganStanley’s Registration Statement on Form 8-A dated December 9, 2013).

3.2 Amended and Restated Bylaws of Morgan Stanley, as amended to date (Exhibit 3.1 to MorganStanley’s Current Report on Form 8-K dated March 9, 2010).

4.1 Indenture dated as of February 24, 1993 between Morgan Stanley and The Bank of New York, astrustee (Exhibit 4 to Morgan Stanley’s Registration Statement on Form S-3 (No. 33-57202)).

4.2 Amended and Restated Senior Indenture dated as of May 1, 1999 between Morgan Stanley and TheBank of New York, as trustee (Exhibit 4-e to Morgan Stanley’s Registration Statement onForm S-3/A (No. 333-75289) as amended by Fourth Supplemental Senior Indenture dated as ofOctober 8, 2007 (Exhibit 4.3 to Morgan Stanley’s Annual Report on Form 10-K for the fiscal yearended November 30, 2007).

4.3 Senior Indenture dated as of November 1, 2004 between Morgan Stanley and The Bank of New York,as trustee (Exhibit 4-f to Morgan Stanley’s Registration Statement on Form S-3/A (No. 333-117752),as amended by First Supplemental Senior Indenture dated as of September 4, 2007 (Exhibit 4.5 toMorgan Stanley’s Annual Report on Form 10-K for the fiscal year ended November 30, 2007), SecondSupplemental Senior Indenture dated as of January 4, 2008 (Exhibit 4.1 to Morgan Stanley’s CurrentReport on Form 8-K dated January 4, 2008), Third Supplemental Senior Indenture dated as ofSeptember 10, 2008 (Exhibit 4 to Morgan Stanley’s Quarterly Report on Form 10-Q for the quarterended August 31, 2008), Fourth Supplemental Senior Indenture dated as of December 1, 2008

(1) For purposes of this Exhibit Index, references to “The Bank of New York” mean in some instances theentity successor to JPMorgan Chase Bank, N.A. or J.P. Morgan Trust Company, National Association;references to “JPMorgan Chase Bank, N.A.” mean the entity formerly known as The Chase ManhattanBank, in some instances as the successor to Chemical Bank; references to “J.P. Morgan Trust Company,N.A.” mean the entity formerly known as Bank One Trust Company, N.A., as successor to The FirstNational Bank of Chicago.

E-1


(Exhibit 4.1 to Morgan Stanley’s Current Report on Form 8-K dated December 1, 2008), FifthSupplemental Senior Indenture dated as of April 1, 2009 (Exhibit 4 to Morgan Stanley’s QuarterlyReport on Form 10-Q for the quarter ended March 31, 2009), Sixth Supplemental Senior Indenturedated as of September 16, 2011 (Exhibit 4.1 to Morgan Stanley’s Quarterly Report on Form 10-Q forthe quarter ended September 30, 2011), Seventh Supplemental Senior Indenture dated as ofNovember 21, 2011 (Exhibit 4.4 to Morgan Stanley’s Annual Report on Form 10-K for the year endedDecember 31, 2011) and Eighth Supplemental Senior Indenture dated as of May 4, 2012 (Exhibit 4.1to Morgan Stanley’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012).

4.4 The Unit Agreement Without Holders’ Obligations, dated as of August 29, 2008, between MorganStanley and The Bank of New York Mellon, as Unit Agent, as Trustee and Paying Agent under theSenior Indenture referred to therein and as Warrant Agent under the Warrant Agreement referred totherein (Exhibit 4.1 to Morgan Stanley’s Current Report on Form 8-K dated August 29, 2008).

4.5 Amended and Restated Subordinated Indenture dated as of May 1, 1999 between Morgan Stanley andThe Bank of New York, as trustee (Exhibit 4-f to Morgan Stanley’s Registration Statement onForm S-3/A (No. 333-75289)).

4.6 Subordinated Indenture dated as of October 1, 2004 between Morgan Stanley and The Bank of NewYork, as trustee (Exhibit 4-g to Morgan Stanley’s Registration Statement on Form S-3/A(No. 333-117752)).

4.7 Junior Subordinated Indenture dated as of March 1, 1998 between Morgan Stanley and The Bank ofNew York, as trustee (Exhibit 4.1 to Morgan Stanley’s Quarterly Report on Form 10-Q for the quarterended February 28, 1998).

4.8 Junior Subordinated Indenture dated as of October 1, 2004 between Morgan Stanley and The Bank ofNew York, as trustee (Exhibit 4-ww to Morgan Stanley’s Registration Statement on Form S-3/A(No. 333-117752)).

4.9 Junior Subordinated Indenture dated as of October 12, 2006 between Morgan Stanley and The Bankof New York, as trustee (Exhibit 4.1 to Morgan Stanley’s Current Report on Form 8-K datedOctober 12, 2006).

4.10 Deposit Agreement dated as of July 6, 2006 among Morgan Stanley, JPMorgan Chase Bank, N.A. andthe holders from time to time of the depositary receipts described therein (Exhibit 4.3 to MorganStanley’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2006).

4.11 Depositary Receipt for Depositary Shares, representing Floating Rate Non-Cumulative PreferredStock, Series A (included in Exhibit 4.10 hereto).

4.12 Amended and Restated Trust Agreement of Morgan Stanley Capital Trust III dated as of February 27,2003 among Morgan Stanley, as depositor, The Bank of New York, as property trustee, The Bank ofNew York (Delaware), as Delaware trustee, and the administrators named therein (Exhibit 4 toMorgan Stanley’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2003).

4.13 Amended and Restated Trust Agreement of Morgan Stanley Capital Trust IV dated as of April 21,2003 among Morgan Stanley, as depositor, The Bank of New York, as property trustee, The Bank ofNew York (Delaware), as Delaware Trustee and the administrators named therein (Exhibit 4 toMorgan Stanley’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2003).

4.14 Amended and Restated Trust Agreement of Morgan Stanley Capital Trust V dated as of July 16, 2003among Morgan Stanley, as depositor, The Bank of New York, as property trustee, The Bank of NewYork (Delaware), as Delaware trustee and the administrators named therein (Exhibit 4 to MorganStanley’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2003).

4.15 Amended and Restated Trust Agreement of Morgan Stanley Capital Trust VI dated as of January 26,2006 among Morgan Stanley, as depositor, The Bank of New York, as property trustee, The Bank ofNew York (Delaware), as Delaware trustee and the administrators named therein (Exhibit 4 toMorgan Stanley’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2006).

E-2


4.16 Amended and Restated Trust Agreement of Morgan Stanley Capital Trust VII dated as of October 12,2006 among Morgan Stanley, as depositor, The Bank of New York, as property trustee, The Bank ofNew York (Delaware), as Delaware trustee and the administrators named therein (Exhibit 4.3 toMorgan Stanley’s Current Report on Form 8-K dated October 12, 2006).

4.17 Amended and Restated Trust Agreement of Morgan Stanley Capital Trust VIII dated as of April 26,2007 among Morgan Stanley, as depositor, The Bank of New York, as property trustee, The Bank ofNew York (Delaware), as Delaware trustee and the administrators named therein (Exhibit 4.3 toMorgan Stanley’s Current Report on Form 8-K dated April 26, 2007).

4.18 Instruments defining the Rights of Security Holders, Including Indentures—Except as set forth inExhibits 4.1 through 4.17 above, the instruments defining the rights of holders of long-term debtsecurities of Morgan Stanley and its subsidiaries are omitted pursuant to Section (b)(4)(iii) ofItem 601 of Regulation S-K. Morgan Stanley hereby agrees to furnish copies of these instruments tothe SEC upon request.

10.1 Amended and Restated Trust Agreement dated as of October 18, 2011 by and between MorganStanley and State Street Bank and Trust Company (Exhibit 10.1 to Morgan Stanley’s Annual Reporton Form 10-K for the year ended December 31, 2011).

10.2 Transaction Agreement dated as of April 21, 2011 between Morgan Stanley and Mitsubishi UFJFinancial Group, Inc. (Exhibit 10.1 to Morgan Stanley’s Current Report on Form 8-K dated April 21,2011).

10.3 Amended and Restated Investor Agreement dated as of June 30, 2011 by and between MorganStanley and Mitsubishi UFJ Financial Group, Inc. (Exhibit 10.1 to Morgan Stanley’s Current Reporton Form 8-K dated June 30, 2011), as amended by Third Amendment, dated October 3, 2013(Exhibit 10.1 to Morgan Stanley’s Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2013).

10.4† Morgan Stanley 401(k) Plan, amended and restated as of January 1, 2013 (Exhibit 10.6 to MorganStanley Annual Report on Form 10-K for the year ended December 31, 2012).

10.5†* Amendment to Morgan Stanley 401(k) Plan, dated as of December 20, 2013.

10.6†* Amendment to Morgan Stanley 401(k) Savings Plan, dated as of December 20, 2013.

10.7† 1994 Omnibus Equity Plan as amended and restated (Exhibit 10.23 to Morgan Stanley’s AnnualReport on Form 10-K for the fiscal year ended November 30, 2003) as amended by Amendment(Exhibit 10.11 to Morgan Stanley’s Annual Report on Form 10-K for the fiscal year endedNovember 30, 2006).

10.8† Tax Deferred Equity Participation Plan as amended and restated as of November 26, 2007(Exhibit 10.9 to Morgan Stanley’s Annual Report on Form 10-K for the fiscal year endedNovember 30, 2007).

10.9† Directors’ Equity Capital Accumulation Plan as amended and restated as of March 22, 2012(Exhibit 10.2 to Morgan Stanley’s Current Report on Form 8-K dated May 15, 2012).

10.10† Select Employees’ Capital Accumulation Program as amended and restated as of May 7, 2008(Exhibit 10.1 to Morgan Stanley’s Quarterly Report on Form 10-Q for the quarter ended May 31,2008).

10.11† Form of Term Sheet under the Select Employees’ Capital Accumulation Program (Exhibit 10.9 toMorgan Stanley’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2008).

10.12† Employees’ Equity Accumulation Plan as amended and restated as of November 26, 2007(Exhibit 10.12 to Morgan Stanley’s Annual Report on Form 10-K for the fiscal year endedNovember 30, 2007).

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10.13† Employee Stock Purchase Plan as amended and restated as of February 1, 2009 (Exhibit 10.20 toMorgan Stanley’s Annual Report on Form 10-K for the fiscal year ended November 30, 2008).

10.14† Morgan Stanley Supplemental Executive Retirement and Excess Plan, amended and restated effectiveDecember 31, 2008 (Exhibit 10.2 to Morgan Stanley’s Quarterly Report on Form 10-Q for thequarter ended March 31, 2009) as amended by Amendment (Exhibit 10.5 to Morgan Stanley’sQuarterly Report on Form 10-Q for the quarter ended June 30, 2009), Amendment (Exhibit 10.19 toMorgan Stanley’s Annual Report on Form 10-K for the year ended December 31, 2010) andAmendment (Exhibit 10.3 to Morgan Stanley’s Quarterly Report on Form 10-Q for the quarter endedJune 30, 2011).

10.15† 1995 Equity Incentive Compensation Plan (Annex A to MSG’s Proxy Statement for its 1996 AnnualMeeting of Stockholders) as amended by Amendment (Exhibit 10.39 to Morgan Stanley’s AnnualReport on Form 10-K for the fiscal year ended November 30, 2000), Amendment (Exhibit 10.5 toMorgan Stanley’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2005),Amendment (Exhibit 10.3 to Morgan Stanley’s Quarterly Report on Form 10-Q for the quarter endedFebruary 28, 2006), Amendment (Exhibit 10.24 to Morgan Stanley’s Annual Report on Form 10-Kfor the fiscal year ended November 30, 2006) and Amendment (Exhibit 10.22 to Morgan Stanley’sAnnual Report on Form 10-K for the fiscal year ended November 30, 2007).

10.16† Form of Equity Incentive Compensation Plan Award Certificate (Exhibit 10.1 to Morgan Stanley’sQuarterly Report on Form 10-Q for the quarter ended August 31, 2004).

10.17† Form of Management Committee Equity Award Certificate for Discretionary Retention Award ofStock Units and Stock Options (Exhibit 10.30 to Morgan Stanley’s Annual Report on Form 10-K forthe fiscal year ended November 30, 2006).

10.18† Form of Deferred Compensation Agreement under the Pre-Tax Incentive Program 2 (Exhibit 10.12 toMSG’s Annual Report for the fiscal year ended November 30, 1996).

10.19† Key Employee Private Equity Recognition Plan (Exhibit 10.43 to Morgan Stanley’s Annual Reporton Form 10-K for the fiscal year ended November 30, 2000).

10.20† Morgan Stanley Financial Advisor and Investment Representative Compensation Plan as amendedand restated as of November 26, 2007 (Exhibit 10.34 to Morgan Stanley’s Annual Report onForm 10-K for the fiscal year ended November 30, 2007).

10.21† Morgan Stanley UK Share Ownership Plan (Exhibit 4.1 to Morgan Stanley’s Registration Statementon Form S-8 (No. 333-146954)).

10.22† Supplementary Deed of Participation for the Morgan Stanley UK Share Ownership Plan, dated as ofNovember 5, 2009 (Exhibit 10.36 to Morgan Stanley’s Annual Report on Form 10-K for the yearended December 31, 2009).

10.23† Aircraft Time Sharing Agreement, dated as of January 1, 2010, by and between CorporateServices Support Corp. and James P. Gorman (Exhibit 10.1 to Morgan Stanley’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2010).

10.24† Agreement between Morgan Stanley and James P. Gorman, dated August 16, 2005, and amendmentdated December 17, 2008 (Exhibit 10.2 to Morgan Stanley’s Quarterly Report on Form 10-Q for thequarter ended March 31, 2010).

10.25†* Amendment to Agreement between Morgan Stanley and James P. Gorman, effective as ofDecember 19, 2013.

10.26† Agreement between Morgan Stanley and Gregory J. Fleming, dated February 3, 2010 (Exhibit 10.5 toMorgan Stanley’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011).

10.27† Form of Restrictive Covenant Agreement (Exhibit 10 to Morgan Stanley’s Current Report onForm 8-K dated November 22, 2005).

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10.28† Morgan Stanley Performance Formula and Provisions (Exhibit 10.3 to Morgan Stanley’s QuarterlyReport on Form 10-Q for the quarter ended May 31, 2006).

10.29† Morgan Stanley Performance Formula and Provisions (Exhibit 10.2 to Morgan Stanley’s CurrentReport on Form 8-K dated May 14, 2013).

10.30† 2007 Equity Incentive Compensation Plan, as amended and restated as of March 21, 2013(Exhibit 10.1 to Morgan Stanley’s Current Report on Form 8-K dated May 14, 2013).

10.31† Morgan Stanley 2006 Notional Leveraged Co-Investment Plan, as amended and restated as ofNovember 28, 2008 (Exhibit 10.47 to Morgan Stanley’s Annual Report on Form 10-K for the fiscalyear ended November 30, 2008).

10.32† Form of Award Certificate under the 2006 Notional Leveraged Co-Investment Plan (Exhibit 10.7 toMorgan Stanley’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2008).

10.33† Morgan Stanley 2007 Notional Leveraged Co-Investment Plan, amended as of June 4, 2009(Exhibit 10.6 to Morgan Stanley’s Quarterly Report on Form 10-Q for the quarter ended June 30,2009).

10.34† Form of Award Certificate under the 2007 Notional Leveraged Co-Investment Plan for CertainManagement Committee Members (Exhibit 10.8 to Morgan Stanley’s Quarterly Report onForm 10-Q for the quarter ended February 29, 2008).

10.35† Governmental Service Amendment to Outstanding Stock Option and Stock Unit Awards (replacingand superseding in its entirety Exhibit 10.3 to Morgan Stanley’s Quarterly Report on Form 10-Q forthe quarter ended May 31, 2007) (Exhibit 10.41 to Morgan Stanley’s Annual Report on Form 10-Kfor the fiscal year ended November 30, 2007).

10.36† Amendment to Outstanding Stock Option and Stock Unit Awards (Exhibit 10.53 to Morgan Stanley’sAnnual Report on Form 10-K for the fiscal year ended November 30, 2008).

10.37† Morgan Stanley Compensation Incentive Plan (Exhibit 10.54 to Morgan Stanley’s Annual Report onForm 10-K for the fiscal year ended November 30, 2008).

10.38† Form of Executive Waiver (Exhibit 10.55 to Morgan Stanley’s Annual Report on Form 10-K for thefiscal year ended November 30, 2008).

10.39† Form of Executive Letter Agreement (Exhibit 10.56 to Morgan Stanley’s Annual Report onForm 10-K for the fiscal year ended November 30, 2008).

10.40† Morgan Stanley 2009 Replacement Equity Incentive Compensation Plan for Morgan Stanley SmithBarney Employees (Exhibit 4.2 to Morgan Stanley’s Registration Statement on Form S-8(No. 333-159504)).

10.41† Form of Award Certificate for Discretionary Retention Awards of Stock Units (Exhibit 10.1 toMorgan Stanley’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011).

10.42† Form of Award Certificate for Performance Stock Units (Exhibit 10.3 to Morgan Stanley’s QuarterlyReport on Form 10-Q for the quarter ended March 31, 2011).

10.43† Form of Award Certificate for Special Discretionary Retention Awards of Stock Options(Exhibit 10.4 to Morgan Stanley’s Quarterly Report on Form 10-Q for the quarter ended March 31,2011).

10.44† Morgan Stanley Schedule of Non-Employee Directors Annual Compensation, effective as of May 17,2011 (Exhibit 10.59 to Morgan Stanley’s Annual Report on Form 10-K for the year endedDecember 31, 2011).


10.46† Form of Award Certificate for Discretionary Retention Awards under the Morgan StanleyCompensation Incentive Plan Deferred Bonus Program (Exhibit 10.2 to Morgan Stanley’s QuarterlyReport on Form 10-Q for the quarter ended March 31, 2012).

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10.47† Form of Award Certificate for Performance Stock Units (Exhibit 10.3 to Morgan Stanley’s QuarterlyReport on Form 10-Q for the quarter ended March 31, 2012).

10.48† Memorandum to Colm Kelleher Regarding Repatriation to London (Exhibit 10.4 to MorganStanley’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012).

10.49† Morgan Stanley U.S. Tax Equalization Program (Exhibit 10.5 to Morgan Stanley’s Quarterly Reporton Form 10-Q for the quarter ended March 31, 2012).

10.50† Change of Employment Status and Release Agreement between Morgan Stanley and PaulJ. Taubman, dated January 3, 2013 (Exhibit 10.1 to Morgan Stanley’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2013).

10.51† Morgan Stanley UK Limited Alternative Retirement Plan, dated as of October 8, 2009 (Exhibit 10.2to Morgan Stanley’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

10.52† Form of Award Certificate for Discretionary Retention Awards under the Morgan StanleyCompensation Incentive Plan (Exhibit 10.3 to Morgan Stanley’s Quarterly Report on Form 10-Q forthe quarter ended March 31, 2013).


10.54† Form of Award Certificate for Discretionary Retention Awards of Stock Options (Exhibit 10.5 toMorgan Stanley’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

10.55† Form of Award Certificate for Long-Term Incentive Program Awards (Exhibit 10.6 to MorganStanley’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).

12* Statement Re: Computation of Ratio of Earnings to Fixed Charges and Computation of Ratio ofEarnings to Fixed Charges and Preferred Stock Dividends.

21* Subsidiaries of Morgan Stanley.

23.1* Consent of Deloitte & Touche LLP.

24 Powers of Attorney (included on signature page).

31.1* Rule 13a-14(a) Certification of Chief Executive Officer.

31.2* Rule 13a-14(a) Certification of Chief Financial Officer.

32.1** Section 1350 Certification of Chief Executive Officer.

32.2** Section 1350 Certification of Chief Financial Officer.

101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements ofFinancial Condition—December 31, 2013 and December 31, 2012, (ii) the Consolidated Statementsof Income—Twelve Months Ended December 31, 2013, December 31, 2012 and December 31, 2011,(iii) the Consolidated Statements of Comprehensive Income—Twelve Months Ended December 31,2013, December 31, 2012 and December 31, 2011, (iv) the Consolidated Statements of Cash Flows—Twelve Months Ended December 31, 2013, December 31, 2012 and December 31, 2011, (v) theConsolidated Statements of Changes in Total Equity—Twelve Months Ended December 31, 2013,December 31, 2012, and December 31, 2011, and (vi) Notes to Consolidated Financial Statements.

* Filed herewith.** Furnished herewith.† Management contract or compensatory plan or arrangement required to be filed as an exhibit to this

Form 10-K pursuant to Item 15(b).

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