MORGAN STANLEY FINANCE LLC
Annual Financial Report
December 31, 2022
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Directors’ Report
Directors’ Responsibility Statement
Independent Auditor’s Report
Statements of Financial Condition
Statements of Comprehensive Income
Statements of Cash Flows
Statements of Changes in Member’s Equity (Deficit)
Notes to Financial Statements
Glossary of Common Terms and Acronyms
MORGAN STANLEY FINANCE LLC
TABLE OF CONTENTS
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The Directors present their report and financial statements
(which comprise the statement of financial condition, the
statement of comprehensive income, the statement of cash flows,
the statement of changes in member’s equity (deficit) and the
related notes as well as a glossary of common terms and
acronyms for Morgan Stanley Finance LLC (the “Company”) for
the year ended December 31, 2022.
RESULTS AND DIVIDENDS
The comprehensive income for the twelve months was
$673,000,000 (December 31, 2021:
$277,000,000).
During the period, no dividends were paid 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 the Company is the issuance of
Borrowings (“Structured Notes”), the cash proceeds being lent to
its Parent and the hedging of the obligations arising pursuant to
such issuances.
The Company was established under Delaware law on March 27,
2002. The business office of the Company is at 1585 Broadway,
New York, NY 10036, U.S.A.
FUTURE OUTLOOK
There have not been any significant changes in the Company’s
principal activity during the year, other than those disclosed in
the notes to the financial statements and no significant change is
expected.
BUSINESS REVIEW
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 Parent in the
form of Intercompany notes.
The Company has a rating of A- from S&P.
The issuance of Structured Notes exposes the Company to
various types of risk including foreign exchange, equity, interest
rate, and commodities risk. The Company hedges these risks
through the use of derivative instruments.
The statement of comprehensive income for the twelve months is
set out on page 4 of the audited financial statements. The
Company did not make any gains or losses over $1,000,000 in
the period.
In the period, Structured Notes that are measured at fair value
pursuant to the fair value option election requires presenting
unrealized DVA of $673,000,000 as ‘Other comprehensive
income’ in the statement of comprehensive income.
The statement of financial condition for the Company is set out
on page 3 of the audited financial statements. At December 31,
2022 the Company’s total assets were $37,223,000,000, an
increase of $7,406,000,000 or 25% compared to December 31,
2021 and total liabilities were $36,959,000,000 an increase of
$6,733,000,000 or 22%, compared to December 31, 2021.
The changes to the statements of comprehensive income and
financial condition are in line with the Company’s primary
activity during the period due to growth of the business.
The performance of the Company is included in the results of the
Firm, which are disclosed in the Firm’s Annual Report on Form
10-K and quarterly on Form 10Q to the SEC. The Firm manages
its key performance indicators on a global basis but in
consideration of individual legal entities. For this reason, the
Company’s Directors believe that providing further performance
indicators for the Company itself would not enhance an
understanding of the development, performance or position of
the business of the Company.
The risk management section below sets out the Company's and
the Firm's policies for the management of significant business
risks.
Risk Management
The Company’s risk management practices are aligned with
those of the Firm. These practices are administered on a
coordinated global and legal entity basis with consideration
given to the Company’s specific internal capital requirements.
Risk is an inherent part of the Firm’s business and activities.
Management 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 risk management philosophy is the
pursuit of risk-adjusted returns through prudent risk-taking that
protects the Firm’s capital base and franchise. Five key
principles
underlie
this
philosophy:
integrity,
comprehensiveness,
independence,
accountability,
and
transparency. To help ensure the efficacy of risk management,
which is an essential component of the Firm’s reputation, senior
management requires thorough and frequent communication and
the appropriate escalation of risk matters. The fast-paced,
complex, and constantly-evolving nature of global financial
markets requires that the Firm maintains a risk management
culture that is incisive, knowledgeable about specialized products
and markets, and subject to ongoing review and enhancement.
MORGAN STANLEY FINANCE LLC
DIRECTORS’ REPORT
Year ended December 31, 2022
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Market Risk
Market risk refers to the risk that a change in the level of one or
more
market
prices,
rates,
spreads,
indices,
volatilities,
correlations or other market factors, such as market liquidity,
will result in losses for a position or portfolio. Generally, the
Firm incurs market risk as a result of trading, investing and client
facilitation
activities,
principally
within
the
Institutional
Securities business segment where the substantial majority of the
Firm’s market risk exposure is generated.
The Company has exposures to a wide range of risks relating to
interest rates, equity prices and foreign exchange rates as well as
the associated implied volatilities and spreads of the global
markets in which the Company conducts its trading activities.
Sound market risk management 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-
managed and prudent. Market risk is also monitored through
various measures: by use of statistics; 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 loss arising when a borrower,
counterparty or issuer does not meet its financial obligations to
the Firm. The Firm is primarily exposed to credit risk exposure
from institutions and individuals.
This risk may arise from a variety of business activities,
including, but not limited to, entering into swap or other
derivative contracts under which counterparties have obligations
to make payments to the Firm; extending credit to clients;
providing short- or long-term funding that is secured by physical
or financial collateral whose value may at times be insufficient to
fully cover the repayment amount; and posting margin and/or
collateral to counterparties. This type of risk requires credit
analysis of specific counterparties, both initially and on an
ongoing basis. The Firm also incurs credit risk in traded
securities and whereby the value of these assets may fluctuate
based on realized or expected defaults on the underlying
obligations or loans.
The Firm establishes practices to evaluate, monitor and control
credit risk exposure both within and across business segments.
The Firm is responsible for ensuring timely and transparent
communication of material credit risks, ensuring compliance
with established limits, and escalating risk concentrations to
appropriate senior
management. The Firm’s credit risk
exposure is managed by credit professionals and risk
committees that monitor risk exposures, including credit
sensitive, higher risk transactions.
Operational Risk
Operational risk refers to the risk of loss, or of damage to the
Firm’s reputation, resulting from inadequate or failed processes
or systems, from human factors or from external events (e.g.
cyber attacks or third-party vulnerabilities) that may manifest as,
for example, loss of information, business disruption, theft and
fraud, legal and compliance risks, or damage to physical assets.
The Firm 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
technology and trade 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 reputational
risks. The framework is continually evolving to account for
changes in the Firm and to respond to the changing regulatory
and business environment.
Model Risk
Model risk refers to the potential for adverse consequences from
decisions based on incorrect or misused model outputs. Model
risk can lead to financial loss, poor business and strategic
decision making or damage to the Company’s or the Firm’s
reputation. The risk inherent in a model is a function of the
materiality, complexity and uncertainty around inputs and
assumptions.
Model risk is generated from the use of models impacting
financial
statements,
regulatory
filings,
capital
adequacy
assessments and the formulation of strategy.
Sound model risk management (“MRM”) 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.
The 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 quantitative factors.
A guiding principle for managing model risk is the “effective
challenge” of models. The effective challenge of models is
defined as critical analysis by objective, informed parties who
can identify model limitations and assumptions and drive
appropriate changes. The MRM provides effective challenge of
models, independently validates and approves models for use,
MORGAN STANLEY FINANCE LLC
DIRECTORS’ REPORT
Year ended December 31, 2022
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annually recertifies 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 risk that the Firm will be unable to
finance its operations 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
significant business 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 idiosyncratic 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, investing, and client facilitation activities.
The Firm’s Liquidity Risk Management Framework is critical to
help ensure that the Firm maintains sufficient liquidity reserves
and durable funding sources to meet the Firm’s daily obligations
and to withstand unanticipated stress events. The Liquidity Risk
Department is a distinct area in Risk Management responsible
for the oversight and monitoring of liquidity risk. The Liquidity
Risk Department ensures transparency of material liquidity and
funding risks, compliance with established risk limits and
escalation
of
risk
concentrations
to
appropriate
senior
management.
To execute these responsibilities, the Liquidity Risk Department
establishes limits in line with the 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.
Going Concern
Retaining sufficient liquidity and capital to withstand market
pressures remains central to the Firm’s strategy. The Company
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 Intercompany
notes. Due to the risk neutral nature of the business, the
Company does not maintain significant liquidity or capital.
Additionally, the Company has access to Firm capital and
liquidity as required.
Taking all of these factors into consideration, the Directors
believe it is reasonable to assume that the Company will have
access to adequate resources to continue in operational existence
for the foreseeable future.
Accordingly, they continue to adopt
the going concern basis in preparing the audited financial
statements.
DIRECTORS
The following Directors held office since the Company was
repurposed as a financing subsidiary in the beginning of 2016
and to the date of approval of this report:
Kevin Woodruff
Nikki Tippins
Joshua Schanzer
EVENTS AFTER THE REPORTING DATE
There have been no significant events since the reporting date.
AUDIT COMMITTEE
The Company is not required to have an audit committee
separate from that of its Parent.
AUDITOR
Deloitte & Touche LLP will continue as auditor of the Company.
Approved and signed on behalf of the Board by:
_______________________________
Kevin Woodruff
, President
MORGAN STANLEY FINANCE LLC
DIRECTORS’ REPORT
Year ended December 31, 2022
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The Directors, Kevin Woodruff, Nikki Tippins and Joshua
Schanzer, confirm to the best of their knowledge:
•
the financial statements have been prepared in
accordance with accounting principles generally
accepted in the United States of America (“U.S.
GAAP”) and give a true and fair view of the
assets, liabilities, financial position and profit or
loss of the Company; and
•
the financial statements are prepared in compliance
with the European Single Electronic Format
Regulatory Technical Standard (“ESEF RTS”). In
preparing the Company’s financial statements in
compliance with ESEF RTS, the Directors are
required to file the financial statements in a valid
xHTML format; and
•
the
management
report
represented
by
the
Directors’ report includes a fair review of the
development and performance of the business that
have occurred during the twelve months ended
December 31, 2022 and the position of the
Company together with a description of the
principal risks and uncertainties that the Company
faces.
Approved by the Board and signed on its behalf by:
_________________________________________
Name: Kevin Woodruff
Title: President and Director
MORGAN STANLEY FINANCE LLC
DIRECTORS’ RESPONSIBILITY STATEMENT
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INDEPENDENT AUDITOR’S REPORT
To the Board of Directors of
Morgan Stanley Finance, LLC
Opinion
We have audited the financial statements of Morgan Stanley Finance, LLC (the “Company”), a wholly owned
subsidiary of Morgan Stanley (the “Parent”), which comprise the statements of financial condition as of December
31, 2022 and December 31, 2021, and the related statements of comprehensive income, cash flows, and changes
in member’s equity (deficit) for the years then ended, and the related notes to the financial statements
(collectively referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position
of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the
years then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities
for the Audit of the Financial Statements section of our report. We are required to be independent of the
Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements
relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance
with accounting principles generally accepted in the United States of America, and for the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or
events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a
going concern for one year after the date that the financial statements are available to be issued.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, and issue an auditor’s report that includes our
opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a
guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it
exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from
error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of
internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in
the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
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In performing an audit in accordance with GAAS, we:
•
Exercise professional judgment and maintain professional skepticism throughout the audit.
•
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud
or error, and design and perform audit procedures responsive to those risks. Such procedures include
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
•
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed.
•
Evaluate the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluate the overall presentation of the financial
statements.
•
Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that
raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable
period of time.
We are required to communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that
we identified during the audits.
Emphasis of Matter
We draw attention to Note 3 of the financial statements, which describes the fact that the activities of the
Company include significant transactions with affiliates and may not necessarily be indicative of the conditions
that would have existed or the results of operations if the Company had operated as an unaffiliated business. Our
opinion is not modified with respect to this matter.
Report on Other Legal and Regulatory Requirements — European Single Electronic Format
In connection with the Company’s listing requirements with the Luxembourg Stock Exchange, management is
responsible for preparing the financial statements in compliance with the requirements set forth in Article 3 of
the Delegated Regulation 2019/815 on European Single Electronic Format (ESEF Regulation). The requirements
set forth in the ESEF Regulation that are relevant to the Company relate to the financial statements being
prepared using a valid eXtensible HyperText Markup Language (XHTML) format. As part of our assessment as to
whether the financial statements are prepared, in all material respects, in accordance with the requirements set
forth in the ESEF Regulation that are relevant to the Company, we have performed tests of the Company’s
compliance with the requirement to prepare the financial statements using a valid XHTML format. In our opinion,
the financial statements, identified as “MSF-2022-en.xhtml”, have been prepared, in all material respects, in
accordance with the requirements set forth in the ESEF Regulation that are relevant to the Company insofar as it
relates to the preparation of the financial statements in a valid XHTML format.
Other Information Included in the Annual Director’s Report
Management is responsible for the other information included in the Annual director’s report. The other
information comprises the information included in the Annual director’s report but does not include the financial
statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other
information, and we do not express an opinion or any form of assurance thereon.
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In connection with our audits of the financial statements, our responsibility is to read the other information and
consider whether a material inconsistency exists between the other information and the financial statements, or
the other information otherwise appears to be materially misstated. If, based on the work performed, we
conclude that an uncorrected material misstatement of the other information exists, we are required to describe
it in our report.
/s/ Deloitte & Touche LLP
New York, New York
April 13, 2023
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At December 31,
2022
At December 31,
2021
Assets
Cash
$
1 $
5
Trading assets at fair value
—
1,687
Receivables:
Broker dealers
76
14
Notes receivable from Parent
37,015
27,977
Intercompany from Parent
131
134
Total Assets
$
37,223 $
29,817
Liabilities
Trading liabilities at fair value
$
4,287 $
—
Payables:
Broker dealers
128
64
Interest
37
17
Intercompany to Parent
20
—
Borrowings
(includes $32,280 and $30,017 at fair value)
32,487
30,145
Total Liabilities
$
36,959 $
30,226
Commitments and contingent liabilities (See Note 8)
Member’s equity:
Additional paid-in capital
44
44
Accumulated other comprehensive income (loss)
220
(453)
Total member’s equity (deficit)
264
(409)
Total Liabilities and Member’s equity (deficit)
$
37,223 $
29,817
MORGAN STANLEY FINANCE LLC
STATEMENTS OF FINANCIAL CONDITION
(In millions of dollars, except where noted)
See Notes to Financial Statements.
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2022
2021
Revenues
Trading
(1)
$
(617) $
(135)
Interest income
730
207
Total Revenues
113
72
Expenses
Interest expense
113
72
Total Expenses
113
72
Income (loss) before income taxes
—
—
Net income (loss)
—
—
Other comprehensive income
673
277
Comprehensive income
$
673 $
277
(1)
Trading revenues comprise related party and non-related party components. For further information see notes 3 and 5
MORGAN STANLEY FINANCE LLC
STATEMENTS OF COMPREHENSIVE INCOME
(In millions of dollars, except where noted)
See Notes to Financial Statements.
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2022
2021
Cash flows from operating activities:
Net income (loss)
$
— $
—
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net changes in asset and liabilities:
Trading assets, net of Trading liabilities
1,173
1,780
Broker dealers
2
(8)
Intercompany (Parent)
23
(98)
Interest
20
1
Net cash provided by operating activities
1,218
1,675
Cash flows from investing activities:
Net payments for:
Notes receivable from Parent
(9,739)
(4,352)
Net cash used for investing activities
(9,739)
(4,352)
Cash flows from financing activities:
Proceeds from:
Borrowings
14,689
17,216
Payments for:
Borrowings
(6,172)
(14,540)
Net cash provided by financing activities
8,517
2,676
Effect of exchange rate changes on cash
—
—
Net (decrease) / increase in cash
(4)
(1)
Cash at beginning of the period
5
6
Cash at end of the period
$
1 $
5
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest
$
89 $
71
MORGAN STANLEY FINANCE LLC
STATEMENTS OF CASH FLOWS
(In millions of dollars, except where noted)
See Notes to Financial Statements.
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Additional
paid-in capital
Accumulated other
comprehensive
income/(loss)
Total member's
equity/(deficit)
Balance, December 31, 2020
$
44 $
(730) $
(686)
Net change in accumulated other comprehensive income
—
277
277
Balance, December 31, 2021
$
44 $
(453) $
(409)
Net change in accumulated other comprehensive income
—
673
673
Balance, December 31, 2022
$
44 $
220 $
264
MORGAN STANLEY FINANCE LLC
STATEMENTS OF CHANGES IN MEMBER’S EQUITY (DEFICIT)
(In millions of dollars, except where noted)
See Notes to Financial Statements.
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1. Introduction and Basis of Presentation
The Company
Morgan Stanley Finance LLC (the “Company”), a single
member limited liability corporation, is a wholly owned
subsidiary of Morgan Stanley (the “Parent”).
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 Parent in the
form of Intercompany notes.
In 2022, the Company received a rating of A- 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
financial statements.
Basis of Financial Information
The audited financial statements are prepared in accordance with
U.S. GAAP, which requires the Company to make estimates and
assumptions regarding the valuations of certain financial
instruments, the outcome of legal matters, and other matters that
affect the financial statements and related disclosures. The
Company believes that the estimates utilized in the preparation
of its financial statements are prudent and reasonable. Actual
results could differ materially from these estimates.
The Company has evaluated subsequent events for adjustment to
or disclosure in the financial statements through April 13th,
2023, the date on which the financial statements are available to
be issued, and the Company has not identified any recordable or
disclosable events, not otherwise reported in the financial
statements or the notes thereto.
2. Significant Accounting Policies
Revenue Recognition
Trading
See “Fair Value of Financial Instruments” below for Trading
revenue recognition discussions.
Fair Value of Financial Instruments
Instruments within Trading assets and Trading liabilities are
measured at fair value, as required or allowed by accounting
guidance. These financial instruments represent derivatives the
Company enters into with the Parent to economically hedge its
Borrowings, which are primarily structured notes. Gains and
losses on instruments carried at fair value are reflected in
Trading
revenues
in
the
Company’s
Statements
of
comprehensive income.
The fair value of OTC financial instruments, including derivative
contracts related to financial instruments and commodities, is
presented in the accompanying statements of financial condition
on a net-by-counterparty basis, when appropriate.
Fair Value Option
The Company has elected the fair value option for certain
Borrowings (structured notes) that are risk managed on a fair
value basis to mitigate income statement volatility caused by
measurement basis differences between the elected instruments
and their associated risk management transactions or to eliminate
complexities of applying certain accounting models.
Fair Value Measurement – Definition and Hierarchy
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.
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, assumptions are set to reflect those that the
Company believes market participants would use in pricing the
asset or liability at the measurement date. Where the Company
manages a group of financial assets, financial liabilities and non
financial items on the basis of its net exposure to either market
risks or credit risk, the Company measures the fair value of that
group of financial instruments consistently with how market
participants
would
price
the
net
risk
exposure
at
the
measurement date.
In determining fair value, the Company uses various valuation
approaches and establishes a hierarchy for inputs used in
measuring fair value that requires the most observable inputs be
used when available.
Observable inputs are inputs that market participants would use
in pricing the asset or liability that were developed based on
market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect assumptions the
Company believes other market participants would use in pricing
the asset or liability that are developed based on the best
information available in the circumstances. The fair value
hierarchy is broken down into three levels based on the
observability of inputs as follows, with Level 1 being the highest
and Level 3 being the lowest level:
Level 1.
Valuations based on quoted prices in active markets that
the Company has the ability to access for identical assets or
liabilities. Valuation adjustments are not applied to Level 1
instruments. Since valuations are based on quoted prices that are
readily and regularly available in an active market, valuation of
these products does not entail a significant degree of judgment.
MORGAN STANLEY FINANCE LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 2022 AND 2021
(In millions of dollars, except where noted)
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DocuSign Envelope ID: C6D216D6-3E00-432B-A1D9-1A8AEEC73CD6
Level 2.
Valuations based on one or more quoted prices in
markets that are not active or for which all significant inputs are
observable, either directly or indirectly.
Level 3.
Valuations based on inputs that are unobservable and
significant to the overall fair value measurement.
The availability of observable inputs can vary from product to
product and is affected by a wide variety of factors, 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 product. To the extent that
valuation is based on models 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 determining 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 periods of market
dislocation. In periods of market dislocation, the observability of
prices and inputs may be reduced for many instruments. This
condition 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 Note
4
.
In certain cases, the inputs used to measure fair value may fall
into different levels of the fair value hierarchy. In such cases, the
total fair value amount is disclosed in the level appropriate for
the lowest level input that is significant to the total fair value of
the asset or liability.
Valuation Techniques
OTC derivative contracts have bid and ask prices that can be
observed in the marketplace. Bid prices reflect the highest price
that a party is willing to pay for an asset. Ask prices represent the
lowest price that a party is willing to accept for an asset. The
Company carries positions at the point within the bid-ask range
that meets its best estimate of fair value. For offsetting positions
in the same financial instrument, the same price within the bid-
ask spread is used to measure both the long and short positions.
Fair value for OTC derivative contracts is derived using pricing
models. Pricing models take into account the contract terms, as
well as multiple inputs, including, where applicable, commodity
prices, equity prices, interest rate yield curves, correlation, option
volatility, and currency 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 and
funding in order to arrive at fair value. Adjustments for liquidity
risk adjust model-derived mid-market amounts of Level 2 and
Level 3 financial instruments for the bid-mid or mid-ask spread
required to properly reflect the exit price of a risk position. Bid-
mid and mid-ask spreads are marked to levels observed in trade
activity, broker quotes or other external third-party data. Where
these spreads are unobservable for the particular position in
question, spreads are derived from observable levels of similar
positions.
The Company applies credit-related valuation adjustments to its
Borrowings (structured notes) for which the fair value option
was elected. The Company considers the impact of changes in its
own credit spreads based upon observations of the secondary
bond market spreads when measuring the fair value for
Borrowings. Such credit risk considerations do not impact the
valuation of derivative transactions with the Parent as credit risk
would not impact the exit price.
Adjustments for model uncertainty are taken for positions whose
underlying models are reliant on significant inputs that are
neither directly nor indirectly observable, hence requiring
reliance on established theoretical concepts in their derivation.
These adjustments are derived by making assessments of the
possible degree of variability using statistical approaches and
market-based information where possible.
See Note 4 for a description of valuation techniques applied to
the major categories of financial instruments measured at fair
value.
Interest Income and Expense
Interest income and Interest expense are accrued for interest-
earning assets and interest-bearing liabilities, including Notes
receivable, Receivables and Payables with the Parent, and
Borrowings.
Interest income and Interest expense are recorded within the
Company’s statements of comprehensive income
depending on
the nature of the instrument and related market conventions.
When interest is included as a component of the instruments’ fair
value, interest is included within Trading revenues. Otherwise, it
is included within Interest income or Interest expense.
Offsetting of Derivative Instruments
In connection with its derivative activities with the Parent, the
Company enters into a master netting agreement with the Parent.
This agreement provides the Company with the right, in the
event of a default by the Parent, to net Parent’s rights and
obligations under the agreement and to liquidate against any net
amount owed by the Parent.
For further information related to offsetting of derivatives, see
Note 6.
Income Taxes
The Company is a single-member limited liability company that
is treated as a disregarded entity for federal income tax purposes.
All current and deferred taxes have been accrued by the Parent.
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DocuSign Envelope ID: C6D216D6-3E00-432B-A1D9-1A8AEEC73CD6
Receivables from and Payables to Broker 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 Currencies
Gains or losses resulting from remeasurement of foreign
currency transactions are included in Trading revenues, and
amounts recognized in statements of comprehensive income are
translated at the rate of exchange on the respective date of
recognition for each amount.
Accounting Development Updates
The FASB has issued certain accounting updates that apply to
the Company. Accounting updates were assessed and are not
expected to have a significant impact on the Company’s financial
statements
3. Related Party Transactions
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”). These rates reflect the
rate of interest that the Firm incurs in funding its business (the
“Firm proxy rate”).
Intercompany receivables from and payables to the Parent
represents additional funding provided to and received from the
Parent which is unsecured, payable on demand, and bears
interest at the Firm proxy rate.
Receivables from and payables to Broker dealers represent
unsettled amounts related to Borrowings (structured notes) that
broker dealer affiliates distribute for the Company. These
receivables are unsecured and payable on demand.
Trading assets and liabilities and the associated Trading revenues
mainly represent OTC derivative transactions the Company
enters into with the Parent to economically hedge its Borrowings
(structured notes) as well as any mark to market movements on
those OTC derivative transactions.
Interest income and expense are calculated daily based on the
Notes receivable and Intercompany receivables from and
payables to the Parent.
The activities of the Company include significant transactions
with affiliates and may not necessarily be indicative of the
conditions that would have existed or the results of operations if
the Company had operated as an unaffiliated business.
At December
31, 2022
At December
31, 2021
Assets and receivables from affiliated
companies
Trading assets
$
— $
1,687
Receivables – Broker dealers
45
1
Receivables – Notes receivable from
Parent
37,015
27,977
Receivables – Intercompany from Parent
131
134
Liabilities and payables to affiliated
companies
Derivatives
$
4,281 $
—
Payables - Broker dealers
128
—
Payables – Intercompany to Parent
20
—
2022
2021
Revenues and Expenses from (transfer
to) affiliated companies:
Trading
$
(5,199) $
1,919
Interest income
730
207
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DocuSign Envelope ID: C6D216D6-3E00-432B-A1D9-1A8AEEC73CD6
4. Fair Values
Assets and Liabilities Measured at Fair Value on a Recurring Basis
At December 31, 2022
Level 1
Level 2
Level 3
Netting
(1)
Total
Assets at Fair Value
Trading assets:
OTC Derivative contracts:
Equity contracts
$
— $
991 $
19 $
— $
1,010
Interest rate contracts
—
13
3
—
16
Foreign exchange contracts
—
6
1
—
7
Commodity contracts
—
11
—
—
11
Netting
(1)
—
(1,021)
(23)
—
(1,044)
Total OTC derivative contracts
—
—
—
—
0
Total trading assets
$
— $
— $
— $
— $
—
Total assets at fair value
$
— $
— $
— $
— $
—
Liabilities at Fair Value
Trading liabilities:
OTC Derivative contracts:
Equity contracts
$
— $
2,223 $
462 $
— $
2,685
Interest rate contracts
—
2,064
159
—
2,223
Foreign exchange contracts
—
382
14
—
396
Commodity contracts
—
26
—
—
26
Credit contracts
—
—
1
1
Netting
(1)
—
(1,021)
(23)
—
(1,044)
Total OTC derivative contracts
—
3,674
613
—
4,287
Total trading liabilities
$
— $
3,674 $
613 $
— $
4,287
Borrowings - Structured Notes
—
31,201
1,079
—
32,280
Total liabilities at fair value
$
— $
34,875 $
1,692 $
— $
36,567
1.
For positions with the same counterparty that cross over the levels of the fair value hierarchy, counterparty netting is included in the column titled “Netting”.
Positions classified within the same level that are the same counterparty are netted within that level. For further information on derivative instruments, see Note 6
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DocuSign Envelope ID: C6D216D6-3E00-432B-A1D9-1A8AEEC73CD6
At December 31, 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 contracts
—
31
8
—
39
Commodity contracts
—
6
2
—
8
Netting
(1)
—
(950)
(108)
(38)
(1,096)
Total OTC derivative contracts
—
1,725
—
(38)
1,687
Total trading assets
$
— $
1,725 $
— $
(38) $
1,687
Total assets at fair value
$
— $
1,725 $
— $
(38) $
1,687
Liabilities at Fair Value
Trading liabilities:
OTC Derivative contracts:
Equity contracts
$
— $
309 $
95 $
— $
404
Interest rate contracts
—
557
32
—
589
Foreign exchange contracts
—
84
18
—
102
Commodity contracts
—
—
1
—
1
Netting
(1)
—
(950)
(146)
—
(1,096)
Total OTC derivative contracts
—
—
—
—
—
Total trading liabilities
$
— $
— $
— $
— $
—
Borrowings - Structured Notes
—
28,860
1,157
—
30,017
Total liabilities at fair value
$
— $
28,860 $
1,157 $
— $
30,017
1.
Positions classified within the same level that are with the same counterparty are netted within the column for that level. As of December 31, 2021, there were no
positions with the same counterparty classified in different levels of the fair value hierarchy. For further information on derivative instruments, see Note 6.
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DocuSign Envelope ID: C6D216D6-3E00-432B-A1D9-1A8AEEC73CD6
Valuation Techniques for Assets and Liabilities Measured at Fair Value on a Recurring Basis
OTC Derivative Contracts
• OTC derivative contracts include forward, swap and option contracts related to interest 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 can be modeled using a series of techniques, including closed-form analytic
formulas, such as the Black-Scholes option-pricing model, simulation models or a
combination thereof. Many pricing models do not entail material subjectivity as the
methodologies employed do not necessitate significant judgment, since model inputs may be
observed from actively quoted markets, as is the case for generic interest rate swaps, and
many equity, commodity and foreign currency option contracts. In the case of more
established derivative products, the pricing models used by the Company are widely accepted
by the financial services industry.
• More complex OTC derivative products are typically less liquid and require more judgment
in the implementation of the valuation technique since direct trading activity or quotes are
unobservable. This includes certain types of interest rate derivatives with volatility and
correlation exposure, equity, and commodity or foreign currency derivatives that are either
longer-dated or include exposure to multiple underlyings. Where required inputs are
unobservable, relationships to observable data points, based on historical and/or implied
observations, may be employed as a technique to estimate the model input values.
For further information on the valuation techniques for OTC derivative products, see Note 2.
• Level 2 - when valued using observable
inputs, or where the unobservable input is
not deemed significant
• Level 3 - if an unobservable input is
deemed significant
Borrowings - Structured Notes
• The Company issues structured notes which are primarily composed of: instruments whose
payments and redemption values are linked to the performance of a specific index, a basket
of stocks, a specific equity security, a commodity,
a credit exposure or basket of credit
exposures; and instruments with various interest-rate-related features including step-ups,
step-downs, and zero coupons. Also included are unsecured contracts which are not
classified as OTC derivatives because they fail net investment criteria.
• Fair value is determined using valuation models for the derivative and debt portions of the
notes. These models incorporate observable inputs referencing identical or comparable
securities, including prices to which the notes are linked, interest rate yield curves, option
volatility and currency rates, and commodity or equity prices.
•
Independent, external and traded prices for the notes are considered as well as the impact of
the Company’s own credit spreads, which are based on observed secondary bond market
spreads.
• Level 2 - when valued using observable
inputs, or where the unobservable input is
not deemed significant
• Level
3
-
in
instances
where
the
unobservable
inputs
are
deemed
significant
Asset and Liability / Valuation Technique
Valuation Hierarchy
Classification
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DocuSign Envelope ID: C6D216D6-3E00-432B-A1D9-1A8AEEC73CD6
Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for 2022
Beginning
Balance at
December
31, 2021
Total Realized
and Unrealized
Gains (Losses)
Purchases
Sales and
Issuances
Settlements
Net
Transfers
(1)
Ending
Balance at
December
31, 2022
Unrealized
Gains
(Losses)
Net Liabilities at Fair
Value
Net OTC derivative
contracts
(2)
:
Equity contracts
$
19 $
— $
(6) $
— $
425 $
5 $
443 $
189
Interest rate contracts
10
—
—
—
160
(14)
156
—
Commodity contracts
(1)
—
—
—
2
—
1
—
Foreign exchange
contracts
10
—
—
—
9
(6)
13
—
Total net OTC derivative
contracts
38
—
(6)
—
596
(15)
613
189
Borrowings – Structured
Notes
1,157
130
—
402
(54)
(296)
1,079
132
Net Liabilities at Fair
Value
$
1,195 $
130 $
(6) $
402 $
542 $
(311) $
1,692 $
321
(1)
During the year ended December 31, 2022, the Company transferred from Level 3 to Level 2 $296 of Borrowings (structured notes) due to a reduction in the
significance of the unobservable inputs relating to volatility.
(2)
Net OTC derivative contracts represent Trading liabilities, net of Trading assets. Amounts are presented before counterparty netting.
Rollforward of Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for 2021
Beginning
Balance at
December
31, 2020
Total Realized
and Unrealized
Gains (Losses)
Purchases
Sales and
Issuances Settlements
Net
Transfers
(1)
Ending
Balance at
December
31, 2021
Unrealized
Gains
(Losses)
Net Liabilities at Fair Value
Net OTC derivative
contracts
(2)
:
Equity contracts
$
(106) $
59 $
(1) $
— $
102 $
83 $
19 $
4
Interest rate contracts
30
(1)
—
—
(1)
(20)
10
—
Commodity contracts
—
1
—
—
—
—
(1)
—
Foreign exchange contracts
—
3
—
—
39
(26)
10
—
Total net OTC derivative
contracts
(76)
62
(1)
—
140
37
38
4
Borrowings – Structured
Notes
1,763
31
—
385
(111)
(849)
1,157
35
Net Liabilities at Fair Value
$
1,687 $
93 $
(1) $
385 $
29 $
(812) $
1,195 $
39
(1)
During the year ended December 31, 2021, the Company transferred from Level 3 to Level 2 $849 of Borrowings (structured notes) due to a reduction in the
significance of the unobservable inputs relating to volatility.
(2)
Net OTC derivative contracts represent Trading liabilities, net of Trading assets. Amounts are presented before counterparty netting.
The unrealized gains (losses) during the period for assets and
liabilities within the Level 3 category may include changes in
fair value during the period that were attributable to both
observable
and
unobservable
inputs.
Total
realized
and
unrealized gains (losses) are primarily included in Trading
revenues in the statements of comprehensive income.
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DocuSign Envelope ID: C6D216D6-3E00-432B-A1D9-1A8AEEC73CD6
Significant Unobservable Inputs Used in Recurring Level 3
Fair Value Measurements
Valuation Techniques and Unobservable Inputs
Balance/Range (Average)(1)
$ in millions, except inputs
December 31, 2022
December 31, 2021
Net Liabilities at Fair Value
Net OTC derivative contracts:
Equity contracts
(2)
$
443 $
19
Option Model:
Equity Volatility
7% to 86% (20%)
6% to 85% (19%)
Equity Volatility skew
-4% to 0% (0%)
-3% to 0% (0%)
Equity - Equity correlation
25% to 99% (88%)
40% to 99% (87%)
Equity – Foreign exchange
correlation
-68% to 40% (-25%)
-72% to 5% (-30%)
Interest rate contracts
$
156 $
10
Option Model
Interest Rate - Foreign
Exchange correlation
28% to 63%
(42% / 34%)
NM
Interest Rate Curve
Correlation
57% to 87%
(74% / 79%)
NM
Interest Rate Curve
Correlation
91% to 143% (107% /
113%)
NM
Foreign exchange contracts
13
10
Option Model
Interest Rate - Foreign
Exchange correlation
28% to 63%
(42% / 34%)
NM
Interest Rate Volatility
Skew
91% to 108%
(97% / 100%)
NM
Borrowings - Structured
Notes
1,079
1157
Option Model:
Equity Volatility
7% to 86% (23%)
7% to 85% (19%)
Equity Volatility skew
-2% to 0% (0%)
-1% to 0% (0%)
Equity - Equity correlation
36% to 99% (75%)
60% to 95% (85%)
Equity - Foreign exchange
correlation
-49% to 30% (-19%)
-55% to 2% (-28%)
(1)
A single amount is disclosed for range and average when there is no
significant difference between the minimum, maximum and average.
Amounts represent weighted averages except where simple averages and
the median of the inputs when more relevant.
(2)
Includes OTC derivative contracts with multiple risks (i.e., hybrid
products).
The previous tables provide information on the valuation
techniques, significant unobservable inputs, and the ranges and
averages for each major category of assets and liabilities
measured at fair value on a recurring basis with a significant
Level 3 balance. The level of aggregation and breadth of
products cause the range of inputs to be wide and not evenly
distributed across the inventory of financial instruments. Further,
the range of unobservable inputs may differ across firms in the
financial services industry because of diversity in the types of
products included in each firm’s inventory. Generally, there are
no
predictable
relationships
between
multiple
significant
unobservable inputs attributable to a given valuation technique.
During 2022, there were no significant revisions made to the
descriptions of the Firm’s significant unobservable inputs.
An increase (decrease) to the following significant unobservable
inputs would generally result in an impact to the fair value, but
the magnitude and direction of the impact would depend on
whether the Company is long or short the exposure.
•
Correlation
: A pricing input where the payoff is driven by
more than one underlying risk. Correlation is a measure of
the relationship between the movement of two variables (i.e.,
how the change in one variable influences a change in the
other variable).
•
Interest rate curve
: The term structure of interest rates
(relationship between interest rates and the time to maturity)
and a market’s measure of future interest rates at the time of
observation. An interest rate curve is used to set interest rate
and foreign exchange derivative cash flows and is a pricing
input used in the discounting of any OTC derivative cash
flow.
•
Volatility
: The measure of variability in possible returns for
an instrument given how much that instrument changes in
value over time. Volatility is a pricing input for options and,
generally, the lower the volatility, the less risky the option.
The level of volatility used in the valuation of a particular
option depends on a number of factors, including the nature
of the risk underlying that option, the tenor and the strike
price of the option.
•
Volatility skew
: The measure of the difference in implied
volatility for options with identical underliers and expiry
dates but with different strikes.
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DocuSign Envelope ID: C6D216D6-3E00-432B-A1D9-1A8AEEC73CD6
Financial Instruments Not Measured at Fair Value
At December 31, 2022
Fair Value Level
Carrying Value
Level 1
Level 2
Level 3
Total
Financial Assets
Cash
$
1 $
1 $
— $
— $
1
Receivables:
Broker dealers
76
—
76
—
76
Notes receivable from Parent
37,015
—
37,015
—
37,015
Intercompany from Parent
131
—
132
—
132
Financial Liabilities
Payables:
(1)
Broker dealers
$
128 $
— $
128 $
— $
128
Intercompany to Parent
20
—
20
—
20
Borrowings
207
—
207
—
207
At December 31, 2021
Fair Value Level
Carrying Value
Level 1
Level 2
Level 3
Total
Financial Assets
Cash
$
5 $
5 $
— $
— $
5
Receivables:
Broker dealers
14
—
14
—
14
Notes receivable from Parent
27,977
—
27,977
—
27,977
Intercompany from Parent
134
—
136
—
136
Financial Liabilities
Payables:
(1)
Broker dealers
$
64 $
— $
64 $
— $
64
Borrowings
128
—
128
—
128
(1)
Accrued interest payables have been excluded. Carrying value approximates fair value for these payables.
5. Fair Value Option
The Company elected the fair value option for Borrowings
(structured notes) that are risk managed on a fair value basis to
mitigate income statement volatility caused by measurement
basis differences between the elected instruments and their
associated
risk
management
transactions
or
to
eliminate
complexities of applying certain accounting models.
Net Revenues from Borrowings under the Fair Value
Option
Trading
Revenues
Interest
Expense
Net
Revenues
(2)
2022
Borrowings
(1)
$
5,295 $
109 $
5,186
2021
Borrowings
(1)
$
(2,053) $
72 $
(2,125)
(1)
Unrealized DVA gains (losses) are recorded in OCI and, when realized, in
Trading revenues. For additional information, see Notes 2 and 9.
(2)
Amounts do not reflect any gains or losses from related economic hedges.
Gains (losses) from changes in fair value are recorded in Trading
revenues and are mainly attributable to movements in the
reference price or index, interest rates, or foreign exchange rates.
Gains (Losses) due to Changes in Instrument-Specific
Credit Risk
Trading
Revenues
OCI
2022
Borrowings
(1)
$
3 $
673
2021
Borrowings
(1)
$
(13) $
277
(1)
Unrealized DVA gains (losses) are recorded in OCI and, when realized, in
Trading revenues. For additional information, see Notes 2 and 9.
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DocuSign Envelope ID: C6D216D6-3E00-432B-A1D9-1A8AEEC73CD6
Borrowings Measured at Fair Value on a Recurring Basis
At December
31, 2022
At December
31, 2021
Business Unit Responsible for
Risk Management
Equity
$
23,011 $
20,719
Interest rates
8,591
9,023
Foreign exchange
317
161
Commodities
361
114
Total
$
32,280 $
30,017
Difference between Contractual Principal and Fair Value
(1)
At December
31, 2022
At December
31, 2021
Borrowings
(2)
$
2,772 $
311
(1)
Amounts indicate contractual principal greater than or (less than) fair
value.
(2)
Excludes borrowings (structured notes) where the repayment of the initial
principal amount fluctuates based on changes in a reference price or index.
6. Derivative Instruments
The Company uses OTC swaps, forwards, options and other derivatives referencing, among other things, interest rates, currencies,
commodity products, and equity securities as part of the hedging strategy for structured notes. The Company does not apply hedge
accounting.
Fair Values and Notionals Derivative Contracts
Bilateral OTC
At December 31, 2022
Assets
Liabilities
Fair Value
Notional
(1)
Fair Value
Notional
(1)
OTC Derivative contracts
Equity
$
1,010 $
4,745 $
2,685 $
20,958
Interest rate
16
453
2,223
9,409
Foreign exchange
7
665
396
2,310
Commodity
11
38
26
334
Credit
—
—
1
27
Total gross OTC derivative contracts
1,044
5,901
5,331
33,038
Amounts offset
Counterparty netting
(1,044)
(1,044)
Total in Trading liabilites
$
—
$
4,287
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DocuSign Envelope ID: C6D216D6-3E00-432B-A1D9-1A8AEEC73CD6
Bilateral OTC
At December 31, 2021
Assets
Liabilities
Fair Value
Notional
(1)
Fair Value
Notional
(1)
OTC Derivative contracts
Equity
$
2,611 $
10,157 $
404 $
9,170
Interest rate
125
2,207
589
5,961
Foreign exchange
39
616
102
1,403
Commodity
8
50
1
55
Total gross OTC derivative contracts
2,783
13,030
1,096
16,589
Amounts offset
Counterparty netting
(1,096)
(1,096)
Total in Trading assets
$
1,687
$
—
1.
The Company believes that the notional amounts of derivative contracts generally overstate its exposure. In most circumstances notional amounts are only used as
a reference point from which to calculate amounts owed between the parties to the contract. Furthermore, notional amounts do not reflect the benefit of legally
enforceable netting arrangements or risk mitigating transactions.
The table below summarizes realized and unrealized gains and
losses, from derivative and non-derivative financial instruments,
included
in
Trading
revenues
in
the
Statements
of
Comprehensive Income.
Trading Revenues by Product Type
2022
2021
Equity contracts
$
(468) $
(103)
Interest rate contracts
(170)
(40)
Foreign exchange contracts
29
9
Commodity contracts
(8)
(1)
Total Loss
$
(617) $
(135)
7. Borrowings
Maturities and Terms of Borrowings
Fixed
Rate
(1)
Variable
Rate
(2)
At
December
31, 2022
At
December
31, 2021
Original maturities of one year or less
Next 12 months
$
16
220
236
189
Original maturities greater than one year
Due in 2022
$
—
$
— $
— $
3,284
Due in 2023
216
4,789
5,005
4,644
Due in 2024
217
5,419
5,636
4,478
Due in 2025
237
3,556
3,793
1,977
Due in 2026
207
3,422
3,629
3,716
Due in 2027
297
3,612
3,909
1,218
Thereafter
3,642
6,637
10,279
10,639
Total
$ 4,816
$ 27,435 $
32,251 $
29,956
Total Borrowings
$ 4,832
$ 27,655 $
32,487 $
30,145
Weighted average
coupon rate at
period-end
(3)
3.39 %
N/M
(1)
Fixed rate borrowings include instruments with step-up, step-down and zero
coupon features.
(2)
Variable rate borrowings bear interest based on a variety of indices. Amounts
include borrowings linked to equity, credit or other indices.
(3)
For the fixed rate borrowing, the weighted average coupon rate represents
one issuance. Other issuances by the Company are primarily carried at fair
value so weighted average coupon is not meaningful.
All of the Company’s Borrowings are considered Senior Debt.
For the year ended December 31, 2022 and December 31, 2021,
the Company issued notes with a fair value of approximately
$14,689 and $17,216 respectively.
Certain senior debt securities are denominated in various non-
U.S. dollar currencies and primarily structured to provide a
return that is linked to equity, credit, commodity or other indices
(e.g., the consumer price index). Senior debt also may be
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structured to be callable by the Company or extendible at the
option of holders of the senior debt securities.
Senior Debt – Borrowings (structured notes).
The Company’s
Borrowings primarily include structured notes carried and
managed on a fair value basis. These include instruments whose
payments and redemption values are linked to the performance
of a specific index, a basket of stocks, a specific equity security,
a commodity, a credit exposure or basket of credit exposures;
and instruments with various interest-rate-related features
including step-ups, step-downs, and zero coupons. Also included
are unsecured contracts which are not classified as OTC
derivatives because they fail net investment criteria. To minimize
the exposure from such instruments, the Company has entered
into various OTC derivative swap contracts and purchased
options that effectively convert the borrowing costs into floating
rates. The Company carries the entire Borrowings (structured
notes) at fair value. The various OTC derivative swaps and
purchased options used to economically hedge the embedded
features are also carried at fair value. Changes in fair value
related to the Borrowings (structured notes) and economic
hedges are reported in Trading revenues. See Notes 2 and 4 for
further information on Borrowings (structured notes).
8. Contingencies
Legal
In the normal course of business, the Company may be named,
from time to time, as a defendant in various legal actions,
including arbitrations, class actions and other litigation, arising in
connection with its activities as a global financial services
institution. Certain of the actual or threatened legal actions
include claims for substantial compensatory and/or punitive
damages or claims for indeterminate amounts of damages. In
some cases, the entities that would otherwise be the primary
defendants in such cases are bankrupt or are in financial distress.
The Company may also be involved, from time to time, in other
reviews, investigations and proceedings (both formal and
informal)
by
governmental
and
self-regulatory
agencies
regarding the Company’s business, and involving, among other
matters, sales and trading activities, 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. Where available information
indicates that it is probable a liability had been incurred at the
date of the financial statements and the Company can reasonably
estimate the amount of that loss, the Company accrues the
estimated loss by a charge to income.
In many proceedings and investigations, however, it is inherently
difficult to determine whether any loss is probable or even
possible or to estimate the amount of any loss. In addition, even
where a loss is possible or an exposure to loss exists in excess of
the liability already accrued with respect to a previously
recognized loss contingency, it is not always possible to
reasonably estimate the size of the possible loss or range of loss,
particularly for proceedings and investigations where the factual
record is being developed or contested or where plaintiffs or
government entities seek substantial or indeterminate damages,
restitution, disgorgement or penalties. Numerous issues may
need to be resolved, including through potentially lengthy
discovery and determination of important factual matters,
determination of issues related to class certification and the
calculation of damages or other relief, and by addressing novel
or unsettled legal questions relevant to the proceedings or
investigations in question, before a loss or additional loss or
ranges of loss or ranges of additional loss can be reasonably
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 adverse effect on the Company’s financial
statements as a whole.
9. Accumulated Other Comprehensive Income (Loss)
Changes in AOCI
Debt Valuation
Balance at December 31, 2021
$
(453)
Change in net DVA
(1)
673
Balance at December 31, 2022
$
220
Balance at December 31, 2020
$
(730)
Change in net DVA
(1)
277
Balance at December 31, 2021
$
(453)
(1)
DVA represents the change in the fair value resulting from fluctuations in
the Company’s credit spreads and other credit factors related to liabilities
carried at fair value.
10. Income Taxes
The Company is a single-member limited liability company that
is treated as a disregarded entity for federal income tax purposes.
The Company is included in the consolidated federal income tax
return filed by the Parent. The Company is included in the
combined state and local income tax returns with the Parent and
certain other subsidiaries of the Parent. All current and deferred
taxes have been accrued by the Parent.
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11. Subsequent Events
The Company has evaluated subsequent events for adjustment to
or disclosure in the financial statements through April 13th,
2023, the date on which the financial statements are available to
be issued, and the Company has not identified any recordable or
disclosable events, not otherwise reported in the financial
statements or the notes thereto.
********
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AOCI
Accumulated other comprehensive income (loss)
The Company
Morgan Stanley Finance LLC
DVA
Debt Valuation Adjustment
FASB
Financial Accounting Standards Board
MRM
Model Risk Management Department
N/M
Not Meaningful
OCI
Other comprehensive income (loss)
OTC
Over-the-counter
The Parent
Morgan Stanley
S&P
Standard & Poor’s
SEC
U.S. Securities and Exchange Commission
U.S.
United States of America
U.S. GAAP
Accounting principles generally accepted in the United States of America
Glossary of Common Terms and Acronyms
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