Morgan Stanley Finance

MORGAN STAN

LEY FINANCE

LLC

Annual Financial Rep

ort

December 31, 2021

MORGAN STA

NLEY FINA

NCE

LLC

TABLE

OF

CONTEN

TS

Directors’

Report

Directors’

Responsib

ility Statement

Independent Audito

r

’

s Report

Statements of Financ

ial Condition

Statements of Comp

rehensive Incom

e (Loss)

Statements of Cash F

lows

Statements of Change

s

in

Member’s

Equity (D

eficit)

Notes

to

the F

inancial State

ments

Glossary

of

Common Terms and Acrony

ms

MORGAN STA

NLEY FINA

NCE

LLC

DIRECTORS

’

RE

PORT

Year ended 31 Dec

ember 2021

The

Directo

rs

present

their

r

eport

and

financial

statements

(which

comprise

the

statement

of

financial

condition,

the

statement

of

co

mprehensive

income

(loss),

the

statement

of

cash

flows, t

he

statement

of

changes

in

member’s

equity (deficit) and

the

es

as

well

as

a

glossary

of

com

mon

terms

and

acronyms

for

Morgan

Stanley

Finance

LLC

(the

“

Company

”)

for

the

year

ended 31 Decembe

r 2021.

RESULT

S

AND

DIVIDENDS

The

comprehensive

income

for the

twelve

months

was

$277,000,000

(31

December

2020: loss of $394,00

0,000).

During the period,

no

dividends were pa

id

or

proposed.

PRINCIPAL

ACTIVITY

The

Company

is

wholly

owned

by

Morgan

Stanley

(the

“Parent”),

which

together

with

its

consolidated

subsidiaries,

form

“

the

Firm”.

The

principal

activity

of

t

he

Company

is

the

issuance

of

Borrowings

(“Struct

ured

Notes”)

,

the cash proceeds bei

ng lent

to

its Parent and

the

hedging

of

t

he

obligations

arising

pursuant

to

s

uch issuances.

The

Company

was

established

under

Delaware

law

on

March

27,

2002.

The

business

office

of

the

Company

is

at

1585

Broadway, New Y

ork,

NY

10036, U.S.A.

FUTURE

OUTLOOK

There

have

not

been

any

significant

changes

in

t

he

Co

mpany’s

principal

activity

during

the

year,

oth

er

than

those

disclosed

in

the

notes

to

the

financia

l

statements

and

no

significant chang

e

is

expected.

BUSINESS R

EVIEW

The

Company

is a

“financ

e

subsidiary”

of

the

Parent,

as

defined

in

SEC

Regulation

S-X.

The

Co

mpany

issues

structured

notes

to

the

marketplace

that

are

fully

and

unconditionally

guaranteed

by

the

Parent.

Proceeds

from

issuances

are

lent

to

the

Parent

in the form of Interco

mpany notes.

The

Co

mpany

has

a

rating

of

B

BB+

from

S&P.

The

issuance

of

S

tructured

Notes expo

ses

the

Company

to

various

types

of

risk

including

foreign

ex

change,

equity,

i

nterest

rate,

and

commodities

risk.

The

Company

hedges

these

risks

through

t

he

use

of

derivative

instruments.

The

statem

ent

of

comprehensive

income

(loss)

for

the

twelve

months

is

set

out

on

page

4 of the audi

ted financial

statements. Th

e

Company

did

not

make

a

ny

gains

or

losses

over $1,000,000

in

the period.

In

the

period,

Structured

Notes

that

are

measured

at

fa

ir

v

alue

pursuant

to

the

fa

ir

value

option

election

requires

presenting

unrealized

DVA

of

$277,000,000

as

‘

Other

comprehensive

income

’

in

the

statement

of

comprehensive inco

me (loss).

The

statement

of

financial

condition

for

the

Company

is

set

out

on

page

3

of

the

audited

financial

statements.

At

31

December

2021

the

Company’s

total

assets

were

$29,817,000,000,

an

in

crease

of

$4,251,000,000

or

17%

com

pared

to

31

December

2020

and

total

liabilities

were

$30,226,000,000

an

increase

of

$3,974,000,000

or

15

%,

compared

to

31

December 2020.

The

changes

to

the

state

ments

of

comprehensive

income

(lo

ss)

and

financial

condition are

in

line

with the

Company

’

s

primary

activity

during

the

period

due

to

growth of the business

.

The pe

rformance

of the

Company

is

included

in

the

results

of

the

Firm, w

hich

are

disclosed

in

the

Firm

’s

Annual

Report

on

Form

10-K

and

quarterly

on

Form

10Q

to

the

SEC

.

The

Firm man

ages

its

key p

erformance

indic

ators

on

a

global

basis

but

in

consideration

of

individual

legal

entities.

For

this

reason,

the

Company’s

Directors

believe

that

providing

MORGAN STA

NLEY FINA

NCE

LLC

DIRECTORS

’

RE

PORT

Year ended 31 Dec

ember 2021

further

performance

indica

tors

for

the

Company

itself

would

not

enhance

an

understanding

of

the

developmen

t,

performance

or

position

of

the

business

of

t

he

Company.

The

risk

management

section

below

sets

out

the Company's and the Firm

's

policies for the

management of sig

nificant busin

ess risks.

Risk managemen

t

The

Company’s

r

isk

manageme

nt

practices

are

aligned

with

those of

the Fir

m.

These

practices

are

administered

on

a

coordinated

global

and

legal

enti

ty

basis

with

consideration

given

to

the

Com

pany’s

specific internal capi

tal requirements

.

Risk

is

an

inherent

part

of

the

Fir

m’s

business

and

activities.

Manag

ement

believes

effective

risk

management

is

vital

to

the

success

of

the

Firm’s

business

activities.

Accordingly,

the

Firm

has

policies

and

procedures

in

place

to

identify,

assess,

monitor

and

manage

the

significant

risks

involved

in

the

activities

of

its

business

and

support functions.

The

cornerstone

of

the

Firm’s

r

isk

management

philosophy

is

the

pursuit

of

risk-adjusted returns through prudent risk-

taking

that

protects

the

Firm

’s

capital

base

and

f

ranchise.

Five

key

principles

underlie

this

philosophy:

integrity,

comprehensiven

ess,

independenc

e,

accountability,

and

transparency.

To

help

ensure

the

efficacy

of

ri

sk

management,

which

is

an

essen

tial

component

of

the

F

irm’s

reputation,

senior

management

requ

ires

thorough

and frequent c

ommunicat

ion and

the

appropriate

escal

ation

of

risk

matters.

The

fast-paced,

complex,

and

constantly-

evolving

nature

of

global

financial

markets

requires

that

the

Firm

maintains

a

risk

management

culture

that

is

incisive,

knowledgeable

about

specialized

products

and

markets,

and

subject

to

ongoing

review

and enhancement.

Market risk

Market risk refers

to

the ris

k that a change

in

the level of

one

or

more market prices, rates,

spreads,

indice

s,

volatilitie

s,

correlations

or

other

market

factors,

such

as

m

arket

liquidity,

wil

l

result

in

losse

s

for

a

position

or

portfolio.

Genera

lly,

the

Firm

incurs

market

risk

as

a

result of

trading,

investing

and

client

facilitation

activities,

principa

lly

within

the

Institutional

Securities

business

segment

where

the

substantial

majority

of

the

Firm’s

market risk exposu

re

is

gen

erated.

The Company has exposures

to

a wide range

of

r

isks

relating

to

interest

rates,

equity

prices

and for

eign exchan

ge

rates

as

w

ell

as

the

associated implied volatilities

and spreads

of

the

global

markets

in

wh

ich

the

Company

conducts its trad

ing activities.

Sound

market

risk m

anagemen

t

is

an

integral

part

of

the

Firm’s

culture.

The

various

business

units

and

trading

desks

are

responsible

for

ensuring

that

market

risk

exposures

are

well-manag

ed

and

prudent.

Market

risk

is

also

monitored

through

var

ious

measures:

by

use

of

st

atistics;

by

measures of

position

size

and

sensitivity;

and

through

routine

stress testing,

which measures

the

impact

on

the

value

of

existing

portfolios

of

specified

changes

in

market

factors,

and

scenarios

designed

by

the

Market

Risk

Department

in

collaboration with business

units.

Credit risk

Credit

risk

refers

to

the

risk

of

l

oss

arising

when a

borrower,

counterp

arty or

issuer do

es

not meet

its financia

l obligations

to

the

Firm.

The

Firm

is

primarily

exposed

to

credit

risk

exposure

from

institutions

and

individuals.

This

r

isk

may

arise

from

a v

ariety

of

business

activities,

i

ncluding,

but

not

l

imited

to,

entering

into

swap

or

other

derivative

contracts under

which

counterpart

ies

have

obligations

to

make

payments

to

the

Firm;

extending

credit

to

clients;

providing

short-

or

long-term

funding

t

hat

is

secured

by

MORGAN STA

NLEY FINA

NCE

LLC

DIRECTORS

’

RE

PORT

Year ended 31 Dec

ember 2021

physical

or

financial

collatera

l

whose

value

may

at

time

s

be

i

nsufficien

t

to

ful

ly

cover

the

repayment

amount;

and

posting

margin

and/or

collateral

to

counterparties.

This

type

of risk requires cred

it analysis

of

specific

counterparties,

both

initially

and

on

an

ongoing

basis.

The

Firm

al

so

incurs

credi

t

risk

in

traded

securities

and

whereby

the

value

of

these

assets

may

fluctuate

based

on

realized

or

expected

defaults

on

the

underlying obligat

ions or loans.

The

Firm

establishes

practices

to

evaluate,

monitor

and con

trol c

redit

risk

ex

p

osure

both

within and across

business segments. The

Firm

is

responsible

for

ensuring

timely

and

transparent co

mmunicatio

n of

material

credit

risks,

ensuring

compliance

with

establish

ed

limits,

and

es

calating

risk

concentrations

to

appropriate

senior

management.

The

Firm’s

credit risk exposure

is

managed by credit

professionals

a

nd

risk

committees

that

monitor

risk

exposures,

i

ncluding

credit

sensitive, higher

risk transactions.

Operational Risk

Operational

risk

refers

to

the

risk

of

loss,

or

of damage

to

t

he

Firm’s

reputation, resulting

from

ina

dequate

or

failed

processes

or

systems,

from

human

factors

or

fr

om

external

events

(e.g.

cyber

attack

s

or

third-party

vulnerabilities)

that

may

m

anifest

a

s,

for

example,

loss

of

information,

business

disruption,

theft

and

fraud,

l

egal

and

compliance

risks,

or

damage

to

physical

assets.

The

Firm

may

incur

operational

risk

across

the

full

sc

ope

of

its

business

activities,

including

revenue-generating

activiti

es

(e.g.,

sales

and

trading)

and

co

ntrol

g

roups

(e

.g.

information

technology

and

t

rade

processing).

The

Firm’s

operational

risk

framework

is

established

to

identify,

measure,

monitor and

control

risk.

Effective

operational

risk

management

is

essential

to

reducing

the

impact

of

operational

risk

incidents

and

mitigating

legal,

regulatory

and

r

eputational

risks. The framework

is

contin

ually evolving

to

a

ccount

for

changes

in

the

Firm

and

to

respond

to

the

changing

regulatory

and

business environme

nt.

Model

Ri

sk

Model risk

refers

to

the potential f

or adverse

consequences

from

decisions

based

on

incorrect

or

misused

model

out

puts.

Model

risk

can

l

ead

to

financial

loss,

poor

business

and

strategic

decision

making

or

damage

to

the

Company’s

or t

he

Firm’s

reputation. The

risk

inherent

in

a

model

is

a

function

of

the

materiality,

complexity

and

uncertainty

around inputs and assu

mptions.

Model

risk

is

generated

from

the

use

of

models

impac

ting

financial

stat

ements,

regulatory

f

ilings,

capital

adequacy

assessments

an

d th

e formulation of st

rategy.

Sound m

odel risk

management

is

an

integral

part

of

our

Risk

Management

Framework.

The

MRM

is

a

distinct

department

in

Risk

Management responsible

for the oversight

of

model risk.

MRM

establishes

a

model

risk

tolerance

in

line

with

the

Firm’s

risk

appetite.

The

tolerance

is

based

on

an

assessment

of

the

materiality

of the

risk

of

financial

loss

or

reputational

damage

due

to

errors

in

design,

implementation

and/or

inappropriate

use

of

models.

The

tolerance

is

monitored

through

model-specific

and

aggregate

business-level

assessments,

which

are

based

upon

qualitative and quant

itative factors.

MORGAN STA

NLEY FINA

NCE

LLC

DIRECTORS

’

RE

PORT

Year ended 31 Dec

ember 2021

A guiding principle for managing model risk

is

the

“effective

chal

lenge”

of

models.

The

effective

chal

lenge

of

models

is

defined

as

critical

analysis

by

objective,

informed

parties

who

can

identify

model

limitatio

ns

and

assumptions

and

drive

appropriate

changes.

MRM

provides

effec

tive

challenge

of

models,

independen

tly

validates

and

approves models for use,

annually recertifie

s

models,

identifies

and

tracks

remediation

plans

for

model

limitations,

and

reports

on

model

risk

metrics.

The

department

also

oversees

the

development

of

controls

to

support

a

complete

and

accurate

Firm-wide

model inventory.

Liquidity risk

Liquidity

risk

refers

to

the

ri

sk

that

the

Firm

will

be

unable

to

finance

i

ts

opera

tions

due

to

a

loss

of

access

to

capital

markets

or

difficulty

in

liquidating

its

assets.

Liquidity

risk

also

encompasses

the

Firm’s

ability

(or

perceived

ability)

to

meet

its

financial

obligations

in

a

timely

manner

without

experiencing

significan

t

b

usiness

disruption

or

reputational

damage

that

may

threaten

its

viability

as

a

going

concern.

Liquidity

risk

also

encompasses

the

associated

funding

risks triggered by the

market or idiosyncr

at

ic

stress

events

that

may

negatively

affect

our

liquidity

and

may

impact

our

ability

to

raise

new

funding.

Generally

,

the

Firm

incurs

liquidity

and

funding

risk

as

a

result

of

its

trading,

lending,

i

nvesting,

and

client

facilitation activi

ties.

The

Firm’s

Liquidity

Risk

Management

Framework

is

critical

to

help

ensure

that

the

Firm

maintains

sufficient

li

quidity

reserves

and

durable

funding

sources

to

meet

the

Firm’s

daily

obligations

and

to

withstand

unanticipated

stress

events.

The

Liquidity

Risk

Dep

artment

is

a

d

istinct

area

in

Risk

Management responsible f

or

the oversight

and monitoring of

liquidity risk.

The

Liquid

ity

Ri

sk

Dep

artment

ens

ures

transparency

of

m

aterial

liquidity

and

funding

risks, comp

liance

with establ

ished

risk

limits

and

escalation

of

ri

sk

concentrations

to

appropriate

senior

management.

To

execute

these

r

esponsib

ilities,

the

Liquidity

Risk Department

establishes limits

in

line

with

t

he

Firm’s

risk

appetite,

identifies

and

analyzes emerging

liquidity and

funding

risks

to

ensure

such

risks

are

appropriately

mitigated,

monitors

and

reports

risk

exposures

against

metrics

and

limits,

and

reviews

the

methodologies

and

assumptions

underpinning

its

Liquidity

Stress

Tests

to

ensure sufficient

liquidity

and

funding under

a range

of

adverse scenarios.

Replacement

of

London

Interbank

Offered

Rate

and

replacement

or

reform

of

other

interest

rate

be

nchmarks

could

adversely

affect

our

business,

financial

condition and re

sults of operat

ions.

Central

banks

around

the

world,

including

the

Federal

Reserve,

hav

e

commissioned

committees

and

working

groups

of

market

participants

and

official

sect

or

representatives

t

o

replace

LIBO

R

and

replace

or

reform

other

interest

rate

be

nchmarks

(collectively,

the

“IB

ORs”).

A

transition

away

from

the

widespread use

of

the

IBORs

to

alternative

rates

and

other

potential

interest

rate b

enchmark

reforms

is

underway

an

d

will

continue over

the course of

the next

few

years.

These

r

eforms

have

caused and

may in

the

future

cause

such

rates

to

per

form

differently

than

in

the

past,

or

to

cease

entirely,

or

have

other consequences

that

are

contrary to marke

t expectat

ions.

The ongoing market transition away from

IBORs

and other

interest rate b

enchmarks

to

alternative reference rates i

s

comp

lex

and

could have a range o

f adverse impa

cts on the

business,

financial

c

onditi

on

and

results

of

operations.

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

INDEPENDENT AUDITOR

’

S REPORT

To the Board of Dir

ectors of

Morgan Stanley Fi

nance, LL

C

Op

inion

We have audited

the

financi

al statements o

f Morgan Sta

nley Finance, LLC

(the “Compan

y”), a wholly own

ed

subsidiary of M

organ Stanl

ey (the

“Parent”

), which co

mprise the stat

ements of

financial condition a

s of Decembe

r

31,

20

21 and December

31,

2020

, an

d the relat

ed statements o

f compreh

ensive income (loss), cash flow

s, and

changes in mem

ber’s equity (d

eficit) for th

e years then end

ed, and

th

e relat

ed

notes

to

the financial stat

ements

(collectively r

eferred to as the

“

financia

l statements

”

)

.

In our opinion, t

he accompa

nying financial stat

ements p

re

sent fairly, in al

l material resp

ects, the financi

al position

of the Company as o

f December 31,

20

21

an

d

2020

, and the results o

f its operations a

nd its cash flows

for the

years then end

ed in accorda

nce with accounting

principles

ge

ne

ra

ll

y acc

epted in the Unit

ed States o

f America

.

Basis for Opinion

We

conducted our au

dits in accordanc

e with auditi

ng standards g

enerally accepte

d in t

he

United States of

America (GAAS).

Our responsibil

ities under tho

se stan

dards are furt

her described

in the Auditor

’s Responsibil

ities

for the Audit of th

e Financia

l State

me

nts section of our report.

We are requir

ed to be independent o

f the

Company and to

me

et our

other ethical r

esponsibiliti

es, in accordanc

e with the relevant

ethical requir

ements

relating to our audit

s. We b

elieve that th

e audit eviden

ce we have obtain

ed i

s

sufficient and app

ropriate to

provide a basis

for our audit opinion.

Responsibilit

ie

s of Manage

ment for the Financial

Statements

Management is r

esponsible for th

e preparation a

nd fair prese

ntation of the

se financial

statements in acc

ordance

with accounting principl

es gen

erally accept

ed

in

th

e United

States of America, a

nd for the desig

n,

implementati

on, and maint

enance of int

ernal control r

elevant to the p

reparation a

nd fair presentati

on of

financial statem

ents that are

free from mat

erial missta

tement, whether due to fraud o

r er

ro

r.

In preparing th

e financial sta

tements, managem

ent is required to

evaluate whet

her there are co

nditions o

r

events, consid

ered in the a

ggregate, that

raise substan

tial doubt abo

ut the Compa

ny’s ability to co

ntinue as a

going concern for on

e year after

the date that th

e financia

l statements are available to

be issued.

Auditor

’

s Responsibilit

ies for the Audit of the Fina

nc

ia

l Statements

Our objectives are to

obtain reaso

nable assura

nce about wh

ether t

he

financial

statements as a w

hole are fr

ee

from material mi

sstatement, wh

ether due to fraud or

error, and issu

e an auditor

’

s repo

rt that includ

es the

auditor

’

s opinion

.

Re

asona

ble assurance is

a high level of a

ssurance but is

not absolut

e assurance an

d therefore

is

not a guarantee t

hat an audit

conducted in acco

rdance with GAA

S will always detect a material

misstatem

ent

when it exists.

The risk of n

ot detecting a

material misstatement r

esulting fro

m fraud is high

er than for on

e

resulting from

error, as frau

d may involve collusion

, forgery, intenti

onal omissio

ns, misrepr

esentations, or t

he

override of internal

control. Missta

tements are con

sidered mat

erial if there is a

sub

st

antial likelihood t

hat,

individually or

in the aggreg

ate, they would in

fluence t

he judgment made by a rea

sonable us

er based on the

financial statem

ents.

In performing an a

udit in accordanc

e with GAAS

, we:

•

Exercise professional

judgment and

maintain prof

e

ss

ional skepticis

m throughout

the audit.

•

Identify and asses

s the risks of mat

erial missta

tement of the financial stat

ements, wheth

er due to fraud

or error, and d

esign and perform a

udit proc

edures responsi

ve to those risks

. Such proced

ures include

examining

,

on

a test basis

, evidence r

egarding the am

ounts and disclo

sures in th

e financial state

ments.

•

Obtain an understandi

ng of internal cont

rol relevant to the a

udit in order to de

sign audit

procedures that

are appropriate

in the circu

mstances, but

not for the

pu

rpose of expressing a

n opinion o

n the

effectiveness o

f the Compa

ny’s internal cont

rol. Accordi

ngly, no such opinion i

s express

ed.

•

Evaluate the approp

riateness of acc

ounting policies us

ed and the r

easonableness

of significant

accounting esti

mates made by

ma

nagement, as

well as eva

luate the ove

rall presenta

tion of the financial

statements.

•

Conclude whether, in ou

r judgment

, there are con

ditions or events, co

nsidered in th

e aggregate, that

raise substantial

doubt abo

ut the Compan

y’s ability to

continue as a

go

ing concer

n for a reasona

ble

period of time

.

We are require

d to commu

nicate with thos

e charged with governanc

e regarding, among

other matters

, the

planned scope an

d timing of the au

dit, significant a

udit findi

ngs, and c

ertain intern

al control-related mat

te

rs that

we identified du

ring the au

dit.

Emphasis of Matter

We draw attenti

on to Note 3 of the

financial stat

ements, which

describes th

e fact that

the activities of t

h

e

Company include signi

ficant t

ransactions with a

ffiliates

and may not n

ece

ss

arily be indica

tive of th

e conditions

that would hav

e existed or

the results o

f operations if t

he Company had operated

as an unaffili

ated busines

s. Our

opinion is not mo

dified with respect

to this matter.

Report on Other Legal and

Regulatory Requirement

s

—

European Single Electronic F

ormat

In connection with

the Company’s

listing requir

ements w

ith the Luxembo

urg Stock Excha

nge, manag

ement is

responsible

for preparing t

he financial statement

s in complianc

e with the requir

ements s

et forth in Arti

cle 3 of

the Delegate

d R

egulation 2

019/815 on Europea

n Single Electronic

Format (ESEF R

egulation).

The require

ments

se

t forth in

the ESEF Regula

tion that ar

e relevant to th

e Company relate

to the financial statem

ents being

prepared using a

valid eXte

nsible Hyper

Text Markup L

anguage (XHTML) format. A

s part of our ass

essment as to

whether the fi

nancial statement

s are prepa

red, in all material r

espects, in acco

rdance with the

requirements

set

forth in the ESEF Reg

ulation that ar

e relevant to th

e Company, we

have per

formed tests of

th

e Company’s

compliance with th

e requirement to

prepare th

e financial

statements using a

valid XHTML format. In ou

r opinion,

the financial stat

ements, id

entified as

“

MSF 202

1 F

S.

xhtml

”

,

have been

prepared, i

n all materia

l respects, in

accordance with t

he requir

ements set fo

rth in the ESEF Regulati

on that are rel

evant to the Co

mpany inso

far as it

re

lates to the pr

eparation of th

e financial stat

ements i

n a valid XHT

ML format.

Ot

her Information Includ

ed in the Annual Director

’

s

R

eport

Management is r

esponsible for th

e other infor

mation includ

ed in the Annual director

’

s

r

eport. The oth

er

information comp

rises the informati

on includ

ed in the Annual director

’

s

report bu

t does not include th

e financia

l

statements an

d our auditor

’s report th

ereon. Our opini

on on

the financial state

ments does

not cover the

other

information, and

we do not expr

ess an opini

on or any f

orm of assuranc

e thereon.

In connection with

our audits of

the financial statem

ents, our res

ponsibility is to

read the oth

er information

and

consider wheth

er a material inconsi

stency exist

s between the oth

er information

and the financi

al statem

ents, or

the other informat

ion otherwise

appears to be

materia

lly misstated. If, based on the wo

rk performed, we

conclude that an u

ncorrected mat

erial misstatem

ent of the other in

formation exi

sts, we are r

equired to de

scribe

it in our report.

s/ Deloitte &

Touche LLP

New York, New Yo

rk

April 22

,

202

2

MORGAN STA

NLEY FINA

NCE

LLC

STATEMEN

TS

OF

FINAN

CIAL CONDITION

(In millions

of

dollars, except

where noted)

See Notes

to

the Financial Statements

- 3 -

At

December 31,

2021

December 31,

2020

Assets

Cash

$

5

$

6

Trading assets at f

air value

1,687

1,524

Receivables:

Broker dealers

14

6

Notes receivab

le from Parent

27,977

23,972

Intercompany fro

m Parent

134

58

Total Assets

$

29,817

$

25,566

Liabilities

Trading liabilitie

s at fair value

$

-

$

3

Payables:

Broker dealers

64

-

Interest

17

16

Intercompany to Pa

rent

-

22

Borrowings (inclu

des $30,017 and $26,206

at fair v

alue)

30,145

26,211

Total Liabilities

$

30,226

$

26,252

Commitments and

contingent

liabilities (See Not

e 8)

Member’s equ

ity:

Additional paid-i

n capital

44

t

44

t

Accumulated ot

her comp

rehensive loss

(453)

(730)

Total member’s

equity (deficit)

(409)

(686)

Total Liabilities and

Member’s

equity (defic

it)

$

29,817

$

25,566

MORGAN STA

NLEY FINA

NCE

LLC

STATEMEN

TS

OF

COMPR

EHENSIVE INC

OME (LOSS)

(In millions

of

dollars, except

where noted)

See Notes

to

the Financial Statements

- 4 -

(1)

Trading revenues comprise r

elated par

ty and non-related party c

omponents.

For further inf

ormation see n

otes 3 and 5

2021

2020

Revenues

Trading

(1)

$

(135)

$

(170)

Interest income

207

249

Total Revenues

72

79

Expenses

Interest expense

72

79

Total Expenses

72

79

Income (loss) be

fore income taxes

-

Net income (los

s)

-

Other comprehens

ive income (loss)

277

(394)

Comprehensive loss

$

277

$

(394)

MORGAN STA

NLEY FINA

NCE

LLC

STATEMEN

TS

OF

CASH FLO

WS

(In millions

of

dollars, except

where noted)

See Notes

to

the Financial Statements

- 5 -

2021

2020

Cash flows from

operating activiti

es:

Net income (loss)

$

-

$

-

Adjustments to rec

oncile net inco

me (loss) to n

et cash

provided

by operating activ

ities:

Net changes in

asset and liabilit

ies:

Trading assets, n

et of Trading liabilities

1,780

651

Broker dealers

(8)

47

Intercompany (Par

ent)

(98)

(44)

Interest

1

Net cash provided by

operating ac

tivities

1,675

655

Cash flows from

investing act

ivities:

Net payments fo

r:

Notes receivable f

rom Parent

(4,352)

(4,659)

Net cash used for

investing act

ivities

(4,352)

(4,659)

Cash flows from

financing activiti

es:

Proceeds from:

Borrowings

17,216

12,183

Payments for:

Borrowings

(14,540)

(8,176)

Net cash provided by

financing a

ctivities

2,676

4,007

Effect of exchang

e rate changes on

cash

-

Net (decrease) / incr

ease in cash

(1)

3

Cash at beginning o

f the period

6

3

Cash at end of the pe

riod

$

5

$

6

Supplemental Di

sclosure of Cash F

low Information

:

Cash payments fo

r interest

$

71

$

78

MORGAN STA

NLEY FINA

NCE

LLC

STATEMEN

TS

OF

CHA

NGES

IN

MEMBER

’S

EQUITY (DE

FICIT)

(In millions

of

dollars, except

where noted)

See Notes

to

the Financial Statements

- 6 -

Additional

paid-in

capital

Accumulated oth

er

comprehensive

income/(loss)

Total

member's

equity/(deficit)

Balance, Decembe

r 31, 2019

$

13

$

(3

36

)

$

(323)

Net change in eq

uity

31

(3

94

)

(363)

Balance, Decembe

r 31, 2020

$

44

$

(730)

$

(686)

Net change in accu

mulated othe

r

comprehensive inco

me

-

277

Balance, Decembe

r 31, 2021

$

44

$

(453)

$

(409)

MORGAN STA

NLEY FINA

NCE

LLC

NOTES

TO

THE FINAN

CIAL STAT

EMENTS

FOR THE

YEARS

ENDED

DECEMBE

R 31, 2021

AND

2020

(In millions

of

dollars, except wher

e noted)

- 7 -

1. Introduction and B

asis of Present

ation

The Company

Morgan

Stanley

Finance

LLC

(the

“Company”),

a

single

member

limited

l

iability

corpor

ation,

is

a

wholly

owned

subsidiary

of

Morgan Stanley (the

“Par

ent”).

The

Company

is

a

“finance

subsidiary”

of

the

Parent,

as

defined

in

SEC

Regulation

S-

X.

The

Company

issues

structured

notes

to

the

marketplace

that

are

fully

and

unconditionally

guaranteed

by

the

Parent.

Proceeds

from

issuances

are

lent

to

the Pa

rent

in

th

e

form

of

In

tercom

pany

notes.

In

2016,

the

Company

received

a

rating

of

BBB+

from

S&P.

See

the

“Glossary

of

Common

Terms

and

Acronyms”

for

the

definition

of

certain

terms

and

acronyms

used

throughout the notes

to

the financi

al statements.

A

reclassification

has

been

ma

de

to

the

prior

year

to

conform

to

the

curren

t

presentation

as

the

Comp

any

will

no

longer

r

ecord

income

taxes

on

its

financial

statements

under

ASU

2019-12,

Simplifying

the

Accounting

for

Inc

ome

Taxes

. See Accounting Up

dates Adopted

in

2021 for more

information.

The

Company

has

adjusted

for

t

his

retrospectively th

rough

Member’s

equ

ity (deficit).

Basis

of

Financial Information

The

audited

f

inancial

statements

are

prepared

in

accordance

with

U.S.

GAAP,

which

requires

the

Compa

ny

to

make

estimates

and

assumption

s

r

egarding

the

valuations

of

certain financial instrumen

ts, the outcome

of

legal matters,

and

other

m

atters

that

affect

the

financial

statements

and

T

he

Company

be

lieves

that

the

estimates

utilized

in

the

preparat

ion

of

its

financial

st

atements

are

prudent

and reasonab

le. Ac

tual

results

could

differ materially fro

m these estimates.

The

Company

h

as

evaluated

subsequent

events

f

or

adjustment

to

or

disclosu

re

in

the

financial

statements

through

April

22

nd

,

2022,

the

date

on

which

t

he

financial

statements are

available

to

be issued,

and

the Compa

ny has

not identifie

d any

recordable

or

disclosable

events, not

otherwise

reported

in

the

financial

statements

or

the

notes

thereto.

2. Significant Accoun

ting Policies

Revenue Recognition

Trading

See

“Fair

Value

of

Financial

Instrumen

ts”

below

for

Trading revenue recogn

ition discussion

s.

Fair Value

of

Financial Instrumen

ts

Instruments

within

Trading

assets

and

Trading

liabilities

are

m

easured

at

fair

value,

as

required

or

allowed

by

accounting

guidance. Thes

e

financial

instruments

represent

derivatives

the

Company

enters

into w

ith

the Pa

rent

to

economically

hedge

its

Borrowings,

wh

ich

are

primarily

structured no

tes. Ga

ins and

losses on

instruments carried

at

fair

value

are

reflected

in

Trading

revenues

in

the

Company’s

State

ments

of

comprehensive income (lo

ss).

The fair

value

of

OTC financi

al instr

uments, inclu

ding

derivative

contracts

financial

instruments

and

commodities,

is

presented

in

the ac

companyi

ng statements

of financi

al condit

ion on

a

net-by-counter

party bas

is, when

appropriate.

Fair Value Option

The

Company

has

elected

the

fair

value

option

for

certain

Borrowings

(structured

notes)

that

are

risk

m

anaged

on

a

fair value basis

to

mitigate income statement volatility

caused

by

measurement

bas

is

difference

s

between

the

elected

instruments

and

their

associated

risk

m

anagemen

t

transactions

or

to

eliminate

complexities

of

applying

certain accountin

g models.

Fair Value Measu

rement

–

Definition an

d Hierarchy

Fair value

is

defined

as

t

he price

that would

be

received

to

sell

an

asset

or

paid

to

transfe

r

a

liability

(

i.e

.,

the

“exit

price”)

in

an

orderly

transaction

between

market

participants

at

the

measurement da

te.

Fair

value

is

a

market-based

measure

considered

from

the

perspective

of

a

market

participant

rather

than

an

entity-

specific

measure.

Therefore,

even

when

market

assumptions

are

not

readily

available,

assumpt

ions

are

set

to

reflect

those

th

at

t

he

Company

believes

market

participants wou

ld use

in

pricing

the asset

or

liability

at

the

measurement

date.

Where

the

Company

manag

es

a

group

of

financial

assets,

financial

liabilities

and

non

financial

items

on

the

basis

of

its

net

exposure

to

either

market

or

credit

risk,

the

Company

measures

the

fair

value

of

that

Click here to en

ter text.

- 8 -

group

of

financial

instruments

consistently

with

how

market pa

rticipants wo

uld p

ri

ce

the net

risk

exposur

e

at

the

measurement date.

In

determining

fair

value,

t

he

Company

uses

various

valuation approache

s and establishe

s a hierarchy fo

r inputs

used

in

measuring

fair

value

that

requires

the

m

ost

observable inputs be

used when ava

ilable.

Observable

inputs

are

inputs

that

market

participants

would

use

in

pricing

the

asset

or

liability

tha

t

were

developed

based

on

market d

ata

obtained

from

sources

independen

t

of

the

Company.

Unobservable

inputs

are

i

nputs

that

reflect

assumptions

t

he

Company

believes

other

market

participants

would

use

in

pricing

t

he

asset

or

liability

that

are

developed

based

on

the

best

inf

ormation

available

in

the

circumstances.

The

fair

val

ue

hierarchy

is

broken

down

into

three levels

based

on the

observabi

lity

of

inputs

as

f

ollows,

with

Level

1 bei

ng

the

highest

and

Level 3

being

the

lowest

level:

Level

1

.

Valuations

based

on

quoted

prices

in

active

markets

that

the

Compan

y

has

the

ability

to

acces

s

for

identical

assets

or

l

iabilitie

s.

Valuation

adjustments,

block

discounts

and

discounts

for

entity-specific

restrictions

that

would not transfer

to

marke

t participants are not applied

to

Level

1

i

nstrument

s.

Since valuations

are

based

on

quoted

prices

t

hat

are

readily

and

regularly

available

in

an

active

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

t

hat

are

not

active

or

for

which

all

significant

inputs

are observable, ei

ther directly or indir

ectly.

Level

3

.

Valuations

based

on

inputs

that

are

unobservabl

e

and significant

to

the overa

ll fair value mea

surement.

The

availabili

ty

of

ob

servable

inputs c

an

vary

from

pro

duct

to

p

roduct

and

is

affected

by

a

wide

variety

of

fact

ors,

including

the

type

of

product,

whether

the

product

is

new

and

not

yet

established

in

the

marketplace,

the

liquidity

of

markets

and

other

characteristics

particular

to

the

pr

oduct.

To

the

extent

that

valuation

is

based

on

m

odels

or

inputs

that

are

less

observable

or

unobservable

in

the

market,

the

determination

of

fair

value

requires

more

judgment.

Accordingly,

the

degree

of

judgment

exercised

by

the

Company

in

d

etermining

f

air

va

lue

is

greatest

fo

r

instruments

categori

zed

in

Level

3

of

the

fair

value

hierarchy.

The

Company

considers

pr

ices

and

inputs

t

hat

are

current

as

of

the

measurement

dat

e,

including

during

periods

of

market

dislocation.

In

periods

of

market

dislocation,

the

observability

of

p

rices

and

inputs

may be

reduced fo

r

many

instruments.

This c

ondition

could

cause

an

instrument

to

be

reclassified

from

Level

1

to

Level

2

or

from

Level

2

to

Level

3

of

the

fair

value

hierarchy.

For

additional

information,

see

No

te 4.

In

certain

cases,

the i

nputs used

to

measure

fair

value may

fall into different levels of the f

air value hierarchy.

In

such

cases,

the

total

fair

value

amount

is

disclosed

in

the

level

appropriate

for

the

lowest

level

input

that

is

significan

t

to

the total fair valu

e of the asset

or

liability.

Valuation Techniqu

es

OTC

der

ivative

contracts

have

bid

and

ask

prices

that

can

be

observed

in

the

marketplace. Bid

prices

reflect

t

he

highest price that a party

is

willing

to

pay for

an

a

sset. Ask

prices

represent

the

lowest

price

that

a

party

is

willing

to

accept

for

an

as

set.

The

Company

carries

positions

at

the

point within

the b

id-

ask

range that

meet i

ts best

estimate

of

fair

value.

For

offsetting

positions

in

the

same

financial

instrument,

the

same

price

within

the

bid-ask

spread

is

use

d

to

measure both

the long and shor

t positions.

Fair

value

for

OTC

derivative

contracts

is

der

ived

using

pricing

models.

Pricing

models

take

into

account

the

contract terms,

as

well

as

multiple

inputs, including, w

here

applicable,

commodity

pri

ces,

equity

prices,

i

nterest

rate

yield

curves,

correl

ation,

option

vol

atility,

and

curr

ency

rates.

Where

appropriate,

valuation

adjustments

are

made

to

account

for

various

factors

such

as

liquidity

risk

(bid-

ask

adjustments),

credit

quality,

model

uncertainty

and

concentration

risk. A

djustments

for

li

quidity

risk a

djust

model-derived

m

id-market

amounts

of

Level

2

and

Lev

el 3

financial

inst

ruments

for

t

he

bid-mid

or

mid

-ask

spread

required

to

proper

ly reflect the exit price of a risk position.

Bid-

mid

and

mid-

ask

spreads

are

marked

to

levels

observed

in

trade

activity, b

roker quo

tes

or

other exte

rnal third-p

arty

data.

Where

these

spreads

are

unobservab

le

for

the

particular

position

in

question,

spreads

are

derived

from

observable levels

of

similar positions.

The

Company

applies

credit-relate

d

valuation

adjustm

ents

to

its

Borrowings

(

structure

d

notes)

for

wh

ich

the

fair v

alue

option

was

elected.

The

Company

considers

the

impact

of

changes

in

its

own

credit

spreads

based

upon

observation

s

of the

secondary bond market spreads when

measuri

ng

t

he

fair

value

f

or

Borrowings.

Such

credit

risk

considerations

do

not

impact

the

valuation of

derivative

transactions with

the Parent

as

credit risk wo

uld not impact the ex

it price.

Adjustments

for

model

uncertainty

are

taken

for

positions

whose

underlying

models

are

reliant

on

significant

inputs

Click here to en

ter text.

- 9 -

that

are

neither

directly

nor

indirectly

observable,

hence

requiring

reliance

on

esta

blished

theoretical

concep

ts

in

their

derivatio

n.

These

adj

ustments

are

derived

by

making

assessments of t

he possible degree of

variability

using

statistical approaches and market-based infor

mation where

possible.

See

Note

4

for

a

descriptio

n

of

valuation

techniques

app

lied

to

the

major

categori

es

of

financial

instrument

s

measured

at

fair value.

Interest Income and E

xpense

Interest

i

nco

me

and

Interest

expense

are

accrued

for

interest-earning

assets

and

interes

t-bearing

liabilities,

including Notes rec

eivable, R

eceivables and Paya

bles with

the Parent, and Bor

rowings.

Interest

income

and

Interest

expense

are

recorded

within

th

e

Company’s

statements

of

comprehensive

income

depending

on

t

he nature of

the

instrument and

conventions.

Wh

en

interest

is

included

as

a

component

of

the

instruments’

f

air

value,

interest

is

included

within

Trading

revenues.

Otherwise,

it

is

included

within Interest inco

me

or

Interest expense.

Offsetting

of

Derivative Instru

ments

In

connection

with its

derivative

activities with

the

Parent,

the

Company

enters

into

a

master

netting

agreement

with

the Parent. This agreement provi

des the Company with the

right,

in

the even

t of a

default by

t

he Paren

t,

to

n

et

Par

ent’s

rights and obligations un

der the agreemen

t and

to

liqui

date

against any net amo

unt owed by th

e Parent.

For

further information

offsetting of

derivatives,

see

Note 6.

Income Taxes

The

Company

is

a

single-member

limited

liability

company

that

is

treated

as

a d

isregarded en

tity

for

federal

income tax

purposes. All

current an

d deferre

d taxes hav

e been

accrue

d

by

the

Parent.

See

Accounting

Updates

Adopted

in

2021

Simplifying the Acc

ounting for

Income Taxes

.

Receivables from and

Payables

to

Brok

er Dealers

Receivables

from

and

Payables

to

Broker

Dealers

include

unsettled amounts related

to

Borrowings (structured notes)

as

well

as

amounts

for

securities

failed

to

deliver,

through

its

broker

dealer

affiliates,

by

the

Company

to

the

purchaser

or

failed

to

receive

by

the

Company

from

the

seller

by

the

settlement date.

Foreign Curren

cies

Gains

or

losses

resulting

from

remeasurement

of

foreign

currency

transactions

are

included

in

Trading

revenues,

and

amounts

recognized

in

statements

of

comprehen

sive

income

(loss)

are

translated

at

t

he

rate

of

exchange

on

the

respective date

of

recognition fo

r each amount.

Accounting Updat

es Adopted

in

2021

Simplifying the Acc

ounting for Inco

me Taxes

This accounting update provided an

option for entities that

are

disregarded

by

the

taxing

authorities

for

income

t

ax

purposes

to

push

down

income

taxes

to

i

ts

financial

statements. As

a

result, the

Company

has n

ot mad

e such

an

election

and

th

erefore

w

ill

no

longer

push

down

inc

ome

taxes

to

its

financial

statem

ents.

The

Company

has

adjusted

for this re

trospectively

through

Member’s

equity.

The

accounting

update

al

so

included

othe

r

changes

to

ASC

740,

Income

Taxes,

however,

such

changes

did

not

impact

the

Company. This upd

ate was adopted

as

of January 1, 20

21.

Accounting Develop

ment Upd

ates

The FA

SB

has

issued cert

ain

accounting

updates tha

t

apply

to

the

Company.

Accounting

updates

were

assessed

an

d

are

not

expected

to

have

a

significant

impact

on

the

Company’s

financial stateme

nts.

3. Related Party Tr

ansactions

Notes receivable from Parent represents the

proceeds from

Borrowings

(structured

notes)

which

are

lent

to

the

Parent

at

rates

established

by

the

treasury

function

of

the

Parent

and

its

consolidated

subsidiaries

(the

“Firm”)

,

and are

payable

on d

emand.

These

rates are

period

ically

re

asses

sed

and intended

to

app

roximate th

e mar

ket rate

of

interest

that

the Firm incurs

in

funding i

ts business.

Intercompany

receivables

from

and

payables

to

the

Parent

represents

additional

funding

provided

to

and

received

fr

om

the

Parent

whi

ch

i

s

unsecured,

payable

on

demand,

and

bears

interest

at

rates

established

by

the

treasury

function

of

the

Firm.

These

rates

are

periodically

assessed

and intended

to

app

roximate th

e mar

ket rate

of

interest

that

the Firm incurs

in

funding i

ts business

.

Receivables from and payables

to

Broker dealers repre

sent

unsettled amounts related

to

Borrowings (structured notes)

that

broker

dea

ler

affiliates

distr

ibute

for

the

Co

mpany.

These receivabl

es are unsecured and payab

le on demand.

Trading

assets

and

liabilities

and

the

associated

Tradi

ng

revenues mainly represent OTC derivative transaction

s the

Click here to en

ter text.

- 10 -

Company

enters

into

with

the

Parent

to

econo

mically

hedge

its

Borrow

ings

(structured

notes)

as

well

as

any

mark

to

market movemen

ts on those OTC

derivative transac

tions.

Interest

i

ncome

and

expense

are

calculated

daily

based

on

the

Notes

receivable

and

Intercompany

receivables

from

and payables

to

t

he Parent.

The

activities

of

the

Company

include

signifi

cant

transactions with

affiliates and

m

ay not

necessarily be

indicative

of

t

he

conditions

that

would

have

existed

or

the

results

of

opera

tions

if

the

Company

had

operated

as

an

unaffiliated busine

ss.

At

December

31, 2021

December

31, 20

20

Assets and receivable

s from

affiliated compa

nies

Trading assets

$

1,687

$

1,524

Receivables

–

Broker dealer

s

1

6

Receivables

–

Notes

receivable from

Parent

27

,9

77

23,972

Receivables

–

Intercompany

from Paren

t

13

4

58

Liabilities and payables t

o

affiliated compa

nies

Payables

–

Intercompany to

Parent

$

-

$

22

202

1

2020

Revenues and

Expenses from

(transfer to)

affiliated companies:

Trading

$

1,919

$

1,253

Interest incom

e

207

249

- 11 -

4.

F

air

Va

lue

s

Assets and Liabilitie

s Measure

d

at

Fair Va

lue

on

a Recurring Basis

At

December 3

1, 2021

Level 1

Level 2

Level 3

Netting

(1)

Total

Assets at Fair Value

Trading assets:

OTC Derivative

contracts:

Equity contracts

$

-

$

2,535

$

76

$

-

$

2,611

Interest rate contracts

-

103

22

-

125

Foreign exchange con

tracts

-

31

8

-

39

Commodity contracts

-

6

2

-

8

Netting

(1)

-

(950)

(

108

)

(

38

)

(1,096)

Total OTC derivativ

e contracts

-

1,725

-

(38)

1,687

Total trading

assets

$

-

$

1,725

$

-

(38)

$

1,687

Total assets at f

air value

$

-

$

1,725

$

-

(38)

$

1,687

-

Liabilities at Fa

ir Value

Trading liab

ilities:

OTC Derivative co

ntracts:

Equity contracts

$

-

$

309

$

95

-

$

404

Interest rate contracts

-

557

32

-

589

Foreign exchange con

tracts

-

84

18

-

102

Commodity contracts

-

1

-

1

Netting

(1)

-

(950)

(1

46

)

-

(1,0

96

)

Total OTC derivativ

e contracts

-

Total trading

liabilities

$

-

$

-

$

-

$

-

Borrowings

- Structured No

tes

-

28,860

1,157

-

30,017

Total liabilities a

t fair value

$

-

$

28,

860

$

1,1

57

-

$

30,0

17

(1)

For

positions

with

the

same

c

ounterpar

ty

that

cross

ove

r

the

le

vels

of

the

fair

value

hierarchy,

counterparty

netting

i

s

i

ncl

uded

in

the

column

titled

“Netting”.

Positions c

lassified

within

the sa

me level

that are

the

same

counterp

arty ar

e netted

within

that

level.

For f

urther i

nformati

on on

derivative

instrume

nts, s

ee

Note 6.

Click here to enter text.

- 12 -

At December 3

1, 2020

Level 1

Level 2

Level 3

Total

Assets at Fair

Value

Trading assets:

OTC Derivative co

ntracts:

Equity contracts

$

-

$

1,690

$

168

$

1,858

Interest rate contracts

-

178

15

193

Foreign exchange con

tracts

-

120

-

120

Commodity contracts

-

1

-

1

Netting

(1)

-

(541)

(107)

(648)

Total OTC derivativ

e contracts

-

1,448

76

1,524

Total trading

assets

$

-

$

1,448

$

76

$

1,524

Total assets at

fair value

$

-

$

1,448

$

76

$

1,524

-

Liabilities at F

air Value

Trading liab

ilities:

OTC Derivative co

ntracts:

Equity contracts

$

-

$

157

$

62

$

219

Interest rate contracts

-

337

45

382

Foreign exchange con

tracts

-

48

-

48

Commodity contracts

-

2

-

2

Netting

(1)

-

(541)

(107)

(648)

To

tal OTC derivative

contracts

-

3

-

3

Total trading

liabilities

$

-

$

3

$

-

$

3

Borrowing

s - Structured No

tes

-

24,443

1,763

26,206

Total liabilities at fa

ir va

lue

$

-

$

24,446

$

1,763

$

26,209

(1)

Positions classified within

the same level that are w

ith the same co

unterpart

y are netted within the

column for tha

t level.

As

of

De

cember

31

2020, ther

e were

no

positions with the s

ame counterpar

ty

cl

assified

in

differen

t levels

of

t

he fair value hierar

ch

y.

F

or further informat

ion

on

derivative instrum

ents, see note

6.

- 13 -

Valuation Techni

ques for Assets

and Liabilities

Measured

at

Fa

ir Value

on

a Recurring Basis

Asset and Liability / Va

luation

Technique

Valuation Hiera

rchy Cla

ssification

OTC Derivative Contracts

•

OTC

derivativ

e

contracts

i

nclude

forward,

swap

and

op

tion

contracts related to interest rates, foreign

currencies,

credit standing

of reference en

tities, equ

ity prices or comm

odity prices.

•

Lev

el

2

-

when

valued

using

observable

inputs,

or

where

the

unobserv

able

input

is

n

ot

d

eemed

sig

nificant

•

Depending

on

the

product

and

the

terms

of

the

tran

saction,

th

e

fair

value

of

OTC

deriv

ative

products

can

be

modeled

using

a

s

eries

of

techniques,

i

ncluding

closed-form

analytic

formulas,

such

as

the

Black-Scholes

option-

pricing

model,

simu

lation

models

or

a

combination

th

ereof.

Many

pricing

m

odels

do

not

entail

material

subjectivity

as

th

e

meth

odologies

employ

ed

do

not

necessita

te

significant

judgment,

since

model

inputs

may

be

o

bserved

fr

om

actively quoted markets,

as

is the case

for

generic

interest

rate

swaps,

and

many

eq

uity,

commod

ity

and

foreign

currency

o

ption

contracts.

In

th

e

case

of

more

established

derivative

products,

the

pricing

m

odels

used

by

the

Company

are

widely

accepted

by

the

financial services in

dustry.

•

Level

3

-

if

an

unobservable

inpu

t

is

d

eemed

significant

•

More complex OTC

der

ivative products

are

typically less

liquid

and

require

m

ore

judgment

in

th

e

implemen

tation

of

the

valuatio

n

technique

since

direct

trad

ing

activity

or

quotes

are

unobservab

le.

This includes

certain types of

interest

rate derivatives

wit

h volatility

and

correlation

exposur

e,

equity,

and

commodity

or

fo

reign

currency derivatives that

are either

lo

nger-dated

o

r

include

exposure

to

mu

ltiple

underlying

s.

Where

these

inputs

ar

e

unobservab

le,

relationships

to

o

bservable

data

poin

ts,

based

on

h

i

storic

al

and/or

implied

o

bservations,

may

be

employ

ed

as

a

technique

to

estimate

the model in

put values.

For

further

informatio

n

on

the

v

aluation

techniqu

es

fo

r

OTC

derivative products,

see Note 2

.

Borrowings - S

tructured Notes

•

The Company

issues s

tructured n

otes

which

are

p

rimarily

composed

of:

instruments

wh

ose

payments

and

redemp

tion

valu

es

are

linked

to the perform

ance of a specific index

, a basket of stocks,

a specific

equity

secur

ity,

a

commod

ity,

a

credit

exposure;

and

instrum

ents

with

various

interest

-rate-related

features

including

step-ups,

step-

downs, and zer

o coupons.

•

Lev

el

2

-

when

valued

using

observable

inputs,

or

where

the

unobserv

able

input

is

n

ot

d

eemed

sig

nificant

• Level

3

-

in instance

s where

the

unobservable

inputs

are deemed

significant

•

Fair

v

alue

is

determined

u

sing

v

aluation

models

for

the

d

erivative

and debt

portions of

the

notes.

These models incorporate

observable

inputs

referencing

identical

or

co

mparable

securities,

includ

ing

prices

to

wh

ich

the

no

tes

are linked,

interest

rate yield

curv

es,

option

volatility and

currency rates, and commo

dity

or equity prices.

•

Independen

t, external and

traded prices for

the notes are considered

as

well

as

th

e

impact

of

the

Comp

any’s

own

cred

it

sprea

ds,

wh

ich

are based on o

bserved secondary bond m

arket spreads.

- 14 -

Rollforward

of

Level 3 Assets and L

iabilities Measu

red at Fair Va

lue on a Recurrin

g Basis for 2021

Beginning

Balance at

December

31, 20

20

Total Realized

and Unrealize

d

Gains (Losses)

Purchases

Sales and

Issuances

Settlements

Net

Transfers

(1)

En

ding

Balance

at

December

31, 2021

Unrealized

Gains

(Losses)

Net Liabilities at

Fair

Value

Net OTC deriva

tive

contracts

(2)

:

Equity co

ntracts

$

(106)

$

59

$

(1)

$

-

$

10

2

$

83

$

19

$

4

Interest rate

contracts

30

..

(1)

-

(1)

(

20

)

10

-

Commodit

y

contracts

-

r

1

-

(1)

-

Foreign e

xchange

contracts

-

r

3

-

39

(26)

10

-

Total net OTC

derivative co

ntracts

(76)

62

(1)

-

140

37

38

4

Borrowings

–

Structured No

tes

1,763

31

-

385

(111)

(849)

1,1

57

35

Net Liabilities at

Fair

Value

$

1,687

$

93

$

(1)

$

385

$

29

$

(812)

$

1,1

95

$

39

5

(1)

Dur

ing

t

he y

ear

ende

d D

ec

emb

er

31

,

20

21

, t

he

Com

p

an

y tra

nsfer

r

ed f

rom

Le

vel

3

to

Leve

l

2 $8

49

of

Bor

r

owi

ngs

(s

tr

uctu

re

d

not

es)

due

to

a re

ducti

on

in

t

he

si

gnif

i

can

ce

of

the

un

obs

er

va

bl

e i

np

uts

r

el

ati

ng

to

vo

la

til

it

y.

(2)

Ne

t O

TC

der

iv

at

iv

e c

ont

ra

ct

s r

ep

re

se

nt

Tr

adi

ng

l

iab

ili

ti

es,

n

et

of

Tr

ad

in

g as

se

t

s.

A

moun

ts

ar

e

pr

es

ent

ed

befor

e c

ou

nt

er

par

ty

ne

tt

ing

.

Rollforward

of

Level 3 Assets and L

iabilities Measu

red at Fair Va

lue on a Recurrin

g Basis for 2020

Beginning

Balance at

December

31, 2019

Total Realized

and Unrealize

d

Gains (Losses)

Purchases

Sales and

Issuances

Settlements

Net

Transfers

(1)

Ending

Balance at

December

31, 20

20

Unrealized

Gains

(Losses)

Net Liabilities at

Fair

Value

Net OTC deriva

tive

contracts

(2)

:

Equity co

ntracts

$

5

$

1

55

$

(8)

$

-

$

46

$

6

.

$

(106)

$

161

Interest ra

te

contracts

(5)

-

36

(1)

30

-

Total net OTC

derivative co

ntracts

-

.

155

(8)

-

82

5

.

(76)

161

Borrowings

–

Structured No

tes

2,245

(

192

)

-

335

(255)

(754)

1,763

(188)

Net Liabilities at

Fair

Value

$

2,245

$

(

37

)

$

(8)

$

335

$

(173)

$

(749)

$

1,687

$

(27)

19195

5

(1)

Dur

ing

t

he y

ear

ende

d D

ec

emb

er

31

,

20

,

the

Co

mp

an

y tr

an

sf

er

red

fr

om

Le

vel

3

to

Leve

l

2 $7

54

of

Bor

r

owi

ngs

(s

tr

uctu

re

d

not

es)

due

to

a re

ducti

on

in

t

he

si

gnif

i

can

ce

of

the

un

obs

er

va

bl

e i

np

uts

r

el

ati

ng

to

vo

la

til

it

y.

(2)

Ne

t O

TC

der

iv

at

iv

e c

ont

ra

ct

s r

ep

re

se

nt

Tr

adi

ng

l

iab

ili

ti

es,

n

et

of

Tr

ad

in

g as

se

ts. A

m

oun

ts

ar

e

pr

es

ent

ed

befor

e c

ou

nt

er

par

ty

net

ting.

The

unrealized

gains

(loss

es)

during

the

period

f

or

assets

and

liabilities

w

ithin

the

Level

3