Registered number: 02068222
Morgan Stanley
Registered office:
25 Cabot Square
Canary Wharf
London
E14 4QA
Morgan Stanley & Co. International plc
Report and financial statements
31 December 2022
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Table of contents
STRATEGIC REPORT
......................................................................................................................................
3
Group and Company Overview
........................................................................................................................
3
The Company, Governance and Stakeholders
.....................................................................................
3
Supervision and Regulation
.....................................................................................................................
3
Risk Factors and Business Environment
...............................................................................................
4
Financial Performance and Condition
.............................................................................................................
6
Performance Indicators
.............................................................................................................................
6
Overview of 2022 Financial Results
........................................................................................................
7
Key Accounting Estimates and Judgements
.........................................................................................
9
Capital and Liquidity Resource Management and Regulation
....................................................................
10
Regulatory Capital and Leverage Requirements
..................................................................................
10
Funding and Liquidity Management
........................................................................................................
11
Recovery and Resolution Planning
.........................................................................................................
12
Regulatory Developments
........................................................................................................................
13
Risk Management
..............................................................................................................................................
15
Risk Strategy and Appetite
.......................................................................................................................
15
Risk Management Framework
.................................................................................................................
15
Market Risk
.................................................................................................................................................
17
Credit Risk
...................................................................................................................................................
18
Liquidity Risk
...............................................................................................................................................
20
Operational Risk
.........................................................................................................................................
21
Legal, Regulatory and Compliance Risk
................................................................................................
21
Conduct Risk
..............................................................................................................................................
22
Model Risk
..................................................................................................................................................
22
Climate and Environmental Risks
...........................................................................................................
23
Sustainability
.......................................................................................................................................................
26
Sustainability Strategy and Disclosures
.................................................................................................
26
Environmental Matters
..............................................................................................................................
27
Operational Sustainability
.........................................................................................................................
28
Environmental and Social Risk Management
........................................................................................
29
Human Rights in the Supply Chain
.........................................................................................................
30
Anti-corruption and Bribery
.......................................................................................................................
30
Our People
..................................................................................................................................................
31
Giving Back to the Community
................................................................................................................
32
Corporate Governance
......................................................................................................................................
34
Corporate Governance Framework
........................................................................................................
34
Stakeholder Engagement and Section 172(1) Statement
...................................................................
38
DIRECTORS’ REPORT
....................................................................................................................................
40
INDEPENDENT AUDITOR’S REPORT
.........................................................................................................
44
PRIMARY FINANCIAL STATEMENTS
.........................................................................................................
52
NOTES TO THE FINANCIAL STATEMENTS
..............................................................................................
59
2
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The Directors present their Strategic Report for
Morgan Stanley & Co. International plc (the
“Company”) and all of its subsidiary undertakings
(together “the Group”) for the year ended
31 December 2022.
Group and Company Overview
The Company, Governance and
Stakeholders
The ultimate parent undertaking and controlling
entity of the Company is Morgan Stanley, which
together with the Group and Morgan Stanley’s
other subsidiary undertakings, forms the “Morgan
Stanley Group”. Morgan Stanley is a global
financial services firm authorised as a Financial
Holding Company and regulated by the Board of
Governors of the Federal Reserve System in the
United States of America.
Morgan Stanley International Limited (“MSI”) is
the ultimate United Kingdom (“UK”) parent
undertaking of the Company. MSI, together with
all of its subsidiary undertakings, forms the “MSI
Group”.
The Company operates within the financial
services industry and is subject to extensive
supervision and regulation. The Company shares
elements of its corporate governance and its
supervision with MSI and the MSI Group.
Throughout the Strategic Report, the Directors
may refer to policies, procedures and practices of
MSI and the MSI Group that are relevant to the
Group and/or Company.
These policies, procedures and practices are
consistent with the Morgan Stanley Group to the
extent permissible by local law and regulation.
More information on Morgan Stanley is available
at
www.morganstanley.com
.
The Group follows the core values of the Morgan
Stanley Group. The core values are designed to
guide decision making and ensure alignment to
the expectations of stakeholders. The core
values are:
Put Clients First
Do the Right Thing
Lead with Exceptional Ideas
Commit to Diversity and Inclusion
Give Back
Further
detail
on
the
engagement
with
stakeholders by the Board of Directors (“Board")
and the Company’s section 172(1) statement is
in the ‘Corporate Governance’ section within the
Strategic Report.
Principal Activity
of financial services to a global client base
consisting of corporations, governments and
to the Group’s principal activity during the year
and no significant change is expected.
The Group is a key contributor to the execution
of the Morgan Stanley Group’s global Institutional
Securities segment strategy. The Group provides
investment banking, sales and trading, and other
services
to
its
clients.
Investment
Banking
services consist of capital raising (including
underwriting of debt, equity and other securities)
and financial advisory services (including advice
on mergers and acquisitions, restructurings and
project finance). Sales and Trading services
include sales, financing, prime brokerage and
market-making activities in equity and fixed
income as well as the provision of secured
lending to sales and trading customers. Other
services include Asset Management.
Company
conducts
business
from
its
headquarters in London, UK and operates
branches in the Dubai International Financial
Centre, the Qatar Financial Centre, South Korea,
France
and
Switzerland.
Details
of
the
Company’s subsidiaries can be found in note 14
Supervision and Regulation
As a UK-based financial services provider, the
Company
is
authorised
by
the
Prudential
Regulation
Authority
(“PRA”)
as
a
PRA-
designated investment firm and is regulated by
the PRA and the Financial Conduct Authority
(“FCA”).
As a provider of services to global clients, the
Company is registered with the Securities and
Exchange Commission (“SEC”) as a Securities
Based Swap Dealer (“SBSD”). The Company is
also provisionally registered with the Commodity
Futures Trading Commission (“CFTC”) as a
Swap Dealer. The CFTC are developing specific
requirements to allow provisionally registered
swap dealers to meet CFTC requirements by
reference to local prudential standards. This work
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is country specific with a draft proposal for the
UK still to be published. The provisional status
exists until rules are finalised. These swap dealer
registrations provide a comprehensive regulatory
framework applicable to the Company’s US-
related swap and security-based swap dealer
activities.
During the year, the Company ceased
its
structured notes issuance on the London Stock
Exchange (“LSE”) and
is
, therefore no longe
r
subject to
the
FCA Disclosure and Transparency
Rules. The Company continues to trade on
European Union (“EU”) regulated markets and to
be
subject
to
the
Luxembourg
Law
of
Transparency Requirements.
The key regulations impacting the financial
soundness of the Company are as follows:
Capital
and
Liquidity
Standards:
Until
31
December 2020, the Company was subject to
risk-based
capital,
leverage
and
liquidity
standards for EU regulated financial institutions
prescribed in the Capital Requirements Directive
(“CRD”)
and
the
Capital
Requirements
Regulation (“CRR”), as implemented by the PRA.
These are largely based on the standards
developed by the Basel Committee on Banking
Supervision
(“BCBS”).
Following
the
UK’s
withdrawal from the EU, a Temporary Transitional
Power (“TTP”) ensured that EU law largely
continued to apply in the UK. Discussion of the
standards impacted by the TTP and their
management can be found in ‘Capital and
Liquidity Resource Management and Regulation’.
The TTP period expired on 31 March 2022. From
1 April 2022, the Company has been subject to
the
UK
on-shored
regulatory
obligations,
predominantly unchanged from the EU CRR.
Recovery and Resolution:
The Company is
subject to regulatory requirements on recovery
and resolution planning set by the PRA and the
Bank of England (“BOE”), as part of the UK’s
recovery and resolution framework, established
through the UK Banking Act 2009 and related
legislation. This includes regulatory requirements
that apply directly to the Company, and those
regulatory requirements that apply to the MSI
Group and therefore, indirectly apply to the
Company. The Company is also within the scope
of the resolution strategy adopted by the Morgan
Stanley Group. Refer to ‘Capital and Liquidity
Resource
Management
and
Regulation
–
Recovery and Resolution Planning’ for further
information.
Risk Factors and Business Environment
The business results of the Group’s operations
may be impacted by exposure to risk factors and
the current business environment in which it
operates.
Risk Factors
Risk is an inherent part of the Group’s business
activity. The Group seeks to identify, assess,
monitor and manage each of the various types of
risk
involved
in
its
business
activities,
in
accordance
with
defined
policies
and
procedures.
The Group Risk Appetite Statement articulates
the aggregate level and type of risk that the
Group is willing to accept to execute its business
strategy and protect its capital and liquidity
resources.
The Group has an established Risk Management
Framework
to
support
the
identification,
monitoring and management of risk, including
any risk acceptances.
The primary risk areas for the Group include
Market, Credit, Operational and Liquidity risks.
Climate risk is one of the drivers of these risks. A
description of these and other principal risks and
how these risks are managed is outlined in the
‘Risk Management’ section.
Business Environment
During
2022,
the
global
economic
and
geopolitical environment in which the Group
operates has been characterised by elevated
inflation, rising interest rates and volatility in
global financial markets and these factors have
continued into 2023. These factors had a mixed
impact on the performance of the Group
- see
‘Overview of 2022 Financial Results’.
In addition to the aforementioned conditions,
certain institutions have come under significant
stress in early 2023. While the full impact of
these events in the banking sector remains
uncertain, there has so far been limited impact
on the results and financial condition of the
Group.
Russia and Ukraine War
The Group continues to monitor the war in
Ukraine and its impact on the world economies
and the financial markets. During the year the
Group recognised expected credit losses (“ECL”)
of $144 million (31 December 2021: $nil) in
relation to cash and margin cash deposited with
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banks and exchanges in Russia, see ‘Overview
of
2022
Financial
Results’.
Following
the
recognition of these ECL, the Group’s direct
exposure to Russia and Ukraine is de minimis.
Morgan Stanley is not entering into any new
business
onshore
in
Russia
and
Morgan
Stanley’s activities in Russia are limited to
helping global clients address and close out pre-
existing obligations.
Replacement of London Interbank Offered
Rate (“LIBOR”) and Replacement or Reform
of Other Interest Rate Benchmarks
Central banks around the world, including the
BOE and the Federal Reserve, have sponsored
committees in recent years to replace LIBOR and
replace or reform other interest rate benchmarks
(collectively, the “IBORs”). The Morgan Stanley
Group continues to implement its IBOR transition
plan. At 31 December 2022 and 2021, the
Group’s exposure to financial instruments which
did not contain fallback provisions to allow for the
transition to alternative reference rates upon the
cessation of the applicable IBOR rate was not
significant.
Future Developments
The Strategic Report contains certain forward-
looking statements and information on future
developments. These statements are made by
the Board in good faith, based on the information
available at the time of the approval of the report
and such statements should be treated with
caution
due
to
the
inherent
uncertainties,
including both economic and business risk
factors, underlying any such forward-looking
information.
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Financial Performance and Condition
Performance Indicators
To assess the effectiveness of the execution of
the Group’s strategy, the Board monitors the
results of the Group by reference to a range of
performance and risk based metrics, including,
but not limited to the following:
Key Performance Indicators
Return on Shareholders’ Equity (Group)
6.3%
6.4%
2022
2021
in $ millions
2022
2021
Total shareholders’ equity at
beginning of the year
22,175
21,021
Profit after tax
1,396
1,351
Return on shareholders’ equity
6.3%
6.4%
Tier 1 Capital Ratio (Company)
17.8%
15.0%
2022
2021
in $ millions
2022
2021
Risk-weighted assets (“RWAs”)
124,739
136,746
Tier 1 capital
22,202
20,522
Tier 1 capital ratio
17.8%
15.0%
Leverage Ratio (Company)
5.3%
4.1%
2022
2021
in $ millions
2022
2021
Leverage exposure
416,138
496,231
Tier 1 capital
22,202
20,522
Leverage ratio
5.3%
4.1%
Liquidity Coverage Ratio (Company)
184%
196%
2022
2021
in $ millions
2022
2021
Liquidity buffer - High quality liquid
assets ("HQLA")
41,800
40,982
Liquidity coverage ratio
(1)
184%
196%
1.
Calculated as the average of the preceding twelve months
Net Stable Funding Ratio (Company)
110%
2022
in $ millions
2022
Net Stable Funding Ratio ("NSFR")
110%
From 1 January 2022, the Company was
required to maintain a minimum NSFR of 100%.
Senior Unsecured Credit Ratings (Company)
At 31 December 2022 and 31 December 2021,
the Company’s senior unsecured ratings were as
follows:
Short-
Term Debt
Long-
Term Debt
Rating
Outlook
Moody’s Investor
Service, Inc
P-1
Aa3
Stable
Standard & Poor’s
Rating Service
A-1
A+
Stable
The explanation behind the movements in the
performance
indicators
can
be
found
in
‘Overview of 2022 Financial Results’, as well as
the ‘Capital Resources’ and ‘Regulatory Liquidity
and Funding Requirements’ sections of ‘Capital
and
Liquidity
Resource
Management
and
Regulation’.
Other Indicator
The PRA requires the Group to disclose the
Return on Assets ratio, as per the PRA Rulebook
for CRR firms. This is not an indicator that the
Board monitors to assess the effectiveness of the
execution of the Group’s strategy.
Return on Assets (Group)
0.25%
0.23%
2022
2021
in $ millions
2022
2021
Return on assets
Total assets at beginning of the year
567,186
597,789
Profit after tax
1,396
1,351
Return on assets
0.25%
0.23%
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Overview of 2022 Financial Results
Income Statement
Set out below is an overview of the Group’s
financial
results
for
the
years
ended
31 December 2022 and 31 December 2021.
in $ millions
2022
2021
Increase/
(decrease)
Variance
%
Investment Banking
738 1,801
(1,063)
(59%)
Sales and Trading
1,252 1,347
(95)
(7%)
Other
56
75
(19)
(25%)
Fee and
Commission
Income
2,046 3,223
(1,177)
(37%)
Sales and Trading
net trading income
5,076 4,342
734
17%
Net revenue
7,122 7,565
(443)
(6%)
Staff related
expenses
1,805 2,154
(349)
(16%)
Non-staff related
expenses
3,456 3,473
(17)
(1%)
Net impairment loss/
(reversal) on
financial instruments
148
(2)
150
N/M
Non-interest
expenses
5,409 5,625
(216)
(4%)
Net gain on
investment in
subsidiary
4
—
4
N/M
Profit before tax
1,717 1,940
(223)
(11%)
Income tax expense
321
589
(268)
(46%)
Profit after tax
1,396 1,351
45
3%
Non meaningful ("N/M")
The consolidated
income statement for the year
is set out on page
52
and the geographical split
is in ‘Segment reporting’ no
te
25
.
The Group reported an 11% decrease in profit
before
tax
for
the
year,
driven
by
lower
investment
banking
activity
and
fee
and
commission income as a result of the uncertain
macroeconomic environment partially offset by
higher Sales and Trading net trading income.
Net revenues
Profit before tax
2022
($ millions / %)
($ millions / %)
EMEA
4,645
65%
700
41%
Asia
2,012
28%
820
48%
Americas
465
7%
197
11%
Total
7,122
1,717
2021
EMEA
5,174
68%
1,138
59%
Asia
2,014
27%
701
36%
Americas
377
5%
101
5%
Total
7,565
1,940
The profit before tax for 2022 reflects the
continued strong performance of equity products
in the Group’s Asia segment.
Net Revenue
Investment Banking
Investment Banking fee income is derived from
client engagements in which the Group acts as
an
advisor
in
relation
to
mergers
and
acquisitions,
divestitures
and
corporate
restructurings, underwriter of equity and fixed
income securities or distributor of capital.
Investment Banking revenue decreased 59%
reflecting
lower
underwriting
and
advisory
revenues in line with market levels, reflecting a
decline in global volumes.
Sales and Trading
Sales and Trading income consists of fee and
commission income of $1,252 million (2021:
$1,347 million) and net trading income of $5,076
million (2021: $4,342 million).
Sales and Trading fee and commission income
arises from arrangements in which the client is
charged commission for executing and clearing
transactions related to securities and other listed
products. Sales and Trading fee and commission
income
decreased
7%,
primarily
in
equity
products
due
to
lower
client
activity
amid
challenging market conditions.
Sales
and
Trading
net
trading
income
is
comprised
of
‘Net
gains
from
financial
instruments at fair value through profit or loss
(“FVPL”)’ and ‘Net interest expense’ as set out in
the consolidated income statement on pa
ge
52
.
These revenues can be affected by a variety of
interrelated factors, including market volumes,
bid-offer spreads and the impact of market
conditions on positions held to facilitate client
activity, as well as the effect of hedging activity.
Sales and Trading net trading income increased
by 17%, reflecting an increase from equity and
fixed income products.
•
The equity revenues increased, benefiting
from higher client activity notably in derivative
products and the impact of market conditions
on positions held to facilitate client activity.
•
The fixed income product revenues increase
was primarily in macro products across all
regions as a result of higher client activity
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partially offset by credit products from lower
client activity.
•
‘Net interest expense’ increased as a result of
interest rates increasing, notably in United
States Dollar (“USD”), British pound (“GBP”)
and Euro (“EUR”) markets. Refer to note 6.
Operating Expenses
Staff-Related Expenses
Staff-related expenses include: base salaries and
fixed
allowances,
discretionary
incentive
compensation, amortisation of deferred cash and
equity awards, changes in the fair value of
investments
to
which
certain
deferred
compensation plans are referenced, carried
interest allocated to employees, severance costs,
and other items such as health and welfare
benefits. Incentive compensation is determined
following the assessment of the Morgan Stanley
Group’s,
business
unit’s
and
individual’s
performance.
For the Group, staff-related expenses primarily
reflect those of the European, the Middle East
and Africa (“EMEA”) segment. The impact to the
Group of staff-related expenses for the Asia and
Americas segments is primarily reflected in
transfer pricing payments to the employing
entities which are reflected within net revenues.
Refer to ‘Related Party Disclosures’ n
ote
34
for
further
details
on
Morgan
Stanley’s
Global
Transfer Pricing Policies.
Staff-related expenses decreased by 16%. This
decrease was mainly driven by the mark-to-
market on deferred equity compensation.
Non Staff-Related Expenses
Non-staff related
expenses decreased by 1%,
reflecting
a
decrease
in
transaction
taxes,
partially
offset by increase in Asia and EMEA
brokerage fees and litigation provisions.
Refer to ‘Operating expense’ note 7 for further
detail.
Net Impairment Loss/(Reversal) on Financial
Instruments
During the year, the Group recognised $148
million of ECL, predominantly related to cash and
margin
cash
deposited
with
banks
and
exchanges in Russia.
Income Tax Expense
The Group’s tax expense represents an effective
tax rate (“ETR”) of 18.7% (2021: 30.4%), which is
lower than the average standard rate of UK
corporation tax (inclusive of the UK Banking
surcharge) of 27% (2021: 27%). The main
reasons that the effective tax rate is lower than
the statutory rate are the allocation of UK group
relief from UK entities outside of the Group for nil
consideration,
and
the
impact
of
the
tax
deductible AT1 coupons.
Balance Sheet
in $ millions
2022
2021
Increase/
(decrease)
Variance
%
Cash and short
term deposits
18,754 28,532
(9,778)
(34%)
Trading financial
assets
329,382 332,635
(3,253)
(1%)
Secured
financing
129,779 125,895
3,884
3%
Trade and other
receivables
81,780 79,334
2,446
3%
Other assets
696
790
(94)
(12%)
Total Assets
560,391 567,186
(6,795)
(1%)
Trading financial
liabilities
298,690 300,325
(1,635)
(1%)
Secured
borrowing
93,966 97,262
(3,296)
(3%)
Trade and other
payables
97,150 94,052
3,098
3%
Debt and other
borrowings
45,682 52,679
(6,997)
(13%)
Other liabilities
670
693
(23)
(3%)
Total Liabilities
536,158 545,011
(8,853)
(2%)
Total Equity
24,233 22,175
2,058
9%
Assets and Liabilities
The decrease in ‘Cash and short term deposits’
is mainly due to a decrease in cash held with
central banks as part of the management of the
Group’s liquidity reserve.
The decreases in ‘Trading financial assets’ and
‘Trading financial liabilities’ were primarily driven
by a reduction in cash securities as a result of
lower client activity towards the end of the year
and market movements across the EMEA and
Asia segments. Partially offsetting the decrease
in cash securities, derivative products increased
largely due to fair value movements caused by
an increase in interest rates and changes in
foreign exchange rates as the USD strengthened
against major currencies, including EUR.
The increase in ‘Secured financing’ is due to an
increase in reverse repurchase agreements held
as part of the Group’s liquidity reserve, partially
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offset by lower client activity towards the end of
the year.
The decrease in ‘Debt and other borrowings’ is
due to a decrease in unsecured funding as
business activity decreased towards the end of
the year.
Equity
Total
Equity
increased
by
$2,058
million,
primarily reflecting profit after tax of $1,396
million, the issuance of $800 million of AT1
capital in the year and a gain of $137 million in
the
‘Debt
valuation
reserve’
within
Other
Comprehensive Income (“OCI”) as a result of
widening credit spreads. This was partially offset
by dividends paid of $236 million.
Key Accounting Estimates and
Judgements
Throughout 2022, in the preparation of the
financial results, management is required to
make accounting estimates and assumptions
(see note 2 for further details). Of the significant
accounting policies (see note 3), the following
policies involved a higher degree of judgement
and complexity, and consequentially greater
consideration by management.
Valuation of Financial Instruments at Fair
Value
Given the extent to which the Group recognises
financial instrument assets and liabilities at fair
value,
the
preparation
of
the
Group’s
consolidated
financial
statements
requires
management to consider on an on-going basis
the
key
valuation
metrics
and
judgements
involved in the determination of fair value. 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 judgement.
Management have reviewed the key valuation
metrics,
assumptions
and
methodologies
involved in the determination of the fair value of
financial instruments and determined that the
valuations were reasonable.
Refer to accounting policy note 3(d) and note 30
for more detail on the Group’s fair value
measurement and valuation methods.
Tax and Litigation Provisions
The preparation of the Group’s consolidated
financial statements requires management to
make judgements, estimates and assumptions
regarding the outcome of matters that are
uncertain, including those relating to tax and
litigation. The Group has provisions arising on a
number of uncertain tax and litigation matters, for
which management has made judgements and
interpretations
when
determining
these
provisions. Whilst a range of outcomes is
foreseeable, management considers the amount
provided
to
be
a
reasonable
estimate
of
expected future liabilities after consideration of all
pertinent facts.
Refer to accounting policy note 3(k) and note 18
for more details.
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Capital and Liquidity Resource
Management and Regulation
The Company manages and monitors its capital
and liquidity in line with established policies and
procedures
and
in
compliance
with
local
regulatory requirements. Consistent with the
Morgan Stanley Group capital management
policies, the MSI Group manages its capital
position
based
upon,
among
other
things,
business opportunities, risks, capital availability
and rate of return together with internal capital
policies,
regulatory
requirements
and
rating
agency guidelines.
Further information is available in the Pillar 3
Regulatory Disclosures Report of the MSI Group,
available
at
https://www.morganstanley.com/
about-us-ir/pillar-uk
. The MSI Group’s Pillar 3
report
includes
specific
disclosure
of
the
Company as a significant subsidiary.
Regulatory Capital and Leverage
Requirements
The Company is subject to minimum capital
requirements calculated in accordance with PRA
rules – referred to as Pillar 1.
The Company is
also subject to a Pillar 2 supervisory review
process, including a requirement to undertake an
Internal
Capital
Adequacy
Assessment
(“ICAAP”), assessed by the PRA, for risks not
covered in Pillar 1.
The MSI Group conducts an ICAAP at least
annually. The ICAAP is a key tool used to inform
the MSI Board and executive management on
risk profile and capital adequacy. The MSI Group
ICAAP includes specific consideration of the
Company as a significant subsidiary.
The
PRA
reviews
the
ICAAP
through
its
Supervisory Review and Evaluation Process
(“SREP”) and sets a Total Capital Requirement
(“TCR”) comprising Pillar 1 and Pillar 2A, which
establishes the minimum level of regulatory
capital for the MSI Group and the Company.
As at 31 December 2022, the Company’s TCR
was $13,634 million, equivalent to 10.9% of
RWAs. In addition, the PRA sets a buffer, which
is available to support the Company in a stressed
market environment.
Set out below are the Company’s minimum risk-
based capital requirements.
in $ millions
2022
2021
TCR
13,634
15,015
The Company’s capital is monitored on an
ongoing basis to ensure compliance with these
requirements. The Company complied with all of
its capital requirements during the year.
Capital Resources
The capital managed by the Company includes
share
capital,
AT1
capital
instruments,
subordinated debt and reserves.
To maintain or adjust its capital structure, the
Company may pay dividends, return capital to its
shareholders, issue new shares, or issue or
repay AT1 capital instruments or subordinated
debt.
Set out below are details of the Company’s
Capital Resources, as at 31 December 2022 and
31 December 2021:
in $ millions
2022
2021
Total Company equity
24,214
22,330
Regulatory adjustments
(2,012)
(1,808)
Tier 1 Capital
22,202
20,522
Of which
CET1
17,902
17,022
AT1
4,300
3,500
Tier 2 Capital
6,874
5,376
Total Capital Resources
29,076
25,898
RWAs
124,739
136,746
CET1 capital ratio
14.4 %
12.4 %
Tier 1 capital ratio
17.8 %
15.0 %
Total capital ratio
23.3 %
18.9 %
The increase in the Total capital ratio reflects the
increase in total Company equity (Refer to
‘Overview of 2022 Financial Results’) and from
lower RWAs, see below. Regulatory adjustments
includes
deductions
applied
based
on
the
prudential filters in compliance with the PRA Rule
book (CRR).
RWAs
Set out below are details of the Company’s
RWAs.
in $ millions
2022
2021
Credit RWAs
64,770
77,267
Market RWAs
49,162
49,412
Operational risk RWAs
10,807
10,067
Total RWAs
124,739
136,746
RWAs decreased by $12,007 million over the
year, due to broad reductions in business and
market activity as well as a decrease in affiliate
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concentration risk. This was partially offset by
increases driven by the implementation of the
Capital Requirements Regulation (“CRRII”).
Leverage Ratio
The leverage ratio is a supplementary measure
to the risk-based capital requirements calculated
as the ratio of Tier 1 capital to total leverage
exposure (certain assets plus certain off-balance
sheet exposures adjusted for Tier 1 capital
deductions). Although there was no binding
leverage
requirement
for
2022,
the
Group
managed its risk of excessive leverage through
the
application
of
business
unit
leverage
exposure limits and leverage ratio early warning
trigger levels. Limits are calibrated in line with
legal entity capacity and ensure that leverage
exposure remains within the MSI Board’s risk
appetite.
From 1 January 2023, the Company became
subject to a minimum leverage ratio of 3.25% as
part of the UK’s implementation of the prudential
standards included in the CRRII.
The Company’s leverage ratio is detailed below.
in $ millions
2022
2021
Tier 1 Capital
22,202
20,522
Leverage Exposure
416,138
496,231
Leverage Ratio
5.3%
4.1%
Leverage exposure decreased over the year
primarily driven by the introduction of the
standardised approach to counterparty credit risk
(“SA-CCR”) calculation and the deduction of
central bank claims, implemented into the PRA
rulebook (CRR) on 1 January 2022.
Funding and Liquidity Management
Funding and Balance Sheet Management
Liquidity and funding risk refers to the risk that
the Group is unable to meet its financial
obligations
without
experiencing
significant
business disruption or reputational damage that
may threaten its viability as a going concern, as
well as 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.
The Group manages its funding in a manner that
reduces the risk of disruption to its operations.
The Group pursues a strategy of diversification of
secured and unsecured funding sources (by
product and investor) and attempts to ensure that
the tenor of its liabilities equals or exceeds the
expected holding period of the assets being
financed.
The Group funds itself through diverse sources.
These sources may include equity capital, long-
term debt, securities sold under agreements to
repurchase, securities lending and deposits. The
MSI Group has active financing programs for
both standard and structured products, targeting
global investors and currencies.
In managing both the Morgan Stanley Group’s
and the Group’s funding risk, the composition
and size of the entire balance sheet, not just
financial liabilities, is monitored and evaluated.
The liquid nature of the marketable securities
and short-term receivables arising principally
from
sales
and
trading
activities
in
the
Institutional
Securities
business
provide
the
Morgan Stanley Group and the Group with
flexibility in managing the composition and size
of its balance sheet.
Credit Ratings
The Company relies on external sources to
finance
a
significant
portion
of
its
daily
operations. The cost and availability of financing
generally are impacted by the Company’s credit
ratings, among other variables. In addition, the
Company’s credit ratings can have an impact on
certain trading revenues, particularly in those
businesses
where
longer-term
counterparty
performance is a key consideration, such as
certain over the counter (“OTC”) derivative
transactions. When determining credit ratings,
ratings agencies consider both company-specific
and
industry-wide
factors.
The
Company’s
unsecured
credit
ratings
are
included
in
‘Financial Performance and Condition’.
Regulatory Liquidity and Funding
Requirements
The
Company
is
subject
to
the
liquidity
regulations prescribed by the PRA which include
the Liquidity Coverage Ratio (“LCR”),
Pillar 1
and Pillar 2 requirements.
The Pillar 2 requirements are assessed by the
PRA for risks not captured in Pillar 1. Pillar 2
risks
are
identified
by
the
Company
and
documented in the Internal Liquidity Adequacy
Assessment Process (“ILAAP”), reviewed and
assessed by the PRA as part of the Liquidity
Supervisory Review Process (“L-SREP”). From 1
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January 2022, the PRA required the Company to
maintain a regulatory minimum NSFR of 100%.
Throughout
the
year,
the
Company
held
adequate liquidity in the form of HQLA and
maintained an appropriate funding profile to meet
LCR and NSFR regulatory requirements.
The
Company
complied
with
all
liquidity
requirements during the year.
in $ millions
2022
2021
Liquidity buffer - High quality liquid
assets ("HQLA")
41,800
40,982
Liquidity coverage ratio
(1)
184%
196%
1.
Calculated as the average of the preceding twelve months
in $ millions
2022
2021
NSFR
110%
N/A
(1)
(1)
NSFR not disclosed for 2021 as PRA requirement from 1 January
2022.
Recovery and Resolution Planning
The UK Banking Act 2009 and related legislation
established a recovery and resolution framework
for UK institutions, including the Company.
Annually, the MSI Group prepares a recovery
plan which identifies mitigation tools available in
times of severe stress. The Company is covered
in the recovery plan and is identified as a
material legal entity of the MSI Group.
The MSI Group and the Company produce
information required for resolution purposes by
the BOE, as the UK Resolution Authority in
accordance with UK statutory and regulatory
requirements. The Company also complies with
relevant BOE and PRA rules on resolution
planning and resolvability, including requirements
under
the
BOE’s
Resolvability
Assessment
Framework, and the Minimum Requirement for
own funds and Eligible Liabilities (“MREL”) set by
the BOE (see following sub-section).
The Morgan Stanley Group has developed a
resolution
plan
in
accordance
with
the
requirements of Section 165(d) of Title I of the
Dodd-Frank Wall Street Reform and Consumer
Protection Act and its implementing regulations
adopted by the Federal Reserve Board and the
Federal Deposit Insurance Corporation. The
resolution
plan
presents
Morgan
Stanley’s
strategy for resolution of Morgan Stanley upon
material
financial
distress
or
failure.
The
Company is a Material Operating Entity of the
Morgan Stanley Group and is within the scope of
the single point of entry resolution strategy
adopted by the Morgan Stanley Group.
MREL and Total Loss Absorbing Capacity
(“TLAC”)
MREL, as implemented by the BOE, and TLAC,
as implemented by the EU and on-shored into
UK law, are broadly consistent measures that are
designed to enhance the resilience of the
financial system by ensuring firms have sufficient
capital instruments and eligible liabilities to
absorb losses and appropriately recapitalise
entities in the case of resolution. They reflect the
recommendations of the Financial Stability Board
on TLAC standards for global systemically
important banks and as reflected within the EU’s
Bank Recovery and Resolution Directive.
MREL requirements apply to the Company on an
individual level and to the MSI Group on a
consolidated basis. TLAC applies to the MSI
Group only.
The Company and MSI Group have issued
senior subordinated loans to ensure compliance
with these requirements.
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Regulatory Developments
The Company continues to monitor the changing
political, tax and regulatory environment, with
specific changes expected as part of the BOE
implementation
of
Basel
III
standards,
as
described below. Whilst the Company continues
to engage with various stakeholders, it remains
difficult to predict the exact impact these changes
and other changes will have on its business,
statement
of
financial
position,
results
of
operations and cash flows for a particular future
period. The Company expects to remain subject
to extensive supervision and regulation.
Finalising Basel III Reforms
BCBS sets the standard for international banking
prudential regulation in a series of accords
(“Basel Accords”) that are implemented in the UK
via the PRA Rulebook including retained EU Law
under the European Union (Withdrawal) Act
2018. This includes the CRR as amended but
also other technical standards issued by EU
bodies, such as European Banking Authority, that
were in place as at 31 December 2020.
Following the UK’s withdrawal from the EU, the
PRA issued its final rules, to implement key
components of the Basel III reforms that were
previously finalised in the EU, effective 28 June
2021. This includes but is not limited to:
Standardised Approach to Counterparty Credit
Risk,
Net
Stable
Funding
Ratio,
revised
Leverage
Ratio,
revised
Large
Exposure
Framework, and revised Pillar 3 disclosure
requirements. These were effective and fully
implemented from 1 January 2022.
Following the impact of the COVID-19 pandemic
and its impact on the global banking system, the
BCBS decided to defer the remaining standards
of the Basel III reform package (referred to as
“Finalisation of Basel III”) by one year to 1
January 2023. The key remaining amendments
include
revised
market
RWA
requirements
through the Fundamental Review of the Trading
Book, new Credit Valuation Adjustments ("CVA")
RWA requirements, revisions to the credit RWA
calculations covering both standardised and
advanced
treatments,
and
a
new
RWA
requirement for operational risk. They also
include an aggregate floor for RWA generated by
the internal models, which will be set at 72.5% of
total standardised RWA. The output floor will be
phased in over five years. Banks will also need to
disclose their RWA based upon the standardised
approaches.
The PRA issued their draft rules to implement
these final standards, which are referred to as
Basel 3.1, for consultation on 30 November
2022. These rules are expected to be effective
from 1 January 2025. The proposed rules are
largely consistent with the Basel III reform
package with some adjustments to address UK
specificities. Pending the publication of the final
rules, expected in 2023, there remains some
uncertainty as to the final requirements and
overall impact.
Environmental, Social and Governance
(“ESG”)
On
28
November
2022,
the
European
Commission
adopted
the
Corporate
Sustainability
Reporting
Directive
(“CSRD”)
which
replaces
the
existing
reporting
requirements of the Non-financial Reporting
Directive (“NFRD”). The CSRD extends the
scope of entities required to report on non-
financial matters and introduces a requirement to
report according to mandatory EU sustainability
reporting standards. The CSRD was published in
the Official Journal of the EU on 16 December
2022 and EU Member States have 18 months to
transpose the CSRD into their national laws. The
requirements
will
apply
to
financial
years
commencing on or after 1 January 2024. As a UK
entity, the Company is subject to the CSRD from
the financial year ending 31 December 2024, as
a result of having securities listed on an EU
regulated market and also meeting the size
criteria of the CSRD scoping requirements.
The Taxonomy Regulation (Regulation (EU)
2020/852) (“Taxonomy Regulation”) entered into
force on 12 July 2020 and establishes criteria for
determining whether an economic activity is
“environmentally sustainable”. Article 8 of the
Taxonomy
Regulation
requires
certain
companies to report on how, and to what extent,
their
activities
are
associated
with
environmentally sustainable economic activities.
The Company is subject to Taxonomy Regulation
reporting requirements from the financial year
ending 31 December 2024 as a result of the
scoping criteria of the CSRD outlined above.
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The
UK
is
also
introducing
ESG-related
regulation of which the Company is in-scope.
FCA Policy Statement 21/24 was published on
17 December 2021 and applies on a phased
basis
from
1
January
2022,
with
the
requirements applying to the Company from the
financial year ending 31 December 2023. It
introduces required disclosures on an annual
basis consistent with the recommendations of the
Taskforce
on
Climate-related
Financial
Disclosures (“TCFD”) at both the entity level and
the product or portfolio level. The Companies
(Strategic
Report)
(Climate-related
Financial
Disclosure) Regulations 2022 (“Regulations”)
were published on 17 January 2022 and apply to
financial years commencing on or after 6 April
2022.
The
Regulations
introduce
required
disclosures on an annual basis consistent with
the recommendations of the TCFD at entity level.
Temporary Transitional Power (“TTP”)
Following the end of the transition period of the
UK’s withdrawal from the EU on 31 December
2020, His Majesty’s Treasury decided to retain
the regulators’ TTP, which was introduced via the
Financial
Services
and
Markets
Act
2000
(Amendment) (EU Exit) Regulations 2019.
The TTP allowed the BOE, the PRA and the FCA
to
phase-in
changes
to
UK
regulatory
requirements so that firms can adjust to the UK’s
post-Transition Period regime in an orderly way.
The TTP was effective from 1 January 2021 and
expired on 31 March 2022. During this period,
from a prudential regulatory rules perspective,
requirements as implemented by the EU largely
continued to apply in the UK in the same way as
prior to 31 December 2020. From 1 April 2022,
there were some further changes that were not
material
to
the
Company.
The
Company
continues to be compliant with the UK on-shored
regulatory obligations, predominantly unchanged
from the EU CRR.
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Risk Management
Risk is an inherent part of the Group’s business
activities. The Group seeks to identify, assess,
monitor and manage each of the various types of
risk
involved
in
its
business
activities,
in
accordance
with
defined
policies
and
procedures.
The Company’s Board is assisted in its oversight
of the Group’s risk management by the MSI Audit
Committee, the MSI Risk Committee and the
executive management EMEA Risk Committee in
addition to a number of management level
committees. The corporate governance structure
between MSI and the Company, including the
executive and
management-level Committees
(associated with Risk Governance) is described
in
further
detail
within
the
‘Corporate
Governance’ section.
Note 26 provides additional qualitative and
quantitative
disclosures
about
the
Group’s
management
of,
and
exposure
to,
certain
financial risks.
Risk Strategy and Appetite
The Group Risk Appetite Statement articulates
the aggregate level and types of risk that the
Group is willing to accept to execute its business
strategy and protect its capital and liquidity
resources. The combination of qualitative risk
appetite
and
tolerance
statements
and
quantitative limits aims to ensure that the
Group’s
businesses
are
carried
out
in
accordance with the risk appetite approved by
the Board, and to protect the Group’s reputation
in both normal and stressed environments.
The Group has no risk appetite for conduct risk
or reputational risk. It acknowledges, however,
that
conduct
and
reputational
risk
remain
inherent in conducting business and thus cannot
be entirely eliminated.
The Group risk appetite is set by the Board in
conjunction with its business strategy and in
consideration of its capital and liquidity resource
adequacy framework.
Risk Management Framework
Risk of loss is an inevitable consequence of the
Group’s business activities and effective risk
management is vital to the Group’s success. The
Group has an established Risk Management
Framework,
which
leverages
the
risk
management policies and procedures of the MSI
Group and the Morgan Stanley Group, to support
the identification, monitoring and management of
risk.
The Risk Management Framework includes a
well-defined, comprehensive risk governance
structure
with
appropriate
risk
management
expertise, including processes for periodically
assessing the efficacy of the Risk Management
Framework.
The
key
components
of
the
framework are set out below.
Risk Policies and Processes
Morgan Stanley Group has a number of well-
established policies and processes which set out
the standards that govern the identification,
assessment,
monitoring,
management
and
mitigation of the various types of risk involved in
its business activities. Specific risk management
policies have been implemented to address local
business and regulatory requirements where
appropriate. These policies are approved by the
MSI Board and are reviewed at least annually.
These policies include:
•
EMEA and MSI Group Risk Management
Principles
•
MSI Group Market Risk Management Policy
•
MSI Group Credit Policy
•
MSI Group Liquidity Risk Oversight Policy
•
MSI Group Operational Risk Management
Policy
Control Framework
The
Group
operates
a
control
framework
consistent with the “Three Lines of Defence”
model, with clear delineation of responsibilities
between
the
Business
Units
and
Support
Functions
(First
Line),
Independent
Risk
Management and Control Functions (Second
Line) and the Internal Audit Department (Third
Line).
Business Units are responsible for managing
their
strategy
and
business
activities
in
accordance with the Group’s risk appetite and its
principles. Business Units establish controls to
comply with the Group’s risk policies and
procedures, establish monitoring and escalation
processes and establish review processes for
new business ventures and unique, complex or
significant transactions. Support Functions (such
as Operations, Technology, and Treasury) are
independent of the Business Units and, in whole
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or in part, support strategy execution of the
Group’s
revenue-generating
activities. These
functions are accountable for risks associated
with their activities and are responsible for
actively assessing and managing these risks.
Independent Risk Management and Control
Functions identify, measure, monitor and control
risks.
Independent
Risk
Management
and
Control Functions include, for example, functions
performed
by
the
Risk
Division
and
the
Compliance Department.
The Internal Audit Department is the Third line of
defence, and is an independent source of
assurance to the
Board on controls over
financial
and
non-financial
(predominantly
Operational and Compliance) risks, operational,
and compliance controls. The Internal Audit
Department reports to the MSI Audit Committee
and is independent of the Business Units and
Support
Functions
and
Independent
Risk
Management. The Internal Audit Department
provide independent assurance over the design
quality
and
operating
effectiveness
of
the
Group’s
internal
control
environment,
risk
management
and
governance
systems
and
control processes using a risk-based audit
coverage
model
and
audit
execution
methodology developed in line with professional
auditing standards.
Culture, Values and Conduct of Employees
Employees of the Morgan Stanley Group are
accountable
for
conducting
themselves
in
accordance with the Morgan Stanley Group’s
core values. The Morgan Stanley Group is
committed
to
reinforcing
and
confirming
adherence
to
the
core
values
through
its
governance
framework,
tone
from
the
top,
management oversight, risk management and
controls, and Three Lines of Defence structure.
The
Morgan
Stanley
Group’s
Board
is
responsible for overseeing the Morgan Stanley
Group’s practices and procedures relating to
culture, values and conduct, with support from
senior
management
committees
that
report
regularly to the Morgan Stanley Group’s Board,
as set forth in its corporate governance policies.
A fundamental building block of this program is
the Morgan Stanley Group’s Code of Conduct,
which
establishes
standards
for
employee
conduct that further reinforce the Morgan Stanley
Group’s commitment to integrity and ethical
conduct. All employees are required to certify
their understanding of and adherence to the
Code of Conduct annually.
Morgan
Stanley’s
Global
Conduct
Risk
Management Policy also sets out a consistent
global framework for managing conduct risk (i.e.
the risk arising from misconduct by employees or
contingent workers) and conduct risk incidents.
The
employee
annual
performance
review
process includes evaluation of employee conduct
related
to
risk
management
practices
and
Morgan Stanley’s expectations. The Morgan
Stanley
Group
also
has
several
mutually
reinforcing
processes
to
identify
employee
conduct that may have an impact on employment
status, current year compensation and/or prior
year compensation. Further details of the MSI
Group’s remuneration policies and practices can
be found in the CRR Article 450 Disclosure,
available
at
https://www.morganstanley.com/
about-us-ir/pillar-u
k
.
Limits and Tolerance Framework
The MSI Group Risk Appetite is translated into a
comprehensive
Risk
Limit
and
Tolerance
framework across four primary areas: market
risk, credit risk, operational risk and liquidity risk.
The
MSI
Group
maintains
risk
limits
and
tolerances at various levels of the governance
structure, including for key MSI Group legal
entities, as appropriate, to support linkages
between the MSI Group’s overall risk appetite,
which is determined by the MSI Board, and more
granular risk-taking decisions and activities.
All
risk
limits
are
reviewed
periodically
as
appropriate and at least annually. Adherence to
these limits and tolerances, as well as any
breaches, as tracked, monitored and reported to
the appropriate executive risk committees, MSI
Risk Committee and the MSI Board. Figure 1
outlines the MSI Group’s Risk Limit Framework
for specific risk areas.
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Figure 1 MSI Group’s Risk Limit Framework
RISK METRICS AND LIMITS
MARKET RISK
CREDIT RISK
OPERATIONAL RISK
LIQUIDITY RISK
•
MSI Group-wide
macroeconomic
scenario loss limits
•
Legal entity and
Division Value at Risk
("VaR") and exposure
limits
•
Granular risk exposure
limits are allocated by
desk/products
•
MSI Board-level
portfolio Climate Stress
Loss Limit
•
MSI Group-wide
macroeconomic
scenario loss limits
•
MSI Group single name,
country and industry
credit
limits
•
Climate Risk Industry
Limits
•
Granular product limits
for certain business
areas
•
Quantitative tolerances
for each top operational
risk and against an
aggregate
risk
tolerance level
•
MSI Board Liquidity
Limits
•
Portfolio level liquidity
and funding mix limits
•
Granular business area
specific limits on
liquidity
and funding
•
MSI Board-level portfolio Climate Stress Loss Limit
Stress Testing
Stress testing is one of the MSI Group’s principal
risk management tools, used to identify and
assess the impact of severe stresses on its
portfolios. It provides a flexible approach to
understanding the aggregate risk for the MSI
Group and assessing the MSI Group’s resilience
to different scenarios over a range of severities
and it informs a number of processes and
associated
decisions.
Stress
Testing
also
complements other MSI Group risk metrics by
providing a clear and flexible approach to
assessing the MSI Group’s resilience in the face
of various scenarios over a range of severities,
relevant
to
current
market
conditions
and
forward-looking
macroeconomic
views.
Most
notably, stress testing is used for:
•
Risk
Management:
Identifying
areas
of
potential
vulnerabilities
in
the
portfolio,
measuring portfolio losses and concentrations
as a basis for senior management to review
portfolio-level
risk
and
determine
risk
mitigation actions and set exposure limits.
•
Risk Aggregation:
Estimate aggregate size of
losses in adverse shocks.
•
Capital and Liquidity planning:
Informing the
proposed
stressed
capital
and
liquidity
forecasts through severe but plausible stress
tests.
•
Strategy Planning:
Identifying business model
vulnerabilities through Reverse Stress Testing
and identifying the potential mitigating actions
available as part of recovery planning.
•
Regulatory
Requirements:
Meeting
the
relevant Regulatory requirements for Stress
Testing.
Risk Reporting and Measurement
The MSI Group has a suite of risk reporting
across the main risk types highlighted above.
The
risk
reporting
includes
quantitative
measurements and qualitative assessments that
enable a comparison of the MSI Group’s risk
profile against risk limits and risk tolerances.
Reporting identifies matters for escalation and
highlights emerging risks. Material risk issues are
investigated and escalated where appropriate, as
per the specific escalation procedures specified
by the MSI Group. Escalation triggers have been
articulated, with separate triggers for notification
and further escalation including to the Board
where relevant. The EMEA Risk Division has
constituted specific committees which provide
senior management review of risk reporting
including
stress
testing
and
data
quality
information.
Risk reporting capabilities are supported by a
well-controlled
infrastructure,
including
Front
Office risk systems and the MSI Group’s Risk
Management systems.
Market Risk
Definition
Market risk refers to the risk that a change in the
level of one or more market prices, rates,
spreads, indices, implied volatilities, correlations
or other market factors, such as market liquidity,
will result in losses for a position or portfolio.
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Governance
The Group manages the market risk associated
with its trading activities at both a division and an
individual
product
level,
and
includes
consideration of market risk at the legal entity
level.
Sound market risk management is an integral
part of the Group’s culture. The business units
and trading desks are responsible for ensuring
that market risk exposures are well-managed
and monitored. The Market Risk Department
(“MRD”)
ensures transparency of material
market
risks,
monitors
compliance
with
established
limits,
and
escalates
risk
concentrations
to
appropriate
senior
management.
To execute these responsibilities, the Group
monitors
its
market
risk
against
limits
on
aggregate risk exposures, performs a variety of
risk analyses including monitoring
Value-at-risk
(“VaR”) and stress testing analyses, routinely
reports risk summaries and maintains the VaR
and
scenario
analysis
methodologies.
The
material risks identified by these processes are
summarised
and
reported
to
senior
management.
The
market
risk
management
policies
and
procedures for the Group are consistent with
those of the Morgan Stanley Group and include
escalation
to
the
Board
and
appropriate
management personnel.
Additional information on primary market risk
exposures,
market
risk
management
and
measurement and non-trading risks and currency
risk together with an analysis of VaR sensitivity is
presented in note 26. For information regarding
the management of market risk driven by climate
risk, refer to ‘Risk Management - Climate and
Environmental Risk’.
Year End VaR
The Group’s VaR for Primary Risk Categories
and Total Management VaR for the years ended
31 December 2022 and 31 December 2021 are
shown in the below table. Refer to note 26 for
further detail.
95%/ one-day
VaR 2022
95%/ one-day
VaR 2021
in $ millions
Period
end
Average
Period
end
Average
Primary Market Risk
Categories
24
25
23
29
Credit Portfolio
(1)
12
8
6
7
Less diversification
benefit
(2)
(6)
(7)
(6)
(6)
Total Management
VaR
30
26
23
30
(1)
The Credit Portfolio VaR is disclosed as a separate category from
the Primary Risk Categories and includes loans that are carried at
fair value and associated hedges as well as counterparty credit
valuation adjustments and related hedges.
(2)
Diversification benefit equals the difference between total trading
VaR and the sum of the VaRs for the individual risk categories.
This benefit arises because the simulated one-day losses for
each of the primary market risk categories occur on different
days; similar diversification benefits are also taken into account
within each category.
The 2022 period-end Total Management VaR of
$30 million was higher than the average of $26
million as the 1 year VaR time series includes
larger market volatility caused by the UK mini
budget.
The average Total Management VaR for 2022
was $26 million compared with $30 million for
2021. The decrease was primarily driven by
decreased exposure to equity prices and the
associated implied volatilities.
Credit Risk
Definition
Credit risk refers to the risk of loss arising when a
borrower, counterparty or issuer does not meet
its financial obligations to the Group. Credit risk
includes country risk, which is further described
below.
Governance
Credit risk exposure is managed on a global
basis and in consideration of each significant
legal entity within the Morgan Stanley Group.
The
credit
risk
management
policies
and
procedures
establish
the
framework
for
identifying, measuring, monitoring and controlling
credit
risk
whilst
ensuring
transparency
of
material credit risks, compliance with established
limits and escalating risk concentrations to
appropriate senior management.
Additional information about the primary credit
exposures,
credit
risk
management
and
mitigation, exposure to credit risk, including the
maximum exposure to credit risk by credit rating
is
presented
in
note
26.
For
information
regarding the management of credit risk driven
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by climate-related credit risk, refer to ‘Risk
Management - Climate and Environmental Risk’.
Exposure to Credit Risk
Counterparty Risk Exposure
The table below shows the Group’s maximum
exposure to credit risk and credit exposure for
certain financial assets which are exposed to
credit risk and where the Group has entered into
credit enhancements, including receiving cash
and securities as collateral and master netting
agreements. The net credit exposure represents
the credit exposure remaining after the effect of
the credit enhancements. Exposure to other
Morgan Stanley Group undertakings is included
in this table.
2022
in $ millions
(audited)
Gross
credit
exposure
(1)
Credit
enhancements
(2)
Net credit
exposure
Trading financial
assets:
Derivatives
251,076
(240,879)
10,197
Secured financing
129,779
(128,908)
871
Trade and other
receivables
1,298
(319)
979
Loan commitments
15
—
15
382,168
(370,106)
12,062
2021
in $ millions
(audited)
Gross
credit
exposure
(1)
Credit
enhancements
(2)
Net credit
exposure
Trading financial
assets:
Derivatives
242,432
(229,230)
13,202
Secured financing
125,895
(124,594)
1,301
Trade and other
receivables
993
(777)
216
Loan commitments
121
(2)
119
369,441
(354,603)
14,838
(1)
Gross credit exposure is the carrying amount which best
represents the Group's maximum exposure to credit risk, and for
financial instruments - FVPL is reflected in the consolidated
statement of financial position.
(2)
Credit enhancements include collateral received and netting
allowable under master netting agreements used to manage
credit exposure.
Country and Sovereign Risk Exposure
Definition
Country risk is the risk that events in, or affecting,
a foreign country might adversely affect the
Group. “Foreign country” means any country
other than the UK. Sovereign risk, by contrast, is
the risk that a government will be unwilling or
unable to meet its debt obligations or will renege
on the debt that it guarantees. Sovereign risk is
single-name risk for a sovereign government, its
agencies and guaranteed entities.
Risk Management and Measurement
Country
risk
exposure
is
measured
in
accordance
with
the
Group’s
internal
risk
management standards and includes obligations
from
sovereign
governments,
corporations,
clearing houses and financial institutions. The
Group actively manages country risk exposure
through
a
comprehensive
risk
management
framework that combines credit and market
fundamentals and allows the Group to effectively
identify, monitor and limit country risk.
The Group’s obligor credit evaluation process
may also identify indirect exposures, whereby an
obligor has vulnerability or exposure to another
country or jurisdiction. Examples of indirect
exposures include mutual funds that invest in a
single country, offshore companies whose assets
reside in a different country to that of the offshore
jurisdiction and finance company subsidiaries of
corporations.
Indirect
exposures
identified
through the credit evaluation process may result
in a reclassification of country risk.
The Group’s sovereign exposures consist of
financial instruments entered into with sovereign
and
local
governments.
Its
non-sovereign
exposures primarily consist of exposures to
corporations
and
financial
institutions.
The
following table shows the Group’s five largest
non-UK
net
country
exposures
as
at
31 December 2022.
Exposures to other Morgan Stanley Group
undertakings have been excluded from this table
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Five Largest Non-UK Country Risk Total Net Exposures for the Group:
in $ millions
Net
inventory
(1)
Net
counterparty
exposure
(2)
Funded
lending
Exposure
before
hedges
Hedges
(3)
Total net
exposure
2022
⁽⁴⁾
Total net
exposure
2021
Country
United States
Sovereigns
16
93
—
109
(30)
79
(262)
Non-sovereigns
4,883
4,945
28
9,856
(13)
9,843
5,273
Total United States
4,899
5,038
28
9,965
(43)
9,922
5,011
Germany
Sovereigns
1,151
—
—
1,151
(359)
792
(2,819)
Non-sovereigns
(379)
3,023
—
2,644
(16)
2,628
1,504
Total Germany
772
3,023
—
3,795
(375)
3,420
(1,315)
France
Sovereigns
300
10
—
310
—
310
(1,069)
Non-sovereigns
(459)
2,700
—
2,241
(434)
1,807
1,556
Total France
(159)
2,710
—
2,551
(434)
2,117
487
Singapore
Sovereigns
—
474
—
474
—
474
201
Non-sovereigns
38
429
—
467
(5)
462
302
Total Singapore
38
903
—
941
(5)
936
503
Korea
Sovereigns
225
254
—
479
(25)
454
1,047
Non-sovereigns
69
396
—
465
—
465
622
Total Korea
294
650
—
944
(25)
919
1,669
(1)
Net inventory represents exposure to both long and short single name and index positions (i.e. bonds and equities at fair value and CDS
based on notional amount assuming zero recovery adjusted for any fair value receivable or payable). As a market maker, the Group transacts
in these CDS positions to facilitate client trading.
(2)
Current exposure of repurchase transactions, securities lending and derivatives taking into consideration legally enforceable master netting
agreements and collateral as well as relevant valuation adjustments.
(3)
Represents CDS hedges (purchased and sold) on net counterparty exposure and lending executed by trading desks responsible for hedging
counterparty and lending credit risk exposures for the Group. Amounts are based on the CDS notional amount assuming zero recovery
adjusted for any fair value receivable or payable.
(4)
Total net exposure represents the sum of net inventory exposure, net counterparty exposure, funded lending and hedges.
(5)
In addition, at 31 December 2022, the Group had exposure to these countries for overnight deposits with banks of approximately $1,040
million.
Liquidity Risk
Definition
Liquidity risk refers to the risk that the Group will
be unable to finance its operations due to a loss
of access to capital markets or difficulty in
liquidating its assets. Liquidity risk encompasses
the Group’s ability (or perceived ability) to meet
its financial obligations 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 cause
unexpected changes in funding needs or an
inability to raise new funding. Generally, the
Group incurs liquidity risk as a result of its
trading, investing and client facilitation activities.
Liquidity Risk Management
The primary goal of the Company’s liquidity risk
management framework is to ensure that the
Company has access to sufficient liquidity assets
across a wide range of market conditions and
time horizons. The framework is designed to
enable
the
Company
to
fulfil
its
financial
obligations and to support the execution of its
business strategies. The key components of the
Company’s liquidity risk management include its
Required Liquidity Framework, Liquidity Stress
Testing and Liquidity Reserve, which are further
described in note 26.
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Operational Risk
Definition
Operational risk refers to the risk of loss, or of
damage to the Group’s reputation, resulting from
inadequate or failed processes or systems, from
human factors or from external events (e.g.
fraud, theft, legal and compliance risks, cyber-
attacks or damage to physical assets). This
includes legal risk and includes the risks arising
from ESG Risks (e.g. Climate and Environmental
Risks), but excludes strategic risk. Operational
risk relates to the following risk event categories
as defined by Basel Capital Standards: internal
fraud; external fraud; employment practices and
workplace safety; clients, products and business
practices; business disruption and system failure;
damage to physical assets; and execution,
delivery and process management. The scope
also
includes
oversight
of
technology
risk,
cybersecurity risk, information security risk, and
third
party
risk
management
(supplier
and
affiliate risk).
Governance
The Group has established an operational risk
framework to identify, measure, monitor and
control risk across the Group. This framework is
consistent with the framework established by the
Morgan Stanley Group and includes escalation to
the
Group’s
Board
and
appropriate
senior
management
personnel.
The
framework
is
continually evolving to reflect changes in the
Group and to respond to the changing regulatory
and business environment.
Additional information regarding operational risk
management; measurement and risk mitigation;
business continuity management and disaster
recovery; third-party risk management; cyber and
information risk management; and legal and
regulatory and compliance risk is presented in
note 26.
Cyber and Information Security Risk
Management
The Group maintains a program that oversees its
cyber and information security risks, leveraging
the
Morgan
Stanley
Group
wide
program.
Cybersecurity and information security policies,
procedures and technologies are designed to
protect the Group’s information assets against
unauthorised disclosure, modification or misuse.
These policies and procedures cover a broad
range of areas, including: identification of internal
and
external
threats,
access
control,
data
security,
protective
controls,
detection
of
malicious
or
unauthorised
activity,
incident
response and recovery planning.
A cyber-attack, information or security breach or
a technology failure could adversely affect the
Morgan
Stanley
Group’s
ability
to
conduct
business, manage exposure to risk and may
result in disclosure or misuse of confidential or
proprietary information and otherwise adversely
impact
results
of
operations,
liquidity
and
financial condition, as well as cause reputational
harm.
Additional information on cyber risk management
and risk mitigation is presented in note 26.
Legal, Regulatory and Compliance Risk
Definition
Legal, regulatory and compliance risk includes
the risk of legal or regulatory sanctions, material
financial
loss;
including
fines,
penalties,
judgements, damages and/ or settlements or
reputational damage which the Group may suffer
as a result of failure to comply with laws,
regulations,
rules,
related
self-regulatory
organisation standards and codes of conduct
applicable to business activities. This risk also
includes contractual and commercial risk, such
as the risk that a counterparty’s performance
obligations will be unenforceable. It also includes
compliance with Anti-Money Laundering and
terrorist financing rules and regulations. The
Group is generally subject to extensive regulation
in the different jurisdictions in which it conducts
its business.
Governance
The Group, principally through the Morgan
Stanley Group’s Legal and Compliance Division,
has established procedures based on legal and
regulatory requirements on a worldwide basis
that are designed to facilitate compliance with
applicable statutory and regulatory requirements
and to require that the Group’s policies relating to
business conduct, ethics and practices are
followed globally.
Risk Mitigation
The
Group
has
established
procedures
to
mitigate
the
risk
that
a
counterparty’s
performance obligations will be unenforceable,
including consideration of counterparty legal
authority
and
capacity,
adequacy
of
legal
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documentation, the permissibility of a transaction
under applicable law and whether applicable
bankruptcy or insolvency laws limit or alter
contractual remedies. The heightened legal and
regulatory focus on the financial services and
banking industries globally presents a continuing
business challenge for the Group.
Conduct Risk
Definition
Conduct risk is defined within the MSI Group as
the risk arising from misconduct by individual
employees or contingent workers (collectively,
“Covered
Persons”)
or
groups
of
Covered
Persons, or the risk arising from conduct by
Morgan Stanley where the outcome has an
adverse impact on clients, markets or the
Morgan Stanley Group’s reputation. Conduct
includes
both
intentional
and
unintentional
behaviours.
Governance
The MSI Group has an approved Global Conduct
Risk Management Policy and an EMEA and MSI
Group Conduct Risk Management Supplement.
These documents cover the two main strands of
Morgan Stanley’s Conduct Risk management, as
well as setting out roles and responsibilities in
relation to Conduct Risk Management including
key support and governance mechanisms:
i)
Managing the risk associated with misconduct
by Covered Persons relating to:
•
Business
activities
and
obligations
(“Business Conduct”)
•
“HR or Personal Conduct”, defined as:
◦
misconduct
relating
to
employee
relations, such as misconduct relating
to the work environment, working
relationships,
compensation,
or
performance
management,
or
in
relation to any allegation of retaliation,
or other detrimental treatment by the
Morgan Stanley Group or violations of
discrimination
and
harassment
policies
◦
violations of law or other misconduct
outside of the workplace that poses a
potential
franchise
risk
or
could
otherwise
compromise
Morgan
Stanley’s reputation
ii) Managing the risk arising from conduct by
Morgan Stanley where the outcome is an
adverse impact on clients or markets (“Firm
Conduct Risk”).
Model Risk
Definition
Model
Risk
is
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,
and
reputational
damage.
Model
risk
increases
with
greater
model
complexity, higher uncertainty about inputs and
assumptions, broader use, and larger potential
impact (financial, regulatory and reputational).
Governance
Sound model risk management is an integral part
of the Risk Management Framework. The Model
Risk
Management
(“MRM”)
function
is
responsible for the oversight of model risk. MRM
establishes a model risk tolerance in line with the
risk appetite.
The MRM framework includes policy, procedures
and controls, which set out standards as well as
roles and responsibilities to manage the risk
related to all models, including valuation, risk,
capital and stress testing models.
Risk Mitigation
Model Risk is owned by the model developers,
who are the first line in managing the risk. They
are
responsible
for
adherence
to
model
development
and
implementation
standards,
which set out requirements related to model
purpose, scope and use, model design and
methodology, input and data, model testing,
implementation, and documentation.
The MRM function, as the second line of
defence, is responsible for the oversight of model
risk and provides the effective challenge of
models. The effective challenge is defined as
critical analysis by objective, informed parties
who
can
identify
model
limitations
and
assumptions and drive appropriate changes. The
MRM
function
provides
such
challenge,
independently validates and approves models for
use, annually recertifies models, identifies and
tracks remediation plans for model limitations
and reports on model risk metrics. The function
also oversees the development of controls to
support
a
complete
and
accurate
Morgan
Stanley-wide model inventory.
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In addition to the MRM function, Valuation
Control (“VC”), within Finance, performs a suite
of controls to ensure accurate valuation of the
Group’s inventory and its compliance with fair
value accounting standards. VC is responsible
for
approving
that
the
model
valuation
methodology is appropriate, model inputs and
valuations
are
consistent
with
accounting
standards and that a mark review can be
performed.
Model
risk
monitoring,
within
the
MRM
framework, is in place in the form of ongoing
performance monitoring by model developers,
regular independent model reviews by MRM, and
regular
model
risk
reporting
to
senior
management and the MSI Risk Committee.
Climate and Environmental Risks
Climate and environmental risk may include
impacts to biodiversity, pollution of land, water or
air, climate change, deforestation and forest
degradation,
and
other
significant
negative
impacts on the environment as a result of human
activities. Within climate and environmental risk,
the risks arising from climate change are a
particular area of focus.
The Morgan Stanley Group divides climate and
environmental risks into two main categories:
transition risk and physical risks.
•
Transition Risks:
Transitioning to a low-
carbon and more environmentally sustainable
economy
will
entail
extensive
regulatory,
policy, legal, technology and market initiatives
as
society
adapts
to
climate
change,
mitigates its causes and promotes a more
sustainable environment. Depending on the
nature, speed and focus of these changes,
transition risks may pose varying types and
levels of financial and reputational risk to
businesses and other organisations.
•
Physical Risks:
These risks include both
acute physical events such as flooding, and
chronic physical risks related to longer-term
shifts in climate patterns such as more
frequent
and
prolonged
drought
and
progressive shifts like biodiversity loss, land
use change, habitat destruction and resource
scarcity.
Financial
implications
for
organisations can range from direct damage
to assets to indirect impacts from supply
chain disruption, driven by factors such as
changes in water availability, food security
and
agricultural
productivity.
Extreme
temperature
changes
may
affect
an
organisation’s physical locations, operations,
supply chain, transport needs and employee
safety.
In addition, the Group may be exposed to
litigation risk or reputational risk losses arising
from reliance on statements or representations in
relation
to
ESG
matters
which
are
later
discovered to be incorrect or misleading.
Managing Climate and Environmental Risks
Climate and environmental risk is managed by
integrating
climate
change
and
other
environmental considerations into the MSI Group
Risk Framework as drivers of credit, market,
operational, and liquidity risks. Climate and
environmental risks are also integrated into
policies
and
procedures.
The
Framework
continues
to
be
developed
to
meet
the
requirements set out in new and evolving
regulations.
Risk Identification and Materiality
Assessment
As part of its established Risk Identification and
Materiality Assessment process, the MSI Group
has a granular risk assessment of climate and
environmental risks. This includes:
•
Risk Inventory:
The risk inventory captures
climate and environmental risks as drivers of
existing risks. Risk events considered include
those related to transition risk, such as
environmental policy (e.g. carbon pricing
scenario) as well as to physical risks.
•
Materiality
Assessment:
A
quantitative
assessment is performed across risk types to
determine the materiality of the impact of
climate and environmental risks. A risk is
considered material if the estimated stress
loss or outflow is above the existing risk
identification materiality threshold. In 2022
based on the evolving understanding of
climate
and
environmental
risks,
the
materiality assessment was further expanded
to assess collateral risk, a broader range of
physical and environmental risks for credit as
well as litigation and reputational risk for
operational risk. The transition risk carbon
repricing
scenario
was
assessed
and
quantified
for
strategic
risk.
A
risk
is
considered material if the estimated stress
loss is above the existing risk identification
materiality thresholds.
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In 2022, for the MSI Group, climate transition risk
driven by carbon repricing or an accelerated
green energy technology transition as well as
climate physical risk were assessed as material
for credit risk exposures. Climate transition risk
and physical risk were assessed as material
because the stress loss of the respective
scenarios
is
above
the
risk
identification
materiality thresholds for credit risk. Climate
transition and physical risks were assessed as
nonmaterial for MSI Group collateral positions.
Operational risk (business disruption, litigation
risk and reputational risk) and strategic risk were
assessed
as
non-material
for
climate
and
environmental risks given estimated losses fall
below respective materiality thresholds. As the
assessment
is
performed
quarterly,
the
materiality assessment may change in the future.
Risk Appetite and Limit Framework
Climate transition risk is incorporated into the
MSI Group Risk Appetite and Limits Framework.
An MSI Board-level Climate Stress Loss Limit is
set across credit and market risk, and is
reviewed on an annual basis.
In addition to the Climate Stress Loss Limit,
climate risk is incorporated into the Credit Risk
Management Framework through industry sector
limits as well as country and borrower ratings.
Limits
and
ratings
are
monitored
as
per
standards in credit risk management policies and
procedures.
•
Climate Stress Loss Limit:
The MSI Group
Board manages portfolio risk appetite via a
Climate
Stress
Loss
Limit.
To
monitor
potential credit and market risk losses against
this limit, the MSI Group runs a short-term
transition
risk
carbon
pricing
scenario
assuming a sudden and sustained carbon
repricing in line with global efforts to meet the
Paris Agreement. This scenario is run monthly
and the results are reported quarterly to the
MSI Risk Committee.
•
Industry Sector Limit:
Credit risk limits are
established for industries highly exposed to
climate risk. This process includes a portfolio
segmentation of industries into groups with
common climate risk profiles. These limits
enable the MSI Group to monitor and manage
credit risk from climate risk in the MSI Group
portfolio.
•
Country
Ratings:
ESG
risk
is
being
incorporated into the internal sovereign credit
rating assessment. The sovereign rating is an
important input in determining country limits,
therefore climate risk and ESG considerations
will influence risk appetite at the country level.
•
Borrower Ratings:
Climate risk is being
incorporated into the rating assessment for
corporates.
The
corporate
rating
is
an
important input in determining single name
limits, therefore climate risk will influence risk
appetite at the single name level.
Scenario Analysis and Stress Testing
Scenario Analysis is central to the MSI Group’s
Climate Risk Management Framework.
Short-term Credit and Market Risk Scenario
Analysis:
Informed by carbon emissions data
from external providers, the MSI Group assesses
the financial impact of climate policy (carbon
repricing) in a scenario that captures both
counterparties’ probability of default and market
price
movements. An
additional
credit
risk
scenario that considers an accelerated transition
to green energy technology is assessed for the
counterparties in the Energy sector and updated
on a quarterly basis. Physical risk is assessed in
stress scenarios to calculate the losses from
acute physical events. As transition risk poses a
greater risk of losses to the MSI Group than
physical risk, a Climate Stress Loss Limit was
established for a transition risk scenario.
Operational Risk Scenario Analysis:
A number of
physical risk scenarios on the MSI Group are
assessed focusing on business disruption due to
climate
change
events
(including
extreme
weather). Physical risk scenarios are selected
based on a combination of probability and
severity.
Litigation
and
Reputational
Risk
Scenarios:
Litigation risk arising from Product Design is
assessed, including inadequate due diligence
and disclosure. Reputational risk losses are
assessed for the scenario that is expected to
result in the greatest harm to clients.
Strategic risk
:
The transition risk carbon repricing
scenario was assessed for Strategic Risk. The
scenario considers an impact on the Group’s
revenues driven by the counterparties that
default in the stress scenario. As of 2022, carbon
repricing is assessed as non-material.
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Reverse Stress Testing:
The MSI Group has
developed a reverse stress test focused on
physical risk of sea level rise. This is one of the
scenarios considered in the ICAAP process.
Long-term Strategy Scenarios:
The MSI Group
has conducted an exploratory long-term scenario
analysis,
running
two
30-year
quantitative
scenarios modelling late action (transition risk)
and no additional action (physical risk) to inform
MSI Group strategy.
Metrics
Climate Stress Loss Limit:
The MSI Group
remained within its portfolio Climate Stress Loss
Limit throughout 2022.
Credit Exposures:
The Group’s exposure to
industries identified as having high climate
transition or physical risk is a small percentage of
overall credit exposures. Exposures to these
industries
with
high
climate
transitional
or
physical risk comprise 4% and 1% of the Group’s
aggregate
credit
and
counterparty
risk
net
current exposure, respectively. Among industries
identified as having high climate transition risk,
the energy sector is the only sector with credit
exposure above 1% of the Group’s aggregate
credit exposure. Credit exposures to climate risk
in the table below are current exposures after
taking into consideration legally enforceable
master netting agreements, collateral and credit
risk mitigants and includes deposits, repurchase
transactions, securities lending, derivatives and
corporate loan commitments. Trade and other
receivables are excluded.
Exposures to High Risk Industries
2022
Exposure
in $ millions
% of
Exposure
Transition Risk
1,689
4 %
Physical Risk
(1)
478
1 %
Total Net Exposure
(excluding trade and other
receivables)
43,412
2021
Exposure
in $ millions
% of
Exposure
Transition Risk
1,068
2 %
Physical Risk
(1)
595
1 %
Total Net Exposure
(excluding trade and other
receivables)
48,723
(1)
The industries identified as having high climate physical risk were
updated in 2022. The 2021 figures included in this table were re-
stated accordingly.
The table includes the credit exposure to industry
sectors highly vulnerable to climate transition and
climate
physical
risks.
The
vulnerability
of
obligors is assessed based on a segmentation
approach
which
differentiates
between
low,
medium. high and very high (high and very high
presented in the table). The segments are sub-
industries with consistent climate risk profile. The
assessment considers expert credit assessment,
greenhouse gas emission data and external
physical risk scores.
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Sustainability
Sustainability Strategy and Disclosures
The
Group’s
approach
to
sustainability
is
consistent with that of the Morgan Stanley
Group.
The
Morgan
Stanley
Group’s
sustainability
strategy
seeks
to
integrate
sustainability into core businesses and support
functions through extensive partnership between
teams
across
Morgan
Stanley.
Further
information on the Morgan Stanley Group’s
approach to
sustainability can be found at
www.morganstanley.com/about-us/sustainability-
at-morgan-sta
nley
.
Sustainability activity at Morgan Stanley is
organised across three core areas of focus:
Sustainable Solutions and Services
As part of its focus on Sustainable Solutions and
Services,
the
Morgan
Stanley
Group
is
responding
to
client
demand
with
financial
solutions and advisory services designed to help
deliver both competitive financial returns and
positive environmental and social outcomes. For
more on this core focus area, refer to the
‘Accelerating
the
adoption
of
sustainable
investing’
section
and
https://
www.morganstanley.com/about-us/sustainable-
solutions-servic
es
.
Institute for Sustainable Investing
Housed within the Morgan Stanley Group’s
Global Sustainability Office (“GSO”) team, the
Morgan
Stanley
Institute
for
Sustainable
Investing (the “Institute”) works to accelerate the
adoption of sustainable investing and finance by
fostering
innovation,
empowering
investors
through actionable analysis and developing the
next generation of leaders in the field. The
Institute supports two capacity building efforts
that help emerging talent contribute their ideas to
sustainable solutions: the Sustainable Investing
Challenge
and
the
Sustainable
Investing
Fellowship.
The
Institute
also
runs
the
Sustainable
Solutions
Collaborative
that
channels
$250,000
awards
to
innovators
engaged in breakthrough sustainable solutions
that range from commercial to non-profit. For
more on this core focus area, refer to:
https://
www.morganstanley.com/what-we-do/institute-
for-sustainable-investing
.
Firmwide Sustainability
The Morgan Stanley Group’s commitment to
sustainable
business,
climate
action
and
inclusive growth extends to integrating ESG
considerations
across
business
practices,
operations and culture. Priorities include building
a diverse and inclusive workforce, improving
business
resilience
and
maintaining
strong
governance
practices
and
prudent
risk
management.
For
more
on
the
Firmwide
Sustainability
focus
area,
refer
to
https://
www.morganstanley.com/about-us/corp-
sustainability
Morgan Stanley Group Sustainability
Disclosure
The Morgan Stanley Group is committed to
transparent disclosure of information. The full list
of available disclosures is in the Morgan Stanley
Group’s Sustainability Report. The Sustainability
Report focuses on investor-relevant ESG topics
and
goals
in
line
with
the
Sustainability
Accounting Standards Board (“SASB”) standards
for Investment Banking, Asset Management and
Commercial Banking guide. This is available at
https://www.morganstanley.com/content/dam/
msdotcom/en/assets/pdfs/
Morgan_Stanley_2021_Sustainability_Report.pdf
The Sustainability Report for 2022 will be
published later in the year.
Sustainability Governance
Information
on
the
Corporate
Governance
arrangements in place for the Company are
described
in
the
'Corporate
Governance
Framework' section in the Strategic Report.
Details of engagement activities undertaken by
the Board in 2022 with employees, suppliers,
clients and other stakeholders and how they
inform decision making are also provided in the
Strategic
Report
within
the
‘Stakeholder
Engagement and Section 172(1) Statement’.
Morgan Stanley Group takes an integrated
approach to ESG management, with oversight
from leadership and input from across the core
business and support functions. To coordinate
and support the EMEA region’s efforts around
sustainability, a management level EMEA ESG
Oversight Committee has been established to
support the MSI Group and EMEA business in
the continued development of an ESG strategy
and risk management framework. The EMEA
ESG
Oversight
Committee
oversees
the
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embedding of ESG risks into the risk and control
framework
and
the
tracking,
analysis
and
implementation
of
key
regional
regulatory
requirements. In addition to its existing reporting
to the Board, from 2023, the EMEA ESG
Oversight Committee will report as required to a
newly established Morgan Stanley-wide ESG
Committee.
At a Company level, the Board has appointed the
EMEA Chief Risk Officer (“CRO”) as the Senior
Manager responsible for managing the financial
risks from climate change. The EMEA CRO Co-
Chairs the EMEA ESG Oversight Committee and
is a member of the Board.
During 2022, the MSI Board and the Board had
oversight of various climate related matters on a
regular basis. In particular the MSI Board and the
Board
approved
the
Business
Plan,
which
included the commitment to sustainability and
delivering ESG related regulatory requirements.
Also, the MSI Board and the Board reviewed and
approved
updates
to
their
respective
Risk
Appetite Statements to include climate change
as a driver of existing risks. Furthermore, the MSI
Board approved the KPI for lending exposure
retained on MSI Group to align to Morgan
Stanley’s Net Zero commitment and targets.
As part of the quarterly review of risks, the MSI
Risk Committee reviews the utilisation of the
Climate Stress Loss Limit and the credit risk
limits that are established for industries highly
exposed to climate risk. Please refer to the
‘Climate and Environmental Risks, Risk Appetite
and Limit Framework’ section for additional
details.
Environmental Matters
Climate Change
The Morgan Stanley Group and the Group’s
climate strategy is built on four pillars:
•
Support
the
transition
to
a
low-carbon
economy by mobilising capital toward low
carbon solutions and publishing industry-
leading research and thought leadership for
an investor audience;
•
Manage climate change risk by integrating
climate
change
considerations
into
risk
management
processes
and
governance
structures (see ‘Climate and Environmental
Risk’);
•
Provide
relevant,
transparent
and
useful
climate-related
disclosures
in
Morgan
Stanley’s
Climate
Report
and
other
publications (see ‘Morgan Stanley Group
Sustainability Disclosure’);
•
Enhance the climate resilience of operations
by
minimising
footprint
and
enhancing
operational
resiliency
(see
‘Operational
Sustainability’).
Central to Morgan Stanley Group’s climate
strategy
is
the
commitment,
announced
in
September 2020, to reach net-zero financed
emissions by 2050.
To
demonstrate
progress
toward
net-zero
emissions by 2050, the Morgan Stanley Group
set interim 2030 financed emissions lending
intensity (“FELI”) targets in November 2021 for
the three most emissions-intensive sectors: Auto
Manufacturing, Energy, and Power. The MSI
Group has established a KPI that monitors its
contribution to the Morgan Stanley Group’s
targets in these three sectors. For details on the
Morgan
Stanley
Group’s
targets
and
methodology,
including
its
Measure-Manage-
Report framework launched in 2021, refer to:
https://www.morganstanley.com/about-us/
sustainability-at-morgan-stanley/net-zero-
financed-emissions
The Morgan Stanley Group is also involved in
industry-led initiatives that inform how financial
institutions set net-zero targets, and measure
and disclose financed emissions, including the
Net-Zero Banking Alliance (“NZBA”) and the
Partnership for Carbon Accounting Financials
(“PCAF”). While these industry initiatives inform
Morgan Stanley’s work, the Morgan Stanley
Group
makes
independent
decisions
that
considers the interests of the Morgan Stanley
Group, clients, and shareholders.
Further information about the Morgan Stanley
Group’s
efforts to support climate change
mitigation is available in the Climate Report,
which is guided by the recommendations of the
Task
Force
on
Climate-related
Financial
Disclosures (“TCFD”). This is available at:
https://www.morganstanley.com/content/dam/
msdotcom/en/assets/pdfs/
Morgan_Stanley_2021_Climate_Report.pdf.
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The Climate Report for 2022 will be published
later in the year.
Accelerating the Adoption of Sustainable
Investing and Finance
The Morgan Stanley Group continues to partner
with clients and stakeholders to mobilise capital
at scale for the low-carbon transition and in 2021,
increased its commitment to $750 billion by
2030. This goal is part of a larger commitment to
mobilise $1 trillion in capital toward broader
sustainability solutions in support of the UN
Sustainable Development Goals. Together, these
goals drive the Morgan Stanley Group’s efforts to
develop
innovative,
market-leading
climate
finance and investment solutions that meet
growing client demand. By incorporating climate
considerations
into
business
activities,
the
Morgan Stanley Group aims to manage business
for the long term while providing value for clients
and shareholders. For details, refer to:
https://
www.morganstanley.com/ideas/low-carbon-
finance-1-trillion-dollar-pledge
.
Operational Sustainability
Morgan Stanley believes that its commitment to
sustainability must include steps to address its
own
operations.
Global
Corporate
Services
operates
Morgan
Stanley’s
real
estate
in
accordance with its Environmental and Social
Policy Statement, which was established by the
GSO
and
Environmental
Social
Risk
Management (“ESRM”) Group. For more detail
refer
to the ‘Sustainable Operations’ section of
the Environmental and Social Policy Statement
available at:
https://www.morganstanley.com/content/dam/
msdotcom/en/about-us-governance/pdf/
Environmental_and_Social_Policy_Statement.pd
f
.
Morgan Stanley committed to achieving carbon
neutrality by 2022, covering Scope 1 and 2
emissions
and
Scope
3
business
travel
emissions. Progress towards this goal will be
reported
in
the
Morgan
Stanley
Group’s
Sustainability report that will be published in
2023.
For
more
on
the
approach
to
operational
sustainability, refer to:
https://www.morganstanley.com/about-us/
sustainability-at-work
.
Greenhouse Gas Emissions, Energy
Consumption and Energy Efficiency
Morgan Stanley sets global operational targets
that
are
focussed
on
climate,
resource
management and supply chain. As part of
Morgan
Stanley’s
commitment
to
a
25%
reduction
in
energy
consumption,
Morgan
Stanley has implemented a number of initiatives
in the UK which are relevant to the Company
including:
•
Continual assessment of plant and equipment
run-times with operational requirements;
•
Replacement of lighting and control systems
with energy efficient alternatives (LED);
•
Upgrade of air conditioning and ventilation
control
systems
with
energy
efficient
alternatives;
•
Ongoing
provision
of
energy
and
environmental awareness training to vendors
and staff.
The following table sets out the Group’s carbon
emissions of the energy sources from its UK
locations as required under the Companies Act
2006. Emissions have been calculated in line
with the Greenhouse Gas Protocol Corporate
Accounting and Reporting Standard (revised
edition)
using
emission
factors
from
the
Department of Business, Energy & Industrial
Strategy (Greenhouse gas reporting: conversion
factors
for
2022),
the
Department
for
Environment, Food & Rural Affairs (Table 13 –
Indirect Emissions from the supply chain, March
2014) and the US EPA Center for Climate
Leadership (Emission Factor Hub, April 2021).
In
line
with
the
Morgan
Stanley
Group’s
organisational structure, properties are primarily
leased by service entity subsidiaries of the
Morgan Stanley Group. The service entities
recharge property and travel costs to the Group
reflecting their usage. Total scope 1 and scope 2
emissions reported relate to the Group’s usage
of UK properties only. Scope 3 emissions relate
to the Group’s share of UK employee business
travel only. This disclosure is a subset of the
emissions reported in the financial statements of
Morgan Stanley’s UK service entities - Morgan
Stanley UK Limited (“MSUKL”) and Morgan
Stanley UK Group Limited, both of which are
subsidiaries
of
the
MSI
Group.
Emissions
reported exclude any emissions relating to
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employees
working
from
home,
as
such
emissions cannot be quantified reliably.
The table below represents the Group’s share of
the UK’s carbon emissions for the years ended
31 December 2022 and 31 December 2021:
2022
2021
Energy consumption
used to calculate
emissions in kWh*
53,999,651
57,802,992
CO2e Tonnes**
CO2e Tonnes**
Location
based
Market
based
Location
based
Market
based
Emission source
Scope 1 –
combustion of fuel
and operation of
facilities
394
394
545
545
Scope 2 – Electricity,
heat, steam and
cooling purchased for
own use***
10,048 1,534 11,694 1,339
Total scope 1 and
scope 2
10,442
1,928
12,239
1,884
Scope 3 –
Commercial air and
ground transportation
3,682
3,682
709
709
Scope 3 – Employee
expensed car
mileage
19
19
8
8
Total emissions
14,143
5,629
12,956
2,601
Intensity ratio
(tCO2e/SQM)****
0.1327 0.0245
0.1492
0.0230
*
Energy consumption includes Scope 1,2 and Scope 3 - Employee
expensed car mileage only
**
Tonnes of carbon dioxide equivalent
*** The prior year scope 2 market-based emissions have been
revised to be based on residual emissions where the Morgan
Stanley Group’s UK service entities occupy space in multi-
tenanted buildings (see below)
**** Tonnes of CO2e per square metre of UK real estate (Scope 1 and
2 emissions only)
The Group has chosen to report both location-
based and market-based emissions for scope 2.
The location-based emissions reflect the average
emissions
of
the
grid
where
the
energy
consumption occurs and is calculated using the
government-published UK electricity grid average
factors. Where energy can be directly procured
from energy suppliers, the Morgan Stanley
Group UK service entities have entered into
contractual arrangements to purchase 100%
renewable
electricity,
backed
by
renewable
energy guarantee of origin certificates, as such,
the Group can report a reduced emission figure
based on the specific electricity purchased under
the market-based method. In locations where the
Morgan Stanley Group’s UK service entities
occupy space within multi-tenanted buildings, for
which
renewable
energy
and
associated
renewable energy attributes are procured and
reported by others, market-based emissions
have
been
calculated
using
the
residual
emissions factors.
Total energy consumption for 2022 decreased by
7% from 2021, driven by lower leasehold
premises gas and electricity consumption. Scope
1 and 2 location-based emissions for 2022
decreased by 15% from 2021 due to lower
consumption and as a result of UK grid electricity
conversion factors reducing due to lower UK coal
generation, and higher renewable and nuclear
generation. Scope 3 location-based emissions
increased by 416% due to higher demand for
business travel following the end of COVID-19
health restrictions in 2022.
The intensity ratio is calculated using square
metre (“SQM”) of UK real estate. This is
considered most appropriate as the service entity
subsidiaries
of
the
Morgan
Stanley
Group
recharge property costs to the Group using SQM
reflecting their usage. In addition, the Morgan
Stanley Group manages its carbon emissions
using this metric.
An independent third party provided limited
assurance of the reported energy and emissions
data for 2021 and will do so for 2022 data as part
of the Morgan Stanley’s global greenhouse gas
inventory management process later in 2023. To
Morgan
Stanley’s
knowledge
there
are
no
material omissions or misstatements reported
herein.
Environmental and Social Risk
Management
A Morgan Stanley-wide approach is taken to the
management of environmental and social risks
that could impact its reputation. Morgan Stanley’s
ESRM Group provides internal subject matter
expertise on environmental and social risk,
conducts diligence on relevant transactions, and
monitors emerging environmental and social
issues.
Due diligence and risk management processes
are designed to identify, assess and address
potentially significant environmental and social
issues that may impact Morgan Stanley, clients
and other stakeholders. As outlined in Morgan
Stanley’s
Environmental
and
Social
Policy
Statement,
Morgan
Stanley
has
tailored
approaches to certain sectors and activities,
including carbon-intensive sectors. Transactions
that meet designated environmental and social
risk criteria may require approval by the Global
Franchise Committee, or Regional Franchise
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Committees
such
as
the
EMEA
Franchise
Committee, as well as senior management. This
Policy Statement is reviewed annually and
updated
to
reflect
strategy
and
key
developments. For further detail, refer to Morgan
Stanley’s
Environmental
and
Social
Policy
Statement
which
can
be
found
at
http://
www.morganstanley.com/about-us-governance
.
Human Rights in the Supply Chain
The Morgan Stanley Group is committed to being
a responsible corporate citizen and fulfilling the
important role business can play in protecting
and advancing global standards for human rights
including equal opportunity, the freedom to
associate and bargain collectively, and the
elimination of modern slavery, human trafficking
and harmful or exploitative forms of child labour.
Human rights considerations are incorporated
into our transaction due diligence process, our
engagement
with
companies,
our
supplier
expectations, and our own operations.
Morgan Stanley is committed to complying with
the laws and regulations of the countries in which
it
operates
while
simultaneously
conducting
business and encouraging the promotion of
human rights through its policies, standards, and
practices. Its approach is guided by leading
frameworks, including the Universal Declaration
of Human Rights, adopted by the United Nations
(“U.N.”) General Assembly and the U.N. Guiding
Principles on Business and Human Rights.
Morgan Stanley’s Supplier Code of Conduct
outlines expectations with regard to human
rights,
employment
and
non-discrimination
practices,
health
and
safety,
diversity
and
inclusion, and data protection. As outlined in the
Supplier
Code
of
Conduct,
suppliers
must
conduct their operations in a socially responsible,
non-discriminatory
manner,
and
in
full
compliance with applicable laws including, but
not limited to, those associated with personal
information,
equal
opportunity,
child
labour,
forced or compulsory labour, working hours and
compensation, freedom of association, collective
bargaining
and
a
harassment-free
work
environment.
Each year, Morgan Stanley publishes its Modern
Slavery and Human Trafficking Statement in
accordance with Section 54 of the UK Modern
Slavery Act 2015 that outlines the steps taken by
Morgan Stanley during the preceding financial
year to address the risk of modern slavery in its
own operations and supply chain, as well as
future plans in that regard.
Both the Supplier Code of Conduct and the
Modern Slavery Statement are part of the
contractual
supplier
agreements.
If
Morgan
Stanley finds information through its negative
media searches that a supplier is violating them,
they would be considered to be in breach of
contract, and subject to termination of the
supplier agreement. For assessments completed
in 2022, the Group has not found and is not
aware of any suppliers engaging in Modern
Slavery and Human Trafficking.
For further detail, refer to Morgan Stanley’s
Human Rights Statement, Modern Slavery and
Human Trafficking Statement, Environmental and
Social Policy Statement, and Supplier Code of
Conduct,
which
can
be
found
at
http://
www.morganstanley.com/about-us-governan
ce
.
Anti-Corruption and Bribery
The Group, principally through Morgan Stanley
Group’s Legal and Compliance Division, has
established
and
implemented
policies,
procedures, and internal controls reasonably
designed
to
comply
with
applicable
anti-
corruption
laws
and
regulations
in
the
jurisdictions in which it operates.
The
Morgan
Stanley
Group’s
Global
Anti-
Corruption Policy, which is updated annually and
approved by the Audit Committee, addresses
corruption risks and prohibits offering, promising,
giving or authorising others to give anything of
value, either directly or indirectly, to any party, to
improperly obtain or retain business or gain an
improper business advantage. It also prohibits
receiving, or agreeing to receive, anything of
value that results or may result in the improper
performance of employees’ duties at Morgan
Stanley. These values are embedded within the
Morgan Stanley Group’s Code of Conduct, to
which employees must attest their understanding
of, and adherence to, on an annual basis. For
details, refer to:
https://www.morganstanley.com/about-us-
governance/code-of-conduct
An annual risk assessment is performed to
consider key areas of potential corruption risk to
the Morgan Stanley Group.
Anti-corruption training is provided to all staff
globally on an annual basis and targeted training
is additionally conducted as necessary.
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The Group maintains whistleblowing policies and
procedures
to
ensure
that
individuals
can
confidentially report concerns when these arise.
Management information regarding the anti-
corruption program is reported to appropriate
senior management personnel through Legal and
Compliance Division governance frameworks.
Our People
The Group’s employees are its most important
asset. To facilitate talent attraction and retention,
Morgan Stanley Group strives to create a diverse
and inclusive workplace, with a strong culture
and opportunities for employees to grow and
develop in their careers and be supported by
competitive compensation, benefits, and health
and wellness programs.
Diversity & Inclusion
Morgan Stanley’s diversity and inclusion strategy
is designed to drive meaningful and sustainable
change, and to help achieve a truly diverse and
inclusive workforce. It informs the way the
Morgan
Stanley
Group
engages
with
and
supports its employees, as well as how it serves
clients, investors, and the diverse communities in
which Morgan Stanley operates. The strategy is
built
on
five
key
pillars:
accountability,
representation,
advancement,
culture
and
outreach.
Morgan Stanley Group is an equal opportunity
employer committed to ensuring, within the
framework of the law, that the workplace is free
from
unlawful
discrimination.
The
Morgan
Stanley Group aims to ensure that staff achieve
their full potential and that all employment
decisions
are
taken
without
reference
to
irrelevant or discriminatory criteria. The Dignity at
Work Policy for the Group aims to draw attention
to,
and
therefore
prevent,
all
forms
of
unacceptable behaviour and to ensure all staff
are treated with dignity and respect.
The correlation between inclusive teams and
improved
decision-making,
innovation
and
performance aligns with Morgan Stanley core
values. The EMEA Diversity Action Council acts
as a catalyst to drive forward the EMEA diversity
strategy.
Accountability
is
underscored
by
quarterly meetings with the European Operating
Committee and regular discussion at Divisional
Operating Committees.
Morgan Stanley Group’s commitment to Diversity
and Inclusion, including its UK Gender Pay Gap
Results
and
as
signatory
of
the
UK
Governments’ Women in Finance Charter, is
outlined in the Diversity and Inclusion report. This
report and further information can be found at
https://www.morganstanley.com/about-us/
diversity
The Board also has a diversity policy in place
which is reviewed annually. For further detail on
this
and
the
targets
set,
refer
to
‘Board
Composition’ within the Corporate Governance
section.
Culture
The Morgan Stanley Group’s core values are
designed to guide decision making aligned to the
expectations of employees, clients, shareholders,
regulators, directors and the communities in
which Morgan Stanley operates. These guiding
values are the heart of workplace culture and
underpin Morgan Stanley’s success.
Each year, Managing Directors and other senior
staff lead mandatory Morgan Stanley wide
culture conversations, engaging employees and
on-site contingent workers in a dialogue about
appropriate conduct, behaviour and decision-
making.
Case
studies
and
other
reference
materials used during the sessions encourage
robust
discussion
on
sustaining
Morgan
Stanley’s culture, and attendance is tracked to
ensure participation.
For further detail, refer to the ‘Risk Management
Framework – Culture, values and conduct of
employees’ section as well as the Morgan
Stanley
Group’s
Sustainability
Report.
This
report and further information can be found at
https://www.morganstanley.com/about-us/corp-
sustainability
Talent Management
Both the Company and the Morgan Stanley
Group
place
considerable
value
on
the
investment
in
their
employees
and
have
continued their practice of keeping employees
informed on matters affecting them. Employees
are encouraged to present their suggestions and
views
on
Morgan
Stanley
performance
to
management and employees participate directly
in the success of the business through various
Morgan Stanley compensation incentive plans.
The Group’s recruiting strategy aims to attract
top tier talent in all disciplines required for the
execution
of
the
Morgan
Stanley
Group’s
business activities. The recruitment priorities
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include a mandate seeking to identify a diverse
pool of candidates with the requisite skills and
demonstrated abilities to contribute meaningfully
and productively to the Morgan Stanley Group’s
culture, consistent with its values and standards.
The Morgan Stanley Group also encourages
internal mobility to retain talent and provide
growth opportunities within the Morgan Stanley
Group.
Wellbeing
Morgan Stanley Group aims to foster an inclusive
culture
that
supports
employees’
entire
wellbeing,
encompassing
positive
physical,
mental, social and financial health, by raising
awareness, educating
employees on preventive
care and providing best-in-class resources for
employees and their families.
In September 2022, Morgan Stanley launched a
community of wellbeing culture carriers known as
the Global Wellbeing Influencer Network. These
individuals will help guide wellbeing strategy,
amplify awareness and surface key issues that
arise from the work environment.
As part of Morgan Stanley’s continued increased
focus on mental health at work, the EMEA Mental
Health Advisory Board have signed ‘The Mental
Health at Work Commitment’ in the UK, an
industry framework for best practice which
Morgan Stanley is working towards.
Giving Back to the Community
The Morgan Stanley Group is committed to
giving back to the communities in which it
operates
through
a
range
of
philanthropic
programs.
The
Morgan
Stanley
Foundation
supports healthy starts and solid education for
children in local communities, expanding the
reach of those initiatives globally through the
Morgan Stanley International Foundation. The
impact of these philanthropic initiatives includes:
Volunteering
In 2022, following a two year hiatus, Morgan
Stanley restarted its traditional Global Volunteer
Month, engaging over 41,000 employees across
all offices globally. As part of this, employees
dedicated 211,550 volunteer hours to support
local community organisations where they live
and work. In the UK, 70% of employees were
involved.
Morgan Stanley also ran its annual Strategy
Challenge pro-bono program where teams of
employees make a meaningful impact on a
charitable organisation’s ability to deliver on its
mission. In 2022, London employees delivered
over 4,900 hours of pro-bono service to six
charities, valued at over £625,000.
London employees spent over 1,600 hours
supporting four charities as part of the Skills
Connectors program to tackle strategic and
operational
issues.
In
Glasgow,
employees
provided over 900 hours of pro-bono advice to
eight charities. Pro-bono programs were also run
in
the
Frankfurt
and
Budapest
offices.
In
Budapest and London, employees spent 85
hours supporting two charities through their
‘Technology Change Makers’ program.
Giving
In EMEA, the Morgan Stanley International
Foundation granted over £1.6 million to 23
charities
focused
on
the
fundamentals
of
children’s health and education.
Employees in offices across EMEA nominate
charity partners, raising funds over a two year
period,
supported
by
the
Morgan
Stanley
International
Foundation.
In
October
2021,
London employees nominated the Felix Project
as their new charity partner for two years, aiming
to raise over £1 million to enable the charity to
collect surplus food and distribute 75 million
meals to hundreds of charities, schools, and
community groups in East London. By 31
December 2022, over £600,000 had been raised.
In October 2021, Glasgow employees nominated
Children’s Hospices Across Scotland as their
new charity partner for two years, aiming to raise
over £180,000 to fund a support service to
ensure that bereaved brothers and sisters across
Scotland are given the best chance in life. By 31
December 2022, over £70,000 had been raised.
Other
employee-nominated
charity
partners
across EMEA were: L’Envol in Paris, Fundacion
Aladina in Milan, Association CAF Onlus in
Madrid, Salva Vita in Budapest, Deutscher
Kinderschutzbund in Frankfurt and Kinderspital
Zurich. These charities all work to support a
range of children’s causes.
In response to the cost of living crisis across
EMEA,
the
Morgan
Stanley
International
Foundation has extended support to six charities
across EMEA to provide emergency aid to local
communities.
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In response to the humanitarian crisis in Ukraine,
Morgan Stanley and its employees contributed
$4.5 million globally to the International Rescue
Committee to provide critical assistance to
civilians affected.
Community Impact
For 60 years, the Morgan Stanley Foundation
has
supported
healthy
starts
and
solid
educations for the children in local communities,
and for over 25 years, has expanded the reach of
those initiatives across the EMEA region. This
includes the establishment of the Morgan Stanley
Alliance for Children’s Mental Health, which
funds critical research on children’s mental
health, drives thought leadership, and grows
programs in schools, hospitals and physicians’
offices,
reaching
over
11
million
students,
families and teachers globally since February
2020.
In the UK, Morgan Stanley has partnered with
Place2Be to support a range of critical mental
health
initiatives
for
students,
parents
and
teachers in London and Glasgow, addressing the
ever-growing children’s mental health space.
This includes enabling the charity to extend its
school based mental health services for over
8,400 children in 14 schools in London and
Glasgow.
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Corporate Governance
Corporate Governance Framework
The Company seeks to align with best practice
guidance
on
the
corporate
governance
of
financial institutions. While it has chosen not to
formally
adopt
an
additional
corporate
governance code, the corporate governance
arrangements in place for the Company are
described
below
and
are
materially
in
accordance with the framework set out in the
Wates Corporate Governance Principles. As a
financial services firm, the Company applies
regulatory requirements set out by the PRA and
FCA when determining its corporate governance
arrangements.
Purpose
The Company’s purpose is to deliver the strategy
of the Morgan Stanley Group in the markets and
communities in which it operates and to its global
client base.
Our Strategy
What we do
- advise, originate, trade, manage
and
distribute
capital
for
governments,
institutions and individuals, and always do so
with a standard of excellence.
How we do it
- Execute in a way that is
consistent
with
our
values
and,
whenever
possible, deliver more than one part of the
Morgan Stanley Group.
With what result
- Deliver strong returns for our
shareholders, build long-term value for our
clients
and
offer
highly
attractive
career
opportunities for our employees.
Board Composition
At 31 December 2022, the Board comprised 15
Directors (8 Executive Directors and 7 Non-
Executive
Directors).
The
diagram
below
provides an overview of the Board. In line with
corporate governance best practice, the roles of
Chair and CEO are held by different people.
1.
Megan Butler and Jane Pearce were appointed as Non-Executive Directors of the Company on 1 October 2022.
2.
David Russell retired as an Executive Director of the Company on 17 January 2023 and was replaced by David Cantillon on the same date.
3.
Anthony Mullineaux was appointed as an Executive Director of the Company on 25 October 2022.
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The size, structure and composition of the Board
is reviewed annually to ensure it remains
appropriate and promotes effective decision
making. The MSI Nomination and Governance
Committee
(“NomCo”),
led
by
the
Chair,
considers the balance of skills and experience on
the Board, with recommendations made to the
Board as needed. Having a diverse range of
approaches, backgrounds, skills, experience,
opinions and views on the Board is important. To
promote this the Board has a Board Diversity
policy in place which is reviewed annually. As at
31 December 2022, the policy included a target
of at least 33% female representation on the
Board and in February 2023, the target was
increased to 40% by 2025. As at 31 December
2022, the representation of women on the Board
was 47%. The policy also includes a target of a
minimum of one Board director from an ethnic
minority background, which the Board currently
meets. The targets set out in the policy are in line
with industry targets for diversity and inclusion.
New appointments to the Board are reviewed by
the NomCo prior to recommendation to the
Board for approval. The NomCo will consider a
number of factors when deciding on a new
appointment including, but not limited to, a
candidate’s: skills, experience, demographics,
ethnicity, gender and geographical experience;
honesty, integrity and independence of mind;
time commitment; and collective fit with the
Board and the Morgan Stanley Core Values.
When new Directors are appointed to the Board,
they
receive
a
tailored
induction
program
designed to give them a broad understanding of
the Company, its business and governance and
risk
management
frameworks
and
an
understanding of their regulatory and legal
responsibilities.
To
keep
their
skills
and
knowledge up to date, the Board receives
training sessions on key topics. Non-Executive
Directors receive additional briefings from senior
management, attend site visits to ensure they
continue to have the skills and knowledge
needed to fulfil their role and Directors continued
a program of “open door sessions” throughout
2022. For more information see the ‘Employees’
section of the ‘Stakeholder Engagement and
Section 172(1) Statement’.
The Board reviews its effectiveness annually
using either an internal or externally facilitated
assessment. In 2022 an internal assessment was
facilitated by Company Secretarial. Directors also
receive
individual
annual
performance
assessments
to
assist
with
their
personal
development.
Director Responsibilities
The Board and each Director have a clear
understanding of their responsibilities. These are
set out in the matters reserved to the Board and
the terms of reference for each of the MSI Board
Committees and the role profile provided to each
director on appointment, and are reviewed
periodically.
The Company is a wholly owned subsidiary of
MSI.
The MSI Board has established core Board
Committees to assist it, and a number of its
regulated subsidiaries, in performing their duties.
The MSI Board is assisted in discharging its
responsibilities via its core Board Committees,
the
MSI
Audit,
Risk,
Remuneration,
and
Nomination and Governance Committees. In
2022, the MSI Board established an additional
Board Committee, the EMEA 2022 Enhancement
Programme Committee. The Board Committees
are described below in ‘MSI Board Committee
Structure and EMEA Executive Management
Structure’.
The Board meets approximately 10 times a year
and receives regular reporting on key aspects of
the Company’s business, including performance
against
KPIs,
financial
performance,
risk
management information and updates on market
conditions and the regulatory environment. The
MSI Risk Committee and MSI Audit Committee
meet
at
least
quarterly
and
the
MSI
Remuneration Committee and NomCo meet at
least twice a year to receive reports on key
matters within their remit.
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MSI Board Committee Structure and EMEA Executive Management Structure
Board Committees
The MSI Risk Committee assists the Board on
the management of financial and non-financial
risks, including (i) risk strategy and appetite; (ii)
risk identification and management; (iii) risk
governance
framework
and
policies;
(iv)
measurement of risk against tolerance and limits;
(v) risk culture (save for conduct risk, which is
overseen by the MSI Audit Committee); (vi)
financial resource management and capital; and
(vii) recovery and resolution.
The MSI Audit Committee assists the Board in
monitoring: (i) financial reporting; (ii) internal
controls; (iii) legal and regulatory compliance
(including Client Assets Sourcebook (“CASS”)
requirements); (iv) internal audit; (v) external
auditors;
and
(vi)
recovery
and
resolution
planning.
The MSI Remuneration Committee assists the
Board in (i) overseeing the implementation of
remuneration policies and practices applicable to
the Company (as a member of the MSI Group)
and (ii) overseeing compliance by the Company
with applicable EU and UK remuneration rules,
statements and guidance.
The MSI NomCo assists the Board in (i) the
recruitment of Board members; (ii) assessment
of the performance of the Board and (iii) the MSI
Group corporate governance framework (as it
applies to the Company).
The
EMEA
2022
Enhancement
Programme
Committee assists and provide guidance to the
Board on its oversight of the implementation of a
program of control enhancements.
Each MSI Board Committee (other than the
EMEA
2022
Enhancement
Programme
Committee) is comprised solely of independent
Non-Executive Directors appointed to provide
robust and effective challenge of the matters
within its remit. Processes are in place to
manage conflicts of interest, should they arise.
EMEA Executive and Risk Focused
Management Committees
Day to day management of the Company’s
business is delegated to key EMEA Executive
Committees,
namely
the
EMEA
Operating
Committee, the EMEA Risk Committee and the
EMEA Culture and Conduct Committee.
These Executive Committees are the most senior
MSI Group executive management committees
and have responsibility for overseeing business
performance, operations and risks identified in
relation to the MSI Group. The Executive
Committees are supported in their oversight of
specific areas of the MSI Group’s activities by a
number of management committees.
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Executive Committees
The EMEA Operating Committee is the principal
forum
for
key
decisions
regarding
matters
affecting the operations and performance of the
MSI Group in accordance with the strategy
approved by the MSI Board. The Committee’s
responsibilities include matters relating to: (i)
strategy; (ii) financial and business performance;
(iii) risk and control; (iv) operational, legal and
regulatory matters; and (v) human resources.
The EMEA Risk Committee (“ERC”) assists in
the oversight of the MSI Group’s management of
risk (including financial and non-financial risks)
within the MSI Group. The Committee provides
oversight of: (i) risk strategy and appetite; (ii) risk
identification
and
management;
(iii)
risk
framework and policies; (iv) risk behaviour; and
(v) financial resource management and capital.
The EMEA Culture & Conduct Committee assists
in the oversight of the culture and of conduct risk
within the MSI Group. The Committee provides
oversight of (i) material inherent or emerging
conduct risks; (ii) material conduct incidents and
issues;
(iii)
strategic
employee
matters
or
initiatives relevant to culture and conduct; and
(iv) assists in the embedding of Morgan Stanley’s
core values and culture within the MSI Group.
Management-level Committees (Associated
with Risk Governance)
The
EMEA Franchise Committee
assists in the
oversight of potentially significant reputational or
franchise
risks
in
connection
with
relevant
transactions, activities and clients in EMEA
The
EMEA ALCO
assists the ERC to oversee
the capital adequacy, funding, and liquidity risk
management of the MSI Group.
The
EMEA
Operational
Risk
Oversight
Committee
assists and provides guidance to the
ERC
in
relation
to
the
oversight
of
the
management of operational risk of the MSI
Group.
The
EMEA
Client
Assets
Governance
Committee
provides support for MSI Group’s
compliance with CASS requirements, and acts
as the principal body for providing governance of
CASS related issues, being responsible for co-
ordinating the approach to managing Client
Money and Client Assets.
The
EMEA Conduct Risk Committee
assists
the ERC in the oversight and management of
conduct risk within the MSI Group.
The
EMEA Electronic Trading Governance
Committee
is established by the ERC to review
and
challenge
controls
applicable
to
the
electronic trading business undertaken by the
MSI Group.
The
EMEA Product Committee
assists the ERC
in discharging its responsibilities for the oversight
of approvals of New Products, and the oversight
of product governance.
The
EMEA ESG Oversight Committee
supports
the MSI Group and EMEA business in the
development of a comprehensive approach to
the incorporation of ESG risks into business
strategy,
business
processes
and
risk
management in EMEA
.
Management Committees (Associated with
Financial Reporting)
The
EMEA
Financial
Statement
Review
Committee
(“FSRC”) reviews and recommends
or approves the publicly disclosed financial
information, the related representations and
associated controls of MSI and its EMEA
regulated subsidiaries and their branches.
Changes Subsequent to 31 December 2022
Following a targeted review of MSI Group
governance during 2022, the following changes
have
become
effective
subsequent
to
31
December 2022: (i) the EMEA Remuneration
Oversight
Committee
is
identified
as
an
Executive Committee, and provides executive
oversight of EMEA remuneration matters and
helps to ensure remuneration practices in EMEA
are
compliant
with
relevant
UK
and
EU
legislation and do not incentivise excessive risk-
taking; (ii) the EMEA Conduct Risk Committee
has been re-aligned from the ERC to the EMEA
Culture & Conduct Committee; (iii) the EMEA
Culture Advisory Group is no longer identified as
a Management Committee; and (iv) the EMEA
Public
Disclosure
Review
Committee
has
assumed
responsibility
from
the
FSRC
for
providing governance and oversight over a broad
range of publicly disclosed information, including
financial information, relating to Morgan Stanley’s
EMEA business.
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Strategy and Risk
The Board sets the Company strategy, which
implements the Global Morgan Stanley Strategy
as it applies to the Company’s business and is
aligned
to
the
Company’s
Risk
Appetite
Statement. The Board, with assistance from the
MSI
Risk
Committee,
reviews
performance
against the strategy and risk appetite (including
compliance
with
the
risk
management
framework, risk tolerances and risk limits) at its
meetings throughout the year. The Board holds
an annual strategy day to consider long term
strategic opportunities and risks for the business.
Significant changes in strategy or risk appetite,
including material changes to the Company’s
business,
require
Board
consideration
and
approval to ensure they are in the long-term
interests of the Company and to consider the
impact on key stakeholders. The Board is
supported in its monitoring of financial and non-
financial risk by the MSI Risk Committee. The
ERC is responsible for the oversight of the day to
day management of the Company’s financial and
non-financial risks. Further information on the
risk management framework applicable to the
Company’s business is provided in the ‘Risk
Management’ section of the Strategic Report.
Remuneration
The Company, as a wholly owned subsidiary of
Morgan Stanley, is subject to Global Morgan
Stanley Remuneration Policies and Procedures
which
determine
the
remuneration
paid
to
Company employees. Morgan Stanley has a pay
for performance philosophy and is committed to
responsible compensation programs with the
following key objectives, all of which support
Morgan
Stanley’s
culture
and
values
and
shareholders’
interests:
deliver
pay
for
sustainable performance; align compensation
with shareholders’ interests; attract and retain top
talent; and mitigate excessive risk-taking. The
Board has delegated responsibility to the MSI
Remuneration
Committee
to
oversee
the
implementation of those policies and procedures
to
the
Company’s
business
and
oversee
compliance by the Company with applicable EU
and UK remuneration rules, statements and
guidance.
Further
information
on
the
link
between the culture, values and conduct of
employees and their remuneration is provided in
the ‘Culture, Values and Conduct of Employees’
section of Risk Management. Information about
compliance
with
the
Capital
Requirements
Directive (“CRD IV”), the FCA Remuneration
Code for dual-regulated firms (“SYSC 19D”), the
PRA
Rulebook:
Remuneration,
and
any
guidelines
or
guidance
related
to
these
provisions is included in MSI’s annual CRR 450
remuneration disclosure.
Stakeholder Engagement and Section
172(1) Statement
Directors of the Company are required to act in a
way that they consider, in good faith, to be most
likely to promote the success of the Company for
the benefit of its members as a whole, and in so
doing have regard, among other matters, to:
•
the likely consequences of any decision in the
long term;
•
the interests of the Company’s employees;
•
the need to foster the Company’s business
relationships with suppliers, customers and
others;
•
the impact of the Company’s operations on
the community and the environment;
•
the desirability of the Company maintaining a
reputation for high standards of business
conduct; and
•
the need to act fairly as between members of
the Company.
To assist them in discharging their duty under
s172 Companies Act 2006, Directors undertake a
number of stakeholder engagement activities to
provide them with the information they need to
understand
the
views
and
interests
of
stakeholders. This information helps Directors to
have regard to stakeholder interests, and the
likely long term consequences, including to the
reputation
of
the
Company,
when
making
decisions and setting strategy. The Company’s
key stakeholders were considered in 2022, and
are listed below with examples of the stakeholder
engagement activities that took place in 2022.
Employees
During 2022, Directors continued a program of
“open door” sessions at which employees were
encouraged
to
ask
questions
about
the
Company’s business, its strategy, performance,
current initiatives and the role of the Board.
Employees also attended MSI Board meetings to
report on employee initiatives as part of the
employee talent programs and NomCo meetings
to report on Diversity and Inclusion initiatives
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within the MSI Group. The Board continued to
focus on employee culture and conduct as part of
its review of the EMEA Culture Plan which
informed management actions for the year.
People and culture were also areas of particular
focus of the Board Strategy day. The Board
continued to focus on the future of working
practices
post
the
pandemic.
For
more
information
on
employees,
diversity
and
inclusion, and culture, refer to ‘Our People’ within
the Strategic Report.
Suppliers
Reporting
on
the
Morgan
Stanley
Modern
Slavery Act Statement provided the Board with
insights into how supplier relationships are
managed, and the vendor due diligence program
to assess risks with third party suppliers. The
Board also considered supply chain operational
resilience.
Clients
Throughout the year, the Board received reports
from the heads of each Business Unit on the
competitive landscape for their business and the
plans in place to respond to changing client
demands. The Board focused particularly on
market volatility as a result of the war in Ukraine
and the wider geopolitical and client impacts.
Focus areas of the Board Strategy day were
technology innovation and disruption, and energy
transition and the impact on clients. The Board
also considered the implementation plans for the
FCA’s new Consumer Duty Principles. Business
Unit heads also provided regular updates on
performance and client focus areas which gave
the Board insight into client issues and concerns.
Community and Environment
The Morgan Stanley Group is committed to
giving back to the communities in which it
operates. The Board receives updates on giving
back and sustainability initiatives taking place in
EMEA. Refer to the following sections of the
Strategic Report for more information on (i)
Morgan Stanley’s community initiatives see the
‘Giving Back to the Community’ section; (ii)
Morgan Stanley Group’s and the MSI Group’s
approach to Climate Risk, see the ‘Climate and
Environmental Risk’ section; and (iii) Morgan
Stanley’s and the MSI Group’s sustainability
initiatives, see ‘Sustainability’ within the Strategic
Report
(including
‘Governance’
for
more
information
on
climate-related
matters
considered by the MSI Board and the Company).
See also ‘Clients’ for the Board’s consideration of
energy transition and the impact on clients.
Regulators
In 2022, the Board has continued its open and
continuous
dialogue
with
the
Company’s
regulators, including through meetings with the
Chair and CEO. In addition, individual Directors
engage regularly with both regulators through
Continuous
Assessment
and
Proactive
Engagement meetings.
Investors
The Company is a wholly owned subsidiary of
Morgan Stanley. A number of Executive Directors
on the Board are members of Morgan Stanley
Group management committees and are able to
provide the Board with insights on Morgan
Stanley’s views and priorities. Further insight into
the views of Morgan Stanley and its shareholders
are
obtained
through
regular
interactions
between the Company’s Chair and Chairs of the
MSI Board Committees and the Morgan Stanley
non-executive directors, including the Chairs of
the
Morgan
Stanley
Audit,
Risk,
and
Compensation, Management Development and
Succession Committees.
Making Decisions
When making decisions, the Board considers the
insights obtained through relevant stakeholder
engagement activities as well as the need to
maintain a reputation for high standards of
business
conduct
and
the
long
term
consequences
of
its
decisions.
Principal
decisions taken by the Board in 2022 included:
approval of the implementation plans for the
FCA’s new Consumer Duty Principles, and a
number
of
annual
approvals,
including
the
Business
Plan,
the
2021
Internal
Capital
Adequacy Assessment and the MSI Group’s
2022 Internal Liquidity Adequacy Assessment
Process.
Approved by the Board and signed on its behalf
by
A Mullineaux
Director
21 April 2023
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The
Directors
present
their
report
and
consolidated financial statements of the Group
and Company, which comprise the consolidated
income statement, consolidated statement of
comprehensive income, consolidated statement
of changes in equity, consolidated statement of
financial position, consolidated statement of cash
flows, together with the Company’s statement of
changes in equity, statement of financial position
and the Group and Company related notes 1 to
34 and the appendix to the financial statements
for the year ended 31 December 2022.
Results and Dividends
The Group’s profit for the year, after tax, was
$1,396 million (2021: $1,351 million).
The Company paid the following dividends on 30
November 2022 (see ‘Dividends’ note 22):
•
Coupon payment on the $1,300 million AT1
instrument of $71 million (2021: $72 million);
•
Coupon payment on the $2,200 million AT1
capital instrument of $165 million (2021: $165
million).
Regulation, Risk Management, Branches
and Future Developments
Information
regarding
regulation,
risk
management, branches and future developments
has been included in the Strategic Report.
Energy and Carbon Reporting
Information on the Company’s UK energy and
carbon reporting has been included in the
Strategic
Report
within
the
‘Environmental
Matters’ section.
Employees
Both the Company and the Morgan Stanley
Group
place
considerable
value
on
the
investment
in
their
employees
and
have
continued their practice of keeping employees
informed on matters affecting them.
Employees
are encouraged to present their suggestions and
views
on
the
Morgan
Stanley
Group’s
performance to management and employees
participate directly in the success of the business
through the Morgan Stanley Group’s various
compensation incentive plans.
Every effort is also made to ensure that disabled
applicants, or those existing employees who are
disabled or may have become disabled, are
treated as fairly as possible on terms comparable
with those of other employees. Appropriate
training
is
arranged
for
disabled
persons,
including
retraining
for
alternative
work
for
employees who become disabled, to promote
their career development within the organisation.
Pillar 3 Disclosures and Country-by-
Country Reporting
The Company is included in the MSI Group Pillar
3 disclosures, which allow investors and other
market
participants
to
understand
capital
adequacy, particularly risk exposures and risk
management
processes
of
individual
firms
required by the EU implementation of Basel
capital standards.
The Company is also included in the MSI
consolidated disclosure to comply with the
provisions of Statutory Instrument 2013 No. 3118
Capital
Requirements
(Country-by-Country
Reporting) Regulations 2013, which implements
in the UK the requirements set out in Article 89 of
the Capital Requirement Directive (Directive
2013/36/EU). The Pillar 3 disclosures and the
Country-by-Country Reporting for the MSI Group
for the year ended 31 December 2022 will be
made available on the Morgan Stanley website at
https://www.morganstanley.com/investorrelatio
ns
Directors
The following Directors held office throughout the
year and to the date of approval of this report
(except where otherwise shown):
J Bloomer
(Chair)
M Butler
(appointed 1 October 2022)
D O Cannon
D Cantillon
(appointed 17 January 2023)
T Duhon
A Kohli
K Lazaroo
A Mullineaux
(appointed 25 October 2022)
S Orlacchio
J Pearce
(appointed 1 October 2022)
M Richards
D A Russell
(resigned 17 January 2023)
A V Sekhar
P D Taylor
N P Whyte
C Woodman
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Directors’ and Officers’ Liability
Insurance
Directors’ and Officers’ Liability Insurance is
taken out by Morgan Stanley, for the benefit of
the Directors and Officers of the Group.
Directors’ Indemnity
Qualifying third party indemnity provisions (as
defined in section 234 of the Companies Act
2006) were in force during the year and up to
and including the date of the Directors’ report for
the benefit of the Directors of the Group.
Audit Committee
MSI,
the
Company’s
ultimate
UK
parent
undertaking,
has
appointed
the
MSI
Audit
Committee to assist and provide guidance to the
Boards
of
MSI,
the
Company,
other
MSI
regulated subsidiary undertakings and certain
other Morgan Stanley Group undertakings in
monitoring, among other things, internal controls,
compliance, and external financial reporting
obligations. For details on the Risk governance
framework,
refer
to
‘Risk
Management
Framework’ within the Strategic Report.
Employee Remuneration
The Group employs staff directly, in addition to
utilising staff employed by other Morgan Stanley
Group undertakings. The Group’s policies are
comparable and consistent with those of the
Morgan
Stanley
Group,
which
include
the
deferral of significant portions of certain key
employees’ discretionary compensation. Notes 7
and 32 to the consolidated financial statements
provide additional information and disclosure
regarding the Group’s compensation policies.
Going Concern
Business risks associated with the uncertain
market and economic conditions are being
actively monitored and managed by the Group.
Retaining
sufficient
capital
and
liquidity
to
withstand
these
market
pressures
remains
central to the Group’s strategy. In particular, the
Group’s capital and liquidity is deemed sufficient
to exceed regulatory minimums under both a
normal and in a stressed market environment.
The effect of relevant macroeconomic scenarios
on the business of the Group have been
considered as part of the going concern analysis,
including impact on operational capacity, access
to capital and liquidity, contractual obligations,
asset valuations and other critical accounting
judgements and key sources of estimation
uncertainty. The Group has access to further
Morgan Stanley Group capital and liquidity as
required.
Taking all of these factors into consideration, the
Directors believe it is reasonable to assume that
the
Group
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
annual reports and financial statements.
Auditor
Deloitte LLP have expressed their willingness to
continue in office as auditor of the Group and
their re-appointment was approved by the MSI
Board on 28 March 2022.
Statement as to Disclosure of Information to
the Auditor
Each of the persons who are Directors of the
Company at the date when this report is
approved confirms that:
•
so far as each of the Directors is aware, there
is
no
relevant
audit
information
(being
information needed by the Group’s auditor in
connection with preparing their report) of
which the Group's auditor is unaware; and
•
each of the Directors has taken all the steps
that they ought to have taken as a Director to
make themselves aware of any relevant audit
information and to establish that the Group’s
auditor is aware of that information.
This
confirmation
is
given
and
should
be
interpreted in accordance with the provisions of
section 418 of the Companies Act 2006.
Approved by the Board and signed on its behalf
by
A Mullineaux
Director
21 April 2023
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Directors’ Responsibilities Statement
The Directors are responsible for preparing the
annual report and the financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare
financial statements for each financial year.
Under that law the Directors have prepared the
Group financial statements in accordance with
International
Financial
Reporting
Standards
(“IFRS”) as adopted by the EU and Article 4 of
the International Accounting Standards (“IAS”)
Regulation and have elected to prepare the
parent
company
financial
statements
in
accordance
with
United
Kingdom
Generally
Accepted Accounting Practice (United Kingdom
Accounting
Standards
and
applicable
law),
including
FRS
101
“Reduced
Disclosure
Framework” (“FRS 101”).
Under company law
the Directors must not approve the accounts
unless they are satisfied that they give a true and
fair view of the state of affairs of the Group and
of the profit or loss of the Group for that period.
In preparing the Group financial statements, the
Directors are required by IAS 1
‘Presentation of
financial statements’
to:
•
properly select and apply accounting policies;
•
present
information,
including
accounting
policies, in a manner that provides relevant,
reliable,
comparable
and
understandable
information;
•
provide
additional
disclosures
when
compliance with the specific requirements in
IFRSs is insufficient to enable users to
understand
the
impact
of
particular
transactions, other events and conditions on
the entity’s financial position and financial
performance; and
•
make an assessment of the Group’s ability to
continue as a going concern.
In preparing the Company financial statements,
the Directors are also required to:
•
select suitable accounting policies and then
apply them consistently;
•
make judgements and accounting estimates
that are reasonable and prudent;
•
state
whether
applicable
UK
accounting
standards have been followed; and
•
prepare the financial statements on the going
concern basis unless it is inappropriate to
presume that the Company will continue in
business.
The
Directors
are
responsible
for
keeping
adequate accounting records that are sufficient
to show and explain the Group’s transactions
and disclose with reasonable accuracy at any
time the financial position of the Group and
enable
them
to
ensure
that
the
financial
statements comply with the Companies Act 2006.
They are also responsible for safeguarding the
assets of the Group and hence for taking
reasonable
steps
for
the
prevention
and
detection of fraud and other irregularities.
The
Directors
are
responsible
for
the
maintenance and integrity of the corporate and
financial information included on the company’s
website. Legislation in the United Kingdom
governing the preparation and dissemination of
financial statements may differ from legislation in
other jurisdictions.
The Directors are responsible for preparing and
filing the consolidated financial statements of the
Group in compliance with the European Single
Electronic Format Regulatory Technical Standard
(”ESEF RTS”) with the relevant member state
regulator’s storage mechanism. In preparing the
Group financial statements in compliance with
ESEF RTS, the Directors are required to:
•
prepare the Group financial statements in a
valid xHTML format; and
•
apply iXBRL markup of the Group financial
statements using the core taxonomy and the
common rules on markups specified in the
ESEF RTS.
The Directors confirm to the best of their
knowledge:
•
in accordance with Article 3.2(c) of the
Luxembourg
Law
on
Transparency
Requirements for Issuers of 11 January 2008,
as
amended
(“Luxembourg
Transparency
Law”), the consolidated financial statements,
which have been prepared in accordance with
IFRSs
as
issued
by
the
International
Accounting Standards Board (“IASB”) and as
endorsed by the EU and in compliance with
the
European
Single
Electronic
Filing
(“ESEF”) Regulation 2019/815, have been
prepared in accordance with the applicable
set of accounting standards and give a true
and fair view of the assets, liabilities, financial
position and profit or loss of the Group and
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the undertakings included in the consolidation
taken as a whole; and
•
the management report represented by the
Strategic
Report
has
been
prepared
in
accordance with Article 3.2(c) of Luxembourg
Transparency Law, and includes a fair review
of the development and performance of the
business and the position of the Group and
the undertakings included in the consolidation
taken as a whole, together with a description
of the principal risks and uncertainties that the
Group faces.
Approved by the Board and signed on its behalf
by
A Mullineaux
Director
21 April 2023
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Report on the Audit of the Financial Statements
Opinion
In our opinion:
•
the financial statements of Morgan Stanley &
Co. International plc (the “parent company”)
and its subsidiaries (the “Group”) give a true
and fair view of the state of the Group’s and
the
parent
company’s
affairs
as
at
31 December 2022 and of the Group’s profit
for the year then ended;
•
the Group financial statements have been
properly prepared in accordance with United
Kingdom adopted international accounting
standards
and,
International
Financial
Reporting Standards (“IFRSs”) issued by the
International Accounting
Standards
Board
(“IASB”) as adopted by the European Union
(“EU”) and UK;
•
the parent company financial statements have
been properly prepared in accordance with
United
Kingdom
Generally
Accepted
Accounting
Practice,
including
Financial
Reporting Standard (“FRS”) 101 “Reduced
Disclosure Framework”; and
•
the financial statements have been prepared
in accordance with the requirements of the
Companies Act 2006.
We have audited the financial statements which
comprise:
Group
Parent
company
•
Consolidated income
statement;
•
Consolidated statement of
comprehensive income;
•
Consolidated statement of
changes in equity;
•
Consolidated statement of
financial position; and
•
Consolidated statement of
cash flows.
•
Statement
of changes
in equity;
and
•
Statement
of financial
position.
Group and Parent Company
•
Relevant notes 1 – 34
to the financial
statements.
The financial reporting framework that has been
applied in the preparation of the group financial
statements is applicable law, United Kingdom
adopted
international
accounting
standards,
IFRSs as adopted by the EU and IFRSs as
issued by the IASB.
The financial reporting framework that has been
applied in the preparation of the parent company
financial statements is applicable law and United
Kingdom Accounting Standards, including FRS
101 “Reduced Disclosure Framework”
.
Basis for opinion
We conducted our audit in accordance with
International Standards on Auditing (UK) (“ISAs
(UK)”) and applicable law. 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 independent of the Group and the parent
company
in
accordance
with
the
ethical
requirements that are relevant to our audit of the
financial statements in the UK, including the
Financial
Reporting
Council’s
(the
“FRC’s”)
Ethical Standard, and we have fulfilled our other
ethical responsibilities in accordance with these
requirements. The non-audit services provided to
the Group and parent company for the year are
disclosed in note 7 to the financial statements.
We confirm that we have not provided any non-
audit services prohibited by the FRC’s Ethical
Standard to the Group or the parent company.
We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a
basis for our opinion.
Summary of our audit approach
Key audit matter
The key audit matter that we identified in the
current year was:
•
Valuation of Level 3 financial instruments;
Materiality
The materiality that we used for the Group
financial statements in the current year was $120
million, which was determined on the basis of
0.5% of total equity.
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Scoping
The planning and scoping of our audit considers
the Group’s business, organisational structure
and
global
operating
model.
This
model
comprises a common control structure for key
business processes and internal controls over
financial reporting.
Based on this global operating model, our audit
scope is globally integrated with various audit
testing procedures performed by our component
auditor, Deloitte & Touche LLP, USA, the lead
auditor of the ultimate parent company, Morgan
Stanley.
Significant changes in our approach
There are no significant changes in our approach
as compared to the prior year.
Conclusions relating to going concern
In auditing the financial statements, we have
concluded that the Directors’ use of the going
concern basis of accounting in the preparation of
the financial statements is appropriate.
Our evaluation of the Directors’ assessment of
the Group’s and parent company’s ability to
continue to adopt the going concern basis of
accounting included understanding the current
and
forecast
profitability
of
the
entity,
the
historical accuracy of the forecasts and the
capital and liquidity position relative to minimum
regulatory requirements under base and stress
forecasts, over the lookout period, being twelve
months from the date of approval of the financial
statements.
Based on the work we have performed, we have
not identified any material uncertainties relating
to events or conditions that, individually or
collectively, may cast significant doubt on the
Group's and parent company’s ability to continue
as a going concern for a period of at least twelve
months from when the financial statements are
authorised for issue.
Our responsibilities and the responsibilities of the
Directors with respect to going concern are
described in the relevant sections of this report.
Key audit matters
Key audit matters are those matters that, in our
professional
judgement,
were
of
most
significance
in
our
audit
of
the
financial
statements of the current period and include the
most significant assessed risks of material
misstatement (whether or not due to fraud) that
we identified. These matters included those
which had the greatest effect on the overall audit
strategy, the allocation of resources in the audit;
and directing the efforts of the engagement team.
These matters were addressed in the context of
our audit of the financial statements as a whole,
and in forming our opinion thereon, and we do
not provide a separate opinion on these matters.
Valuation of Level 3 financial instruments
Relevant references in the financial
statements
Group financial statements:
•
Note 2 – Basis of Preparation – (e) Critical
accounting
judgements
and
sources
of
estimation uncertainty
•
Note 3 – Summary of significant accounting
policies
– (d) Fair value
•
Note 30 – Financial instruments measured at
fair value – (a) (c) (d) (e)
Key audit matter description
The Group’s trading and financing activities
result in the Group carrying material financial
instruments for which the fair value is derived
using significant unobservable inputs. Under
IFRS 13
Fair Value Measurement
, such financial
instruments are classified as Level 3 financial
assets or liabilities.
Unlike financial instruments whose inputs are
readily observable and, therefore, more easily
independently corroborated, the valuation of
financial instruments classified as Level 3 are
inherently subjective, and often involve the use of
inputs and proprietary valuation models whose
underlying
algorithms
and
valuation
methodologies are complex. This degree of
subjectivity may also give rise to potential fraud
through management intentionally manipulating
fair values or incorporating management bias in
determining fair values. Auditing the Group’s
valuation of Level 3 financial instruments is
therefore
subjective
and
presents
certain
challenges in evaluating the appropriateness of
the Group’s valuation judgements and estimates.
Significant judgements made by the Group
include the derivation of key model inputs which
are not observable and the underlying valuation
methodologies used by the pricing model to
determine an appropriate fair value. Performing
our
audit
procedures
to
evaluate
the
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appropriateness of these models and inputs
involved a high degree of auditor judgement,
professionals
with
specialised
skills
and
knowledge, and an increased extent of testing.
As at 31 December 2022, the Group’s total
financial assets and liabilities measured at fair
value were $461 billion (2021: $460 billion) and
$370 billion (2021: $375 billion), respectively, of
which Level 3 financial assets and liabilities were
$4.9 billion (2021: $4.7 billion) and $2.3 billion
(2021: $2.4 billion), respectively.
How the scope of our audit responded to
the key audit matter
To address the complexities associated with
auditing the valuation of Level 3 financial
instruments,
our
team
included
valuation
specialists who have significant valuation and
modelling
expertise.
Our
valuation
audit
procedures included the following procedures:
•
Testing the Group’s internal controls that
address the risk of errors in the fair value
estimates.
This
includes,
model
review
controls and independent price verification
controls.
Management
maintains
these
internal
controls
to
assess
the
appropriateness
of
its
valuation
methodologies and the relevant inputs and
assumptions used to determine fair value
estimates.
•
On a sample basis in line with our audit
methodology, we:
–
Evaluated Group’s significant valuation
methodologies,
including
the
input
assumptions, considering our observations
of assumptions made by other market
participants,
and
external
data,
when
available.
–
Performed a retrospective assessment of
management’s fair value estimates for
certain Level 3 financial instruments, for
which there were events or transactions
occurring after the valuation date. We did
so by comparing management’s estimates
to the relevant evidence provided by such
events or transactions, as applicable.
–
Developed
independent
fair
value
estimates for Level 3 financial instruments,
using
externally
sourced
inputs
and
independent
valuation
models,
to
the
extent possible, compared the resulting
fair values to those recorded by the Group
and assessed the differences against pre-
determined thresholds.
–
Tested the revenues arising from the trade
date fair value estimates for selected
structured transactions classified as Level
3
financial
instruments.
For
selected
transactions, we developed independent
fair value estimates to test the valuation
inputs
and
assumptions
used
by
management and evaluated whether these
methods were consistent with the relevant
Morgan Stanley’s valuation policies.
–
Assessed
the
consistency
with
which
management has applied significant and
unobservable valuation assumptions used
in developing fair value estimates, across
similar transactions.
•
Assessment
of
financial
statement
disclosures
related
to
Level
3
financial
instruments.
Key observations
As a result of our audit procedures performed,
we concluded with reasonable assurance that
the valuation of Level 3 financial instruments is
materially correct.
Our application of materiality
We define materiality as the magnitude of
misstatement in the financial statements that
makes it probable that the economic decisions of
a reasonably knowledgeable person would be
changed or influenced. We use materiality both
in planning the scope of our audit work and in
evaluating the results of our work.
Based
on
our
professional
judgement,
we
determined
materiality
for
the
financial
statements as a whole as follows:
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Group financial statements
Parent company financial statements
Materiality
$120 million (2021: $110 million)
$118 million (2021: $109 million)
Basis
for
determining
materiality
The Group materiality of $120 million
represents 0.5% (2021: 0.5%) of total
equity
The parent company materiality of $118
million represents 0.5% (2021: 0.5%) of
total equity
Rationale
for
the benchmark
applied
We have considered total equity to be
the most appropriate benchmark as the
Group is wholly owned by the ultimate
parent entity Morgan Stanley and is a
regulated entity, therefore its capital
position is of importance to the key users
of the financial statements. These key
users include regulators, counterparties,
external rating agencies and the ultimate
parent entity.
We considered it appropriate to maintain
the same benchmark as that for the
Group as the parent company is the
most significant member of the Group
and
its
solo
capital
position
is
of
importance to the key users of the
financial statements who are common
with those for the Group.
Performance
materiality
Group performance materiality and parent company performance materiality was
set at 70% of Group materiality for the 2022 audit (2021: 65%).
Basis
and
rationale
for
determining
performance
materiality
We set performance materiality at a level lower than materiality to reduce the
probability that, in aggregate, uncorrected and undetected misstatements exceed
the materiality for the financial statements as a whole.
In determining performance materiality, we considered the following factors:
–
our risk assessment, including our assessment of the Group’s overall
control environment and that we consider it appropriate to rely on controls
over a number of
business processes;
–
limited impact of Covid-19 on the control environment;
–
ability of the Group to detect misstatements; and
–
our past experience of the audit, which has indicated a low number of
corrected and uncorrected misstatements identified in prior periods.
Error reporting threshold
We agreed with the Group Audit Committee that
we would report to the Committee all audit
differences in excess of $6 million (2021: $5
million), as well as differences below that
threshold that, in our view, warranted reporting
on qualitative grounds. We also report to the
Group Audit Committee on disclosure matters
that we identified when assessing the overall
presentation of the financial statements.
An overview of the scope of our audit
Identification and scoping of components
Morgan Stanley is a globally managed business
with a global operating model in which major
classes of transactions are subject to a common
control processing environment irrespective of
product, region or legal entity. Given this global
operating model for the Group, we audit relevant
controls,
financial
reporting
processes
and
balances utilising significant component auditors
in New York.
We instructed our component auditor, Deloitte &
Touche
LLP,
USA
to
perform
their
audit
procedures at a materiality level of $114 million
(2021: $104 million).
Involvement with component auditor
We exercised oversight over the work of our
component
auditor
by
remaining
in
active
dialogue at regular intervals throughout the
duration of the audit. We remotely attended the
audit planning meetings in New York, involved
our component auditor in our team briefing and
issued a set of instructions setting out the audit
work and the specified audit procedures we
requested them to undertake. We undertook
visits to our component auditor during the interim
period
and
final
stages
of
our
audit,
in
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conjunction with regular remote meetings and
review sessions throughout the year, to oversee
and review the work performed in support of our
audit.
Audit procedures undertaken at the Group
level
We designed our audit approach for the Group
based on our understanding of the business and
our independent assessment of the risks of
material misstatement arising in the financial
statements.
These
procedures
included,
amongst others, auditing the consolidation of the
Group’s results and the preparation of the
financial statements as well as obtaining an
understanding and testing of relevant controls
over the financial reporting process.
Our consideration of the control environment
For certain relevant controls, we have tested
internal controls over financial reporting and key
business process where our scoping and risk
assessment determined those controls to be
relevant to the audit and where we intended to
place reliance on controls. This included testing
of general IT controls with the involvement of our
IT specialist, process level controls and entity
level controls at the Group level. For certain
other relevant controls, we have obtained an
understanding to support our risk assessment
and design our audit procedures.
Our consideration of climate-related risks
In planning our audit, we have considered the
impact
of
climate
change
on
the
Group’s
operations
and
subsequent
impact
on
its
financial statements. The Group sets out its
assessment of the potential impact on pages 23
to 25 of the Strategic Report and in note 26.3.2.3
Credit Evaluation on page 98 of the Annual
Report.
We have held discussions with the Group to
understand their:
•
process for identifying affected operations,
including the governance and controls over
this process, and the subsequent effect on
the financial reporting for the Group; and
•
long-term strategy to respond to climate
change risks as they evolve including the
effect on the Group’s forecasts.
Our audit work has involved:
•
obtaining an understanding of management’s
analysis and data considered in the Group’s
climate risk assessment; and
•
assessing disclosures in the annual report
and the consistency between the financial
statements and the remainder of the annual
report.
As part of our audit procedures, we are required
to read and consider whether climate related
disclosures are materially inconsistent with the
financial statements or knowledge obtained in
the audit and we did not identify any material
inconsistencies as a result of these procedures.
Other information
The other information comprises the information
included in the annual report, other than the
financial statements and our auditor’s report
thereon. The Directors are responsible for the
other information contained within the annual
report.
Our opinion on the financial statements does not
cover the other information and, except to the
extent otherwise explicitly stated in our report, we
do not express any form of assurance conclusion
thereon.
Our responsibility is to read the other information
and, in doing so, consider whether the other
information is materially inconsistent with the
financial statements or our knowledge obtained
in the course of the audit or otherwise appears to
be materially misstated.
If we identify such material inconsistencies or
apparent
material
misstatements,
we
are
required to determine whether this gives rise to a
material misstatement in the financial statements
themselves. If, based on the work we have
performed, we conclude that there is a material
misstatement of this other information, we are
required to report that fact.
We have nothing to report in this regard.
Responsibilities of Directors
As
explained
more
fully
in
the
Directors’
responsibilities
statement,
the
Directors
are
responsible for the preparation of the financial
statements and for being satisfied that they give
a true and fair view, and for such internal control
as the Directors determine is necessary to
enable the preparation of financial statements
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that are free from material misstatement, whether
due to fraud or error.
In
preparing
the
financial
statements,
the
Directors are responsible for assessing the
Group’s and the parent company’s ability to
continue as a going concern, disclosing as
applicable, matters related to going concern and
using the going concern basis of accounting
unless the Directors either intend to liquidate the
Group or the parent company or to cease
operations, or have no realistic alternative but to
do so.
The Directors are responsible for preparing the
Group financial statements in compliance with
the requirements set out in the European Single
Electronic Format Regulatory Technical Standard
(“ESEF RTS”).
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
to issue an auditor’s report that includes our
opinion. Reasonable assurance is a high level of
assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will
always detect a material misstatement when it
exists. Misstatements can arise from fraud or
error and are considered material if, individually
or in the aggregate, they could reasonably be
expected to influence the economic decisions of
users taken on the basis of these financial
statements.
A further description of our responsibilities for the
audit of the financial statements is located on the
FRC’s
website
at
www.frc.org.uk/
auditorsresponsibilities
. This description forms
part of our auditor’s report.
Our responsibility is to assess whether the Group
financial statements have been prepared, in all
material respects, with the requirements laid
down in the ESEF RTS.
Extent to which the audit was considered
capable
of
detecting
irregularities,
including fraud
Irregularities, including fraud, are instances of
non-compliance with laws and regulations. We
design
procedures
in
line
with
our
responsibilities, outlined above, to detect material
misstatements
in
respect
of
irregularities,
including
fraud.
The
extent
to
which
our
procedures
are
capable
of
detecting
irregularities, including fraud is detailed below.
Identifying and assessing potential risks
related to irregularities
In identifying and assessing risks of material
misstatement
in
respect
of
irregularities,
including fraud and non-compliance with laws
and regulations, we considered the following:
•
the nature of the industry and sector, control
environment
and
business
performance
including
the
design
of
the
Group’s
remuneration
policies,
key
drivers
for
Directors’ remuneration, bonus levels and
performance targets;
•
the Group’s own assessment of the risks that
irregularities may occur either as a result of
fraud or error in the financial statements that
was reviewed by the Audit Committee on 13
April 2023;
•
results of our enquiries of management,
internal audit, the Directors and the audit
committee about their own identification and
assessment of the risks of irregularities,
including those that are specific to the
Group’s sector;
•
any matters we identified having obtained and
reviewed the Group’s documentation of their
policies and procedures relating to:
–
identifying, evaluating and complying with
laws and regulations and whether they
were aware of any instances of non-
compliance;
–
detecting and responding to the risks of
fraud and whether they have knowledge of
any actual, suspected or alleged fraud;
and
–
the internal controls established to mitigate
risks of fraud or non-compliance with laws
and regulations.
•
the
matters
discussed
among
the
audit
engagement team including the component
audit team and relevant internal specialists,
including tax, valuations, IT and industry
specialists regarding how and where fraud
might occur in the financial statements and
any potential indicators of fraud.
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As a result of these procedures, we considered
the opportunities and incentives that may exist
within the Group for fraud and identified the
greatest potential for fraud in the following area:
valuation of Level 3 financial instruments. In
common with all audits under ISAs (UK), we are
also required to perform specific procedures to
respond to the risk of management override.
We also obtained an understanding of the legal
and
regulatory
frameworks
that
the
Group
operates in, focusing on provisions of those laws
and regulations that had a direct effect on the
determination
of
material
amounts
and
disclosures in the financial statements.
The key
laws and regulations we considered in this
context included the UK Companies Act 2006,
Luxembourg Transparency Law, Luxembourg
Listing
Rules,
pensions
legislation
and
tax
legislation.
In
addition,
we
considered
the
relevant provisions of other laws and regulations
that do not have a direct effect on the financial
statements but compliance with which may be
fundamental to the company’s ability to operate
or to avoid a material penalty. These included the
regulation and supervisory requirements of the
Prudential Regulation Authority and the Financial
Conduct Authority.
Audit response to risks identified
As a result of performing the above, we identified
the valuation of Level 3 financial instruments is a
key audit matter related to the potential risk of
fraud. The key audit matters section of our report
explains the matter in more detail and also
describes the specific procedures we performed
in response to that key audit matter.
In addition to the above, our procedures to
respond to risks identified included the following:
•
reviewing the financial statement disclosures
and testing to supporting documentation to
assess compliance with provisions of relevant
laws and regulations described as having a
direct effect on the financial statements;
•
enquiring
of
management,
the
audit
committee and in-house and external legal
counsel
concerning
actual
and
potential
litigation and claims;
•
performing analytical procedures to identify
any unusual or unexpected relationships that
may indicate risks of material misstatement
due to fraud;
•
reading minutes of meetings of those charged
with governance, reviewing internal audit
reports and reviewing correspondence with
HMRC
and
other
regulatory
authorities
including the PRA and the FCA; and
•
in addressing the risk of fraud through
management override of controls, testing the
appropriateness of journal entries selected
against specific fraud factors, and other
adjustments;
assessing
whether
the
judgements
made
in
making
accounting
estimates are indicative of a potential bias;
and evaluating the business rationale of any
significant transactions that are unusual or
outside the normal course of business.
•
assessing
accounting
estimates
and
judgements for evidence of management
bias.
We also communicated relevant identified laws
and regulations and potential fraud risks to all
engagement team members including internal
specialists and the component audit team, and
remained alert to any indications of fraud or non-
compliance with laws and regulations throughout
the audit.
Report on other legal and regulatory
requirements
Opinions on other matters prescribed by the
Companies Act 2006
In our opinion, based on the work undertaken in
the course of the audit:
•
the information given in the Strategic Report
and the Directors’ Report for the financial year
for
which
the
financial
statements
are
prepared is consistent with the financial
statements; and
•
the Strategic Report and the Directors’ Report
have been prepared in accordance with
applicable legal requirements.
In the light of the knowledge and understanding
of the Group and the parent company and their
environment obtained in the course of the audit,
we
have
not
identified
any
material
misstatements in the Strategic Report or the
Directors’ Report.
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Opinions on other matters prescribed by the
European
Single
Electronic
Format
Regulatory Technical Standard
We have checked the compliance with the Group
financial statements as at 31 December 2022
with the relevant statutory requirements as set
out in the ESEF RTS that are applicable to the
Group financial statements.
For the Group it relates to:
•
Group financial statements prepared in a valid
xHTML format; and
•
the XBRL markup of the Group financial
statements using the core taxonomy and the
common rules on markups specified in the
ESEF RTS.
In our opinion, the Group financial statements of
Morgan Stanley & Co. International plc as at
31 December 2022, have been prepared, in all
material
respects,
in
compliance
with
the
requirements laid down in the ESEF RTS.
Matters on which we are required to report by
exception
Adequacy of explanations received and
accounting records
Under the Companies Act 2006 we are required
to report to you if, in our opinion:
•
we have not received all the information and
explanations we require for our audit; or
•
adequate accounting records have not been
kept by the parent company, or returns
adequate
for
our
audit
have
not
been
received from branches not visited by us; or
•
the parent company financial statements are
not in agreement with the accounting records
and returns.
We have nothing to report in respect of these
matters.
Directors’ remuneration
Under the Companies Act 2006 we are also
required to report if in our opinion certain
disclosures of Directors’ remuneration have not
been made.
We have nothing to report in respect of this
matter.
Other matters which we are required to
address
Auditor tenure
Following the recommendation of the Group
Audit Committee, we were appointed by the
Board of Directors on 17 November 1997 to audit
the financial statements for the year ended 31
December
1997
and
subsequent
financial
periods.
The
period
of
total
uninterrupted
engagement including previous renewals and
reappointments of the firm is 26 years, covering
the
years
ended
30
November
1997
to
31 December 2022.
Consistency of the audit report with the
additional
report
to
the
Group
Audit
Committee
Our audit opinion is consistent with the additional
report to the Group Audit Committee that we are
required to provide in accordance with ISAs
(UK).
Use of our report
This report is made solely to the Company’s
members, as a body, in accordance with Chapter
3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might
state to the Company’s members those matters
we are required to state to them in an auditor’s
report and for no other purpose. To the fullest
extent permitted by law, we do not accept or
assume responsibility to anyone other than the
Company and the Company’s members as a
body, for our audit work, for this report, or for the
opinions we have formed.
Fiona Walker, FCA (Senior Statutory Auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
21 April 2023
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in $ millions
Note
2022
2021
Net gains from financial instruments at fair value through profit or loss
4
Fee and commission income
5
Other revenue
Interest income
6
(398 )
Interest expense
6
(3,874 )
(134 )
Net interest expense
(948 )
(532 )
Net revenue
Net gain on investments in subsidiaries
14
Non-interest expenses:
Operating expense
7
(5,261 )
(5,627 )
Net impairment (loss) / reversal on financial instruments
8
(148 )
PROFIT BEFORE TAX
Income tax expense
9
(321 )
(589 )
PROFIT FOR THE YEAR
All operations were continuing in the current and prior year.
The notes on pages 59 to 141 form an integral part of the consolidated financial statements.
As permitted by section 408 of the Companies Act 2006, the Company has elected not to present its
own income statement for the year. The Company reported a profit after tax of $1,201 million for the
year ended 31 December 2022 (31 December 2021: $1,381 million).
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MORGAN STANLEY & CO. INTERNATIONAL plc
CONSOLIDATED INCOME STATEMENT
Y
ear ended 31 December 2022
52
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in $ millions
Note
2022
2021
PROFIT FOR THE YEAR
OTHER COMPREHENSIVE INCOME AFTER INCOME TAX
Items that will not be reclassified subsequently to profit or loss:
Remeasurement of net defined benefit liability
9
(2 )
Changes in fair value attributable to own credit risk on financial liabilities
designated at fair value
9,10
Items that may be reclassified subsequently to profit or loss:
Foreign currency translation differences arising on foreign operations
9
(43 )
(33 )
Net amount reclassified to consolidated income statement upon disposal
of subsidiary
14
(4 )
OTHER COMPREHENSIVE INCOME AFTER INCOME TAX
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
The notes on pages 59 to 141 form an integral part of the consolidated financial statements.
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MORGAN STANLEY & CO. INTERNATIONAL plc
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 December 2022
53
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in $ millions
2022
2021
Share capital and other equity instruments – at 1 January
Issuance of AT1 Instrument
Share capital and other equity instruments – at 31 December
Share premium account – at 1 January and 31 December
Currency translation reserve - at 1 January
Foreign currency translation differences arising on foreign operations
(43 )
(33 )
Net amount reclassified to consolidated income statement upon disposal of subsidiary
(4 )
Currency translation reserve - at 31 December
Capital contribution reserve – at 1 January and 31 December
Capital redemption reserve – at 1 January and 31 December
Debt valuation reserve - at 1 January
(259 )
(339 )
Changes in fair value attributable to own credit risk on financial liabilities designated at
fair value
Realised debt valuation losses
Debt valuation reserve - at 31 December
(122 )
(259 )
Retained earnings and pension reserve - at 1 January
Profit for the year
Remeasurement of net defined benefit liability
(2 )
Realised debt valuation losses
(7 )
Dividends
(236 )
(237 )
Share based payments
Retained earnings
and pension reserve - at 31 December
Total equity at 31 December
The notes on pages 59 to 141 form an integral part of the consolidated financial statements.
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MORGAN STANLEY & CO. INTERNATIONAL plc
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2022
54
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in $ millions
2022
2021
Share capital and other equity instruments – at 1 January
15,965
15,965
Issuance of AT1 Instrument
800
—
Share capital and other equity instruments – at 31 December
16,765
15,965
Share premium account – at 1 January and 31 December
513
513
Currency translation reserve - at 1 January
(62)
(23)
Foreign currency translation differences arising on foreign operations
(26)
(39)
Currency translation reserve - at 31 December
(88)
(62)
Capital contribution reserve – at 1 January and 31 December
3
3
Capital redemption reserve – at 1 January and 31 December
1,400
1,400
Debt valuation reserve - at 1 January
(259)
(339)
Changes in fair value attributable to own credit risk on financial liabilities designated at
fair value
137
73
Realised debt valuation losses
—
7
Debt valuation reserve - at 31 December
(122)
(259)
Retained earnings and pension reserve - at 1 January
4,770
3,633
Profit for the year
1,201
1,381
Remeasurement of net defined benefit liability
4
(2)
Realised debt valuation losses
—
(7)
Dividends
(236)
(237)
Share based payments
4
2
Retained earnings and pension reserve - at 31 December
5,743
4,770
Total equity at 31 December
24,214
22,330
The notes on pages 59 to 141 form an integral part of the financial statements.
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MORGAN STANLEY & CO. INTERNATIONAL plc
COMPANY STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2022
55
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in $ millions
Note
2022
2021
ASSETS
Cash and short term deposits
23
Trading financial assets (of which $38,522 million (2021: $41,685 million)
were pledged to various parties)
11
Secured financing
10
Loans and advances
Investment securities
Trade and other receivables
13
Current tax assets
Deferred tax assets
19
Property, plant and equipment
Other assets
TOTAL ASSETS
LIABILITIES
Bank loans and overdrafts
23
Trading financial liabilities
11
Secured borrowing
10
Trade and other payables
16
Debt and other borrowings
17
Provisions
18
Current tax liabilities
Accruals and deferred income
Post-employment benefit obligations
33
TOTAL LIABILITIES
EQUITY
Share capital
21
Other equity instruments
21
Share premium account
21
Currency translation reserve
21
Capital contribution reserve
21
Capital redemption reserve
21
Pension reserve
21
(4 )
Debt valuation reserve
21
(122 )
(259 )
Retained earnings
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
20 April 2023.
Signed on behalf of the Board
A Mullineaux
Director
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MORGAN STANLEY & CO. INTERNATIONAL plc
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Year ended 31 December 2022
56
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in $ millions
Note
2022
2021
ASSETS
Cash and short term deposits
23
18,449
28,218
Trading financial assets (of which $38,522 million (2021: $ 41,685 million)
were pledged to various parties)
11
329,068
332,449
Secured financing
10
129,579
125,695
Loans and advances
29
26
Investment securities
141
165
Trade and other receivables
13
81,868
79,407
Current tax assets
305
305
Deferred tax assets
19
150
212
Investment in subsidiaries
14
132
130
Property, plant and equipment
14
11
Other assets
35
40
TOTAL ASSETS
559,770
566,658
LIABILITIES
Bank loans and overdrafts
23
59
48
Trading financial liabilities
11
298,690
300,325
Secured borrowing
10
93,442
96,854
Trade and other payables
16
97,163
94,063
Debt and other borrowings
17
45,647
52,463
Provisions
18
131
43
Current tax liabilities
76
64
Accruals and deferred income
347
462
Post employment benefit obligations
33
1
6
TOTAL LIABILITIES
535,556
544,328
EQUITY
Share capital
21
12,465
12,465
Other equity instruments
21
4,300
3,500
Share premium account
21
513
513
Currency translation reserve
21
(88)
(62)
Capital contribution reserve
21
3
3
Capital redemption reserve
21
1,400
1,400
Pension reserve
21
—
(4)
Debt valuation reserve
21
(122)
(259)
Retained earnings
5,743
4,774
TOTAL EQUITY
24,214
22,330
TOTAL LIABILITIES AND EQUITY
559,770
566,658
These financial statements were approved by the Board and authorised for issue on 20 April 2023.
Signed on behalf of the Board
A Mullineaux
Director
The notes on pages 59 to 141 form an integral part of the financial statements.
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MORGAN STANLEY & CO. INTERNATIONAL plc
COMPANY STATEMENT OF FINANCIAL POSITION
Year ended 31 December 2022
57
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in $ millions
Note
2022
2021
NET CASH FLOWS (USED IN)/FROM OPERATING ACTIVITIES
23b
(9,350 )
INVESTING ACTIVITIES
Purchase of property, plant and equipment
(1 )
(13 )
Proceeds from sale of property, plant and equipment
NET CASH FLOWS USED IN INVESTING ACTIVITIES
(13 )
FINANCING ACTIVITIES
Dividends paid
22
(236 )
(237 )
Issuance of AT1 instrument
21
Issuance of subordinated loan liabilities
17
Issuance of senior subordinated loan liabilities
17
Repayment of senior subordinated loan liabilities
17
(2,300 )
(400 )
Interest on subordinated loan liabilities
(196 )
(110 )
Interest on senior subordinated loan liabilities
(134 )
(98 )
NET CASH FLOWS FROM/ (USED IN) FINANCING ACTIVITIES
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
(8,316 )
Currency Translation Differences
(1,473 )
(837 )
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR
23a
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR
23a
The notes on pages 59 to 141 form an integral part of the consolidated financial statements.
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MORGAN STANLEY & CO. INTERNATIONAL plc
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended 31 December 2022
58
DocuSign Envelope ID: FEE48148-B0EF-411E-B1D1-5D218C6A2759
The Company is incorporated and domiciled in
The Group’s immediate parent undertaking is
which is registered in England and Wales.
Copies
of
its
financial
statements
can
be
obtained from the Registrar of Companies for
England and Wales, Companies House, Crown
Way, Cardiff CF14 3UZ.
The Group’s ultimate parent undertaking and
controlling entity is Morgan Stanley which,
together with the Group and Morgan Stanley’s
other subsidiary undertakings, form the Morgan
Stanley Group.
Morgan Stanley is incorporated
in the State of Delaware, the United States of
America. Copies of its financial statements can
be
obtained
from
investorrelations
.
Statement of Compliance
These
financial
statements
incorporate
the
financial statements of the Group and the
Company.
The Group has prepared its annual consolidated
financial statements in accordance with IFRSs
issued by the IASB as adopted by the EU and
the UK, Interpretations issued by the IFRS
Interpretations Committee (“IFRIC”) and the
Companies Act 2006. The Group has prepared
its annual consolidated financial statements in
compliance with the European Single Electronic
Format Regulatory Technical Standard (“ESEF
RTS”), including the preparation in a valid xHTML
format and the application of iXBRL markup
using the core taxonomy and the common rules
on markups specified in the ESEF RTS.
The Company financial statements have been
prepared in accordance with United Kingdom
Generally Accepted Accounting Practice (United
Kingdom Accounting Standards and applicable
law), including FRS 101, with a departure from
the requirement of Schedule 1 paragraph 40 to
The Large and Medium-sized Companies and
Groups (Accounts and Reports) Regulations
2008 (“the Regulations”) as described in note
3(c) for the overriding purpose of giving a true
and fair view.
The Company meets the definition of a qualifying
entity and is a Financial Institution as defined in
FRS 100
Application of Financial Reporting
Requirements
.
The
Company
has
taken
advantage of the disclosure exemptions available
under FRS 101 in relation to share-based
payments,
fair
value
measurements
(as
applicable to assets and liabilities other than
financial
instruments),
revenue
recognition,
presentation
of
comparative
information
in
respect of certain assets and shares outstanding,
presentation
of
a
cash
flow
statement,
accounting standards not yet adopted, related
party transactions and leases.
Where relevant, equivalent disclosures have
been provided in the Group accounts in which
New Standards and Interpretations
Adopted During the Year
The
following
standards,
amendments
to
standards and interpretations relevant to the
Group and Company’s operations were adopted
during the year. These did not have a material
impact on the Group or Company’s financial
statements.
Amendments to IAS 37
‘Provisions, Contingent
Liabilities and Contingent Assets
’ (‘IAS 37’):
Onerous contracts - Costs of Fulfilling a Contract
were issued by the IASB in May 2020, for
modified retrospective application in accounting
periods beginning on or after 1 January 2022.
The amendments were adopted by the UK in
April 2022 and endorsed by the EU in July 2021.
As part of the 2018-2020 Annual Improvements
Cycle published in May 2020, the IASB made an
amendment to IFRS 9
‘Financial Instruments
’,
relating
to
the
treatment
of
fees
in
the
assessment of whether financial liabilities are
modified or exchanged, where such transactions
occur
on
or
after
1
January
2022.
Early
application is permitted. The amendments were
adopted by the UK in April 2022 and endorsed by
the EU in July 2021.
There were no other standards, amendments to
standards or interpretations relevant to the Group
and Company’s operations which were adopted
New Standards and Interpretations Not
Yet Adopted
At the date of authorisation of these consolidated
financial statements, the following amendments
to standards relevant to the Group’s operations
were issued by the IASB but not mandatory for
accounting periods beginning 1 January 2022.
The Group does not expect that the adoption of
the following amendments to standards will have
a material impact on the Group’s or Company’s
financial statements.
Amendments to IAS 1 ‘
Presentation of Financial
Statements
’ (‘IAS 1’): Classification of Liabilities
as Current or Non-current were issued by the
IASB in January 2020 and revised in July 2020,
for
retrospective
application
in
accounting
periods beginning on or after 1 January 2023.
Amendments to IAS 8 ‘
Accounting Policies
,
C
hanges in Accounting Estimates and Errors
’:
Definition of Accounting Estimates were issued
by the IASB in February 2021, for prospective
application in accounting periods beginning on or
after 1 January 2023. Early application is
permitted. The amendments were adopted by the
UK in November 2022 and endorsed by the EU
in March 2022.
Amendments to IAS 1 ‘
Presentation of Financial
Statements’
: Disclosure of Accounting Policies
were issued by the IASB in February 2021, for
prospective application in accounting periods
beginning on or after 1 January 2023. Early
application is permitted. The amendments were
adopted by the UK in November 2022 and
endorsed by the EU in March 2022.
Amendments to IAS 12 ‘
Income Taxes’
: Deferred
Tax related to Assets and Liabilities arising from
a Single Transaction were issued by the IASB in
May
2021,
for
retrospective
application
in
accounting periods beginning on or after 1
January 2023. Early application is permitted. The
amendments
were
adopted
by
the
UK
in
November 2022 and endorsed by the EU in
August
d.
Basis of Measurement
The financial statements of the Company and the
consolidated financial statements of the Group
are prepared under the historical cost basis,
except for certain financial instruments that have
been measured at fair value as explained in the
accounting policies below.
Critical Accounting Judgements and
Sources of Estimation Uncertainty
In
preparing
the
financial
statements
and
consolidated financial statements, the Company
and Group make judgements and estimates that
affect the application of accounting policies and
reported amounts.
Critical accounting judgements are key decisions
made by management in the application of the
Group and Company’s accounting policies, other
than those involving estimations, which have the
most
significant
effects
on
the
amounts
recognised in the financial statements.
assumptions
and
estimations
made
by
management that have a significant risk of
resulting in a material adjustment to the carrying
amount of assets and liabilities within the next
financial year.
The Group and Company’s critical sources of
estimation uncertainty are as follows:
•
Valuation of Level 3 financial instruments:
Valuation techniques used to measure the fair
value of instruments categorised in Level 3 of
the fair value hierarchy are dependent on
unobservable
parameters,
and
as
such
require the application of judgement, involving
estimations and assumptions. The fair value
for these financial instruments has been
determined using parameters appropriate for
the
valuation
methodology
based
on
prevailing market evidence. It is recognised
that the unobservable parameters could have
a range of reasonable possible alternate
values. See accounting policy note 3(d) and
note 30(d)(ii) ‘Sensitivity of Fair Values to
Changing
Significant
Assumptions
to
Reasonably Possible Alternatives’.
•
Measurement
of
litigation
and
taxation
provisions:
Estimates
are
used
in
the
calculation of provisions, which are initially
measured, and subsequently remeasured, at
the best estimate of the expenditure required
to settle the obligation. With such items there
is a possibility that, on conclusion at a future
date, the final outcome may differ significantly.
Whilst a range of outcomes is reasonably
possible,
the
extent
of
the
reasonably
possible range has been assessed as not
material. See accounting policy note 3(k) and
No critical accounting judgements have been
made in the process of applying the Group and
Company’s accounting policies that have had a
significant effect on the amounts recognised in
the financial statements.
The Group and Company evaluates the critical
accounting
judgements
and
accounting
estimates on an ongoing basis and believes that
Basis of Consolidation
The consolidated financial statements of the
Group comprise the financial statements of the
Company and its subsidiaries as at 31 December
2022. Subsidiaries are all entities over which the
Group has control. The Group controls an entity
when the Group is exposed to, or has rights to,
variable returns from its involvement with the
entity and has the ability to affect those returns
through its power over the entity. The financial
statements for the subsidiaries are prepared for
the same reporting year as the Group, using
consistent accounting policies. The financial
statements for the subsidiaries are translated into
US
dollars
as
described
in
note
3(b).
Subsidiaries are consolidated from the date that
the Group gains control until the date that control
ceases.
In certain cases, the Group may exercise control
over another entity on behalf of investors or other
parties.
In such cases it is necessary, as part of
the assessment of whether it should consolidate
the entity, for the Group to determine whether it
exercises such control primarily as an agent for
the other investors or whether it does so primarily
as principal on its own behalf. In making such a
determination, the management will consider all
relevant factors, including in particular:
•
the scope of the Group’s decision-making
authority over the investee;
•
the rights, including removal rights, held by
other parties;
•
the remuneration to which the Group is
entitled; and
•
the significance of the Group’s exposure to
variability of returns from its interests in the
entity.
Intra-group balances, transactions, income and
expenses and profits and losses resulting from
intra-group
transactions
are
eliminated
in
preparing the consolidated financial statements.
Details of the Group’s interests in other entities
are
given
in
note
14
to
these
financial
The Going Concern Assumption
The Group’s and Company’s business activities,
together with the factors likely to affect its future
development, performance and position, and the
Group’s and Company’s objectives, policies and
processes for managing its capital; its financial
risk management; and its exposures to credit risk
and liquidity risk, are reflected in the Strategic
Report, and as set out in the Strategic report,
retaining
sufficient
capital
and
liquidity
to
withstand market pressures remains central to
the Morgan Stanley Group’s, the Group’s and the
Company’s strategy.
Taking the above factors into consideration, the
Directors believe the Group and 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 annual
Change in Presentation
The Group has updated the income statement
presentation for gains and losses arising on
financial instruments measured at FVPL, such
that these are now presented in the ‘Net gains
from financial instruments at fair value through
profit or loss’ income statement line. In prior
reporting periods, this information was presented
across two income statement lines: ‘Net gains/
losses from financial instruments measured at
fair value’ and ‘Net trading income’, both of which
are now included in note 4. This presentation is
more closely aligned to the way that the business
is managed and therefore provides more relevant
information. The comparative period has also
ACCOUNTING POLICIES
Functional Currency
Items included in the consolidated financial
statements are measured and presented in US
dollars, the currency of the primary economic
environment in which the Group operates.
All
currency
amounts
in
the
consolidated
financial
statements,
Strategic
Report
and
Directors’ Report are rounded to the nearest
Foreign Currencies
All monetary assets and liabilities denominated in
currencies other than US dollars are translated
into US dollars at the rates ruling at the reporting
date. Transactions and non-monetary assets and
liabilities denominated in currencies other than
US dollars are recorded at the rates prevailing at
the dates of the transactions. Assets and
liabilities of foreign operations are translated into
US dollars using the closing rate method.
Translation differences arising from the net
investment(s) in the foreign operations are taken
to the ‘Currency translation reserve’.
The amount of change in the fair value of
financial liabilities designated at FVPL that is
attributable to changes in the credit risk of these
liabilities (Debt Valuation Adjustment (“DVA”))
includes foreign exchange differences thereon.
All other translation differences are taken through
the consolidated income statement. Exchange
differences
recognised
in
the
consolidated
income
statement
are
presented
in
‘Other
income’ or ‘Operating expense’, except where
c.
Financial Instruments
Financial Instruments Mandatorily at Fair
Value through Profit and Loss
T
rading financial instruments include government
debt securities, corporate and other debt, traded
loans, and corporate equities where the Group
acquires the financial asset or financial liability
for the purpose of selling or repurchasing in the
near term or is part of a portfolio for which there
is evidence of short term profit taking, and all
derivative contracts.
Purchases and sales of non-derivative financial
instruments classified as trading are initially
recognised on settlement date at fair value,
including regular way securities transactions. For
purchases of non-derivative financial instruments
classified as trading, from the date that the terms
are agreed (trade date) until the settlement date,
the
Group
and
Company
recognises
any
unrealised fair value in the statement of financial
position as ‘Trading financial instruments’ with
corresponding profit or loss recognised within the
consolidated income statement in ‘Net gains/
(losses) from financial instruments at fair value
through profit or loss’. For sales of non-derivative
financial
instruments,
unrealised
fair
value
changes
are
no
longer
recognised
in
the
consolidated income statement from trade date.
Upon settlement date the resulting financial
instrument is recognised or de-recognised from
the consolidated statement of financial position.
Derivatives, are initially recorded on trade date at
fair value (see note 3(d) below). All subsequent
changes in fair value are reflected in the
consolidated income statement in ‘Net gains/
(losses) from financial instruments at fair value
through profit or loss’.
All changes in fair value, foreign exchange
differences, interest and dividends are reflected
in the consolidated income statement in ‘Net
gains/(losses) from financial instruments at fair
value through profit or loss’. When interest is
included as a component of an instrument’s fair
value, interest is also reflected in the income
statement in ‘Net gains/(losses) from financial
instruments at fair value through profit or loss’,
otherwise, it is included within ‘Interest income’
or ‘Interest expense’.
Transaction costs are incremental costs that are
directly attributable to the acquisition, issue or
disposal of a financial instrument. For all trading
financial
instruments,
transaction
costs
are
excluded from the initial fair value measurement
of the financial instrument. These costs are
recognised in the consolidated income statement
Non-trading Financial Assets at Fair Value
through Profit or Loss
Non-trading financial assets at FVPL include
secured financing transactions such as cash
collateral on securities borrowed and securities
purchased under agreements to resell, prepaid
OTC contracts and financial assets arising upon
consolidation of certain special purpose entities,
and
certain
investment
securities
(unlisted
equities).
Non-trading
financial
assets
at
FVPL
are
principally financial assets where the Group
makes decisions based upon the assets’ fair
values. These assets are generally recognised
on settlement date at fair value (see note 3(d)
below), since they are neither regular way nor
are they derivatives. From the date the terms are
agreed (trade date), until the financial asset is
funded
(settlement
date),
the
Group
and
Company recognises any unrealised fair value
changes in the financial asset as non-trading
financial assets at FVPL. On settlement date, the
fair value of consideration given is recognised as
a non-trading financial asset at FVPL.
All subsequent changes in fair value and foreign
exchange
differences
are
reflected
in
the
consolidated income statement in ‘Net gains/
(losses) from financial instruments at fair value
through profit or loss’. When interest is included
as a component of an instrument’s fair value,
interest is also reflected in the consolidated
income statement in ‘Net gains/(losses) from
financial instruments at fair value through profit
or loss’, otherwise it is included within ‘Interest
income’ or ‘Interest expense’.
Transaction costs are excluded from the initial
fair value measurement of the financial assets
and are recognised in the consolidated income
statement in ‘Operating expense’.
Financial Instruments Designated at Fair
Value through Profit or Loss
Financial
instruments
designated
at
FVPL
include
corporate
loans,
unfunded
loan
commitments,
prepaid
OTC
contracts,
cash
collateral on securities loaned and securities sold
under
agreements
to
repurchase,
issued
structured notes and other financial assets and
liabilities.
The Group and Company have designated
certain financial instruments at FVPL when the
designation
at
fair
value
eliminates
or
significantly reduces an accounting mismatch
which would otherwise arise. The Group has also
designated certain financial liabilities at FVPL
where:
•
the financial liability forms part of a group of
financial assets or financial liabilities or both
which are managed, evaluated and reported
internally on a fair value basis; or
•
the financial liability contains an embedded
derivative that significantly modifies the cash
flows that would otherwise be required under
the contract.
From the date the transaction in a financial
instrument designated at FVPL is entered into
(trade date) until settlement date, the Group
recognises any unrealised fair value changes in
the contract as financial instruments designated
at FVPL in the statement of financial position. On
settlement date, the fair value of consideration
given or received is recognised as a financial
instrument designated at FVPL (see note 3(d)
below).
All subsequent changes in fair value, foreign
exchange
differences,
and
dividends
are
reflected in the consolidated income statement in
‘Net gains/(losses) from financial instruments at
fair value through profit or loss’, other than DVA
on financial liabilities designated at FVPL which
is recognised in the ‘Debt valuation adjustment’
reserve where those changes do not create or
enlarge an accounting mismatch. When interest
is included as a component of an instrument’s
fair value, interest is also reflected in the
consolidated income statement in ‘Net gains/
(losses) from financial instruments at fair value
through profit or loss’, otherwise it is included
within ‘Interest income’ or ‘Interest expense’. DVA
presented within other comprehensive income is
not subject to reclassification to the consolidated
income statement, but is transferred to ‘Retained
earnings’ when realised.
For the Company, the presentation of ‘Debt
valuation adjustment’ within other comprehensive
income represents a departure from Schedule 1
paragraph 40 to the Regulations, which requires
that changes in the value of financial instruments
be included in the profit and loss account. The
Directors
consider
that
this
departure
is
necessary in order that the accounts give a true
and fair view of the results of the Company. All
other subsequent changes in fair value, foreign
exchange differences not relating to changes in
the credit risk of those liabilities, interest and
dividends are reflected in the income statement.
Transaction costs are excluded from the initial
fair
value
measurement
of
the
financial
instrument. These costs are recognised as
incurred in the consolidated income statement in
‘Operating expense’.
See note 10 for an analysis of financial assets
iii)
Investments in Subsidiaries
Subsidiaries
are
entities
over
which
the
Company has control. The Company controls an
entity when it is exposed to, or has rights to,
variable returns from its involvement with the
entity and has the ability to affect those returns
through its power over the entity.
Investments in subsidiaries are stated at cost,
less provision for any impairment (see note
3(c)(iv) below). Dividends, impairment losses and
reversals of impairment losses are recognised in
the income statement.
Impairment of Subsidiaries
Impairment losses on investments in subsidiaries
are measured as the difference between cost
and the current estimated recoverable amount.
When the recoverable amount is less than cost,
an impairment is recognised within the income
statement and is reflected against the carrying
amount of the impaired asset in the statement of
financial position. Investments in subsidiaries
which have suffered an impairment are reviewed
v)
Financial Assets and Financial Liabilities
at Amortised Cost
and short-term deposits, certain trade and other
receivables and certain loans and advances.
cost when the Group and Company’s business
model objective is to collect the contractual cash
flows of the assets and where these cash flows
are Solely Payments of Principal and Interest
(“SPPI”) on the principal amount outstanding until
maturity. Such assets are recognised when the
Group and Company becomes a party to the
contractual provisions of the instrument. The
instruments are initially measured at fair value
(see
note
3(d)
below)
and
subsequently
measured at amortised cost less ECL allowance.
Interest is recognised in the consolidated income
statement in ‘Interest income’, using the effective
interest rate (“EIR”) method as described below.
Transaction costs that are directly attributable to
the acquisition of the financial asset are added to
the fair value on initial recognition. ECL, and
reversals
thereof,
are
recognised
in
the
consolidated
income
statement
in
‘Net
include
bank
loans
and
overdrafts,
certain
secured borrowings, certain trade and other
payables, and certain debt and other borrowings.
Financial
liabilities
are
classified
as
being
subsequently
measured
at
amortised
cost,
except where they are held for trading or are
designated as measured at FVPL. They are
recognised when the Group becomes a party to
the contractual provisions of the instrument and
are initially measured at fair value (see note 3(d)
below) and subsequently measured at amortised
cost. Interest is recognised in the consolidated
income statement in ‘Interest expense’ using the
EIR method as described below. Transaction
costs that are directly attributable to the issue of
a financial liability are deducted from the fair
value on initial recognition.
The EIR method is a method of calculating the
amortised cost of a financial instrument (or a
group of financial instruments) and of allocating
the interest income or interest expense over the
expected life of the financial instrument. The EIR
is the rate that exactly discounts the estimated
future cash payments and receipts through the
expected life of the financial instrument (or,
where appropriate a shorter period) to the
carrying amount of the financial instrument. The
EIR is established on initial recognition of the
financial instrument. The calculation of the EIR
includes all fees and commissions paid or
received, transaction costs, and discounts or
Secured
Financing
and
Secured
Borrowings
In the course of financing its business and part of
its trading activities, the Group and Company
enter into arrangements which involve the sale of
securities with agreements to repurchase, the
purchase of securities with resale agreements,
the lending of securities with collateral received
and the borrowing of securities with collateral
given.
Securities received by the Group and Company
under
resale
arrangements
and
securities
borrowing
arrangements
are
generally
not
recognised on the consolidated statement of
financial position, and securities pledged or sold
by the Group under sale and repurchase
agreements and securities lending arrangements
are
generally
not
derecognised
from
the
consolidated statement of financial position.
Securities pledged or sold by the Group and
Company
under
sale
and
repurchase
agreements and securities lending arrangements
are
generally
not
derecognised
from
the
statement of financial position. Where cash
collateralised,
the
resulting
cash
collateral
balances repayable and accrued interest are
designated at FVPL where the financial liability
forms part of a group of financial assets or
financial liabilities or both, which is managed,
evaluated and reported internally of a fair value
Fair Value
Fair Value Measurement
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
Group
and
Company
believes
market
participants would use in pricing the asset or
liability at the measurement date.
Where the Group and Company manages a
group of financial assets and financial liabilities
on the basis of its net exposure to either market
risks or credit risk, the Group and 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
Group
and
Company use various valuation approaches and
establish
a
hierarchy
for
inputs
used
in
measuring fair value that require 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
Group and Company. Unobservable inputs are
inputs that reflect assumptions the Group and
Company
believe
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 - Quoted prices (unadjusted) in an
active market for identical assets or liabilities
Valuations based on quoted prices in active
markets that the Morgan Stanley Group has
the ability to access for identical assets or
liabilities. Valuation adjustments and block
discounts
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 judgement.
•
Level
2
-
Valuation
techniques
using
observable inputs
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 - Valuation techniques with significant
unobservable inputs
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, for example, 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 judgement. Accordingly,
the degree of judgement exercised by the Group
and Company in determining fair value is
greatest for instruments categorised in Level 3 of
the fair value hierarchy.
The Group and 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 to a
lower Level of the fair value hierarchy.
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.
The
Group
incorporates
Funding
Valuation
Adjustment
(“FVA”)
into
the
fair
value
measurements
of
OTC
uncollateralised
or
partially
collateralised
derivatives
and
in
collateralised derivatives where the terms of the
agreement do not permit the re-use of the
collateral received. In general, the FVA reflects a
market funding risk premium inherent in the
noted derivative instruments. The methodology
for measuring FVA leverages the Group and
Company’s
existing
credit-related
valuation
adjustment
calculation
methodologies,
which
apply to both assets and liabilities.
For assets and liabilities that are transferred
between levels in the fair value hierarchy during
the period, fair values are ascribed as if the
assets or liabilities had been transferred as of the
beginning of the period.
Valuation Techniques
Many cash instruments and 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
Group and Company carry 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 many cash instruments and 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, credit
curves,
correlation,
creditworthiness
of
the
counterparty, creditworthiness of the Group and
Company, 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 in order
to arrive at fair value.
Adjustments for liquidity risk adjust model-
derived mid-market levels of Level 2 and Level 3
financial instruments for the bid-mid or mid-ask
spread required to 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 Group and Company apply credit-related
valuation
adjustments
(“CVA”)
to
their
Borrowings (primarily structured notes) which are
designated at FVPL and to OTC derivatives. The
Group and Company consider the impact of
changes in own credit spreads based upon
observations of the secondary bond market
spreads when measuring the fair value for
borrowings. For OTC derivatives, the impact of
changes
in
both
the
Group’s
and
the
counterparty’s credit rating is considered when
measuring
fair
value.
In
determining
the
expected exposure, the Group and Company
simulate the distribution of the future exposure to
a counterparty, then apply market-based default
probabilities to the future exposure, leveraging
external third-party CDS spread data. Where
CDS spread data are unavailable for a specific
counterparty, bond market spreads, CDS spread
data based on the counterparty’s credit rating or
CDS spread data that reference a comparable
counterparty may be utilised. The Group also
considers collateral held and legally enforceable
master netting agreements that mitigate its
exposure to each counterparty.
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.
The
Group
and
Company
may
apply
a
concentration adjustment to certain of their OTC
derivative portfolios to reflect the additional cost
of closing out a particularly large risk exposure.
Where possible, these adjustments are based on
observable market information but in many
instances significant judgement is required to
estimate the costs of closing out concentrated
risk exposures due to the lack of liquidity in the
marketplace.
Valuation Process
VC within Finance is responsible for ensuring
that the inventory carried at fair value in the
Group and Company’s financial statements and
associated
disclosures
is
presented
in
accordance
with
applicable
accounting
standards. VC is independent of the business
units and reports to the Chief Financial Officer of
the Morgan Stanley Group (“CFO”), who has final
authority over the valuation of the Group’s
inventory.
VC
implements
valuation
control
processes designed to validate the fair value of
the Group’s financial instruments measured at
fair value including those derived from pricing
models.
Model Control:
VC, in conjunction with MRM,
which reports to the CRO, independently reviews
valuation models. VC is responsible for reviewing
that
the
model
valuation
methodology
is
appropriate, model inputs and valuations are
consistent with accounting standards and an
independent price verification can be performed.
The Group and Company generally subject
valuations and models to a review process
initially and on a periodic basis thereafter.
Independent Price Verification:
The business
units are responsible for determining the fair
value of financial instruments using approved
valuation models and valuation methodologies.
Generally on a monthly basis, VC performs an
independent review of the valuation in the books
and records by determining the appropriateness
of the inputs used by the business units and by
testing
compliance
with
the
documented
valuation methodologies approved in the model
review process described above. External pricing
data used to validate the valuation must meet
minimum quality standards set by VC.
The results of this independent price verification
and any adjustments made to the fair value
generated by the business units are presented to
management of the MSI Group’s business
segments
(i.e.
Institutional
Securities
and
Investment Management), the CFO and the CRO
on a regular basis.
VC
reviews
the
models
and
valuation
methodology used to price new material Level 2
and Level 3 transactions and both Finance and
MRM must approve the fair value of the trade
that is initially recognised.
Gains and Losses on Inception
In the normal course of business, the fair value of
a financial instrument on initial recognition is the
transaction price (i.e. the fair value of the
consideration given or received). In certain
circumstances, however, the fair value will be
based
on
other
observable
current
market
transactions in the same instrument, without
modification or repackaging, or on a valuation
technique whose variables include only data from
observable markets. When such evidence exists,
the Group and Company recognises a gain or
loss on inception of the transaction.
When the use of unobservable market data has a
significant impact on determining fair value at the
inception of the transaction, the entire initial gain
or loss indicated by the valuation technique as at
the
transaction
date
is
not
recognised
immediately
in
the
consolidated
income
statement but is deferred and recognised over
the life of the instrument or is recognised instead
when the market data becomes observable or on
maturity or disposal of the instrument.
For further information, see note 30(e).
Assets and Liabilities Measured at Fair Value
on a Non-Recurring Basis
Certain of the Group and Company’s assets and
liabilities may be measured at fair value on a
non-recurring basis. The Group and Company
incur losses or gains for any adjustments of
these assets or liabilities to fair value.
For assets and liabilities measured at fair value
on a non-recurring basis, fair value is determined
by using various valuation approaches. The
same hierarchy for inputs as described above,
which requires that the observable inputs be
used when available, is used in measuring fair
Impairment of Financial Instruments
The Group recognises ECL for the following
financial instruments that are not measured at
FVPL:
•
financial assets measured at amortised cost;
•
loan commitments, except those that can be
net settled in cash or with another financial
instrument; and
•
financial guarantees.
Measurement of ECL
The Group and Company recognise a loss
allowance for expected credit losses on financial
assets measured at amortised cost, in-scope
loan commitments and financial guarantees and
applies a three stage approach to measuring
ECLs based on the change in credit risk since
initial recognition:
•
Stage 1:
if the credit risk of the financial
instrument at the reporting date has not
increased significantly since initial recognition,
then the loss allowance is calculated as the
lifetime cash shortfalls that will result if a
default
occurs
in
the
next
12
months,
weighted by the probability of that default
occurring.
•
Stage 2:
if there has been a significant
increase in credit risk (“SICR”) since initial
recognition, the loss allowance is calculated
as the ECL over the remaining life of the
financial instrument. If it is subsequently
determined that there has no longer been a
SICR since initial recognition, then the loss
allowance reverts to reflecting 12 month
expected losses.
•
Stage 3:
if there has been a SICR since initial
recognition and the financial instrument is
deemed
credit-impaired
(see
below
for
definition
of
credit-impaired),
the
loss
allowance is calculated as the ECL over the
remaining life of the financial instrument. If it
is subsequently determined that there has no
longer been a SICR since initial recognition,
then the loss allowance reverts to reflecting
12 month expected losses.
Notwithstanding the above, for trade receivables
a lifetime ECL is always calculated, without
considering whether a SICR has occurred.
Assessment of SICR
When assessing SICR, the Group considers both
quantitative
and
qualitative
information
and
analysis based on the Group and Company’s
historical experience and expert credit risk
assessment,
including
forward-looking
information.
The determination of a SICR is generally based
on changes in the probability of default (“PD”), in
conjunction with a rebuttable presumption that a
SICR has occurred if a financial asset is more
than 30 days past due.
Calculation of ECL
ECL is calculated using three main components:
•
PD:
for accounting purposes, the 12 month
and lifetime PD represent the expected point-
in-time probability of a default over the next
12 months and over the remaining lifetime of
the financial instrument respectively, based
on conditions existing at the balance sheet
date and future economic conditions.
•
Loss
given
default
(“LGD”):
the
LGD
represents
expected
loss
conditional
on
default, taking into account the mitigating
effect of collateral, including the expected
value of the collateral when realised and the
time value of money.
•
Exposure at default (“EAD”):
this represents
the expected EAD, taking into account the
expected repayment of principal and interest
from the balance sheet date to the date of
default event together with any expected
drawdowns of the facility over that period.
These parameters are generally derived from
internally
developed
statistical
models,
incorporating historical, current and forward-
looking macro-economic data and country risk
expert
judgement.
The
macro-economic
scenarios are reviewed quarterly.
The 12 month ECL is equal to the sum over the
next 12 months of quarterly PD multiplied by
LGD and EAD, with such expected losses being
discounted at the effective interest rate. Lifetime
ECL is calculated using the discounted present
value of total quarterly PDs multiplied by LGD
and EAD, over the full remaining life of the
facility.
When measuring ECLs, the Group and Company
consider
multiple
scenarios,
except
where
practical expedients are used to determine ECL.
Practical expedients are used where they are
consistent with the principles described above.
ECL on certain trade receivables are calculated
using a ‘matrix’ approach which reflects the
previous history of credit losses on these
financial assets, applying different provision
levels based on the age of the receivable. The
simplified ECL approach is applied to Trade
receivables where a lifetime ECL is always
calculated. Alternatively where there is a history
of no credit losses, and where this is expected to
persist into the future for structural or other
reasons, such as collateral or other credit
enhancement, it may be determined that the ECL
for a financial instrument is
de minimis
(highly
immaterial) and it may not be necessary to
recognise the ECL.
The Group and Company measure ECL on an
individual asset basis and has no purchased or
originated credit-impaired financial assets.
Presentation of ECL
ECL is recognised in the consolidated income
statement within ‘Net impairment loss/(reversal)
on financial instruments’.
Credit-impaired Financial Instruments
In
assessing
the
impairment
of
financial
instruments under the ECL model, the Group and
Company
define
credit-impaired
financial
instruments in accordance with Credit Risk
Management
Department’s
policies
and
procedures. A financial instrument is credit-
impaired when, based on current information and
events, it is probable that the Group or Company
will be unable to collect all scheduled payments
of principal or interest when due according to the
contractual terms of the agreement.
Definition of Default
In
assessing
the
impairment
of
financial
instruments under the ECL model, the Group and
Company defines default in accordance with the
Credit Risk Management Department’s policies
and procedures. This considers whether the
borrower is unlikely to pay its credit obligations to
the Group or Company in full and takes into
account qualitative indicators, such as breaches
of covenants. The definition of default also
includes a presumption that a financial asset
which is more than 90 days past due has
defaulted.
Write-offs
Loans and debt securities are written off (either
partially or in full) when they are deemed
uncollectible. Financial assets that are written off
could still be subject to enforcement activities for
Revenue Recognition
Revenues are recognised when the promised
goods or services are delivered to the Group’s
customers, in an amount that is based on the
consideration the Group expects to receive in
exchange for those goods or services when such
amounts are not probable of significant reversal.
Investment Banking
Revenue from investment banking activities
consists of revenues earned from underwriting
primarily equity and fixed income securities and
advisory
fees
for
mergers,
acquisitions,
restructuring and advisory assignments.
Underwriting revenues are generally recognised
on trade date, if there is no uncertainty or
contingency related to the amount to be paid.
Underwriting costs are deferred and recognised
when the related underwriting revenues are
recorded.
Advisory fees are recognised over time based on
estimated progress of work as advice is provided
to the client and is not probable of a significant
reversal. Advisory expenses are recognised as
incurred, including when reimbursed.
Fee
and
commission
income
results
from
transaction-based arrangements in which the
client is charged a fee for the execution of
transactions. Such revenues primarily arise from
transactions in equity securities; services related
to sales and trading activities; futures, insurance
products and options. Fee and commission
income is recognised on trade date when the
performance obligation is satisfied.
Fee and commission income in the consolidated
income
statement
includes
investment
management
fees,
sales
commissions,
placement fees, advisory fees and syndication
g.
Fees and Commission Expense
Fees
and
commission
expense
in
the
consolidated
income
statement
include
transaction and service fees. Amounts are
h.
Disposal of Subsidiaries
When subsidiaries are sold or the Company
ceases to control an entity, the difference
between the proceeds (plus the fair value of any
investment retained), and the total assets less
total liabilities disposed of, cumulative translation
differences
and
unamortised
goodwill,
is
recognised in the consolidated income statement
within ‘Net gain on investments in subsidiaries’.
Where the disposal or loss of control over an
entity includes a foreign operation, all foreign
exchange
differences
accumulated
in
the
‘Currency translation reserve’ attributable to the
equity holders of the Company are reclassified to
the consolidated income statement within ‘Net
gain on investments in subsidiaries’.
Cash and Cash Equivalents
For the purposes of the consolidated statement
of cash flows, cash and cash equivalents
comprise cash and demand deposits with banks,
net of outstanding bank overdrafts, along with
highly liquid investments, with original maturities
of three months or less, that are readily
convertible to known amounts of cash and
subject to insignificant risk of change in value.
This may include segregated client money, held
in accordance with the FCA’s Client Money Rules
Income Tax
The tax expense represents the sum of the tax
currently payable and deferred tax.
The tax currently payable is calculated based on
taxable profit for the year. Taxable profit may
differ
from
profit/(loss)
before
taxation
as
reported in the consolidated income statement
because it excludes items of income or expense
that are taxable or deductible in other years and
items that are never taxable or deductible.
Taxable profit is also adjusted if it is considered
that it is not probable that a taxation authority will
accept an uncertain tax treatment. The Group
and
Company’s
liability
for
current
tax
is
calculated using tax rates that have been
enacted or substantively enacted by the reporting
date. Current tax is charged or credited in the
consolidated income statement, except when it
relates to items charged or credited directly to
other comprehensive income or equity, in which
case the current tax is also recorded within other
comprehensive income or equity respectively.
recoverable on differences between the carrying
amounts of assets and liabilities in the financial
statements and the corresponding tax bases
used in the computation of taxable profit, and is
accounted for using the balance sheet liability
method. Deferred tax liabilities are generally
recognised for all taxable temporary differences
and deferred tax assets are recognised to the
extent that it is probably that taxable profits will
be available against which deductible temporary
differences can be utilised.
Deferred tax liabilities are recognised for taxable
temporary differences arising on investments in
subsidiaries and associates, except where the
Group and Company is able to control the
reversal of the temporary difference and it is
probable that the temporary difference will not
reverse in the foreseeable future.
The carrying amount of deferred tax assets is
reviewed at each reporting date and limited to
the extent that it is probable that sufficient
taxable profits will be available to allow all or part
of the asset to be recovered.
Deferred tax is calculated at the tax rates that are
expected to apply in the period when the liability
is settled or the asset is realised. Deferred tax is
charged or credited in the consolidated income
statement, except when it relates to items
charged
or
credited
directly
to
other
comprehensive income or equity, in which case
the
deferred
tax
is
reflected
within
other
comprehensive income or equity, respectively.
Current tax assets are offset against current tax
liabilities when there is a legally enforceable right
to set off current tax assets against current tax
liabilities and the Group or Company intends to
settle its current tax assets and current tax
liabilities on a net basis or to realise the asset
and settle the liability simultaneously. Deferred
tax assets and liabilities are offset when there is
a legally enforceable right to set off current tax
assets against current tax liabilities and when
they relate to income taxes levied by the same
taxation authority and the Group intends to settle
its current tax assets and current tax liabilities on
The income tax effect of distributions are
recognised
in
the
consolidated
income
statement,
other
comprehensive
income
or
equity
dependant
on
where
those
past
transactions that generated the distributable
profits were recognised. The income tax effect of
coupons of AT1 instruments accounted for as
distributions are recognised in the consolidated
Provisions and Commitments
Provisions are recognised when the Group or
Company has an identified present obligation as
a result of a past event, when it is probable that
an outflow of resources embodying economic
benefits will be required to settle that obligation
and when a reliable estimate can be made of the
amount of the obligation.
The amount recognised as a provision is the best
estimate of the consideration required to settle
the present obligation at the year-end date,
taking into account the risks and uncertainties
surrounding
the
obligation.
A
provision
is
measured using the cash flows estimated to
settle the present obligation, with its carrying
amount reflecting the present value of those cash
flows, where the effect of discounting is material.
The expected credit loss allowance on loan
commitments
and
financial
guarantees
is
presented in the statement of financial position
A
commitment
is
any
legal
obligation
to
potentially make or receive cash payments or
transfer cash.
Offsetting of Financial Assets and
Financial Liabilities
Where there is currently legally enforceable right
to set off the recognised amounts and an
intention to either settle on a net basis or to
realise the asset and the liability simultaneously,
financial assets and financial liabilities are offset
and the net amount is presented on the
consolidated statement of financial position. In
the absence of such conditions, financial assets
and financial liabilities are presented on a gross
Employee Compensation Plans
i)
Equity-settled Share-based
Compensation Plans
Morgan Stanley issues awards in the form of
restricted stock units (“RSUs”) to employees of
the Morgan Stanley Group for services rendered
to the Group and Company. Awards are equity-
settled
and
the
cost
of
the
equity-based
transactions with employees is measured based
on the fair value of the equity instruments at
grant date. The fair value of RSUs is based on
the market price of Morgan Stanley common
stock,
measured
as
the
volume-weighted
average price on the date of grant (“VWAP”). The
fair value of RSUs not entitled to dividends until
conversion is measured at VWAP reduced by the
present value of dividends expected to be paid
on the underlying shares prior to the scheduled
conversion date.
Awards
generally
contain
clawback
and
cancellation provisions. Certain awards provide
Morgan Stanley the discretion to clawback or
cancel all or a portion of the award under
specified circumstances. Compensation expense
for these awards is adjusted for changes in the
fair value of the Morgan Stanley’s common stock
until conversion.
The
Group
and
Company
recognise
compensation costs over the relevant vesting
period for each separately vesting portion of the
award. An estimation of awards that will be
forfeited prior to vesting due to the failure to
satisfy
service
conditions
is
considered
in
calculating the total compensation cost to be
amortised over the relevant vesting period.
Under
Morgan
Stanley
Group
chargeback
agreements, the Group and Company pay
Morgan Stanley for the procurement of shares.
Prior
to
November
2022,
the
Group
and
Company paid Morgan Stanley the grant date fair
value and any subsequent movement in fair
value up to the time of conversion of the award
and delivery of shares to the employees. In
November
2022,
the
Company
chargeback
agreement was amended such that the Company
no longer pays Morgan Stanley any subsequent
movement in fair value up to the time of
conversion.
This
change
applied
to
all
outstanding awards granted to current and
former employees of the Company.
Share based compensation expense is recorded
within ‘Operating expense’ in the consolidated
ii)
Deferred
Cash-based
Compensation
Plans
Morgan Stanley awards deferred cash-based
compensation on behalf of the Group and
Company for the benefit of employees, providing
a return to the participating employees based
upon the performance of various referenced
investments. Compensation expense for deferred
cash-based compensation awards is calculated
based on the notional value of the award
granted, adjusted for changes in the fair value of
the
referenced
investments
that
employees
select.
The
Group
and
Company
recognise
compensation cost over the relevant vesting
period for each separately vesting portion of the
award. Forfeitures due to failure to satisfy service
conditions are accounted for as they occur.
Deferred cash-based compensation expense is
recorded within ‘Operating expense’ in the
consolidated income statement. The liability for
the awards is measured at fair value and is
included within ‘Accruals and deferred income’ in
the consolidated statement of financial position.
The Group and Company enter into derivative
contracts with other Morgan Stanley Group
undertakings
to
economically
hedge
the
exposure
created
by
these
deferred
compensation
plans.
The
derivatives
are
recognised within ‘Trading financial instruments’
in the consolidated statement of financial position
and the related gains and losses are recorded
within
‘Net
gains/(losses)
from
financial
instruments at fair value through profit or loss’ in
the consolidated income statement.
Although changes in compensation expense
resulting from changes in the fair value of the
referenced investments will generally be offset by
changes
in
the
fair
value
of
derivative
transactions entered into by the Group and
Company, there is typically a timing difference
between the immediate recognition of gains and
losses on the derivatives and the deferred
recognition of the related compensation expense
over the vesting period.
Post-employment Benefits
The Group and Company operates defined
contribution
and
defined
benefit
post-
employment plans.
Contributions
due
in
relation
to
defined
contribution
post-employment
plans
are
recognised in ‘Direct staff costs’ within ‘Operating
expense’ in the consolidated income statement
when payable.
For the Group’s and Company’s defined benefit
post-employment plans, the plan obligations are
measured on an actuarial basis in accordance
with the advice of an independent qualified
actuary using the projected unit credit method
and discounted at a rate that reflects the
estimated settlement of the post-employment
benefit obligations. Plan assets are measured at
their fair value at the reporting date. For each
defined benefit plan, a surplus or deficit of plan
assets over liabilities is recognised in the
consolidated statement of financial position as an
asset or a liability respectively. If the fair value of
the plan assets is higher than the present value
of
the
defined
benefit
obligation,
the
measurement of the resulting defined benefit
asset is limited to the present value of economic
benefits available in the form of refunds from the
plan or reductions in future contributions to the
plan.
The current service costs and any past service
costs together with the net interest on the net
defined benefit obligation/asset is charged to
‘Direct Staff costs’ within ‘Operating expense’ in
the
consolidated
income
statement.
Remeasurements that arise in calculating the
Group and Company’s obligation in respect of a
plan are recognised in other comprehensive
income, in the period in which they occur.
The Group and Company participate in a defined
benefit plan operated by another Morgan Stanley
affiliate. The Group and Company recognise
recharges for the net defined benefit cost of the
plan as a whole under inter-affiliate contractual
agreements.
Details of the plans are given in note 33 to the
INSTRUMENTS AT FAIR VALUE
THROUGH PROFIT OR LOSS
in $ millions
2022
2021
Assets and liabilities held for trading
4,265
4,996
Non-trading financial assets at FVPL
Secured financing
23
(28)
Loans and advances - corporate loans
—
(5)
Investment securities
5
30
Trade and other receivables - prepaid
OTC contracts
19
(508)
Total non-trading financial assets at
FVPL
47
(511)
Financial liabilities designated at FVPL
Secured borrowing
(101)
156
Trade and other payables - prepaid
OTC contracts
(74)
(66)
Debt and other borrowings - issued
structured notes
1,864
272
Total financial liabilities designated
at FVPL
1,689
362
Net gains from financial instruments
at fair value through profit or loss
6,001
4,847
Non-trading
financial
assets
at
FVPL
and
financial
liabilities
designated
at
FVPL
are
frequently economically hedged with trading
financial
instruments.
Accordingly,
gains
or
losses that are reported in net income from other
financial instruments held at fair value can be
partially offset by gains or losses reported in
in $ millions
2022
2021
Investment banking
(1)
738
1,801
Commission income
777
890
Trust and other fiduciary activities
161
200
Other fee and commission income
370
332
Total fee and commission income
2,046
3,223
Of which, revenue from contracts with
customers
2,262
3,010
(1)
Includes advisory and underwriting revenues
Total fee and commission income is stated after
the transfer of revenues totalling $216 million to
other Morgan Stanley Group undertakings (2021:
$213 million from other Morgan Stanley Group
undertakings). These transfers are in accordance
with the Morgan Stanley Group Global Transfer
Pricing Policy, refer to note 34, and do not relate
EXPENSE
The table below presents interest income and
expense by accounting classification. Interest
income and expense is calculated using the
effective interest rate method for financial assets
and financial liabilities measured at amortised
cost.
in $ millions
2022
2021
Financial assets measured at
amortised cost
1,608
24
Trading financial assets
223
199
Non-trading financial assets at FVPL
1,095
(621)
Financial assets measured at FVPL
1,318
(422)
Total interest income
2,926
(398)
Of which, negative interest income
(464)
(983)
Financial liabilities measured at
amortised cost
2,998
172
Financial liabilities designated at FVPL
876
(38)
Total interest expense
3,874
134
Of which, positive interest expense
(404)
(880)
The recognition of negative interest income and
positive
interest
expense
may
result
from
transactions in certain currencies which may at
times have negative interest rates. In addition,
‘Interest income’ includes fees paid on securities
borrowed
transactions.
‘Interest
expense’
includes fees received on securities loaned and
fees from prime brokerage customers for stock
loan transactions incurred to cover customers’
2022
2021
Direct staff costs
1,274
1,530
Management charges from other
Morgan Stanley Group undertakings
relating to staff costs
531
624
Staff-related expenses
1,805
2,154
Management charges from other
Morgan Stanley Group undertakings
relating to other services
1,279
1,191
Brokerage fees
842
765
Administration and corporate services
99
88
Professional services
240
188
UK Bank Levy
33
74
Other taxes
673
850
Commission and other similar
arrangements
245
205
Auditor's remuneration:
Fees payable to the Company’s
auditor and its associates for the
audit of the Company’s annual
financial statements
3
3
Fees payable to the Company’s
auditor and its associates for other
services to the Group
(1)
1
1
Other
41
108
Non-staff related expenses
3,456
3,473
Total operating expense
5,261
(1)
Fees payable to the Company's auditor for other services in 2022
comprise
$74
thousand
for
the
audit
of
the
Company's
subsidiaries (2021: $110 thousand) and $467 thousand for other
The Group employs staff directly and also uses
the services of staff who are employed by other
Morgan Stanley Group undertakings.
Further
information
regarding
employee
compensation plans is provided in note 32.
Staff-related expenses decreased by 16% mainly
driven by lower mark-to-market on deferred
equity compensation.
The average number of direct employees of the
Group is analysed below:
Number
2022
2021
Institutional Securities and Investment
Management
2,195
2,079
Support services
86
82
2,281
2,161
The cost of the direct employees of the Group,
including the Directors, is analysed below:
in $ millions
2022
2021
Wages and salaries
1,098
1,314
Social security costs
147
186
Pension costs
29
30
1,274
1,530
The Group incurs management charges in
respect of Directors’ qualifying services provided
by employees of other Morgan Stanley Group
undertakings,
included
within
‘Management
charges from other Morgan Stanley Group
undertakings relating to staff costs’.
The
amount
of
remuneration
received
by
Directors in respect of their qualifying services to
8. NET IMPAIRMENT LOSS/(REVERSAL)
ON FINANCIAL INSTRUMENTS
in $ millions
2022
2021
Cash and short term deposits
101
—
Trade and other receivables
47
—
Loan commitments
—
(2)
Net Impairment Loss/(Reversal) on
Financial Instruments
148
(2)
All impairment losses were calculated on an
individual
basis.
No
collective
impairment
assessments were made during the current or
prior year.
The increase in net impairment loss is driven by
ECL related to Russian exposures.
in $ millions
2022
2021
Current tax
UK corporation tax charge
-current year
310
455
-prior year
(38)
(25)
Double taxation relief
-current year
(101)
(117)
Overseas tax
-current year
148
163
-prior year
5
161
Total Current tax
324
637
Deferred tax (benefit)/ expense
Current year
(11)
(45)
Prior year
—
11
Effect of changes in tax rates
8
(14)
Total Deferred tax
(3)
(48)
Income tax expense
321
589
Reconciliation of Effective Tax Rate
The Group’s effective tax rate is sensitive to the
geographic mix of profits and tax rates in non UK
jurisdictions (including the net effect of foreign
withholding taxes suffered by the Group), the
additional 8% UK banking surcharge, as well as
the non-deductibility of certain expenses for tax
purposes.
The UK statutory rate, excluding the banking
surcharge, is 19% for the year (2021: 19%).
Finance Act 2021 raised the UK main rate of
corporation tax from 19% to 25% with effect from
1 April 2023. While this change does not affect
the current tax charge for the year, it will affect
future years.
Finance Act 2022 reduced the corporation tax
surcharge rate from 8% to 3% with effect from 1
April
2023
and
increased
the
surcharge
allowance to £100 million. While this change
does not affect the current tax charge for the
year, it will affect future years.
The current year income tax expense is lower
(2021: higher) than that resulting from applying
the standard rate of corporation tax for banking
companies in the UK for the year. The main
differences are:
in $ millions
2022
2021
Profit before income tax
1,717
1,940
Income tax expense using the average
standard rate of corporation tax for
banking companies in the UK of 27%
(2021: 27% )
463
524
Impact on tax of:
Tax-deductible coupons on Additional
Tier 1 capital instruments
(64)
(64)
Non-deductible UK Bank Levy
8
20
Other expenses:
Other permanent differences
34
16
Movement in tax reserve
49
2
Group relief received for no cash
consideration
(66)
—
Effect of tax rates different to the
consolidation rate
(1)
(12)
Net effect of foreign withholding
taxes
(15)
174
Over provided in prior years
(34)
(13)
Tax exempt income
(49)
(44)
Impact of deferred tax rate change
and other deferred tax adjustments
(4)
(14)
Total income tax expense in the
consolidated income statement
321
589
The Group has a policy of surrendering tax-
deductible losses (‘group relief’) for no cash
consideration to other members of the Morgan
Stanley UK tax group, which consists of entities
within the Group and the wider Morgan Stanley
Group. Within the Group, a number of subsidiary
companies generated tax-deductible losses that
were surrendered both inside and outside the
Group in the current and prior years.
In addition to the amount charged to the
consolidated income statement, the aggregate
amount of current and deferred tax relating to
each component of other comprehensive income
was as follows:
2022
in $ millions
Before
tax
Tax
charge
(1)
Net of
tax
Pension reserve:
Remeasurement of net
defined benefit liability
4
—
4
Foreign currency
translation reserve:
Foreign currency
translation differences on
foreign operations
(43)
—
(43)
Net amount reclassified to
consolidated income
statement upon transfer of
subsidiary
(4)
—
(4)
Debt valuation reserve:
Changes in fair value
attributable to own credit
risk on financial liabilities
designated at fair value
206
(69)
137
Other comprehensive
income
163
(69)
94
(1)
The tax charge includes a $14 million charge in relation to the
impact of change in deferred tax rate
2021
in $ millions
Before
tax
Tax
charge
(1)
Net of
tax
Pension reserve:
Remeasurement of net
defined benefit liability
(2)
—
(2)
Foreign currency
translation reserve:
Foreign currency
translation differences on
foreign operations
(33)
—
(33)
Net amount reclassified to
consolidated income
statement upon transfer of
subsidiary
—
—
—
Debt valuation reserve:
Changes in fair value
attributable to own credit
risk on financial liabilities
designated at fair value
77
(4)
73
Other comprehensive
income
42
(4)
38
(1)
The tax charge includes a $14 million credit in relation to the
impact of change in deferred tax rate
In addition to the amount charged to the
consolidated
income
statement
and
the
consolidated
statement
of
comprehensive
income, a $3 million expense (2021: $nil) in
relation to deferred tax on share based payments
is
recognised
directly
in
the
consolidated
CATEGORY
The following table analyses financial assets and financial liabilities presented in the Group’s
consolidated statement of financial position and the Company’s statement of financial position by the
IFRS 9 classifications as at 31 December 2022 and 31 December 2021.
Group
Company
2022
FVPL
FVPL
designated
Amortised
cost
Total
FVPL
FVPL
designated
Amortised
cost
Total
in $ millions
Cash and short term
deposits
—
—
18,754
18,754
—
—
18,449
18,449
Trading financial assets
329,382
—
—
329,382
329,068
—
—
329,068
Secured financing:
Cash collateral on
securities borrowed
15,569
—
—
15,569
15,569
—
—
15,569
Securities purchased
under agreements to
resell
104,167
—
—
104,167
103,967
—
—
103,967
Other secured financing
10,043
—
—
10,043
10,043
—
—
10,043
Loans and advances
—
—
63
63
—
—
29
29
Investment securities
142
—
—
142
141
—
—
141
Trade and other receivables
1,298
—
80,172
81,470
1,298
—
80,261
81,559
Total financial assets
460,601
—
98,989 559,590 460,086
—
98,739 558,825
Bank loans and overdrafts
—
—
59
59
—
—
59
59
Trading financial liabilities
298,690
—
—
298,690
298,690
—
—
298,690
Secured borrowings:
Cash collateral on
securities loaned
—
19,766
6,046
25,812
—
19,766
6,046
25,812
Securities sold under
agreements to repurchase
—
26,042
25,854
51,896
—
26,042
25,854
51,896
Other financial liabilities
—
12,984
3,274
16,258
—
12,984
2,750
15,734
Trade and other payables
—
718
95,703
96,421
—
718
95,717
96,435
Debt and other borrowings
—
12,113
33,569
45,682
—
12,113
33,534
45,647
Total financial liabilities
298,690
71,623
164,505 534,818 298,690
71,623
163,960 534,273
Group
Company
2021
FVPL
FVPL
designated
Amortised
cost
Total
FVPL
FVPL
designated
Amortised
cost
Total
in $ millions
Cash and short term
deposits
—
—
28,532
28,532
—
—
28,218
28,218
Trading financial assets
332,635
—
—
332,635
332,449
—
—
332,449
Secured financing:
Cash collateral on
securities borrowed
19,360
—
—
19,360
19,360
—
—
19,360
Securities purchased
under agreements to
resell
90,296
—
—
90,296
90,096
—
—
90,096
Other secured financing
16,239
—
—
16,239
16,239
—
—
16,239
Loans and advances
—
—
67
67
—
—
26
26
Investment securities
165
—
—
165
165
—
—
165
Trade and other receivables
993
—
78,069
79,062
993
—
78,144
79,137
Total financial assets
459,688
—
106,668 566,356 459,302
—
106,388 565,690
Bank loans and overdrafts
—
—
48
48
—
—
48
48
Trading financial liabilities
300,325
—
—
300,325
300,325
—
—
300,325
Secured borrowings:
Cash collateral on
securities loaned
—
25,141
4,362
29,503
—
25,141
4,362
29,503
Securities sold under
agreements to repurchase
—
19,609
24,939
44,548
—
19,609
24,939
44,548
Other financial liabilities
—
20,053
3,158
23,211
—
20,053
2,750
22,803
Trade and other payables
—
748
92,569
93,317
—
748
92,582
93,330
Debt and other borrowings
—
9,602
43,077
52,679
—
9,602
42,861
52,463
Total financial liabilities
300,325
75,153
168,153 543,631 300,325
75,153
167,542 543,020
Financial Liabilities Designated at FVPL
Cash
collateral
on
securities
loaned
and
securities sold under agreements to repurchase:
These balances are classified as ‘Designated at
FVPL’ where the financial liability forms part of a
group of financial assets or financial liabilities or
both,
which
are
managed,
evaluated
and
reported
internally
on
a
fair
value
basis;
otherwise, they are classified as ‘Financial
liabilities at amortised cost’.
Other financial liabilities:
Liabilities arising as a
result
of
continuing
recognition
of
certain
financial assets and the simultaneous recognition
of an associated financial liability.
Prepaid OTC contracts:
The risk on these
financial instruments, is primarily hedged using
trading financial instruments including equity
securities and interest rate swaps. Prepaid
contract liabilities are designated at FVPL as
they form part of a group of financial assets and
liabilities which are managed, evaluated and
reported internally on a fair value basis.
Issued structured notes:
These relate to financial
liabilities which arise from selling structured
products, generally in the form of notes or
certificates. The structured notes are designated
at FVPL as the risks to which the Group is a
contractual party are risk-managed on a fair
value basis as part of the Group’s trading
portfolio
and
the
risk
is
reported
to
key
management personnel on this basis. Refer to
note 17 for more information.
The cumulative change in fair value recognised
through other comprehensive income attributable
to
own
credit
risk
for
financial
liabilities
designated at FVPL at 31 December 2022 is a
loss of $183 million (2021: loss of $389 million).
During the year, $nil (2021: loss of $7 million)
was realised as a result of the derecognition of
such financial liabilities and was transferred from
the
‘Debt
valuation
adjustment
reserve’
to
‘Retained earnings’.
The Group determines the amount of changes in
fair value attributable to changes in counterparty
credit risk or own credit risk, as relating to
financial liabilities designated at FVPL, by first
determining the fair value including the impact of
counterparty credit or own credit risk, and then
deducting
those
changes
in
fair
value
representing
managed
market
risk.
In
determining fair value, the Group considers the
impact of changes in own credit spreads based
upon observations of the secondary bond market
spreads when measuring the fair value for issued
structured notes. The Group considers that this
approach most faithfully represents the amount
of change in fair value due to both counterparty
credit risk and the Group’s own credit risk.
The
carrying
amount
of
financial
liabilities
designated at FVPL for which the effect of
changes
in
those
liabilities’
credit
risk
is
presented within other comprehensive income
was $920 million lower than the contractual
amount due at maturity (2021: $114 million
LIABILITIES
Group
2022
2021
in $ millions
Assets
Liabilities
Assets
Liabilities
Government debt
securities
13,782
17,025 14,097
20,475
Corporate and
other debt
11,364
4,739 10,807
3,724
Corporate
equities
53,160
24,971 65,299
28,608
Derivatives (see
note 12)
251,076 251,955 242,432 247,518
329,382 298,690 332,635 300,325
Company
2022
2021
in $ millions
Assets
Liabilities
Assets
Liabilities
Government debt
securities
13,780
17,025 14,097
20,475
Corporate and
other debt
11,046
4,739 10,608
3,724
Corporate
equities
53,160
24,971 65,299
28,608
Derivatives (see
note 12)
251,082 251,955 242,445 247,518
Group
2022
in $ millions
Bilateral
OTC
Cleared
OTC
Listed
derivative
contracts
Total
Derivative
assets:
Interest rate
contracts
66,949
9,000
5
75,954
Credit contracts
7,116
266
—
7,382
Foreign exchange
and gold contracts
120,458
2,382
1
122,841
Equity contracts
29,774
—
5,754
35,528
Commodity
contracts
8,505
—
866
9,371
232,802 11,648
6,626 251,076
Derivative
liabilities:
Interest rate
contracts
73,308
7,809
12
81,129
Credit contracts
6,572
280
—
6,852
Foreign exchange
and gold contracts
114,830
2,614
9
117,453
Equity contracts
31,295
—
5,807
37,102
Commodity
contracts
8,527
—
892
9,419
234,532 10,703
6,720 251,955
Group
2021
in $ millions
Bilateral
OTC
Cleared
OTC
Listed
derivative
contracts
Total
Derivative
assets:
Interest rate
contracts
56,787
3,731
10
60,528
Credit contracts
9,745
405
—
10,150
Foreign exchange
and gold contracts
84,810
1,224
—
86,034
Equity contracts
61,052
—
9,853
70,905
Commodity
contracts
13,983
—
832
14,815
226,377
5,360
10,695 242,432
Derivative
liabilities:
Interest rate
contracts
58,118
2,619
13
60,750
Credit contracts
8,935
392
—
9,327
Foreign exchange
and gold contracts
84,080
1,244
5
85,329
Equity contracts
68,914
—
8,411
77,325
Commodity
contracts
14,243
—
544
14,787
234,290
4,255
8,973 247,518
Company
2022
in $ millions
Bilateral
OTC
Cleared
OTC
Listed
derivative
contracts
Total
Derivative
assets:
Interest rate
contracts
66,949
9,000
5
75,954
Credit contracts
7,116
266
—
7,382
Foreign exchange
and gold contracts
120,464
2,382
1
122,847
Equity contracts
29,774
—
5,754
35,528
Commodity
contracts
8,505
—
866
9,371
232,808 11,648
6,626 251,082
Derivative
liabilities:
Interest rate
contracts
73,308
7,809
12
81,129
Credit contracts
6,572
280
—
6,852
Foreign exchange
and gold contracts
114,830
2,614
9
117,453
Equity contracts
31,295
—
5,807
37,102
Commodity
contracts
8,527
—
892
9,419
234,532 10,703
6,720 251,955
Company
2021
in $ millions
Bilateral
OTC
Cleared
OTC
Listed
derivative
contracts
Total
Derivative
assets:
Interest rate
contracts
56,787
3,731
10
60,528
Credit contracts
9,745
405
—
10,150
Foreign exchange
and gold contracts
84,823
1,224
—
86,047
Equity contracts
61,052
—
9,853
70,905
Commodity
contracts
13,983
—
832
14,815
226,390
5,360
10,695 242,445
Derivative
liabilities:
Interest rate
contracts
58,118
2,619
13
60,750
Credit contracts
8,935
392
—
9,327
Foreign exchange
and gold contracts
84,080
1,244
5
85,329
Equity contracts
68,914
—
8,411
77,325
Commodity
contracts
14,243
—
544
14,787
234,290
4,255
Group
Company
in $ millions
2022
2021
2022
2021
Trade and other
receivables
(amortised cost)
Trade receivables
Contracts with
customers
245
262
245
262
Due from other
Morgan Stanley
Group undertakings
35,100 38,420 35,353 38,630
Trading receivables
36,462 36,196 36,412 36,144
Less: ECL
(49)
(5)
(49)
(5)
71,758 74,873 71,961 75,031
Other receivables
(1)
Held at exchanges
8,274 2,886 8,118 2,768
Due from other
Morgan Stanley
Group undertakings
141
310
182
343
Other amounts
receivable
309
272
309
272
8,724 3,468 8,609 3,383
80,482 78,341 80,570 78,414
Trade and other
receivables (FVPL)
Prepaid OTC contracts
562
990
562
990
Held at exchanges
3
3
3
3
Other
733
—
733
—
1,298
993 1,298
993
Total
81,780 79,334 81,868 79,407
(1)
There was immaterial ECL on these amounts as at 31 December
Composition of the Group
Details
of
all
subsidiary
undertakings
are
provided in the Appendix, including changes in
holdings of subsidiaries
.
Company
in $ millions
Subsidiary
undertakings
Cost
At 1 January 2022
1,257
Capital Infusion
218
Disposals
(207)
At 31 December 2022
1,268
Impairment Provisions
At 1 January 2022
(1,127)
Provisions made in the year
(215)
Disposals
206
At 31 December 2022
(1,136)
Carrying Amounts
At 31 December 2021
130
At 31 December 2022
132
On 9 June 2022, the Directors approved a $207
million capital infusion into Morgan Stanley
Turnberry Limited, and a $11 million capital
infusion
into
Morgan
Stanley
Humboldt
Investments Limited, both direct subsidiaries of
the
Company.
The
Company
impaired
its
investment in each subsidiary by $206 million
and $8 million respectively. These changes had
no impact to the group.
On 1 December 2022, the Company received
$579
thousand
from
Morgan
Stanley
International Holdings Inc. in consideration of the
purchase of the equity interest in Morgan Stanley
Turnberry Limited and of its subsidiaries. The
Company recognised a gain/loss of $nil on this
disposal.
All subsidiaries are included in the Group’s
consolidated financial statements.
15. INTERESTS IN STRUCTURED
ENTITIES
The Group is involved with various special
purpose
entities
in
the
normal
course
of
business. In most cases, these entities are
deemed to be structured entities. The Group’s
interests in structured entities include certain
debt
and
equity
interests,
commitments,
guarantees, and derivative instruments.
The Group’s involvement with structured entities
arises primarily from:
•
Loans
made
to,
and
investments
in,
structured entities that hold debt, equity, real
estate or other assets;
•
Interests
purchased
in
connection
with
market-making
activities
and
retained
interests held as a result of securitisation
activities,
including
re-securitisation
transactions;
•
Structuring
of
asset-repackaged
notes
designed to meet the investment objectives of
clients; and
•
Certain
derivatives
entered
into
with
structured entities.
The risks associated with derivatives entered into
with structured entities are essentially the same
as similar derivatives with non-structured entity
counterparties and are managed as part of the
Company’s overall derivative exposure.
The Group determines whether it controls, and
therefore should consolidate, a structured entity
upon its initial involvement with the structured
entity and reassesses whether it should continue
to consolidate on an ongoing basis, as long as it
has
any
continuing
involvement
with
the
structured entity. Control is the ability to direct the
activities of the entity which most significantly
affect the returns of the entity and to determine
the parties which benefit from these returns.
Control can be exercised by a number of
mechanisms, including the ability to direct the
activities
of
the
entity
at
the
time
of
establishment, to manage the assets of the entity
and to determine the time and method of its
termination. The identification of control is based
upon an analysis of the design of the structured
entity, including the structured entity’s structure
and activities; assessment of the significance of
the powers to make economic decisions which
are held by the Group and its related parties and
whether such powers may be used to affect its
investor
returns;
and
consideration
of
the
significance of direct and indirect interests in the
structured entity which are held by the Group and
its related parties.
Consolidated Structured Entities
The table below shows information about the
structured entities which the Group consolidated.
Consolidated
structured
entity
assets
and
liabilities
are
presented
after
intercompany
eliminations and include assets financed on a
non-recourse basis.
2022
Client
intermedia-
tion
Mortgage and
asset-backed
securitisations
Total
in $ millions
Assets of structured
entities
200
606
806
Liabilities of
structured entities
195
330
525
2021
Assets of structured
entities
200
419
619
Liabilities of
structured entities
188
221
409
Unconsolidated Structured Entities
The Group has interests in structured entities
that the Group does not control and which are
therefore not consolidated.
The table below shows certain non-consolidated
structured entities in which the Group has an
interest
at
31
December
2022
and
at
31 December 2021. The table includes all
structured entities in which the Group has
determined that its maximum exposure to loss is
greater than specific thresholds or meets certain
other criteria. In addition the table includes
structured
entities
sponsored
by
unrelated
parties, as well as structured entities sponsored
by the Group; an example of the Group’s
involvement with these structured entities is its
secondary market-making activities.
The Group’s maximum exposure to loss is
dependent on the nature of the Group’s interest
in the structured entity and is limited to notional
amounts of certain liquidity facilities, total return
swaps, as well as the fair value of certain other
derivatives and investments the Group has made
in the structured entity. The reported exposure
does not include the offsetting benefit of hedges,
including total return swaps in relation to fund
investments and other entities, or any reductions
associated with the collateral held as part of a
transaction with the structured entity or with any
party to the structured entity. Where notional
amounts are used to quantify the maximum
exposure related to derivatives, such amounts do
not reflect changes in fair value already recorded
by the Group.
Liabilities issued by structured
entities generally are non-recourse to the Group.
in $ millions
Client
intermed-
iation
Mortgage
and
asset-
backed
securitis-
ations
Collateral-
ised debt
obligations
Total
31 December
2022
Assets of the
structured entity
17,096
6,989
327
24,412
Maximum
exposure to
loss:
Debt and
equity
interests
837
242
160
1,239
Derivative and
other
contracts
4,836
—
—
4,836
Total
maximum
exposure to
loss
5,673
242
160 6,075
Carrying value
of interests -
assets
(1)
:
Debt and
equity
interests
837
242
160
1,239
Derivative and
other
contracts
1,319
—
—
1,319
Total carrying
value of
exposure to
loss - assets
2,156
242
160 2,558
Carrying value
of interests -
liabilities
(1)
:
Derivative and
other
contracts
1,216
—
—
1,216
Commitments,
guarantees
and other
223
—
—
223
Total carrying
value of
exposure to
loss - liabilities
1,439
—
— 1,439
Additional
interests in
structured
entities
(2)
62
216
303
581
(1) The carrying value of the interests in structured entities are
recognised in the consolidated statement of financial position in
Trading financial assets or Trading financial liabilities - derivatives or
Trading financial liabilities - Corporate and other debt
(2) Primarily as a result of its secondary market-making activities,
the Group owned additional securities issued by securitisation
structured entities for which the maximum exposure to loss is less
than the specific thresholds noted earlier.
in $ millions
Client
intermed-
iation
Mortgage
and
asset-
backed
securitis-
ations
Collateral-
ised debt
obligations
Total
31 December
2021
Assets of the
structured entity
17,150
5,255
193
22,598
Maximum
exposure to
loss:
Debt and
equity
interests
846
197
118
1,161
Derivative and
other
contracts
5,201
—
—
5,201
Total
maximum
exposure to
loss
6,047
197
118 6,362
Carrying value
of interests -
assets
(1)
:
Debt and
equity
interests
846
197
118
1,161
Derivative and
other
contracts
1,969
—
—
1,969
Total carrying
value of
exposure to
loss - assets
2,815
197
118 3,130
Carrying value
of interests -
liabilities
(1)
:
Derivative and
other
contracts
1,067
—
—
1,067
Commitments,
guarantees
and other
354
—
—
354
Total carrying
value of
exposure to
loss - liabilities
1,421
—
— 1,421
Additional
structured
entities
owned
(2)
2
203
129
334
(1) The carrying value of the interests in structured entities are
recognised in the consolidated statement of financial position in
Trading financial assets or Trading financial liabilities - derivatives or
Trading financial liabilities - Corporate and other debt
(2) Primarily as a result of its secondary market-making activities,
the Group owned additional securities issued by securitisation
structured entities for which the maximum exposure to loss is less
than the specific thresholds noted earlier.
Client intermediation transactions represent a
range
of
transactions
designed
to
provide
investors with returns based on the returns of
underlying
securities,
referenced
assets
or
indexes. The Group’s involvement in these
transactions
is
to
act
as
the
intermediary
between the Structured Entity and the client,
generally either through a derivative or by
intermediating financing.
Securitisation
transactions
generally
involve
structured entities. Primarily as a result of its
secondary market-making activities, the Group
owned
additional
securities
issued
by
securitisation structured entities for which the
maximum exposure to loss is less than the
specific threshold noted earlier.
Collateralised Debt Obligations (“CDOs”) are
structured entities that purchase a pool of assets
consisting of corporate loans (“collateralised loan
obligations”), corporate bonds, ABS or synthetic
exposures on similar assets through derivatives,
and issue multiple tranches of debt and equity
securities to investors. Although not obligated,
the Group generally makes a market in the
securities issued by structured entities in these
transactions and may retain unsold securities.
These
beneficial
interests
are
included
in
‘Trading financial assets’ and are measured at
fair value.
The Group’s primary risk exposure is to the
securities issued by the structured entity owned
by the Group, with the risk highest on the most
subordinate class of beneficial interests. These
securities generally are included in Trading
financial assets – corporate and other debt.
The
Group does not provide additional support in
these transactions through contractual facilities,
such as liquidity facilities, guarantees or similar
derivatives. The Group’s maximum exposure to
loss generally equals the fair value of the
securities owned.
The Group has not provided financial support to,
or otherwise agreed to be responsible for
supporting
financially,
any
unconsolidated
structured entity.
Sponsored
Unconsolidated
Structured
Entities
The Group considers itself the sponsor of certain
non-consolidated structured entities where it was
primarily involved in the establishment of a
structured entity and where, additionally, the
Group has been involved in the transfer of
assets; servicer of the assets; ability to access
the
assets;
marketing;
managing
activities;
purchasing
protection
or
providing
explicit
guarantees; when Morgan Stanley’s name is
associated with the structured entity or where
market participants may generally expect Morgan
Stanley to be associated with the structured
entity.
In some sponsored entities, the Group has been
involved
with
the
structured
entity
through
establishing the structured entity, marketing of
products associated with the structured entity in
its own name, and/ or through involvement in the
design of the structured entity. The Group has no
interest in or exposure to loss from these entities
as at 31 December 2022 (2021: $nil).
During 2022 $391 million (2021: $1,398 million)
of
assets
were
transferred
to
sponsored
structured entities. It is the investors in the
structured entity, rather than the Group, that are
exposed
to
the
carrying
value
of
assets
transferred.
The
Group’s
exposure
to
the
sponsored entities is limited to net amounts
receivable from swap transactions with the entity
and is not directly linked to the transferred assets
themselves. The profit that the Group received in
relation to transactions with sponsored entities
during 2022 was $313 million (2021: loss of $370
million). Gains or losses are reported within ‘Net
gains from financial instruments at FVPL’ in the
consolidated income statement. The Group may
hedge its exposure to these transactions and the
gains or losses of this hedging activity are also
presented
within
‘Net
gains
from
financial
instruments at FVPL’, offsetting the gains or
Group
Company
in $ millions
2022
2021
2022
2021
Trade and other
payables (amortised
cost)
Trade payables
95,047 91,950 95,043 91,948
Other payables
Due to other Morgan
Stanley Group
undertakings
985
977 1,013 1,004
Other amounts payable
400
377
389
363
96,432 93,304 96,445 93,315
Trade and other
payables (designated at
FVPL)
Prepaid OTC contracts
718
748
718
748
718
748
718
748
Total
Group
in $ millions
2022
2021
Debt and other borrowings
(amortised cost)
Subordinated loan liabilities
8,898
6,400
Senior subordinated loan liabilities
3,900
5,600
Other borrowings
(1)
20,771
31,077
33,569
43,077
Debt and other borrowings
(designated FVPL)
Issued structured notes
12,113
9,602
45,682
52,679
Company
in $ millions
2022
2021
Debt and other borrowings
(amortised cost)
Subordinated loan liabilities
8,898
6,400
Senior subordinated loan liabilities
3,900
5,600
Other borrowings
(1)
20,736
30,861
33,534
42,861
Debt and other borrowings
(designated FVPL)
Issued structured notes
12,113
9,602
45,647
52,463
(1)
There is a floating charge over a pool of assets in favour of
MSIUK to secure certain intercompany loans which MSIUK has
provided to the Company and which are presented within ‘Other
borrowings’. The value of assets subject to this charge at 31
December 2022 was $21,665 million (2021: $28,518 million). The
floating charge is limited to the amount of the funding received
from MSIUK of $20,384 million.
The amounts subject to subordinated loan
agreements are wholly repayable as shown
below:
in $ millions
2022
Counterparty
Repayment
Date
Interest
Rate
Accrued
Interest
Balance
MSIUK
21
December
2025
OBFR
(1)
plus 2.3%
54
5,000
MSIUK
11 August
2032
SOFR
(2)
plus 1.44%
24
1,400
MSIUK
13 June
2033
SOFR
(2)
plus 2.34%
70
2,500
in $ millions
2021
Counterparty
Repayment
Date
Interest
Rate
Accrued
Interest
Balance
MSIUK
21
December
2025
OBFR
(1)
plus 2.3%
21
5,000
MSIUK
11 August
2032
SOFR
(2)
plus 1.44%
8
1,400
(1)
Overnight Bank Funding Rate ("OBFR")
(2)
Secured Overnight Financing Rate ("SOFR")
The amounts subject to senior subordinated loan
agreements are wholly repayable as shown
below:
in $ millions
2022
Counterparty
Repayment
Date
Interest
Rate
Accrued
Interest
Balance
MSIUK
30 January
2023
(1)
MS
Proxy
(2)
—
3,900
in $ millions
2021
Counterparty
Repayment
Date
Interest
Rate
Accrued
Interest
Balance
MSIUK
30 January
2023
(1)
MS
Proxy
(2)
—
5,600
(1)
The repayment date can be extended for 395 days on each
business day but no later than 49 years from utilisation date.
(2)
Interest rate at which Morgan Stanley is offering loans, in the
relevant currency, to members of the Morgan Stanley Group on
such day, which counterparties have acknowledged and agreed
to apply to any loan, acting on an arm's length basis.
The senior subordinated loan, including accrued
interest, may be bailed in by the Bank of England
in certain circumstances.
The Group has not defaulted on principal,
interest
or
breached
any
terms
of
its
subordinated loans or senior subordinated loans
during the year.
All amounts outstanding under subordinated loan
agreements are repayable on the repayment
date. Any repayment of the $5,000 million
instrument prior to contractual maturity of 21
December 2025 would require mutual agreement
between
the
Company
and
the
Lender.
Prepayment of the $2,500 million instrument and
the $1,400 million instrument is at the Company’s
discretion from the contractual call option date.
As at 31 December 2022 and 31 December 2021
amounts reported in the following table were the
same for both the Company and the Group.
in $ millions
Property
Litigation
Total
At 1 January 2022
2
41
43
Additional provisions
—
91
91
Foreign exchange
revaluation
—
(3)
(3)
At 31 December 2022
2
129
131
Litigation Matters
In addition to the matters described below, in the
normal course of business, the Group has been
named, from time to time, as a defendant in
various legal actions, including arbitrations, class
actions and other litigation, arising in connection
with its activities as a global diversified financial
services institution. Certain of the actual or
threatened legal actions include claims for
substantial
compensatory
and/or
punitive
damages or claims for indeterminate amounts of
damages. In some cases, the entities that would
otherwise be the primary defendants in such
cases are bankrupt or are in financial distress.
The Group is also involved, from time to time, in
other reviews, investigations and proceedings
(both formal and informal) by governmental and
self-regulatory agencies regarding the Group’s
business, and involving, among other matters,
sales and trading activities, financial products or
offerings sponsored, underwritten or sold by the
Group, and accounting and operational matters,
certain
of
which
may
result
in
adverse
judgments,
settlements,
fines,
penalties,
injunctions or other relief
.
The Group 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 Group can
reasonably estimate the amount of that loss, the
Group accrues the estimated loss by a charge to
income. The Group’s future legal expenses may
fluctuate from period to period, given the current
environment
regarding
government
investigations and private litigation affecting
global financial services firms, including the
Group.
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. The Group
cannot predict with certainty if, how or when such
proceedings or investigations will be resolved or
what the eventual settlement, fine, penalty or
other relief, if any, may be, 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 before a loss or
additional loss or range of loss or additional
range of loss can be reasonably estimated for a
proceeding or investigation, 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
consideration
of
novel
or
unsettled
legal
questions
relevant
to
the
proceedings
or
investigations
in
question.
Subject
to
the
foregoing, the Group believes, based on current
knowledge and after consultation with counsel,
that the outcome of such proceedings and
investigations will not have a material adverse
effect on the financial condition of the Group,
although the outcome of such proceedings or
investigations could be material to the Group’s
operating results and cash flows for a particular
period depending on, among other things, the
level of the Group’s revenues or income for such
period
.
The
litigation
provisions
recognised
in
the
financial
statements
primarily
relate
to
the
matters outlined below. Significant judgement is
required in deciding when and if to recognise
these provisions, and the actual cost of a legal
claim or regulatory fine/penalty may ultimately be
materially
different
from
the
recognised
provisions.
While the Group has identified below certain
proceedings that the Group believes may be
material, individually or collectively, there can be
no assurance that additional material losses will
not be incurred from claims that have not yet
been asserted or are not yet determined to be
material.
On 5 October 2017, various institutional investors
filed a claim against the Group and another bank
in a matter now styled
Case number B-803-18
(previously BS 99-6998/2017)
, in the City Court
of Copenhagen, Denmark concerning their roles
as underwriters of the initial public offering
(“IPO”) in March 2014 of the Danish company
OW Bunker A/S. The claim seeks damages of
approximately DKK 529 million (approximately
$76 million) plus interest in respect of alleged
losses arising from investing in shares in OW
Bunker,
which
entered
into
bankruptcy
in
November 2014. Separately, on 29 November
2017, another group of institutional investors
joined
the
Group
and
another
bank
as
defendants to pending proceedings in the High
Court of Eastern Denmark against various other
parties involved in the IPO in a matter styled
Case number B-2073-16
. The claim brought
against the Group and the other bank has been
given its own
Case number B-2564-17
. The
investors claim damages of approximately DKK
767 million (approximately $111 million) plus
interest from the Group and the other bank on a
joint and several basis with the Defendants to
these proceedings. Both claims are based on
alleged prospectus liability; the second claim also
alleges professional liability of banks acting as
financial intermediaries. On 8 June 2018, the City
Court of Copenhagen, Denmark ordered that the
matters now styled
Case number B-803-18,
Case number B-2073-16,
and
Case number
B-2564-17
be heard together before the High
Court of Eastern Denmark. On 29 June 2018, the
Group filed its defense to the matter now styled
Case number B-2564-17
. On 4 February 2019,
the Group filed its defense to the matter now
styled
Case number B-803-18
.
The Group and other financial institutions are
responding
to
a
number
of
governmental
investigations and civil litigation matters related
to allegations of anticompetitive conduct in
various aspects of the financial services industry,
including the matters described below.
Beginning in February of 2016, the Group and
certain Morgan Stanley Group affiliates were
named as a defendant in multiple purported
antitrust class actions now consolidated into a
single proceeding in the United States District
Court for the Southern District of New York
(“SDNY”) styled
In Re: Interest Rate Swaps
Antitrust Litigation
. Plaintiffs allege, inter alia, that
the Group and certain Morgan Stanley Group
affiliates, together with a number of other
financial institution defendants, violated U.S. and
New York state antitrust laws from 2008 through
December of 2016 in connection with their
alleged efforts to prevent the development of
electronic exchange-based platforms for interest
rate swaps trading. Complaints were filed both
on behalf of a purported class of investors who
purchased interest rate swaps from defendants,
as well as on behalf of two swap execution
facilities that allegedly were thwarted by the
defendants in their efforts to develop such
platforms. The consolidated complaints seek,
among other relief, certification of the investor
class of plaintiffs and treble damages. On July
28, 2017, the court granted in part and denied in
part the defendants’ motion to dismiss the
complaints. A decision on plaintiffs' motion for
class certification is pending.
The Group is engaging with the UK Competition
and Markets Authority in connection with its
investigation
of
suspected
anti-competitive
arrangements in the financial services sector,
specifically
regarding
the
Group’s
activities
concerning certain liquid fixed income products
between 2009 and 2012.
Tax Matters
The preparation of the Group’s consolidated
financial statements requires management to
make judgements, estimates and assumptions
regarding the outcome of matters that are
uncertain, including those relating to tax.
The
Group has provisions arising on a number of
uncertain tax matters, for which management
has made judgements and interpretations about
the application of inherently complex tax laws
when determining these provisions. Whilst a
range of outcomes is foreseeable, management
considers
the
amount
provided
to
be
a
reasonable estimate of expected future liabilities
after
consideration
of
all
pertinent
facts.
Judgement is required in deciding when and if to
recognise these provisions, and the actual tax
expense may ultimately be materially different
from the recognised provisions.
Refer to accounting policy note 3(k) for more
details on the Group’s accounting policy on
provisions.
The Group and other financial institutions are
responding to inquiries from authorities in relation
to tax matters in various jurisdictions, including
Italy, including requests for information and
documents.
The
Group
is
responding
to
requests
for
information and documents from authorities in
Germany related to the period 2006 to 2022,
including from the Federal Tax Office and the
Cologne Public Prosecutor, in relation to certain
equities transactions over dividend record dates
and
related
tax
matters.
The
Group
is
cooperating with the relevant authorities.
In matters styled
Case number 15/3637
and
Case number 15/4353
, the Dutch Tax Authority
(“Dutch Authority”) is challenging in the Dutch
courts
the
prior
set-off
by
a
subsidiary
undertaking of the Group of approximately €124
million (approximately $133 million) plus accrued
interest of withholding tax credits against the
subsidiary undertaking of the Group’s corporation
tax liabilities for the tax years 2007 to 2012. The
Dutch Authority alleges that the subsidiary
undertaking of the Group was not entitled to
receive the withholding tax credits on the basis,
inter alia, that the subsidiary undertaking of the
Group did not hold legal title to certain securities
subject to withholding tax on the relevant dates.
The Dutch Authority has also alleged that the
subsidiary undertaking of the Group failed to
provide certain information to the Dutch Authority
and keep adequate books and records. On 26
April 2018, the District Court in Amsterdam
issued
a
decision
dismissing
the
Dutch
Authority’s claims with respect to certain of the
tax years in dispute. On 12 May 2020, the Court
of Appeal in Amsterdam granted the Dutch
Authority's appeal in matters re-styled
Case
number 18/00318
and
Case number 18/00319
.
On 22 June 2020, the subsidiary undertaking of
the Group filed an appeal against the decision of
the Court of Appeal in Amsterdam before the
Dutch High Court. On 29 January 2021, the
Advocate General of the Dutch High Court
issued an advisory opinion on the subsidiary of
the Group’s appeal, which rejected the subsidiary
of the Group’s principal grounds of appeal. On 11
February 2021, the subsidiary of the Group and
the Dutch Authority each responded to this
opinion. On 22 June 2021, Dutch criminal
authorities
sought
various
documents
in
connection with an investigation of the subsidiary
undertaking of the Group related to the civil
claims
asserted
by
the
Dutch
Authority,
concerning the accuracy of the subsidiary of the
Group’s tax returns and the maintenance of its
books and records for 2007 to 2012. The Dutch
criminal authorities have requested additional
information, and the Group is continuing to
respond to the Dutch criminal authorities in
LIABILITIES
Deferred taxes are calculated on all temporary
differences
under
the
liability
method. The
movement in the deferred tax account is as
follows:
Group
Company
2022
2021
2022
2021
in $ millions
Deferred
tax
asset/
(liability)
Deferred
tax
asset/
(liability)
Deferred
tax
asset/
(liability)
Deferred
tax
asset/
(liability)
At
1 January
213
171
212
170
Adjustment in
respect of prior
years
—
(12)
—
(12)
Amount
recognised in the
consolidated
income statement
11
45
11
45
Amount
recognised in
consolidated
statement of other
comprehensive
income
(55)
(22)
(55)
(22)
Amount
recognised
directly in equity
4
—
4
—
Impact of changes
in tax rates
recognised in the
consolidated
income statement
(8)
14
(8)
14
Impact of changes
in tax rates
recognised in
consolidated
statement of other
comprehensive
income
(14)
17
(14)
17
At 31 December
151
213
150
212
For
the
purposes
of
presentation
in
the
consolidated statement of financial position,
certain deferred tax assets and liabilities have
been offset in accordance with IAS 12.
The deferred tax included in the consolidated
statement of financial position and changes
recorded in 'Income tax expense' are detailed
below:
in $ millions
Group
2022
Deferred
tax asset/
(liability)
Consolidated
income
statement
Other
comprehen-
sive
income /
Equity
Accelerated
capital allowances
1
—
—
Deferred
compensation
111
18
(4)
Transitional
adjustment
(7)
—
(2)
Temporary
differences arising
in respect of
changes in
Group's and
Company's own
credit risk
49
—
71
Unrealised gains/
(losses)
(3)
(21)
—
Other temporary
differences
—
—
—
151
(3)
65
in $ millions
Group
2021
Deferred
tax asset/
(liability)
Consolidated
income
statement
Other
comprehen-
sive
income /
Equity
Accelerated
capital allowances
1
—
—
Deferred
compensation
125
55
—
Transitional
adjustment
(9)
—
—
Temporary
differences arising
in respect of
changes in
Group's and
Company's own
credit risk
120
—
5
Unrealised gains/
(losses)
(24)
(7)
—
213
48
5
in $ millions
Company
2022
Deferred
tax asset/
(liability)
Consolidated
income
statement
Other
comprehen-
sive
income /
Equity
Accelerated
capital allowances
1
—
—
Deferred
compensation
110
18
(4)
Transitional
adjustment
(7)
—
(2)
Temporary
differences arising
in respect of
changes in
Group's and
Company's own
credit risk
49
—
71
Unrealised gains/
(losses)
(3)
(21)
—
Other temporary
differences
—
—
—
150
(3)
65
in $ millions
Company
2021
Deferred
tax asset/
(liability)
Consolidated
income
statement
Other
comprehen-
sive
income /
Equity
Accelerated
capital allowances
2
—
—
Deferred
compensation
124
54
—
Transitional
adjustment
(9)
—
—
Temporary
differences arising
in respect of
changes in
Group's and
Company's own
credit risk
120
—
5
Unrealised gains/
(losses)
(25)
(7)
—
212
47
5
The UK statutory rate is 27% for the year,
including an 8% corporation tax surcharge on the
profits of banking companies. The Finance Act
2021 raised the UK main rate of corporation tax
from 19% to 25% with effect from 1 April 2023. In
addition, the Finance Act 2022 reduced the
corporation tax surcharge rate from 8% to 3%
with effect from 1 April 2023. These changes
affect the deferred tax charge for both the current
and future years.
The net deferred tax asset shown above has
been
recognised
based
on
management’s
assessment that it is probable that the Group will
have taxable profits against which the temporary
At 31 December 2022 and 2021, the Group and
Company
had
the
following
outstanding
commitments and contingent liabilities arising
from off-balance sheet financial instruments:
in $ millions
2022
2021
Commitments
(1)
Loan commitments
15
121
Guarantees
373
348
Unsettled securities purchased
under agreements to resell
(2)
54,628
34,493
Unsettled securities sold under
agreements to repurchase
(2)
22,894
13,619
Other commitments
26
37
(1)
Certain loan commitments, unsettled securities sold under
agreements to repurchase and guarantees are on balance sheet
and designated at fair value. (see note 10).
(2)
Unsettled securities purchased under agreements to resell and
sold under agreements to repurchase have a trade date at or
prior to 31 December
in $ millions
2022
2021
Issued and fully paid:
Ordinary shares of $1
each
(1)
10,935
10,935
Ordinary shares of £1
each
(1)
30
30
Class A ordinary shares of
$1 each
(2)
1,500
1,500
AT1 capital
(2)
4,300
3,500
Total equity instruments at
31 December
16,765
15,965
(1)
Ordinary shares of $1 each carry 99.9% of the voting rights
(2021: 99.9%). Ordinary shares of £1 each carry 0.1% of the
voting rights (2021: 0.1%). Ordinary shares are pari passu with
each other regardless of currency.
(2)
Class A ordinary shares and AT1 capital do not carry any voting
rights (2021: Non-voting)
The Company issued $800 million of AT1 capital
in the year.
Equity Instruments
At
31
December
2022,
the
total
equity
instruments which the Company had in issue
amounted to $16,765 million (31 December
2021:
$15,965
million)
comprising
10,935,105,148 ordinary shares of $1 each,
17,615,107
ordinary
shares
of
£1
each,
1,500,000,000
Class
A
Non-voting
ordinary
shares of $1 each and Additional Tier 1 capital
instruments of $4,300 million (31 December
2021: $3,500 million). All equity instruments are
fully paid. There have been no changes to equity
instruments for the Company from 1 January
2021.
Ordinary Shares
The holders of the ordinary shares, excluding
Class A ordinary shares, are entitled to receive
dividends as declared from time to time and are
entitled, on a show of hands, to one vote and, on
a poll, one vote per share at meetings of the
shareholders of the Company. All shares rank
equally with regard to the Company’s residual
net assets. All ordinary shares are recorded at
the rates of exchange ruling at the date the
AT1 Capital
AT1 capital issued by the Company comprises
three separate Instruments, with balances of
$2,200 million, $1,300 million and $800 million,
respectively. The Instruments include a trigger
mechanism whereby, if the Common Equity Tier
1 capital ratio of the Company or MSI Group falls
below 7%, the BOE as the UK Resolution
Authority also has the authority to trigger the
write down of the instruments upon the exercise
of statutory powers in a resolution scenario. In
this
situation,
Morgan
Stanley
International
Limited, the holder of the AT1, would have no
further rights against the Group in respect of the
AT1.
The Instruments have no defined maturity and
are
subordinated
to
senior
creditors
and
subordinated loan creditors of the Company. The
Instruments are not entitled to any participation in
the residual net assets of the Company. The
Instruments are callable at the Company’s
discretion, from 30 November 2023 for the
$2,200 million instrument, from 30 November
2025 for the $1,300 million instrument and from
30
November
2027
for
the
$800
million
instrument.
Coupons on the Instruments are non-cumulative.
Coupons are payable at a fixed rate of 7.5% per
annum for the $2,200 million instrument, 5.45%
per annum for the $1,300 million instrument and
7.42% per annum for the $800 million instrument.
Payment of the coupon is wholly at the discretion
of the Company.
Coupon interest on the $2,200 million and $1,300
million instruments was paid on 30 November
2022 (see note 22).
Reserves
Share Premium
The ‘Share premium account’ comprises the
capital raised in an issue of shares that exceeds
the nominal value of the shares.
Currency Translation Reserve
The ‘Currency translation reserve’ comprises all
foreign exchange differences arising from the
translation of the total assets less total liabilities
of foreign operations. The tax effect of these
movements is also included in the ‘Currency
translation reserve’.
Capital Contribution Reserve
The ‘Capital contribution reserve’ comprises
contributions of capital from the Group’s parent
company to subsidiaries of the Group.
Capital Redemption Reserve
The ‘Capital redemption reserve’ represents
transfers in prior years from retained earnings in
accordance with relevant legislation.
Pension Reserve
The ‘Pension reserve’ comprises cumulative
actuarial gains or losses on scheme assets and
obligations net of current tax and the impact of
the asset surplus ceiling (see note 33).
Debt Valuation Reserve
The
‘Debt
valuation
reserve’
includes
the
cumulative change in fair value of certain
financial
liabilities
designated
at
fair
value
through profit or loss that is attributable to
changes in the credit risk of those liabilities at the
reporting date, together with the tax effect of
On 30 November 2022, a coupon payment on
the $1,300 million AT1 capital instrument of
$70,850,000 (31 December 2021: $71,838,000)
was
paid
out
of
reserves
available
for
distribution.
On 30 November 2022, a coupon payment on
the $2,200 million AT1 capital instrument of
$165,000,000
(31
December
2021:
$165,000,000) was paid out of reserves available
for distribution.
The Directors have not proposed the payment of
a final dividend out of reserves available at
INFORMATION
Cash and Cash Equivalents
For the purposes of the consolidated statement
of cash flows, cash and cash equivalents
comprise the following balances, which have less
than three months maturity from the date of
acquisition:
in $ millions
2022
2021
Cash and short term deposits
18,754
28,532
Bank loans and overdrafts
(59)
(48)
18,695
28,484
short term deposits’ is $9,424 million (2021:
$10,569 million) of segregated client money, held
in accordance with the FCA’s Client Money
Rules. Additionally, an amount for the Group of
$170 million (2021: $168 million) and for the
Company of $104 million (2021: $107 million)
represents other client money, that is not
available for use. The corresponding payable is
recognised and included in ‘Trade and other
b.
Reconciliation of Cash Flows from Operating Activities
in $ millions
Note
2022
2021
Profit for the year
1,396
1,351
Adjustments for:
Net impairment loss/(reversal) on financial instruments
148
(2)
Depreciation on property, plant and equipment
7
6
Provisions
18
91
35
Interest income
6
(2,926)
398
Interest expense
6
3,874
134
Income tax expense
9
321
589
Share based payments
4
2
Gain on modification of subordinated loan liabilities
(2)
—
Operating cash flows before changes in operating assets and liabilities
2,913
2,513
Changes in operating assets
Net increase in secured financing
(3,884)
(12,098)
Net decrease in loans and advances
4
51
Net (increase)/decrease in trade and other receivables
(2,354)
3,953
Net decrease/(increase) in investment securities
23
(14)
Net decrease in trading financial assets
3,253
42,374
Net increase in other assets
(65)
(104)
(3,023)
34,162
Changes in operating liabilities
Net (decrease)/increase in secured borrowing
(3,296)
8,912
Net increase in trade and other payables
2,691
1,539
Net decrease in debt and other borrowings
(7,658)
(3,176)
Net decrease in trading financial liabilities
(1,635)
(40,067)
Net decrease in other liabilities
(116)
(43)
Net decrease in provisions
—
(2)
(10,014)
(32,837)
Interest received
2,787
(541)
Interest paid
(3,137)
144
Income taxes paid
(190)
(397)
Effect of foreign exchange movements
1,314
802
Net cash flows used in operating activities
(9,350)
3,846
c.
Reconciliation of Equity and Liabilities arising from Financing Activities
in $ millions
Note
AT1
Senior
Subordinated
loans
Subordinated
Loans
Total equity and
liabilities from
financing
activities
Balance as at 1 January 2021
3,500
6,000
5,000
14,500
Issuance
17
—
—
1,400
1,400
Repayment
17
—
(400)
—
(400)
Balance as at 31 December 2021 and 1
January 2022
3,500
5,600
6,400
15,500
Issuance
17
800
600
2,500
3,900
Repayment
17
—
(2,300)
—
(2,300)
Gain on modification of subordinated loan
liabilities
—
—
(2)
(2)
Balance as at 31 December 2022
4,300
3,900
8,898
The table below shows an analysis of assets and liabilities analysed according to when they are
expected to be recovered, realised or settled.
Group
2022
2021
in $ millions
Less than or
equal to
twelve
months
More than
twelve
months
Total
Less than or
equal to
twelve
months
More than
twelve
months
Total
ASSETS
Secured financing
129,142
637
129,779
125,365
530
125,895
Loans and advances
—
63
63
—
67
67
Investment securities
—
142
142
—
165
165
Trade and other receivables
80,669
1,111
81,780
78,349
985
79,334
Deferred tax assets
29
122
151
48
165
213
Property, plant and equipment
—
33
33
—
33
33
Other
348,441
2
348,443
361,477
2
361,479
558,281
2,110
560,391
565,239
1,947
567,186
LIABILITIES
Secured borrowing
91,551
2,415
93,966
92,568
4,694
97,262
Trade and other payables
96,600
550
97,150
93,598
454
94,052
Debt and other borrowings
6,814
38,868
45,682
4,584
48,095
52,679
Post-employment benefit
obligations
—
4
4
—
9
9
Other
299,356
—
299,356
301,009
—
301,009
494,321
41,837
536,158
491,759
53,252
545,011
Company
2022
2021
in $ millions
Less than or
equal to
twelve
months
More than
twelve
months
Total
Less than or
equal to
twelve
months
More than
twelve
months
Total
ASSETS
Secured financing
129,142
437
129,579
125,365
330
125,695
Loans and advances
—
29
29
—
26
26
Investment securities
—
141
141
—
165
165
Trade and other receivables
80,773
1,095
81,868
78,439
968
79,407
Deferred tax assets
29
121
150
48
164
212
Investments in subsidiaries
—
132
132
—
130
130
Property, plant and equipment
—
14
14
—
11
11
Other
347,855
2
347,857
361,010
2
361,012
557,799
1,971
559,770
564,862
1,796
566,658
LIABILITIES
Secured borrowing
91,261
2,181
93,442
92,568
4,286
96,854
Trade and other payables
96,613
550
97,163
93,609
454
94,063
Debt and other borrowings
6,814
38,833
45,647
4,584
47,879
52,463
Post-employment benefit
obligations
—
1
1
—
6
6
Other
299,303
—
299,303
300,942
—
300,942
493,991
41,565
535,556
491,703
52,625
Segment information is presented in respect of
the
Group’s
business
and
geographical
segments.
The
business
segments
and
geographical
segments
are
based
on
the
Group’s management and internal reporting
structure.
Transactions
between
business
segments are on normal commercial terms and
conditions.
Business Segment
Morgan Stanley structures its business segments
primarily based upon the nature of the financial
products and services provided to customers and
Morgan Stanley’s internal management structure.
The
Group’s
own
business
segments
are
consistent with those of Morgan Stanley.
The
Group
has
one
reportable
business
segment, Institutional Securities, which includes
capital raising and financial advisory services;
corporate lending; sales, trading, financing and
market-making activities in equity and fixed
income securities and related products, including
global macro, credit and commodities products
and investment activities.
Geographical Segments
The Group operates in three geographic regions,
being EMEA, the Americas and Asia.
The
following
table
presents
selected
consolidated income statement and consolidated
statement of financial position information of the
Group’s operations by geographic area. The
external revenues (net of interest expense) and
total assets disclosed in the following table reflect
the regional view of the Group’s operations, on a
managed basis. The attribution of external
revenues (net of interest expense) and total
assets is determined by a combination of client
and trading desk location.
Net Revenue
Profit before Tax
in $ millions
2022
2021
2022
2021
EMEA
4,645
5,174
700
1,138
Asia
2,012
2,014
820
701
Americas
465
377
197
101
Total
7,122
7,565
1,717
1,940
Total Assets
in $ millions
2022
2021
EMEA
339,424 337,702
Asia
114,501
99,774
Americas
106,466 129,710
Total
26.1 Risk Management Procedures
Risk is an inherent part of the Group and
Company’s business activities. The Group seeks
to identify, assess, monitor, and manage each of
the various types of
risks involved in its business
activities in accordance with defined policies and
procedures. The Group has developed a risk
management
policy
framework,
which
is
consistent
with
and
leverages
the
risk
management policies and procedures of the
Morgan Stanley Group and which includes
escalation to the Group’s Board of Directors and
to appropriate senior management personnel of
the Group .
Significant risks faced by the Group resulting
from trading, financing and investment activities
are set out below.
Market risk refers to the risk that a change in the
level of one or more market prices, rates, indices,
implied volatilities (the price volatility of the
underlying
instrument
imputed
from
option
prices), correlations or other market factors, such
as market liquidity, will result in losses for a
position or portfolio.
26.2.1 Primary Market Risk Exposures
During the year, the Group had exposures to a
wide range of market risk factors related to the
global markets in which it conducts its trading
activities. These market risk factors include
interest rate and credit spread risk, equity prices,
foreign exchange rates and commodity prices
and the associated implied volatilities.
The Group is exposed to interest rate and credit
spread risk, as well as associated implied
volatility risks, as a result of its market making
activities in interest rate or credit sensitive
financial instruments (e.g. risk arising from
changes in the level of interest rates, the shape
of the yield curve and credit spreads). The
activities from which those exposures arise and
the markets in which the Group is active include,
but are not limited to: interest rate and credit
derivatives, corporate and government debt
across both developed and emerging markets
and asset-backed debt (including mortgage-
related securities).
The Group is exposed to equity price and implied
volatility risk as a result of making markets in
equity securities and derivatives and maintaining
other positions (including positions in non-public
entities). Positions in non-public entities may
include, but are not limited to, exposures to
private
equity,
venture
capital,
private
partnerships, real estate funds and other funds.
Such positions are less liquid, have longer
investment horizons and are more difficult to
hedge than listed equities.
The Group is exposed to foreign exchange rate
and implied volatility risk as a result of making
markets
in
foreign
currencies
and
foreign
currency derivatives, from maintaining foreign
exchange positions and from holding non-US
dollar-denominated financial instruments.
The Group has exposure to commodities. This
exposure is due to price and implied volatility risk
as a result of market-making activities in crude
and refined oil products, natural gas, electricity,
and precious and base metals.
26.2.2 Risk Management
The Group manages its trading positions by
employing a variety of risk mitigation strategies.
These strategies include diversification of risk
exposures
and
hedging.
Hedging
activities
consist of the purchase or sale of positions in
related
securities
and
financial
instruments,
including a variety of derivative products (e.g.,
futures, forwards, swaps and options). Hedging
activities
may
not
always
provide
effective
mitigation
against
trading
losses
due
to
differences in the terms, specific characteristics
or other basis risks that may exist between the
hedge instrument and the risk exposure that is
being hedged.
The Group manages and monitors its market risk
exposures, including outright and basis risks, in
such a way as to maintain a portfolio that the
Group
believes
is
well-diversified
in
the
aggregate with respect to market risk factors and
that
reflects
the
Group’s
aggregate
risk
tolerance, as established by the Group’s Board.
The effectiveness of hedges and mitigants is
monitored using processes such as risk and limit
reporting.
Aggregate market risk limits have been approved
for the Group in line with the risk appetite set by
the Board. Additional market risk limits are
assigned, as appropriate, to trading desks,
products and/ or regions and are commensurate
with the aggregate limits. MRD monitors market
risk measures against limits in accordance with
policies
set
by
the
Board
and
senior
management.
26.2.3 Measurement - Value at Risk
The Group uses the statistical technique known
as VaR as one of the tools used to measure,
monitor and review the market risk exposures of
its
trading
portfolios.
MRD
calculates
and
distributes daily VaR-based risk measures to
various levels of management.
The Group calculates VaR using a model based
on historical simulation for general market risk
factors and name specific equity risk, and a
Monte Carlo simulation for name-specific risk in
corporate bonds, loans and related derivatives.
Market risk factors’ daily moves are modelled
either as difference changes or relative changes,
dependent on the most suitable stochastic
process (normal or log normal diffusion process)
to describe the daily risk factor changes. The
model constructs a distribution of hypothetical
daily changes in the value of trading portfolios
based on: historical observation of daily changes
in key market indices or other market risk factors;
and information on the sensitivity of the portfolio
values to these market risk factor changes.
26.2.4 VaR Methodology, Assumptions and
Limitations
The basic methodology for VaR at Morgan
Stanley
is
historical
simulation.
The
risk
exposures used for the daily VaR calculation are
based on Greeks and full-revaluation grids, and
simulations cover both systematic and specific
risk components. The same valuation approach
is used for Stressed VaR. The time series data is
updated on a weekly basis, with the exception of
idiosyncratic risk factors which are updated
quarterly. A set of internal processes and controls
ensure that all trading positions booked by the
Group are being included in VaR. Management
VaR is computed at a 95% level of confidence
over a one day time horizon, which is a useful
indicator of possible trading losses resulting from
adverse daily market moves. The 95%/one-day
VaR corresponds to the unrealised loss in
portfolio
value
that,
based
on
historically
observed market risk factor movements, could
have been exceeded with a frequency of five
times in every 100 trading days, if the portfolio
were held constant for one day.
The Group uses VaR as one of a range of risk
management tools. Among their benefits, VaR
models
permit
estimation
of
a
portfolio’s
aggregate market risk exposure, incorporating a
range of market risks and portfolio assets. One
key element of the VaR model is that it reflects
portfolio diversification or hedging activities.
However, VaR has various limitations, which
include but are not limited to: use of historical
changes in market risk factors, which may not be
accurate predictors of future market conditions,
and may not fully incorporate the risk of extreme
market events that are outsized relative to
observed historical market behaviour or reflect
the historical distribution of results beyond the
95% confidence interval; and reporting of losses
in a single day, which does not reflect the risk of
positions that cannot be liquidated or hedged in
one day. A small proportion of market risk
generated by trading positions is not included in
VaR.
The modelling of the risk characteristics of some
positions relies on approximations that, under
certain
circumstances,
could
produce
significantly different results from those produced
using more precise measures. VaR is most
appropriate as a risk measure for trading
positions in liquid financial markets and will
understate the risk associated with severe
events, such as periods of extreme illiquidity. The
Group is aware of these and other limitations
and, therefore, uses VaR as only one component
in its risk management oversight process. This
process also incorporates stress testing and
scenario analyses and extensive risk monitoring,
analysis, quantification of risk not captured in
VaR, and control at the trading desk, division,
entity and Group levels.
The Group is committed to continuous review
and enhancement of VaR methodologies and
assumptions to capture evolving risks associated
with changes in market structure and dynamics.
As
part
of
regular
process
improvement,
additional systematic and name-specific risk
factors may be added to improve the VaR
model’s ability to estimate more accurately risks
to specific asset classes or industry sectors.
Since the reported VaR statistics are estimates
based on historical data, VaR should not be
viewed as predictive of the Group’s future
revenues or financial performance or of its ability
to manage risk. There can be no assurance that
the Group’s actual losses on a particular day will
not exceed the VaR amounts indicated in the
following paragraphs or that such losses will not
occur more than five times in 100 trading days
for a 95%/one-day VaR. VaR does not predict the
magnitude of losses which, should they occur,
may be significantly greater than the VaR
amount.
VaR statistics are not readily comparable across
firms
because
of
differences
in
the
firms’
portfolios,
modelling
assumptions
and
methodologies. These differences can result in
materially-different VaR estimates across firms
for
similar
portfolios.
The
impact
of
such
differences varies depending on the factor history
assumptions, the frequency with which the factor
history is updated and the confidence level. As a
result, VaR statistics are more useful when
interpreted as indicators of trends in a firm’s risk
profile rather than as an absolute measure of risk
to be compared across firms.
26.2.5 VaR for the Year Ended 31 December
2022
The table below presents the Management VaR
for the Group and Company’s trading portfolio on
a year-end, average and annual high and low
basis for 31 December 2022 and 31 December
2021.
95%/ one-day VaR for the year ended
95%/one-day Var for the year ended 31
December 2022
95%/ one-day VaR for the year ended
95%/one-day Var for the year ended 31
December 2021
in $ millions
Period
end
Average
High
Low
Period
end
Average
High
Low
Market risk category:
Interest rate and credit spread
19
16
26
11
12
16
26
12
Equity price
11
18
26
11
19
22
31
17
Foreign exchange rate
11
6
14
2
4
6
13
3
Commodity price
5
7
11
2
3
3
7
2
Less diversification benefit
(1)(2)
(22)
(22)
N/A
N/A
(15)
(18)
N/A
N/A
Primary Market Risk Categories
24
25
32
19
23
29
37
22
Credit Portfolio
(3)
12
8
15
4
6
7
12
5
Less diversification benefit
(1)(2)
(6)
(7)
N/A
N/A
(6)
(6)
N/A
N/A
Total Management VaR
30
26
35
19
23
30
41
23
(1)
Diversification benefit equals the difference between total trading VaR and the sum of the VaRs for the four risk categories. This benefit arises
because the simulated one-day losses for each of the four primary market risk categories occur on different days; similar diversification
benefits also are taken into account within each category.
(2)
N/A - Not Applicable. The minimum and maximum VaR values for the total VaR and each of the component VaRs might have occurred on
different days during the year and therefore the diversification benefit is not an applicable measure.
(3)
The Credit Portfolio VaR is disclosed as a separate category from the Primary Risk Categories and includes loans that are carried at fair
value and associated hedges as well as counterparty credit valuation adjustments and related hedges.
26.2.6 Non-trading Risks for the Year Ended
31 December 2022
The Group and Company believes that sensitivity
analysis is an appropriate representation of the
Group
and
Company’s
non-trading
risks.
Reflected below is this analysis, which covers
substantially all of the non-trading risks in the
Group
and
Company’s
portfolio,
with
the
exception
of
counterparty
credit
valuation
adjustments, which are covered in the previous
section.
26.2.7 Interest Rate Risk
The Group and Company’s VaR excludes certain
funding liabilities and money market transactions.
The application of a parallel shift in interest rates
of 200 basis points increase or decrease to these
positions would result in a net loss or gain,
respectively, of approximately $60.8 million as at
31 December 2022, compared to a net loss or
gain of $39.6 million as at 31 December 2021.
26.2.8 Funding Liabilities
The credit spread risk sensitivity of the Group’s
mark-to-market funding liabilities corresponds to
an increase in value of approximately $5.6 million
and $5.4 million for each 1 basis point widening
in
the
Group’s
credit
spread
level
at
31 December 2022 and 31 December 2021
respectively.
26.2.9 Equity Investments Price Risk
The Group and Company are exposed to equity
price risk as a result of changes in the fair value
of its investments in listed and private equities
classified as FVPL financial assets. These
investments are predominantly equity positions
with long investment horizons, the majority of
which are for business facilitation purposes. The
market risk related to these investments is
measured by estimating the potential reduction in
net revenues associated with a 10% decline in
asset values as shown in the table below.
2022
2021
in $ millions
10% sensitivity
10% sensitivity
Investment securities
14
17
26.2.10 Currency Risk
The Group and Company have foreign currency
exposure arising from foreign operations. The
majority of this foreign currency risk has been
hedged by other members of the Morgan Stanley
Group, primarily Morgan Stanley, by utilising
forward foreign currency exchange contracts.
The Group and Company also have foreign
currency
exposure
arising
from
its
trading
activities in currencies other than US dollars. The
Group and Company actively manage this
exposure by hedging with other Morgan Stanley
Group undertakings.
The analysis below details the foreign currency
exposure for the Group and Company, by foreign
currency, relating to the retranslation of branches
and subsidiaries which are not denominated in
US
dollars.
The
largest
foreign
currency
exposures for Group and Company are driven by
the
Company’s
South
Korean
branch
and
Morgan
Stanley
Taiwan
Limited,
a
direct
subsidiary
of
the
Company.
The
analysis
calculates the impact on total comprehensive
income of a reasonably possible parallel shift of
the foreign currency in relation to the US dollar,
with all other variables held constant. This
analysis does not take into account the effect of
the foreign currency hedges held by other
members of the Morgan Stanley Group.
2022
2021
Group
Sensitivity to applied percentage
change in currency (+/-)
Sensitivity to applied percentage
change in currency (+/-)
in $ millions
Foreign
currency
exposure
Percentage
change applied
Other
comprehensive
income
Foreign
currency
exposure
Percentage
change applied
Other
comprehensive
income
Euro
(13)
9%
(1)
2
14%
—
Taiwan New Dollar
186
11%
20
195
8%
16
South Korean Won
420
9%
38
417
11%
46
Swiss Franc
41
8%
3
35
8%
3
634
60
649
65
2022
2021
Company
Sensitivity to applied percentage
change in currency (+/-)
Sensitivity to applied percentage
change in currency (+/-)
in $ millions
Foreign
currency
exposure
Percentage
change applied
Other
comprehensive
income
Foreign
currency
exposure
Percentage
change applied
Other
comprehensive
income
Euro
54
9%
5
58
14%
8
South Korean Won
420
9%
38
417
11%
46
Swiss Franc
41
8%
3
35
8%
3
515
46
510
57
The reasonably possible percentage change in
the currency rate in relation to US dollars has
been calculated based on the greatest annual
percentage change over the 5 year period from 1
January 2018 to 31 December 2022 (2021: 1
January 2017 to 31 December 2021).
The Group also has foreign currency exposure
arising from its trading activities and assets and
liabilities in currencies other than US dollars,
which it actively manages by hedging with other
borrower, counterparty or issuer does not meet
its financial obligations to the Group. Credit risk
includes country risk, which is further described
below. Additional information on credit risk
monitoring, control and mitigation is presented in
the Strategic Report and forms part of the
audited financial statements.
26.3.1 Primary Credit Risk Exposure
The
Group
primarily
incurs
credit
risk
to
institutions and sophisticated investors, mainly
through
its
Institutional
Securities
business
segment. The risk may be incurred through a
variety of activities, including, but not limited to,
the following:
•
entering into derivative contracts under which
counterparties may have obligations to make
payments to the Group;
•
extending credit to clients through lending
commitments;
•
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;
•
posting margin and/ or collateral to clearing
houses,
clearing
agencies,
exchanges,
banks, securities firms and other financial
counterparties;
•
placing funds on deposit at other financial
institutions to support the Group’s clearing
and settlement obligations; and
•
investing or trading in securities and loan
pools, whereby the value of these assets may
fluctuate based on realised or expected
defaults on the underlying obligations or
loans.
26.3.2 Risk Management
26.3.2.1 Stress Testing
Stress testing is one of the Group’s principal risk
management tools, used to identify and assess
the impact of severe stresses on its portfolios. A
number of different scenarios are used to
measure the impact on the Group’s credit risks
and
market
risks
stemming
from
negative
economic
and
political
scenarios,
including
possible contagion effects where appropriate.
The results of the stress tests may result in the
amendment of limits or exposure mitigation.
26.3.2.2 Monitoring and Control
To help protect the Group from losses, the Credit
Risk
Management
Department
establishes
Morgan
Stanley-wide
practices
to
evaluate,
monitor and control credit risk at the transaction,
obligor and portfolio levels. The Credit Risk
Management Department approves extensions
of credit, evaluates the creditworthiness of the
Group’s counterparties and borrowers on a
regular basis, and helps ensure that credit
exposure is actively monitored and managed.
The evaluation of counterparties and borrowers
includes an assessment of the probability that an
obligor will default on its financial obligations and
any subsequent losses that may occur when an
obligor defaults. In addition, credit risk exposure
is actively managed by credit professionals and
committees within the Credit Risk Management
Department and through various risk committees,
whose membership includes individuals from the
Credit Risk Management Department.
A Credit Limits Framework is utilised to manage
credit risk levels across the MSI Group. The
Credit Limits Framework is calibrated within the
MSI Group’s risk tolerance and includes single-
name limits and portfolio concentration limits by
country
and
industry.
The
Credit
Risk
Management Department helps ensure timely
and transparent communication of material credit
risks, compliance with established limits and
escalation of risk concentrations to appropriate
senior management.
The Credit Risk Management Department also
works closely with the Market Risk Department
and applicable business units to monitor risk
exposures and to perform stress tests to identify,
analyse and, control credit risk concentrations
arising in the Group’s lending and trading
activities. The stress tests shock market factors
(e.g. interest rates, commodity prices, credit
spreads), and risk parameters (e.g. default
probabilities and loss given default) to assess the
impact of stresses on exposures, profit and loss,
and the Group’s capital position. Stress tests are
conducted in accordance with established Group
policies and procedures.
26.3.2.3 Credit Evaluation
The evaluation of corporate and institutional
counterparties includes assigning obligor credit
ratings, which reflect an assessment of an
obligor’s probability of default and loss given
default. Credit evaluations typically involve the
assessment of financial statements, leverage,
liquidity, capital strength, asset composition and
quality, market capitalisation, access to capital
markets, the adequacy of collateral, if applicable,
and in the case of certain loans, cash flow
projections and debt service requirements. The
Credit
Risk
Management
Department
also
evaluates strategy, market position, industry
dynamics, management and other factors that
could affect the obligor’s risk profile. Additionally,
the
Credit
Risk
Management
Department
evaluates the relative position of the Group’s
exposure in the borrower’s capital structure and
relative recovery prospects, as well as adequacy
of collateral (if applicable) and other structural
elements of the particular transaction.
In addition to assessing and monitoring its credit
exposure and risk at the individual obligor level,
the Group also reviews its credit exposure and
risk to geographic regions. As at 31 December
2022, the Group had no significant geographical
concentration of risk but had credit exposure to
North America, Asia and Western Europe. In
addition, the Group pays particular attention to
smaller exposures in emerging markets given
their unique risk profile. Sovereign ceiling ratings
i.e. the maximum credit rating that can be
assigned to a counterparty with a designated
country of risk, are derived using methodologies
generally consistent with those employed by
external rating agencies.
The Group also reviews its credit exposure and
risk to certain types of customers. At 31
December 2022, the Group’s material credit
exposure was to central clearing counterparties,
corporate
entities,
financial
institutions
and
sovereign-related entities.
The Group also reviews its credit exposure to
industries identified as having high climate
transition and physical risk. At 31 December
2022 this risk is not material.
26.3.3 Risk Mitigation
The Credit Risk Management Department may
seek to mitigate credit risk from its lending and
trading activities in multiple ways, including
collateral provisions, guarantees and hedges. At
the
transaction
level,
the
Credit
Risk
Management Department seeks to mitigate risk
through management of key risk elements such
as size, tenor, financial covenants, seniority and
collateral. The main types of collateral held are
cash or similarly highly-liquid assets. The Group
has internal policies on the acceptability of
specific classes of collateral or credit risk
mitigation. The Group closely monitors collateral
held for financial assets considered to be credit-
impaired, as in such cases it is considered more
likely that the Group will take possession of
collateral to mitigate potential credit losses. The
Group actively hedges its lending and derivatives
exposure through various financial instruments
that may include single-name, portfolio and
structured credit derivatives. Additionally, the
Group may sell, assign or syndicate funded loans
and lending commitments in the primary and
secondary loan markets. In connection with its
derivatives trading activities, the Group generally
enters into master netting agreements and
collateral
arrangements
with
counterparties.
These agreements provide the Group with the
ability to demand collateral, to liquidate collateral
and to offset receivables and payables covered
under the same master agreement in the event
of a counterparty default.
26.3.3.1
Securities
Purchased
Under
Agreements to Resell and Securities Borrowed
The Group manages credit exposure arising from
securities purchased under agreements to resell
and securities borrowed transactions by, in
appropriate circumstances, entering into master
netting agreements and collateral agreements
with counterparties that provide the Group, in the
event of a counterparty default, with the right to
net a counterparty’s rights and obligations under
such agreements and to liquidate and set off
collateral held by the Group against the net
amount owed by the counterparty. Under these
securities purchased under agreements to resell
and securities borrowed transactions, the Group
receives
collateral,
including
United
States
government
and
agency
securities,
other
sovereign government obligations, corporate and
other debt and corporate equities. The Group
also monitors the fair value of the underlying
securities
as
compared
with
the
related
receivable or payable, including accrued interest,
and, as necessary, requests additional collateral
to ensure such transactions are adequately
collateralised.
26.3.3.2 Derivatives
The Group may seek to mitigate credit risk from
its derivatives transactions in multiple ways,
including documentation, collateral provisions,
guarantees and hedges. At the transaction level,
the
Group
seeks
to
mitigate
risk
through
management of key risk elements such as size,
tenor,
financial
covenants,
seniority
and
collateral.
The
Group
actively
hedges
its
derivatives exposure through various financial
instruments
that
may
include
single-name,
portfolio and structured credit derivatives. The
Group may enter into master netting agreements
and collateral arrangements with counterparties.
These master netting agreements and collateral
arrangements may provide the Group with the
ability to demand collateral, as well as to
liquidate collateral and offset receivables and
payables covered under the same master netting
agreement in the event of counterparty default.
The Group monitors the creditworthiness of
counterparties to these transactions on an
ongoing basis and requests additional collateral
in accordance with collateral arrangements when
deemed necessary.
26.3.4 Exposure to Credit Risk
T
he maximum exposure to credit risk (“gross
credit exposure”) of the Group and Company as
at 31 December 2022 is disclosed below, based
on the carrying amounts of the financial assets
and the maximum amount that the Group and
Company could have to pay in relation to
unrecognised financial instruments, which the
Group and Company believes are subject to
credit
risk.
The
table
includes
financial
instruments subject to ECL and not subject to
ECL.
Where the Group or Company enters into credit
enhancements, including receiving cash and
security
as
collateral
and
master
netting
agreements, to manage the credit exposure on
these financial instruments the financial effect of
the credit enhancements is disclosed below. The
net
credit
exposure
represents
the
credit
exposure remaining after the effect of the credit
enhancements.
Trading financial assets are subject to traded
credit risk through exposure to the issuer of the
financial
asset;
the
Group
and
Company
manages this issuer credit risk through its market
risk management infrastructure and this traded
credit risk is incorporated within the VaR based
risk measures included in the market risk
disclosure.
However,
listed
derivatives
are
included below as they are recognised as having
credit risk exposure to central counterparties.
Exposure to Credit Risk by Class
Group
2022
2021
Class
Gross credit
exposure
Credit
enhance-
ments
Net credit
exposure
(1)
Gross credit
exposure
Credit
enhance-
ments
Net credit
exposure
(1)
in $ millions
Subject to ECL:
Cash and short-term deposits
18,754
—
18,754
28,532
—
28,532
Loans and advances
63
—
63
67
—
67
Trade and other receivables
(2)
80,172
—
80,172
78,069
—
78,069
Not subject to ECL:
Trading financial assets:
Derivatives
251,076
(240,879)
10,197
242,432
(229,230)
13,202
Secured financing
129,779
(128,908)
871
125,895
(124,594)
1,301
Trade and other receivables
(2)
1,298
(319)
979
993
(777)
216
481,142
(370,106)
111,036
475,988
(354,601)
121,387
Unrecognised financial
instruments
Not subject to ECL:
Loan commitments
15
—
15
121
(2)
119
Unsettled securities purchased
under agreements to resell
(3)
54,628
—
54,628
34,493
—
34,493
Total unrecognised financial
instruments
54,643
—
54,643
34,614
(2)
34,612
535,785
(370,106)
165,679
510,602
(354,603)
155,999
(1)
Of the residual net credit exposure, intercompany cross product netting arrangements are in place which would allow Group an additional
$8,756 million of an available $34,119 million (31 December 2021: $7,041 million of an available $31,977 million) to be offset in the event of
default by certain Morgan Stanley counterparties.
(2)
Trade and other receivables primarily include cash collateral pledged against the payable on OTC derivative positions. These derivative
liabilities are included within trading financial liabilities in the consolidated statement of financial position.
(3)
For unsettled securities purchased under agreements to resell, collateral in the form of securities will be received at the point of settlement.
Since the value of collateral is determined at a future date, it is currently unquantifiable and not included in the table.
Exposure to Credit Risk by Class
Company
2022
2021
Class
Gross credit
exposure
Credit
enhance-
ments
Net credit
exposure
(1)
Gross credit
exposure
Credit
enhance-
ments
Net credit
exposure
(1)
in $ millions
Subject to ECL:
Cash and short-term deposits
18,449
—
18,449
28,218
—
28,218
Loans and advances
29
—
29
26
—
26
Trade and other receivables
(2)
80,261
—
80,261
78,144
—
78,144
Not subject to ECL:
Trading financial assets
Derivatives
251,082
(240,885)
10,197
242,445
(229,243)
13,202
Secured financing
129,579
(128,712)
867
125,695
(124,394)
1,301
Trade and other receivables
(2)
1,298
(319)
979
993
(777)
216
480,698
(369,916)
110,782
475,521
(354,414)
121,107
Unrecognised financial
instruments
Not subject to ECL:
Loan commitments
15
—
15
121
(2)
119
Unsettled securities purchased
under agreements to resell
(3)
54,628
—
54,628
34,493
—
34,493
Total unrecognised financial
instruments
54,643
—
54,643
34,614
(2)
34,612
535,341
(369,916)
165,425
510,135
(354,416)
155,719
(1)
Of the residual net credit exposure, intercompany cross product netting arrangements are in place which would allow an additional $8,754
million of an available $34,119 million (31 December 2021: $7,039 million of an available $31,956 million) to be offset in the event of default
by certain Morgan Stanley counterparties.
(2)
Trade and other receivables primarily include cash collateral pledged against the payable on OTC derivative positions. These derivative
liabilities are included within trading financial liabilities in the statement of financial position
(3)
For unsettled securities purchased under agreements to resell, collateral in the form of securities will be received at the point of settlement.
Since the value of collateral is determined at a future date, it is currently unquantifiable and not included in the table
The impact of master netting arrangements and
similar agreements on the Group’s ability to
offset financial assets and financial liabilities is
disclosed in note 29.
Exposure to Credit Risk by Internal Rating
Grades
Internal
credit
ratings
are
derived
using
methodologies generally consistent with those
used by external agencies:
Investment grade: AAA - BBB
Non-investment grade: BB – CCC
Default: D
The table below presents gross carrying/ nominal
amount by internal rating grade. All exposures
subject to ECL are Stage 1, unless otherwise
shown.
Group
Investment Grade
31 December 2022
AAA
AA
A
BBB
Non-
Investment
Grade
Unrated
(1)
/
Default
Total
Net of ECL
in $ millions
Subject to ECL:
Cash and short term deposit
Stage 1
212
4,869
12,600
1,019
54
—
18,754
18,754
Stage 3
—
—
—
—
—
96
96
—
Loans and advances
Stage 1
—
—
63
—
—
—
63
63
Trade and other receivables
Stage 1
1,985
10,523
44,737
13,657
6,943
2,300
80,145
80,145
Stage 3
4
7
4
4
1
56
76
27
2,201
15,399
57,404
14,680
6,998
2,452
99,134
98,989
Not subject to ECL:
Trading financial assets -
derivatives
4,700
18,765 155,134
57,802
14,629
46 251,076
251,076
Secured financing
712
28,513
81,530
15,278
3,732
14 129,779
129,779
Trade and other receivables
733
—
561
—
4
—
1,298
1,298
6,145
47,278 237,225
73,080
18,365
60 382,153
382,153
Unrecognised financial
instruments not subject to
ECL:
Unsettled securities
purchased under
agreements to resell
—
24,849
20,732
7,602
1,382
63
54,628
54,628
Loan commitments
—
1
—
—
14
—
15
15
—
24,850
20,732
7,602
1,396
63
54,643
54,643
(1)
For the unrated trade receivables, a lifetime ECL is calculated without considering whether SICR has occurred.
The Cash and short term deposit loss allowance as at 31 December 2022 is $96 million (31
December 2021: $nil) and Trade and other receivables loss allowance as at 31 December 2022 is
$49 million (31 December 2021: $5 million). These loss allowances include $144 million of ECL
related to cash and margin cash deposited with banks and exchanges in Russia.
Group
Investment Grade
31 December 2021
AAA
AA
A
BBB
Non-
Investment
Grade
Unrated
(1)
/
Default
Total
Net of ECL
in $ millions
Subject to ECL:
Cash and short term deposit
Stage 1
6,516
9,272
11,831
852
61
—
28,532
28,532
Stage 3
—
—
—
—
—
—
—
—
Loans and advances
Stage 1
—
—
67
—
—
—
67
67
Trade and other receivables
Stage 1
1,544
5,203
47,597
12,139
8,536
3,016
78,035
78,035
Stage 3
2
2
2
7
—
26
39
34
8,062
14,477
59,497
12,998
8,597
3,042 106,673
106,668
Not subject to ECL:
Trading financial assets -
derivatives
2,457
20,476 155,689
52,764
11,016
30 242,432
242,432
Secured financing
2,324
37,965
68,978
11,816
4,765
47 125,895
125,895
Trade and other receivables
—
—
445
—
545
3
993
993
4,781
58,441 225,112
64,580
16,326
80 369,320
369,320
Unrecognised financial
instruments not subject to
ECL:
Unsettled securities
purchased under
agreements to resell
—
26,419
1,374
5,295
1,405
—
34,493
34,493
Loan commitments
—
—
—
—
27
94
121
121
—
26,419
1,374
5,295
1,432
94
34,614
34,614
(1)
For the unrated trade receivables, a lifetime ECL is calculated without considering whether SICR has occurred.
Company
Investment grade
31 December 2022
AAA
AA
A
BBB
Non-
Investment
Grade
Unrated
(1)
/
Default
Total
Net of ECL
in $ millions
Subject to ECL:
Cash and short term deposit
Stage 1
212
4,868
12,362
954
53
—
18,449
18,449
Stage 3
—
—
—
—
—
96
96
—
Loans and advances
Stage 1
—
—
29
—
—
—
29
29
Trade and other receivables
Stage 1
1,986
10,524
44,795
13,657
6,942
2,330
80,234
80,234
Stage 3
4
7
4
4
1
56
76
27
2,202
15,399
57,190
14,615
6,996
2,482
98,884
98,739
Not subject to ECL:
Trading financial assets -
derivatives
4,700
18,766 155,138
57,803
14,629
46 251,082
251,082
Secured financing
712
28,513
81,330
15,278
3,732
14 129,579
129,579
Trade and other receivables
733
—
561
—
4
—
1,298
1,298
6,145
47,279 237,029
73,081
18,365
60 381,959
381,959
Unrecognised financial
instruments not subject to
ECL:
Unsettled securities
purchased under
agreements to resell
—
24,849
20,732
7,602
1,382
63
54,628
54,628
Loan commitments
—
1
—
—
14
—
15
15
—
24,850
20,732
7,602
1,396
63
54,643
54,643
(1)
For the unrated trade receivables, a lifetime ECL is calculated without considering whether SICR has occurred.
The Cash and short term deposit loss allowance as at 31 December 2022 is $96 million (31
December 2021 :$nil) and Trade and other receivables loss allowance as at 31 December 2022 is
$49 million (31 December 2021: $5 million). These loss allowances include $144 million of ECL
related to cash and margin cash deposited with banks and exchanges in Russia.
Company
Investment grade
31 December 2021
AAA
AA
A
BBB
Non-
Investment
Grade
Unrated
(1)
/
Default
Total
Net of ECL
in $ millions
Subject to ECL:
Cash and short term deposit
Stage 1
6,516
9,272
11,577
792
61
—
28,218
28,218
Stage 3
—
—
—
—
—
—
—
—
Loans and advances
Stage 1
—
—
26
—
—
—
26
26
Trade and other receivables
Stage 1
1,544
5,203
47,690
12,139
8,536
2,998
78,110
78,110
Stage 3
2
2
2
7
—
26
39
34
Total subject to ECL
8,062
14,477
59,295
12,938
8,597
3,024 106,393
106,388
Not subject to ECL:
Trading financial assets -
derivatives
2,457
20,477 155,697
52,767
11,017
30 242,445
242,445
Secured financing
2,324
37,965
68,778
11,816
4,765
47 125,695
125,695
Trade and other receivables
—
—
445
—
545
3
993
993
4,781
58,442 224,920
64,583
16,327
80 369,133
369,133
Total unrecognised
financial instruments not
subject to ECL:
Unsettled securities
purchased under
agreements to resell
—
26,419
1,374
5,295
1,405
—
34,493
34,493
Loan commitments
—
—
—
—
27
94
121
121
—
26,419
1,374
5,295
1,432
94
34,614
34,614
(1)
Liquidity
risk refers to the risk that the Group will
be unable to finance its operations due to a loss
of access to the capital markets or difficulty in
liquidating
its
assets.
Liquidity
risk
also
encompasses the Group’s ability to meet its
financial
obligations
without
experiencing
significant business disruption or reputational
damage that may threaten its viability as a going
concern.
Additional
information
on
liquidity
risk
management is presented in the Strategic Report
and
forms
part
of
the
audited
financial
statements.
26.4.1 Required Liquidity Framework
The Morgan Stanley Group’s Liquidity Risk
Management Framework is critical to helping
ensure
that
the
Group
maintains
sufficient
liquidity reserves and durable funding sources to
meet its daily obligations and to withstand
unanticipated
stress
events.
The
core
components of the Liquidity Risk Management
Framework
are
the
Required
Liquidity
Framework, which considers Liquidity Stress
Tests
and
Liquidity
Resources,
and
a
comprehensive set of Liquidity and Funding
limits.
The Required Liquidity Framework establishes
the amount of liquidity the Company must hold in
both normal and stressed environments to
ensure that the entity’s financial condition and
overall soundness are not adversely affected by
an inability (or perceived inability) to meet
financial obligations in a timely manner. The
Required Liquidity Framework ensures the entity
holds
sufficient
liquidity
to
meet
both
the
regulatory and internal stress test requirements
at the legal entity level.
The Company’s Liquidity Stress Tests model
external and intercompany liquidity flows across
multiple scenarios over a range of time horizons.
These scenarios contain various combinations of
idiosyncratic and systemic stress events of
different severity and duration. The methodology,
implementation, production and analysis of the
Liquidity Stress Tests are important components
of the Liquidity Risk Management Framework.
The
Company
maintains
sufficient
Liquidity
Resources to cover daily funding needs and to
meet strategic liquidity targets sized by the
Required
Liquidity
Framework
and
Liquidity
Stress Tests. The total amount of Liquidity
Resources is actively managed considering the
following components: maturity profile, balance
sheet size and composition; funding needs in a
stressed environment, inclusive of contingent
cash
outflows;
funding
currency,
collateral
requirements and regulatory requirements.
26.4.2 Liquidity Limits
The Company has a comprehensive set of limits,
Key Risk Indicators (“KRI”) and targets to
manage liquidity risk within the defined liquidity
risk appetite. The Liquidity risk limit and KRI
framework is owned by the Liquidity Risk
Department (“LRD”), who then recommend and
set the Company’s liquidity risk limits and KRIs
taking into consideration the capital structure,
risk profile, complexity, activities and size. LRD
maintains limits at various levels of governance
structure to support linkages between overall risk
tolerance, which is determined by the MSI Board,
and more granular risk-taking decisions and
activities. Liquidity limits are set to mitigate
various risk drivers, e.g. Minimum Liquidity
requirements,
Minimum
Cash
requirements,
Secured Funding, Unsecured funding, Prime
Brokerage, Derivatives, foreign currency and
Currency risk.
LRD ensures transparency of material liquidity
risks, compliance with established risk limits and
KRIs as well as escalation of risk concentrations
to appropriate senior management. The liquidity
risk metrics and limits are summarised in reports
produced by LRD that are circulated to and
discussed with the EMEA ALCO, ERC and the
MSI Risk Committee as appropriate.
26.4.3 Maturity Analysis
In the following maturity analysis of financial
liabilities, derivative contracts and other financial
liabilities
held
as
part
of
the
Group
and
Company’s trading activities are presented at fair
value,
consistent
with
how
these
financial
liabilities are managed, and disclosed as on
demand. Derivatives not held as part of the
Group’s trading activities and financial liabilities
designated at fair value through profit or loss
which contain an embedded derivative are
disclosed according to their earliest contractual
maturity; all such amounts are presented at their
fair value, consistent with how these financial
liabilities
are
managed.
All
other
amounts
represent undiscounted cash flows payable by
the Group or Company arising from its financial
liabilities to their earliest contractual maturities as
at 31 December 2022 and 31 December 2021.
Repayments of financial liabilities that are subject
to immediate notice are treated as if notice were
given immediately and are classified as on
demand.
This presentation is considered by the
Group and Company to appropriately reflect the
liquidity risk arising from those financial liabilities,
and is consistent with how the liquidity risk on
these financial liabilities is managed by the
Group and Company.
in $ millions
Group
31 December 2022
On demand
Less than 1
month
1 month - 3
months
3 months -
1 year
1 year - 5
years
Greater
than 5
years
Total
Financial liabilities
Bank loans and overdrafts
59
—
—
—
—
—
59
Trading financial liabilities:
Derivatives
251,955
—
—
—
—
—
251,955
Other
46,735
—
—
—
—
—
46,735
Secured borrowing
61,359
15,794
5,031
9,786
2,480
31
94,481
Trade and other payables
95,990
—
—
209
494
57
96,750
Debt and other borrowings
1,753
305
3,920
2,496
31,778
9,706
49,958
Total financial liabilities
457,851
16,099
8,951
12,491
34,752
9,794 539,938
Guarantees
373
—
—
—
—
—
373
Loan commitments
15
—
—
—
—
—
15
Other commitments
26
—
—
—
—
—
26
Unsettled securities purchased
under agreements to resell
33,777
19,833
10
1,008
—
—
54,628
Total unrecognised financial
instruments
34,191
19,833
10
1,008
—
—
55,042
31 December 2021
Financial liabilities
Bank loans and overdrafts
48
—
—
—
—
—
48
Trading financial liabilities:
Derivatives
247,518
—
—
—
—
—
247,518
Other
52,807
—
—
—
—
—
52,807
Secured borrowing
67,880
14,392
3,739
6,574
4,492
221
97,298
Trade and other payables
92,897
55
10
258
407
47
93,674
Debt and other borrowings
1,035
194
2,321
1,747
43,926
5,160
54,383
Total financial liabilities
462,185
14,641
6,070
8,579
48,825
5,428 545,728
Unrecognised financial
instruments
Guarantees
348
—
—
—
—
—
348
Loan commitments
121
—
—
—
—
—
121
Other commitments
37
—
—
—
—
—
37
Unsettled securities purchased
under agreements to resell
32,922
1,227
—
345
—
—
34,494
Total unrecognised financial
instruments
33,428
1,227
—
345
—
—
35,000
in $ millions
Company
31 December 2022
On demand
Less than 1
month
1 month - 3
months
3 months -
1 year
1 year - 5
years
Greater
than 5
years
Total
Financial liabilities
Bank loans and overdrafts
59
—
—
—
—
—
59
Trading financial liabilities:
Derivatives
251,955
—
—
—
—
—
251,955
Other
46,735
—
—
—
—
—
46,735
Secured borrowing
61,064
15,794
5,031
9,791
2,277
—
93,957
Trade and other payables
96,013
—
—
210
494
57
96,774
Debt and other borrowings
1,753
306
3,922
2,502
31,744
9,706
49,933
Total financial liabilities
457,579
16,100
8,953
12,503
34,515
9,763 539,413
Unrecognised financial
instruments
Guarantees
373
—
—
—
—
—
373
Loan commitments
15
—
—
—
—
—
15
Other commitments
26
—
—
—
—
—
26
Unsettled securities purchased
under agreements to resell
33,777
19,833
10
1,008
—
—
54,628
Total unrecognised financial
instruments
34,191
19,833
10
1,008
—
—
55,042
31 December 2021
Financial liabilities
Bank loans and overdrafts
48
—
—
—
—
—
48
Derivatives
247,518
—
—
—
—
—
247,518
Other
52,807
—
—
—
—
—
52,807
Secured borrowing
67,880
14,392
3,739
6,574
4,304
—
96,889
Trade and other payables
92,923
55
10
258
407
47
93,700
Debt and other borrowings
1,035
194
2,321
1,747
43,710
5,160
54,167
Total financial liabilities
462,211
14,641
6,070
8,579
48,421
5,207 545,129
Unrecognised financial
instruments
Guarantees
348
—
—
—
—
—
348
Loan commitments
121
—
—
—
—
—
121
Other commitments
37
—
—
—
—
—
37
Unsettled securities purchased
under agreements to resell
32,922
1,227
—
345
—
—
34,494
Total unrecognised financial
instruments
33,428
1,227
—
345
—
—
35,000
The Group does not expect that all of the cash
flows
associated
with
financial
guarantees,
letters of credits and loan commitments will be
26.5 Operational Risk
26.5.1 Risk Management and Measurement
The Group has implemented operational risk
data and assessment systems to monitor and
analyse internal and external operational risk
events, to assess business environment and
internal control factors and to perform scenario
analysis.
The
collected
data
elements
are
incorporated in the operational risk capital model.
The model encompasses both quantitative and
qualitative elements. Internal loss data and
scenario analysis results are direct inputs to the
capital
model,
while
external
operational
incidents, business environment and internal
control factors are evaluated as part of the
scenario analysis process.
26.5.2 Risk Mitigation
The Group employs a variety of risk processes
and mitigants to manage its operational risk
exposures.
These
include
a
governance
framework, a comprehensive risk management
program and insurance. Operational risks and
associated risk exposures are assessed relative
to the risk appetite established by the Board and
are prioritised accordingly.
The breadth and variety of operational risks are
such that the types of mitigating activities are
wide-ranging. Examples of such activities include
continuous enhancement of defences against
cyber-attacks; use of legal agreements and
contracts to transfer and/or limit operational risk
exposures; due diligence; implementation of
enhanced policies and procedures; exception
management
processing
controls;
and
segregation of duties.
Operational
Risk
Management
Framework
requires,
among
other
things,
the
proper
recording and verification of a large number of
transactions and events as set out in the policies
and
procedures.
The
Group’s
trading
risk
management strategies and techniques seek to
balance the ability to profit from trading positions
with exposure to potential losses.
Primary responsibility for the management of
operational risk is with the business segments,
the control groups and the business managers
therein.
The
business
managers
maintain
processes and controls designed to identify,
assess, manage, mitigate and report operational
risk. Each of the business segments has a
designated operational risk coordinator. The
operational risk coordinator regularly reviews
operational risk issues and reports to the Group’s
senior management within each business. Each
control group also has a designated operational
risk coordinator and a forum for discussing
operational risk matters with the Group’s senior
management. Oversight of operational risk is
provided by the Operational Risk Oversight
Committee, regional risk committees and senior
management. In the event of a merger; joint
venture; divestiture; reorganisation; or creation of
a new legal entity, a new product or a business
activity, operational risks are considered, and any
necessary changes in processes or controls are
implemented.
The
Operational
Risk
Department
provides
independent oversight of operational risk and
assesses, measures and monitors operational
risk against appetite. The Operational Risk
Department works with the business divisions
and control groups to help ensure a transparent,
consistent and comprehensive framework for
managing operational risk within each area and
across the Group.
The
Operational
Risk
Department’s
scope
includes
oversight
of
technology
risk,
cybersecurity risk, information security risk, the
fraud risk management and prevention program
and the third party risk management (supplier
and affiliate risk oversight and assessment)
program. Furthermore, the Operational Risk
Department supports the collection and reporting
of operational risk incidents and the execution of
operational
risk
assessments;
provides
the
infrastructure needed for risk measurement and
risk
management;
and
ensures
ongoing
validation
and
verification
of
the
Group’s
advanced measurement approach for operational
risk capital.
26.5.3 Business Continuity Management and
Disaster Recovery
The Fusion Resilience Centre’s mission is to
understand, prepare for, respond to, recover and
learn from operational threats and incidents that
impact the Morgan Stanley Group, from cyber
and fraud to technology incidents, climate related
events, terror attack, geopolitical unrest and
pandemics. The Group’s business continuity and
disaster recovery programs are designed to
provide assurance of business continuity in the
event
of
disruptions
impacting
people,
technology, facilities and third parties, and to
comply with regulatory requirements. The key
elements
of
these
programs
include
crisis
management,
business
continuity
planning,
disaster recovery, testing and verification, and
process improvement. Business units within the
Morgan
Stanley
Group
maintain
business
continuity plans, including identifying processes
and strategies to continue business critical
processes during a business continuity incident.
Business units also test the documented plans to
provide a reasonable expectation that, during a
business continuity incident, the business unit
will be able to continue its critical business
processes and limit the impact of the incident to
the Morgan Stanley Group and its clients.
Technical recovery plans are maintained for
critical technology assets and detail the steps to
be implemented to recover in the event of a
disruption impacting the assets’ primary location.
Disaster recovery testing is performed to validate
the
recovery
capability
of
these
critical
technology assets.
26.5.4 Third-party Risk Management
In connection with its ongoing operations, the
Group
utilises
third
party
suppliers
and
anticipates that such usage will continue and
may increase in the future. These services
include, for example, outsourced processing and
support functions and consulting and other
professional services. The Group’s risk-based
approach
to
managing
exposure
to
these
services includes the execution of due diligence,
implementation
of
service
level
and
other
contractual
agreements,
consideration
of
operational risks and ongoing monitoring of ‘third
party
suppliers’
performance.
The
Group
maintains a third party risk program which is
designed to align with the Group’s risk appetite
and meet regulatory requirements. The program
includes governance, policies, procedures, and
enabling technology. The third-party risk program
includes
the
adoption
of
risk
management
controls and practices throughout the third-party
management lifecycle, to manage risk of service
failure, risk of data loss and reputational risk,
among others.
26.5.5 Cyber and Information Security Risk
Management
The Group maintains a program that oversees its
cyber and information security risks leveraging
the Morgan Stanley Group wide cybersecurity
and information security policies, procedures and
technologies are designed to protect the Group’s
information
assets
against
unauthorised
disclosure,
modification
or
misuse.
These
policies and procedures cover a broad range of
areas, including: identification of internal and
external threats, access control, data security,
protective controls, detection of malicious or
unauthorised activity, incident response and
recovery planning.
A cyber-attack, an information or security breach
or a technology failure could adversely affect the
Morgan
Stanley
Group’s
ability
to
conduct
business, manage exposure to risk or result in
disclosure or misuse of confidential or proprietary
information
and
otherwise
adversely
impact
results of operations, liquidity and financial
condition, as well as cause reputational harm.
The Group maintains a significant amount of
personal
information
on
customers,
clients,
employees and certain counterparties that it is
required to protect under various data protection
and privacy laws.
These laws may be in conflict with one another,
or courts and regulators may interpret them in
ways that the Group had not anticipated or that
adversely affects its business.
Cybersecurity risks for financial institutions have
significantly increased in recent years in part
because of the proliferation of new technologies,
the
use
of
the
internet,
mobile
telecommunications and cloud technologies to
conduct financial transactions, and the increased
sophistication and activities of organised crime,
hackers, terrorists and other external extremist
parties, including foreign state actors, in some
circumstances as a means to promote political
ends.
In addition to the growing sophistication of
certain parties, the commoditisation of cyber
tools which are able to be weaponised by less
sophisticated actors has led to an increase in the
exploitation
of
technological
vulnerabilities.
Further, foreign state actors have become more
sophisticated over time, increasing the risk of
such an attack. Any of these parties may also
attempt
to
fraudulently
induce
employees,
customers, clients, vendors or other third parties
or users of Morgan Stanley Group systems.
Cybersecurity risks may also derive from human
error, fraud or malice on the part of employees or
third parties, including third party providers, or
may result from accidental technological failure.
These risks may have been heightened during
the COVID-19 pandemic, which caused the
majority of employees to work remotely during
the pandemic and access Morgan Stanley
secure networks through their home networks.
As employees have started to return to the office,
the reliance on accessing Morgan Stanley secure
networks
through
home
connections
has
reduced.
There is no guarantee that the measures the
Morgan
Stanley
Group
takes
will
provide
absolute security or recoverability given the
techniques used in cyber-attacks are complex
and frequently change, and may not be able to
be anticipated.
Like other financial services firms, the Morgan
Stanley Group, its third party providers, and its
clients continue to be the subject of unauthorised
access
attacks,
mishandling
or
misuse
of
information, computer viruses or malware, and
cyber-attacks.
Such
events
could
cause
interruptions
or
malfunctions
in
the
Group’s,
its
clients’,
employees’, partners’, vendors’, counterparties’
or third parties’ operations, as well as the
unauthorised
release,
gathering,
monitoring,
misuse,
loss
or
destruction
of
confidential,
proprietary and other information of the Group,
its employees, its customers or of other third
parties. Any of these events could result in
reputational damage with the Group’s clients and
the market, client dissatisfaction, additional costs
to
the
Group
to
maintain
and
update
its
operational
and
security
systems
and
infrastructure, regulatory investigations, litigation
or enforcement, or regulatory fines or penalties,
any of which could adversely affect the Group’s
business,
financial
condition
or
results
of
operations.
Given
the
Morgan
Stanley
Group’s
global
footprint and the high volume of transactions
processed, the large number of clients, partners,
vendors and counterparties with which it does
business, and the increasing sophistication of
cyber-attacks, an information or security breach
could occur and persist for an extended period of
time without detection.
The Group expects that any investigation of a
cyber-attack would be inherently unpredictable
and that it would take time before the completion
of
any
investigation
and
before
there
is
availability of full and reliable information. During
such time, the Group would not necessarily know
the extent of the harm or how best to remediate
it, and certain errors or actions could be repeated
or compounded before they are discovered and
remediated, all or any of which would further
increase the costs and consequences of a cyber-
attack.
While many of the Morgan Stanley Group’s
agreements with partners and third party vendors
include indemnification provisions, the Group
may not be able to recover sufficiently, or at all,
under such provisions to adequately offset any
losses it may incur. In addition, although the
Morgan
Stanley
Group
maintains
insurance
coverage that may, subject to policy terms and
conditions, cover certain aspects of cyber and
information
security
risks,
such
insurance
coverage may be insufficient to cover all losses.
The Morgan Stanley Group continues to make
investments with a view toward maintaining and
enhancing its cybersecurity posture. The cost of
managing cyber and information security risks
and attacks along with complying with new,
increasingly expansive, and evolving regulatory
requirements could adversely affect the results of
INCLUDING PLEDGES OF COLLATERAL
Transferred Financial Assets that are not
Derecognised in Their Entirety
In the ordinary course of business, the Group
and Company enter into various arrangements
including selling securities under agreements to
repurchase,
purchasing
securities
under
agreements to resell, securities borrowed and
securities loaned to, amongst other things,
acquire securities to cover short positions and
settle
other
securities
obligations,
to
accommodate customers’ needs and to finance
the Group and Company’s inventory positions.
The
Group
and
Company
pledges
certain
financial instruments to collateralise repurchase
agreements and other securities financings.
Pledged financial instruments that can be sold or
repledged by the secured party are identified as
trading financial instruments (pledged to various
parties) in the statement of financial position.
The Group and Company has determined that it
retains substantially all the risks and rewards of
these financial instruments including credit risk,
settlement risk, country risk and market risk, and
therefore has not derecognised them.
In
addition, it recognises a financial liability in
respect of the consideration received.
Other financial assets transferred that continue to
be recognised for accounting purposes include
pledges of securities as collateral for derivative
transactions or otherwise, as well as certain
sales of securities with related transactions, such
as derivatives, that result in the Group and
Company retaining substantially all the risks and
rewards of the financial assets transferred.
In
addition, the Group and Company recognise a
financial liability in respect of the consideration
received.
These transactions are generally conducted
under standard agreements used by financial
market participants and are undertaken with
counterparties
subject
to
the
Group
and
Company’s normal credit risk control processes.
The resulting credit exposures are controlled by
daily monitoring and collateralisation of the
positions.
The carrying amount of the associated
financial liabilities related to financial assets
transferred that continue to be recognised is
$37,400 million (2021: $43,820 million).
The following table presents those financial
assets which have been sold or otherwise
transferred, but which for accounting purposes
remain recognised in the consolidated statement
of financial position.
There was no difference between Company and
Group in respect of the assets presented below
at 31 December 2022 or 31 December 2021.
in $ millions
2022
2021
Trading financial assets
Debt securities
18,868
20,438
Equity instruments
35,250
41,407
54,118
28. FINANCIAL ASSETS ACCEPTED AS
COLLATERAL
The Group and Company’s policy is generally to
take
possession
of
securities
received
as
collateral,
securities
purchased
under
agreements to resell and securities borrowed.
The Group and Company monitors the fair value
of the underlying securities as compared with the
related receivable or payable, including accrued
interest, and, as necessary, requests additional
collateral
to
ensure
such
transactions
are
adequately
collateralised.
Where
deemed
appropriate,
the
Group
and
Company
agreements with third parties specify its rights to
request additional collateral.
These transactions
are
generally
conducted
under
standard
documentation
used
by
financial
market
participants.
The fair value of collateral accepted under these
arrangements for Group and Company as at
31 December 2022 was $322,418 million (2021:
$304,194 million). Of this amount $273,742
million
(2021: $261,805 million) has been sold or
repledged to third parties in connection with
financing
activities,
or
to
comply
with
commitments under short sale transactions.
LIABILITIES SUBJECT TO OFFSETTING
In order to manage credit exposure arising from
its business activities, the Group and Company
applies various credit risk management policies
and procedures, see note 26 for further details.
Primarily in connection with securities purchased
under agreements to resell and securities sold
under agreements to repurchase, securities
borrowed and securities loaned transactions and
derivative transactions, the Group and Company
enter into master netting arrangements and
collateral arrangements with their counterparties.
These
agreements
provide
the
Group
and
Company with the right, in the ordinary course of
business and/ or in the event of a counterparty
default (such as bankruptcy or a counterparty’s
failure to pay or perform), to net a counterparty’s
rights and obligations under such agreement
and, in the event of counterparty default, set off
collateral held by the Group or Company against
the net amount owed by the counterparty.
However, in certain circumstances, the Group
and Company may not have such an agreement
in place; the relevant insolvency regime (which is
based on type of counterparty of the entity and
the
jurisdiction
of
organisation
of
the
counterparty) may not support the enforceability
of the agreement; or the Group and Company
may not have sought legal advice to support the
enforceability of the agreement.
In the statement of financial position, financial
assets and financial liabilities are only offset and
presented on a net basis where there is a current
legally enforceable right to set off the recognised
amounts and an intention to either settle on a net
basis or to realise the asset and the liability
simultaneously.
In
the
absence
of
such
conditions, financial assets and financial liabilities
are presented on a gross basis.
The following tables present information about
the offsetting of financial instruments and related
collateral amounts. The tables do not include
information about financial instruments that are
subject only to a collateral agreement. The effect
of
master
netting
arrangements,
collateral
agreements and other credit enhancements, on
the Group and Company’s exposure to credit risk
is disclosed in note 26.
Amounts not offset
Not subject to
legally
enforceable
master netting
agreement
Group
Collateralised by:
in $ millions
Gross
amounts
Amounts
offset
(1)(3)
Net
amounts
Financial
instruments
Cash
collateral
(2)
Net
exposure
(4)
31 December 2022
Secured Financing:
Cash collateral on
securities borrowed
22,999
(7,430)
15,569
(15,195)
—
374
39
Securities purchased
under agreement to
resell
174,929
(70,762)
104,167
(103,670)
—
497
125
Trading financial assets -
derivatives
433,717
(182,641)
251,076
(210,029)
(30,850)
10,197
2,074
Total Assets
631,645
(260,833)
370,812
(328,894)
(30,850)
11,068
2,238
Secured borrowing:
Cash collateral on
securities loaned
33,242
(7,430)
25,812
(25,804)
—
8
—
Securities sold under
agreement to repurchase
122,658
(70,762)
51,896
(51,623)
—
273
76
Trading financial liabilities -
derivatives
429,972
(178,017)
251,955
(211,246)
(25,062)
15,647
2,600
Total Liabilities
585,872
(256,209)
329,663
(288,673)
(25,062)
15,928
2,676
31 December 2021
Secured Financing:
Cash collateral on
securities borrowed
27,615
(8,255)
19,360
(18,953)
—
407
95
Securities purchased
under agreement to
resell
139,115
(48,819)
90,296
(89,402)
—
894
857
Trading financial assets -
derivatives
319,019
(76,587)
242,432
(208,784)
(20,446)
13,202
2,398
Total Assets
485,749
(133,661)
352,088
(317,139)
(20,446)
14,503
3,350
Secured borrowing:
Cash collateral on
securities loaned
37,758
(8,255)
29,503
(29,492)
—
11
—
Securities sold under
agreement to repurchase
93,366
(48,818)
44,548
(43,814)
—
734
641
Trading financial liabilities -
derivatives
325,128
(77,610)
247,518
(205,666)
(30,488)
11,364
3,257
Total Liabilities
456,252
(134,683)
321,569
(278,972)
(30,488)
12,109
3,898
(1)
Includes $11,196 million and $6,572 million (31 December 2021: $6,697 million and $7,720 million) of Trading financial assets – derivatives
and Trading financial liabilities – derivatives, respectively, which have been offset against cash collateral received and cash collateral paid,
respectively.
(2)
Cash collateral not offset is recognised within Trade and other receivables and Trade and other payables.
(3)
In addition to the balances disclosed in the table above, legally enforceable master netting agreements are in place for $1,810 million (31
December 2021: $1,170 million) of other secured financing and secured borrowing balances which are presented net in the statement of
financial position, and for $0 million (31 December 2021: $197 million) of certain trade and other receivables and trade and other payables
which are not presented net.
(4)
Intercompany cross-product legally enforceable netting arrangements are in place which would allow for an additional $8,756 million (31
December 2021: $7,041 million) of the statement of financial position, to be offset in the ordinary course of business and/or in the event of
default.
Amounts not offset
Not subject to
legally
enforceable
master netting
agreement
Company
Collateralised by:
in $ millions
Gross
amounts
Amounts
offset
(1)(3)
Net
amounts
Financial
instruments
Cash
collateral
(2)
Net
exposure
(4)
31 December 2022
Secured Financing:
Cash collateral on securities
borrowed
22,999
(7,430)
15,569
(15,195)
—
374
39
Securities purchased under
agreement to resell
174,729
(70,762)
103,967
(103,474)
—
493
125
Trading financial assets -
derivatives
433,723
(182,641)
251,082
(210,034)
(30,850)
10,198
2,074
Total Assets
631,451
(260,833)
370,618
(328,703)
(30,850)
11,065
2,238
Secured borrowing:
Cash collateral on securities
loaned
33,242
(7,430)
25,812
(25,804)
—
8
—
Securities sold under
agreement to repurchase
122,658
(70,762)
51,896
(51,623)
—
273
76
Trading financial liabilities -
derivatives
429,972
(178,017)
251,955
(211,246)
(25,062)
15,647
2,600
Total Liabilities
585,872
(256,209)
329,663
(288,673)
(25,062)
15,928
2,676
31 December 2021
Secured Financing:
Cash collateral on securities
borrowed
27,615
(8,255)
19,360
(18,953)
—
407
95
Securities purchased under
agreement to resell
138,914
(48,818)
90,096
(89,201)
—
895
857
Trading financial assets -
derivatives
319,032
(76,587)
242,445
(208,797)
(20,446)
13,202
2,398
Total Assets
485,561
(133,660)
351,901
(316,951)
(20,446)
14,504
3,350
Secured borrowing:
Cash collateral on securities
loaned
37,758
(8,255)
29,503
(29,492)
—
11
—
Securities sold under
agreement to repurchase
93,366
(48,818)
44,548
(43,814)
—
734
641
Trading financial liabilities -
derivatives
325,128
(77,610)
247,518
(205,666)
(30,488)
11,364
3,257
Total Liabilities
456,252
(134,683)
321,569
(278,972)
(30,488)
12,109
3,898
(1)
Includes $11,196 million and $6,572 million (31 December 2021: $6,697 million and $7,720 million) of Trading financial assets – derivatives
and Trading financial liabilities – derivatives, respectively, which have been offset against cash collateral received and cash collateral paid,
respectively.
(2)
Cash collateral not offset is recognised within Trade and other receivables and Trade and other payables.
(3)
In addition to the balances disclosed in the table above, legally enforceable master netting agreements are in place for $1,810 million (31
December 2021: $1,170 million) of other secured financing and secured borrowing balances which are presented net in the statement of
financial position, and for $0 million (31 December 2021: $197 million) of certain trade and other receivables and trade and other payables
which are not presented net.
(4)
Intercompany cross-product legally enforceable netting arrangements are in place which would allow for an additional $8,754 million (31
December 2021: $7,039 million) of the statement of financial position, to be offset in the ordinary course of business and/or in the event of
MEASURED AT FAIR VALUE
a.
Financial
Assets
and
Liabilities
Recognised at Fair Value on a Recurring
Basis
The following tables present the carrying value of
the
Group’s
financial
assets
and
financial
liabilities recognised at fair value on a recurring
basis, classified according to the fair value
hierarchy.
At
31
December
2022
and
31 December 2021 there were no significant
differences between Group and Company in
respect of the below table.
Group
2022
Quoted prices
in active market
Observable
inputs
Significant
unobservable
inputs
in $ millions
(Level 1)
(Level 2)
(Level 3)
Total
Trading financial assets:
Government debt securities
10,742
2,907
133
13,782
Corporate and other debt
—
10,249
1,115
11,364
Corporate equities
52,139
990
31
53,160
Derivatives:
Interest rate contracts
247
75,292
415
75,954
Credit contracts
—
6,958
424
7,382
Foreign exchange and gold contracts
—
122,527
314
122,841
Equity contracts
253
34,161
1,114
35,528
Commodity contracts
804
8,540
27
9,371
Total trading financial assets
64,185
261,624
3,573
329,382
Secured financing:
Cash collateral on securities borrowed
—
15,569
—
15,569
Securities purchased under agreements to resell
—
103,205
962
104,167
Other secured financing
—
10,043
—
10,043
Total secured financing
—
128,817
962
129,779
Investment securities - corporate equities
—
—
142
142
Trade and other receivables:
Prepaid OTC contracts
—
370
192
562
Other
—
733
3
736
Total trade and other receivables
—
1,103
195
1,298
Total financial assets measured at fair value
64,185
391,544
4,872
460,601
Trading financial liabilities:
Government debt securities
14,660
2,363
2
17,025
Corporate and other debt
—
4,736
3
4,739
Corporate equities
24,687
265
19
24,971
Derivatives:
Interest rate contracts
260
80,380
489
81,129
Credit contracts
—
6,554
298
6,852
Foreign exchange and gold contracts
6
117,263
184
117,453
Equity contracts
450
35,635
1,017
37,102
Commodity contracts
664
8,713
42
9,419
Total trading financial liabilities
40,727
255,909
2,054
298,690
Secured borrowing:
Cash collateral on securities loaned
—
19,766
—
19,766
Securities sold under agreements to repurchase
—
26,042
—
26,042
Other secured borrowing
—
12,984
—
12,984
Total secured borrowing
58,792
—
58,792
Trade and other payables - prepaid OTC contracts
—
530
188
718
Debt and other borrowings - issued structured
notes
—
12,036
77
12,113
Total financial liabilities measured at fair value
40,727
327,267
2,319
370,313
Company
2022
Quoted prices
in active
market
Observable
inputs
Significant
unobservable
inputs
in $ millions
(Level 1)
(Level 2)
(Level 3)
Total
Trading financial assets:
Government debt securities
10,740
2,907
133
13,780
Corporate and other debt
—
9,931
1,115
11,046
Corporate equities
52,139
990
31
53,160
Derivatives:
Interest rate contracts
247
75,292
415
75,954
Credit contracts
—
6,958
424
7,382
Foreign exchange and gold contracts
—
122,533
314
122,847
Equity contracts
253
34,161
1,114
35,528
Commodity contracts
804
8,540
27
9,371
Total trading financial assets
64,183
261,312
3,573
329,068
Secured financing:
Cash collateral on securities borrowed
—
15,569
—
15,569
Securities purchased under agreements to resell
—
103,005
962
103,967
Other secured financing
—
10,043
—
10,043
Total secured financing
—
128,617
962
129,579
Investment securities - corporate equities
—
—
141
141
Trade and other receivables:
Prepaid OTC contracts
—
370
192
562
Other
—
733
3
736
Total trade and other receivables
—
1,103
195
1,298
Total financial assets measured at fair value
64,183
391,032
4,871
460,086
Trading financial liabilities:
Government debt securities
14,660
2,363
2
17,025
Corporate and other debt
—
4,736
3
4,739
Corporate equities
24,687
265
19
24,971
Derivatives:
Interest rate contracts
260
80,379
489
81,128
Credit contracts
—
6,555
298
6,853
Foreign exchange and gold contracts
6
117,264
184
117,454
Equity contracts
450
35,634
1,017
37,101
Commodity contracts
664
8,713
42
9,419
Total trading financial liabilities
40,727
255,909
2,054
298,690
Secured borrowing:
Cash collateral on securities loaned
—
19,766
—
19,766
Securities sold under agreements to repurchase
—
26,042
—
26,042
Other secured borrowing
—
12,984
—
12,984
Total secured borrowing
—
58,792
—
58,792
Trade and other payables - prepaid OTC contracts
—
530
188
718
Debt and other borrowings - issued structured notes
—
12,036
77
12,113
Total financial liabilities measured at fair value
40,727
327,267
2,319
370,313
Group
2021
Quoted prices
in active
market
Observable
inputs
Significant
unobservable
inputs
in $ millions
(Level 1)
(Level 2)
(Level 3)
Total
Trading financial assets:
Government debt securities
11,289
2,599
209
14,097
Corporate and other debt
—
9,617
1,190
10,807
Corporate equities
64,886
378
35
65,299
Derivatives:
Interest rate contracts
49
59,750
729
60,528
Credit contracts
1
9,859
290
10,150
Foreign exchange and gold contracts
—
85,816
218
86,034
Equity contracts
466
69,657
782
70,905
Commodity contracts
1,217
13,583
15
14,815
Total trading financial assets
77,908
251,259
3,468
332,635
Secured financing:
Cash collateral on securities borrowed
—
19,360
—
19,360
Securities purchased under agreements to resell
—
89,433
863
90,296
Other secured financing
—
16,239
—
16,239
Total secured financing
—
125,032
863
125,895
Investment securities - corporate equities
—
—
165
165
Trade and other receivables:
Prepaid OTC contracts
—
818
172
990
Other
—
—
3
3
Total trade and other receivables
—
818
175
993
Total financial assets measured at fair value
77,908
377,109
4,671
459,688
Trading financial liabilities:
Government debt securities
18,714
1,761
—
20,475
Corporate and other debt
—
3,718
6
3,724
Corporate equities
28,541
36
31
28,608
Derivatives:
Interest rate contracts
46
60,333
371
60,750
Credit contracts
—
9,103
224
9,327
Foreign exchange and gold contracts
2
85,120
207
85,329
Equity contracts
655
75,428
1,242
77,325
Commodity contracts
1,133
13,643
11
14,787
Total trading financial liabilities
49,091
249,142
2,092
300,325
Secured borrowing:
Cash collateral on securities loaned
—
25,141
—
25,141
Securities sold under agreements to repurchase
—
19,609
—
19,609
Other secured borrowing
—
20,053
—
20,053
Total secured borrowing
—
64,803
—
64,803
Trade and other payables:
Trade and other payables - prepaid OTC contracts
—
576
172
748
Unfunded loan commitments
—
—
—
—
Total trade and other payables
—
576
172
748
Debt and other borrowings - issued structured notes
—
9,496
106
9,602
Total financial liabilities measured at fair value
49,091
324,017
2,370
375,478
Company
2021
Quoted prices
in active
market
Observable
inputs
Significant
unobservable
inputs
in $ millions
(Level 1)
(Level 2)
(Level 3)
Total
Trading financial assets:
Government debt securities
11,289
2,599
209
14,097
Corporate and other debt
—
9,418
1,190
10,608
Corporate equities
64,886
378
35
65,299
Derivatives:
Interest rate contracts
49
59,750
729
60,528
Credit contracts
1
9,859
290
10,150
Foreign exchange and gold contracts
—
85,829
218
86,047
Equity contracts
466
69,657
782
70,905
Commodity contracts
1,217
13,583
15
14,815
Total trading financial assets
77,908
251,073
3,468
332,449
Secured financing:
Cash collateral on securities borrowed
—
19,360
—
19,360
Securities purchased under agreements to resell
—
89,233
863
90,096
Other secured financing
—
16,239
—
16,239
Total secured financing
—
124,832
863
125,695
Investment securities - corporate equities
—
—
165
165
Trade and other receivables:
Prepaid OTC contracts
—
818
172
990
Other
—
—
3
3
Total trade and other receivables
—
818
175
993
Total financial assets measured at fair value
77,908
376,723
4,671
459,302
Trading financial liabilities:
Government debt securities
18,714
1,761
—
20,475
Corporate and other debt
—
3,718
6
3,724
Corporate equities
28,541
36
31
28,608
Derivatives:
Interest rate contracts
46
60,333
371
60,750
Credit contracts
—
9,103
224
9,327
Foreign exchange and gold contracts
2
85,120
207
85,329
Equity contracts
655
75,428
1,242
77,325
Commodity contracts
1,133
13,643
11
14,787
Total trading financial liabilities
49,091
249,142
2,092
300,325
Secured borrowing:
Cash collateral on securities loaned
—
25,141
—
25,141
Securities sold under agreements to repurchase
—
19,609
—
19,609
Other secured borrowing
—
20,053
—
20,053
Total secured borrowing
—
64,803
—
64,803
Trade and other payables:
Trade and other payables - prepaid OTC contracts
—
576
172
748
Unfunded loan commitments
—
—
—
—
Total trade and other payables
—
576
172
748
Debt and other borrowings - issued structured notes
—
9,496
106
9,602
Total financial liabilities measured at fair value
49,091
324,017
2,370
375,478
The Group’s valuation approach and fair value
hierarchy categorisation for certain significant
classes of financial instruments recognised at fair
value on a recurring basis is as follows:
Government Debt Securities
US Treasury Securities
Valuation Technique:
•
Fair value is determined using quoted market
prices
Valuation Hierarchy Classification:
•
Level 1
Non US Government Obligations
Valuation Technique:
•
Fair value is determined using quoted prices
in active markets when available. When not
available, quoted prices in less-active markets
are used. In the absence of position-specific
quoted prices, fair value may be determined
through
benchmarking
from
comparable
instruments.
Valuation Hierarchy Classification:
•
Level 1 – if actively traded and inputs are
observable
•
Level 2 – if the market is less active or prices
are dispersed
•
Level 3 – in instances where the prices are
unobservable
Corporate and Other Debt and Corporate
Loans
Mortgage- and Asset-backed Securities
(“MABS”)
Valuation Technique:
•
MABS may be valued based on price or
spread
data
obtained
from
observed
transactions or independent external parties
such as vendors or brokers.
•
When position-specific external price data are
not observable, the fair value determination
may require benchmarking to comparable
instruments, and/or analysing ECL, default
and
recovery
rates,
and/or
applying
discounted
cash
flow
techniques.
When
evaluating the comparable instruments for
use in the valuation of each security, security
collateral-specific
attributes,
including
payment priority, credit enhancement levels,
type of collateral, delinquency rates and loss
severity, are considered. In addition, for
RMBS borrowers, Fair Isaac Corporation
scores and the level of documentation for the
loan are considered.
•
Market standard cash flow models may be
utilised
to
model
the
specific
collateral
composition and cash flow structure of each
transaction. Key inputs to these models are
market spreads, forecasted credit losses, and
default and prepayment rates for each asset
category.
•
Valuation levels of RMBS and CMBS indices
are used as an additional data point for
benchmarking purposes or to price outright
index positions.
Valuation Hierarchy Classification:
•
Level 2 – if value based on observable market
data for comparable instruments
•
Level 3 – if external prices or significant
spread inputs are unobservable, or if the
comparability assessment involves significant
subjectivity
related
to
property
type
differences, cash flows, performance or other
inputs
Corporate Bonds
Valuation Techniques
:
•
Fair
value
is
determined
using
recently
executed
transactions,
market
price
quotations, bond spreads and CDS spreads
obtained from independent external parties,
such as vendors and brokers, adjusted for
any basis difference between cash and
derivative instruments
•
The spread data used are for the same
maturity as the bond. If the spread data do
not reference the issuer, then data that
reference
comparable
issuers
are
used.
When position-specific external price data are
not observable, fair value is determined
based on either benchmarking to comparable
instruments or cash flow models with yield
curves, bond or single-name CDS spreads
and recovery rates as significant inputs.
Valuation Hierarchy Classification:
•
Level 2 – if value based on observable market
data for comparable instruments
•
Level 3 – in instances where prices or
significant spread inputs are unobservable or
if the comparability assessment involves
significant sensitivity
Collateralised Debt Obligations (“CDO”)
Valuation Techniques:
•
The Group holds cash CDOs that typically
reference a tranche of an underlying synthetic
portfolio
of
single
name
CDS
spreads
collateralised by corporate bonds (“credit-
linked notes”) or cash portfolio of asset-
backed
securities/loans
(“asset-backed
CDOs”)
•
Credit correlation, a primary input used to
determine the fair value of credit-linked notes,
is usually unobservable and derived using a
benchmarking technique. Other model inputs
such as credit spreads, including collateral
spreads, and interest rates are typically
observable
•
Asset-backed CDOs are valued based on an
evaluation of the market and model input
parameters
sourced
from
comparable
instruments as indicated by market activity.
Each asset-backed CDO position is evaluated
independently
taking
into
consideration
available
comparable
market
levels,
underlying collateral performance and pricing,
deal structures and liquidity
Valuation Hierarchy Classification:
•
Level 2 – when either comparable market
transactions
are
observable,
or
credit
correlation input is insignificant
•
Level 3 – when either comparable market
transactions are unobservable, or the credit
correlation input is significant
Loans and Lending Commitments
Valuation Techniques:
•
Fair value of corporate loans is determined
using recently executed transactions, market
price quotations (where observable), implied
yields
from
comparable
debt,
market
observable CDS spread levels obtained from
independent external parties adjusted for any
basis difference between cash and derivative
instruments, along with proprietary valuation
models and default recovery analysis where
such
transactions
and
quotations
are
unobservable
•
Fair value of contingent corporate lending
commitments
is
determined
by
using
executed transactions on comparable loans
and the anticipated market price based on
pricing indications from syndicate banks and
customers. The valuation of loans and lending
commitments also takes into account fee
income that is considered an attribute of the
contract
Valuation Hierarchy Classifications:
•
Level 2 – if value based on observable market
data for comparable instruments
•
Level 3 – in instances where significant
spread inputs are unobservable or if the
comparability assessment involves significant
subjectivity
Corporate Equities and Equity Investments
Valuation Techniques:
•
Exchange
traded
equity
securities
are
generally valued based on quoted prices from
the exchange. To the extent these securities
are actively traded, valuation adjustments are
not applied
•
Unlisted equity securities are generally valued
based on an assessment of each security,
considering rounds of financing and third-
party
transactions,
discounted
cash
flow
analyses
and
market-based
information,
including comparable transactions, trading
multiples and changes in market outlook,
among other factors
•
Listed fund units are generally marked to the
exchange-traded price if actively traded or
Net Asset Value (“NAV”) if not. Unlisted fund
units are generally marked to NAV
Valuation Hierarchy Classification
:
•
Level 1 – actively traded exchange-traded
securities and fund units
•
Level 2 – if not actively traded, inputs are
observable, or if undergoing a recent mergers
and acquisitions event or corporate action;
•
Level 3 – if not actively traded, inputs are
observable, or if undergoing an aged mergers
and acquisitions event or corporate action
Derivatives
Exchange-Traded Derivative Contracts
Valuation Techniques:
•
Exchange-Traded derivatives that are actively
traded are valued based on quoted prices
from the exchange.
•
Exchange-Traded derivatives that are not
actively traded are valued using the same
techniques
as
those
applied
to
OTC
derivatives.
Valuation Hierarchy Classification:
•
Level 1 – when actively traded.
•
Level 2 – when not actively traded.
OTC Derivative Contracts
Valuation Techniques:
•
OTC derivative contracts include forward,
swap and option contacts 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 modelled 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 judgement, since model inputs may
be observed from actively quoted markets, as
is the case for generic interest rate swaps,
many equity, commodity and foreign currency
option contracts and certain credit default
swaps. In the case of more established
derivative products, the pricing models used
by the Group are widely accepted by the
financial services industry.
•
More complex OTC derivative products are
typically
less
liquid
and
require
more
judgement in the implementation of the
valuation
technique
since
direct
trading
activity or quotes are unobservable. This
includes
certain
types
of
interest
rate
derivatives with both volatility and correlation
exposure,
equity,
commodity
or
foreign
currency derivatives that are either longer-
dated
or
include
exposure
to
multiple
underlyings and credit derivatives, including
credit default swaps on certain mortgage or
asset-backed securities, basket CDS. 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.
Valuation Hierarchy Classification
:
•
Level 2 – when valued using observable
inputs, or where the unobservable input is not
deemed significant
•
Level 3 – if the unobservable input is deemed
significant
Securities Purchased under Agreements to
Resell and Securities Sold under Agreements
to
Repurchase
and
Cash
Collateral
on
Securities Borrowed and Securities Loaned
and Other Secured Financings and Secured
Borrowings
Valuation Techniques:
•
Fair value is computed using a standard cash
flow discounting methodology
•
The inputs to the valuation include contractual
cash flows and collateral funding spreads,
which are the incremental spread over the
overnight indexed swap (“OIS”) rate for a
specific collateral rate (which refers to the rate
applicable to a specific type of security
pledged as collateral)
Valuation Hierarchy Classification:
•
Level 2 – when the valuation inputs are
observable
•
Level
3
–
in
instances
where
the
unobservable inputs are deemed significant
Prepaid OTC Contracts and Issued Structured
Notes
Valuation Techniques:
•
The Group carries structured notes and
prepaid OTC contracts 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 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
•
Fair value is determined using valuation
models for the derivative and debt portions of
the instruments. These models incorporate
observable inputs referencing identical or
comparable securities, including prices to
which the instruments are linked, interest rate
yield curve, option volatility and currency
rates, and commodity or equity prices
•
Independent, external and traded prices for
the instruments are considered as well as the
impact of the Company’s own credit spreads
which are based on observed secondary
bond market spreads
Valuation Hierarchy Classification:
•
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
b.
Transfers Between Level 1 and Level 2 of
the Fair Value Hierarchy for Financial
Assets and Liabilities Recognised at Fair
Value on a Recurring Basis
During the year, the Group and Company
reclassified approximately $838 million (2021:
$773 million) of European government debt
securities liabilities from Level 1 to Level 2 due to
decrease in market activity. Also, the Group and
Company reclassified approximately $506 million
of
government
debt
securities
assets
and
approximately $759 million of government debt
securities liabilities (31 December 2021: $nil)
from Level 2 to Level 1. These reclassifications
were due to increased market activity in these
instruments.
The
Group
and
Company
reclassified $nil (2021: $935 million) of European
government debt assets from Level 1 to Level 2.
c.
Changes in Level 3 Financial Assets and
Liabilities Recognised at Fair Value on a
Recurring Basis
The following tables present the changes in the
fair value of the Group’s Level 3 financial assets
and financial liabilities for the years ended 31
December 2022 and 31 December 2021. Level 3
instruments may be hedged with instruments
classified in Level 1 and Level 2. The realised
and unrealised gains/(losses) for assets and
liabilities within the Level 3 category presented in
the following tables do not reflect the related
realised
and
unrealised
gains/
(losses)
on
hedging instruments that have been classified by
the Group within the Level 1 and/or Level 2
categories.
There were no differences at 31 December 2022
or 31 December 2021 between Group and
Company in respect of the table below.
Unrealised gains/ (losses) during the year for
assets and liabilities within the Level 3 category
presented in the following tables herein may
include changes in fair value during the period
that were attributable to both observable and
unobservable inputs.
The Morgan Stanley Group operates a number of
intra-group
policies
to
ensure
that,
where
possible,
revenues
and
related
costs
are
matched. Where the trading positions included in
the below table are risk managed using financial
instruments held by other Morgan Stanley Group
undertakings, these policies potentially result in
the recognition of offsetting gains or losses in the
Group.
in $ millions
2022
2021
TRADING FINANCIAL ASSETS:
Government debt securities
Beginning balance
209
266
Total losses recognised in the
consolidated income statement
(1)
(4)
(1)
Purchases
81
143
Sales
(106)
(189)
Net transfers out of Level 3
(2)
(47)
(10)
Ending balance
133
209
Unrealised losses
(3)
(14)
—
Corporate and other debt
Beginning balance
1,190
822
Total losses recognised in the
consolidated income statement
(1)
(160)
(157)
Purchases
696
914
Sales
(715)
(308)
Net transfers in and/or (out) of Level 3
(2)
104
(81)
Ending balance
1,115
1,190
Unrealised losses
(3)
(33)
(41)
Corporate equities
Beginning balance
35
8
Total losses recognised in the
consolidated income statement
(1)
(101)
(7)
Purchases
37
44
Sales
(2)
(9)
Net transfers in and/or (out) of Level 3
(2)
62
(1)
Ending balance
31
35
Unrealised losses
(3)
(12)
(5)
Net derivative contracts
(4)
Beginning balance
(21)
269
Total gains recognised in the
consolidated income statement
(1)
173
221
Purchases
65
303
Issuances
(201)
(626)
Settlements
301
(245)
Net transfers in and/or (out) of Level 3
(2)
(53)
57
Ending balance
264
(21)
Unrealised gains/(losses)
(3)
253
(196)
SECURED FINANCING
Securities purchased under
agreements to resell
Beginning balance
863
778
Purchases
962
863
Sales
(863)
(778)
Ending balance
962
863
in $ millions
2022
2021
LOANS AND ADVANCES
Corporate loans
Beginning balance
—
7
Sales
—
(7)
Ending balance
—
—
INVESTMENT SECURITIES
Corporate equities
Beginning balance
165
151
Total losses recognised in the
consolidated income statement
(1)
(3)
(6)
Purchases
—
24
Sales
(20)
(4)
Net transfers in and/or (out) of Level 3
(2)
—
—
Ending balance
142
165
Unrealised losses
(3)
(3)
(6)
TRADE AND OTHER RECEIVABLES
Prepaid OTC contracts
Beginning balance
172
1,291
Purchases
17
171
Sales
(1)
(241)
Net transfers in and/or (out) of Level 3
(2)
4 (1,049)
Ending balance
192
172
Unrealised gains/(losses)
(3)
—
—
Other
Beginning balance
3
12
Settlements
—
(9)
Ending balance
3
3
TRADING FINANCIAL LIABILITIES
Government debt securities
Beginning balance
—
15
Total losses recognised in the
consolidated income statement
(1)
1
—
Total (gains)/losses recognised in
consolidated statement of
comprehensive income
(1)
—
—
Purchases
(1)
—
Sales
1
—
Net transfers in and/or (out) of Level 3
(2)
1
(15)
Ending balance
2
—
Unrealised losses
(3)
2
—
in $ millions
2022
2021
Corporate and other debt
Beginning balance
6
3
Purchases
(5)
—
Sales
3
3
Net transfers out of Level 3
(2)
(1)
—
Ending balance
3
6
Corporate equities
Beginning balance
31
1
Total losses recognised in the
consolidated income statement
(1)
(78)
(15)
Purchases
(13)
(8)
Sales
44
53
Net transfers in Level 3
(2)
35
—
Ending balance
19
31
Unrealised gains/(losses)
(3)
10
(15)
TRADE AND OTHER PAYABLES
Prepaid OTC contracts
Beginning balance
172
241
Issuances
17
171
Settlements
(1)
(240)
Ending balance
188
172
DEBT AND OTHER BORROWINGS
Issued structured notes
Beginning balance
106
334
Total losses recognised in the
consolidated income statement
(1)
(17)
(4)
Total (losses)/gains recognised in
consolidated statement of
comprehensive income
(1)
(2)
4
Issuances
84
70
Settlements
(15)
(148)
Net transfers out of Level 3
(2)
(79)
(150)
Ending balance
77
106
Unrealised gains/(losses)
(8)
1
(1)
The total gains or losses are recognised in the consolidated
income statement as detailed in the financial instruments
accounting policy (note 3c).
(2)
For financial assets and financial liabilities that were transferred
into or out of Level 3 during the year, gains or (losses) are
presented as if the assets or liabilities had been transferred into
or out of Level 3 as at the beginning of the year.
(3)
Amounts represent unrealised gains or (losses) for the year
ended 31 December 2022 related to assets and liabilities still
outstanding at 31 December 2022. The unrealised gains or
(losses) are recognised in the consolidated income statement or
consolidated statement of comprehensive income as detailed in
the financial instruments accounting policy (note 3c)
(4)
Net derivative contracts represent trading financial liabilities
derivative contracts net of trading financial assets - derivative
contracts.
During the year, there were no material transfers
from Level 3 to Level 2 (2021: $1,049 million)
and no material transfers from Level 2 to Level 3
(2021: $nil).
d.
Valuation of Level 3 Financial Assets and
Liabilities Recognised at Fair Value on a
Recurring Basis
The following disclosures provide information on
the sensitivity of fair value measurements to key
inputs and assumptions.
i.
Quantitative
Information
about
and
Qualitative
Sensitivity
if
Significant
Unobservable Inputs
The following table provides information on the
valuation techniques, significant unobservable
inputs and their ranges and averages for each
material
category
of
assets
and
liabilities
measured at fair value on a recurring basis.
The level of aggregation and breadth of products
cause the range of inputs to be wide and not
evenly distributed across the inventory. Further,
the range of unobservable inputs may differ
across groups in the financial services industry
because of diversity in the types of products
included in each group’s inventory. The following
disclosures also include qualitative information
on the sensitivity of the fair value measurements
to changes in the significant unobservable inputs.
There are no predictable relationships between
multiple
significant
unobservable
inputs
attributable to a given valuation technique. A
single amount is disclosed when there is no
significant difference between the minimum,
maximum and average (weighted average or
similar average/median).
31 December 2022
Fair value
$ millions
Predominant valuation techniques/
Significant unobservable inputs
ASSETS
Trading financial assets:
Government debt securities
133 Comparable pricing
Comparable bond price
39 to 189 pts (82 pts)
Corporate and other debt:
Mortgage and asset-backed securities
269 Comparable pricing
Comparable bond price
44 to 133 pts (91 pts)
Corporate bonds
741 Comparable pricing
Comparable bond price
37 to 132 pts (77 pts)
Loans and lending commitments
92 Comparable pricing
Comparable loan price
20 to 100 pts (73 pts)
Corporate equities
31 Comparable pricing
Comparable equity price
100% (100%)
Investment securities:
Corporate equities
142 Comparable pricing
Comparable equity price
95% to 100% (91.6%)
Discounted Cash Flow
Implied Weighted Average Cost
of Capital
15.3% to 15.3% (15.3%)
Secured financing
Securities purchased under
agreements to resell
962
Discounted cash flows
Funding spread
31bps to 113bps (72bps)
Trade and other receivables:
Prepaid OTC contracts
192 Discounted cash flows
Loss Given Default
54% to 84% (62%/54%)
Range (Average)
(1)
31 December 2022
Fair value
$ millions
Predominant valuation techniques/
Significant unobservable inputs
LIABILITIES
Trading financial liabilities
Net derivatives contracts:
(2)
Interest rate
(74) Option Model
Inflation Volatility
22% to 65% (43%/38%)
Interest rate - Foreign
exchange correlation
54% to 63% (58%/57%)
Interest Rate Curve Correlation
47% to 95% (78%/82%)
Inflation Curve
3.8% to 4% (3.9%/3.9%)
Interest rate Volatility Skew
130% to 169% (142%/128%)
Interest rate - Inflation
correlation
n/m (n/m)
Bond Volatility
9% to 53% (17%/20%)
Credit
126 Credit default swap model
Credit spread
1 bps to 320 bps (112 bps)
Comparable pricing
Comparable bond price
8 to 97 pts (55 pts)
Discounted Cashflow
Funding spread
82 bps to 127 bps (108 bps)
Foreign exchange and gold
(3)
129 Option model
Interest rate - Foreign
exchange correlation
54%-63% (58%/57%)
Interest rate volatility skew
129% to 169% (142%/165%)
Deal execution probability
90%-95% (95%/95%)
Foreign exchange volatility
skew
9.6% to 10.4% (10%/10%)
Currency basis
-2% to 7% (4%/5%)
Equity
96 Option model
Equity volatility
5% to 85% (22%)
Equity volatility skew
-5% to 0% (-1%)
Equity correlation
10% to 99% (77%)
Equity FX correlation
-79% to 65% (-26%)
Debt and other borrowings:
Issued structured notes
77 Option model
Equity volatility
17% to 58% (20%)
Equity volatility skew
-1.2% to -0.7% (-0.7%)
Equity correlation
50% to 93% (60%)
Equity FX correlation
-53% to -16% (-34%)
Trade and other payables:
Prepaid OTC contracts
188 Discounted cash flow
Loss Given Default
54% to 84% (62%/54%)
Range (Average)
(1)
(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, respectively, are provided when more
relevant.
(2)
Net derivative contracts represent trading financial liabilities – derivative contracts net of trading financial assets – derivative contracts
(3)
Includes derivative contracts with multiple risks (i.e. hybrid products)
31 December 2021
Fair value
$ millions
Predominant valuation techniques/
Significant unobservable inputs
ASSETS
Trading financial assets:
Government debt securities
209 Comparable pricing
Comparable bond pricing
100 to 140pts (120pts)
Corporate and other debt:
Mortgage and asset-backed securities
219 Comparable pricing
Comparable bond price
40 to 101pts (75 pts)
Corporate bonds
787 Comparable pricing
Comparable bond price
50 to 162pts (104.31pts)
Loans and lending commitments
177 Comparable pricing
Comparable loan price
18.0 to 100.0pts (81.95pts)
Corporate equities
35 Comparable pricing
Comparable equity price
1pts (1pts)
Investment securities:
Corporate equities
165 Comparable pricing
Comparable equity price
80% to 100% (98%)
Secured financing
Securities purchased under
agreements to resell
863
Consensus data on underlying curves
Funding spread
23bps to 98bps (60bps)
Trade and other receivables:
Prepaid OTC contracts
172 Discounted cash flow
Recovery rate
54% to 84% (62%/54%)
LIABILITIES
Net derivatives contracts:
(2)
Interest rate
358 Option model
Inflation volatility
24% to 65% (44%/40%)
Interest rate-foreign exchange
correlation
53% to 56% (55%/54%)
Interest rate curve correlation
62% to 98% (84%/83%)
Inflation curve
2.1% to 2.2% (2.1%/2.1%)
Interest rate volatility skew
44% to 80% (65%/64%)
Interest rate – inflation
correlation
-80%to-5%(-42%/-48%)
Bond volatility
5% to 32% (14%/11%)
Credit
66 Credit Default Swap Model
Credit spread
2bps to 341bps (96.36bps)
Comparable Pricing
Comparable bond price
8 to 101pts (53 pts)
Funding spread
52.8bps to 79.7bps (64 bps)
Foreign exchange and gold
(3)
11 Option model
Interest rate-foreign exchange
correlation
53% to 56% (55%/54%)
Interest rate volatility skew
44% to 80% (65%/64%)
Deal execution probability
90% to 95% (94%/95%)
Foreign exchange volatility
skew
0.4% to 0.5% (0.4%/0.4%)
Currency basis
0.6% to 7% (0.03%/0.02%)
Range (Average)
(1)
31 December 2021
Fair value
$ millions
Predominant valuation techniques/
Significant unobservable inputs
Equity
(460) Option model
Equity volatility
5% to 62% (19%)
Equity volatility skew
-5% to 0% (-1%)
Equity correlation
5% to 99% (77%)
Equity FX correlation
-80% to 37% (-36%)
Corporate equities
(31) Comparable pricing
Comparable equity price
100% (100%)
Debt and other borrowings:
Issued structured notes
(106) Option model
Equity volatility
17% to 69% (17%)
Equity volatility skew
-1% to 0% (-1%)
Equity correlation
43% to 76% (56%)
Equity FX correlation
-45% to 10% (-24%)
Trade and other payables:
Prepaid OTC contracts
(172) Discounted cash flow
Recovery rate
54% to 84% (62%/54%)
Range (Average)
(1)
(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, respectively, are provided when more
relevant.
(2)
Net derivative contracts represent trading financial liabilities – derivative contracts net of trading financial assets – derivative contracts
(3)
Includes derivative contracts with multiple risks (i.e. hybrid products)
Significant
Unobservable
Inputs
–
Description and Sensitivity
During 2022, there were no significant revisions
made to the descriptions of the significant
unobservable inputs.
An increase/(decrease) to the following inputs
would generally result in a higher/(lower) fair
value:
•
Comparable bond price:
A pricing input used
when prices for the identical instrument are
not available for comparable instruments.
Significant subjectivity may be involved when
fair value is determined using pricing data
available
for
comparable
instruments.
Valuation using comparable instruments can
be done by calculating an implied yield (or
spread over a liquid benchmark) from the
price of a comparable bond or loan, then
adjusting that yield (or spread) to derive a
value for the bond or loan. The adjustment to
yield (or spread) should account for the
relevant differences in the bonds or loans
such as maturity or credit quality. Alternatively,
a
price-to-price
basis
can
be
assumed
between the comparable instrument and the
bond being valued in order to establish the
value of the bond.
•
Comparable equity price:
A price derived from
equity raises, share buybacks and external
bid levels, etc. A discount or premium may be
included in the fair value estimate.
•
Recovery rate: Amount expressed as a
percentage of par that is expected to be
received when a credit event occurs.
An increase/(decrease) to the following inputs
would generally result in a lower/(higher) fair
value:
•
Credit spread:
The credit spread reflects the
additional net yield an investor can earn from
a security with more credit risk relative to one
with less credit risk. The credit spread of a
particular security is often quoted in relation to
the yield on a credit risk-free benchmark
security or reference rate, typically either US
Treasury or LIBOR.
•
Funding
spread:
The
cost
of
borrowing
defined as the incremental spread over the
OIS rate for a specific collateral rate (which
refers to the rate applicable to a specific type
of security pledged as collateral).
An increase/(decrease) to the following inputs
would generally result in an impact to the fair
value, but the magnitude and direction of the
impact would depend on whether the Group 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 movements 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 the 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.
ii. Sensitivity of Fair Values to Changing
Significant Assumptions to Reasonably
Possible Alternatives
As detailed in note 3, the valuation of Level 3
financial instruments requires the application of
critical
accounting
judgement,
involving
estimations and assumptions and it is recognised
that there could be a range of reasonably-
possible alternative values.
The Group has reviewed the unobservable
parameters to identify those which would change
the
fair
value
measurement
significantly
if
replaced by a reasonably possible alternative
assumption.
In
estimating
the
potential
variability,
the
unobservable
parameters
were
varied
individually
using
statistical
techniques
and
historic data. The potential variability estimated is
likely to be greater than the actual uncertainty
relating to the financial instruments, as any
diversification effect has been excluded.
The following table presents the potential impact
of both favourable and unfavourable changes,
both of which would be reflected in the income
statement.
31 December 2022
31 December 2021
in $ millions
Favourable
changes
Unfavourable
changes
Favourable
changes
Unfavourable
changes
Trading financial assets:
Government debt securities
1
(1)
—
—
Corporate and other debt
19
(21)
15
(18)
Corporate equities
7
(10)
2
(8)
Net derivative contracts
(1)(2)
168
(168)
88
(100)
Secured Financing:
Securities purchased under agreements
to sell
1
(1)
1
(1)
Investment securities:
Corporate equities
26
(13)
24
(15)
Trading financial liabilities:
Corporate equities
—
—
9
(2)
Debt and other borrowings:
Issued structured notes
1
(2)
1
(7)
223
(216)
140
(151)
(1)
Net derivative contracts represent trading financial assets – derivative contracts net of trading financial liabilities – derivative contracts.
(2)
CVA and FVA are included in the fair value, but excluded from the effect of reasonably possible alternative assumptions in the table above.
CVA is deemed to be a Level 3 input when the underlying counterparty credit curve is unobservable. FVA is deemed to be Level 3 input in its
entirety given the lack of observability of funding spreads in the principle market.
e.
Financial Instruments Valued using
Unobservable Market Data
The amounts not recognised in the consolidated
income statement relating to the difference
between the fair value at initial recognition (the
transaction price) and the amounts determined at
initial recognition using valuation techniques are
as follows:
$ millions
2022
2021
At 1 January
369
409
New transactions
285
142
Amounts recognised in the consolidated
income statement during the year
(181)
(182)
At 31 December
473
369
The balance above predominately relates to
derivatives.
f.
Assets and Liabilities Measured at Fair
Value on a Non-recurring Basis
Non-recurring fair value measurements of assets
and liabilities are those which are required or
permitted
in
the
consolidated
statement
of
financial position in particular circumstances.
There were no assets or liabilities measured at
fair value on a non-recurring basis during the
MEASURED AT FAIR VALUE
As
at
31
December
2022,
all
financial
instruments not measured at fair value, the
carrying
amount
is
considered
reasonable
approximation of fair value.
As at 31 December
2021, the carrying value for subordinated loan
liabilities was $6,400 million while fair value
based on observable inputs (Level 2) was $6,842
Morgan Stanley maintains various equity-settled
share-based
and
cash-based
deferred
compensation plans for the benefit of employees.
Awards under these plans are generally granted
in January following the performance year.
Equity-settled Share-based Compensation
Plans
Morgan
Stanley
has
granted
RSU
awards
pursuant to several equity-based compensation
plans.
The plans provide for the deferral of a
portion
of
certain
employees’
incentive
compensation, with awards made in the form of
restricted common stock.
Awards under these
plans are subject to vesting over time, generally
six months to seven years, and are generally
contingent upon continued employment and
subject to restrictions on sale, transfer or
assignment until conversion to common stock.
All, or a portion of, an award may be forfeited if
employment is terminated before the end of the
relevant vesting period or cancelled after the
vesting period in certain situations.
Recipients of
equity-based awards may have voting rights, at
Morgan
Stanley’s
discretion,
and
generally
receive dividend equivalents if the award vests,
unless this is prohibited by regulation.
Group:
During
the
year,
Morgan
Stanley
granted
3,314,576 RSUs (2021: 4,184,369 RSUs) to
employees of the Group with a weighted average
fair value per unit of $94.10 (2021: $73.60),
based on the market value of Morgan Stanley
common stock at grant date.
The equity-based
compensation expense recognised in the year is
$242 million (2021: $357 million).
As a result of
the
chargeback
agreement
described
in
accounting policy 3m(i), the total amount of
equity-based compensation expense recognised
within ‘Direct staff costs’ and ‘Management
charges from other Morgan Stanley Group
undertakings
relating
to
staff
costs’
within
‘Operating expense’ was $227 million (2021:
$392 million).
The related liability due to Morgan Stanley at the
end of the year, reported within ‘Accruals and
deferred income’ in the statement of financial
position, is $360 million (2021: $400 million) of
which $162 million (2021: $199 million) is
expected to be settled wholly within one year and
$198 million (2021: $201 million) thereafter.
The unrecognised compensation cost related to
unvested equity-based awards is shown in the
table below:
in $ millions
Unvested awards granted:
To 31
December
2022
In January
2023
Total
Expense expected to
be recognised in:
2023
73
150
223
2024
29
36
65
2025
9
19
28
Thereafter
2
7
9
113
212
325
Amounts
above
do
not
reflect
forfeitures,
cancellations,
accelerations
or
future
adjustments to fair value for certain awards.
Company:
During
the
year,
Morgan
Stanley
granted
3,307,052 RSUs (2021: 4,177,776 RSUs) to
employees of the Company with a weighted
average fair value per unit of $94.10 (2021:
$73.60), based on the market value of Morgan
Stanley common stock at grant date.
The equity-
based compensation expense recognised in the
year is $241 million (2021: $356 million).
The related liability due to Morgan Stanley at the
end of the year, reported within ‘Accruals and
deferred income’ in the statement of financial
position, is $360 million (2021: $398 million) of
which $162 million (2021: $198 million) is
expected to be settled wholly within one year and
$198 million (2021: $200 million) thereafter.
Deferred Cash-based Compensation Plans
Morgan Stanley has granted deferred cash-
based
compensation
awards
to
certain
employees
which
defer
a
portion
of
the
employees’ discretionary compensation.
The
plans generally provide a return based upon the
performance of various referenced investments.
Awards under these plans are generally subject
to a sole vesting condition of service over time,
which normally ranges from one to seven years
from the date of grant.
All, or a portion of an
award
may
be
forfeited
if
employment
is
terminated before the end of the relevant vesting
period or cancelled after the vesting period in
certain situations. The awards are settled in cash
at the end of the relevant vesting period.
Group and Company:
Awards with a value of $1 million (2021: $2
million) were granted to employees of the Group
during the year.
The
deferred
cash-based
compensation
expenses recognised in the year is shown in the
table below:
in $ millions
2022
2021
Deferred cash-based awards
10
32
Return on referenced
investments
(2)
4
8
36
The liability to employees at the end of the year,
which is reported within ‘Accruals and deferred
income’ in the consolidated statement of financial
position, is $45 million (2021: $97 million) of
which $27 million (2021: $61 million) is expected
to be settled wholly within one year and
$18 million (2021: $36 million) thereafter.
As at 31 December 2022, the unrecognised
expense
related
to
deferred
cash-based
compensation awards is $5 million of which $3
million is expected to be recognised in 2023, $1
million
in
2024
and
$1
million
thereafter.
Amounts do not include unrecognised expense
for forfeitures, cancellations, accelerations or
assumptions about future market conditions.
The Group economically hedges the exposure
created
by
certain
of
these
deferred
compensation plans by entering into derivative
transactions with other Morgan Stanley Group
undertakings.
The derivative balance at the end
of the year, recognised within ‘Trading financial
assets’ is $1 million (2021: $1 million). The
related loss
recorded within ‘Net gains from
financial instruments at FVPL’ for the year is $7
million (2021: $1 million profit).
Management Charges from Fellow Morgan
Stanley Undertakings
As described in note 7, the Group and Company
utilise the services of staff who are employed by
other
Morgan
Stanley
Group
undertakings.
Management charges are incurred in respect of
these employee services which include the cost
of equity-settled share-based and deferred cash-
33. POST EMPLOYMENT BENEFITS
Defined Contribution Plans
The Group operates several Morgan Stanley
defined
contribution
plans,
which
require
contributions to be made to funds held in trust,
separate from the assets of the Group.
The defined contribution plans are as follows:
•
MSII Offshore Retirement Benefit Plan IV,
Dubai Section;
•
Morgan Stanley DIFC Workplace Savings
Scheme (Dubai)
•
Morgan Stanley Asia Limited Retirement
Benefit Plan (Taiwan);
•
Morgan Stanley & Co. International plc, Seoul
Branch Defined Contribution Plan; and
•
Morgan Stanley & Co. International plc Zurich
Branch Top-up Plan
The Group pays fixed contributions to the plans,
with no legal or constructive obligation to pay
further contributions.
The defined contribution pension charge in
relation to the above plans recognised within
‘Direct staff costs’ in ‘Operating expense’ in the
consolidated income statement was $3.7 million
for the year (2021: $3.6 million) of which $nil was
accrued at 31 December 2022 (2021: $nil).
Defined Benefit Plans
The Group also operates several Morgan Stanley
defined
benefit
plans,
which
provide
post-
employment benefits that are based on length of
service and salary.
The defined benefits plans are as follows:
•
Morgan
Stanley
Asia
(Taiwan)
Limited
Retirement Scheme;
•
Morgan Stanley Asia (Taiwan) Limited Book
Reserve Plan;
•
Morgan
Stanley
Asia
(Taiwan)
Limited
Grandfather Plan
•
Morgan Stanley & Co. International plc Zurich
Branch Base Plan; and
•
Morgan Stanley & Co. International plc Dubai
Branch End of Service Gratuity
The Group’s cumulative amount of actuarial
gains and losses recognised in the consolidated
statement
of comprehensive income is a $1.9
million gain (2021: $1.1 million loss).
An asset of
$0.5 million and liability of $5.1 million (2021:
$7.8 million liability) is recognised in the Group’s
consolidated statement of financial position in
respect of these plans.
Plans Operated by Fellow Morgan Stanley
Undertakings
In addition to the above, the Group incurs direct
expenses and management charges from fellow
Morgan
Stanley
undertakings
for
post-
employment benefit costs related to the Morgan
Stanley UK Group Pension Plan (‘the Plan’)
operated
by
Morgan
Stanley
UK
Limited
(“MSUKL”). The Plan is a defined contribution
scheme with a closed defined benefit section.
Defined Contribution Section of the Plan
MSUKL pays fixed contributions to the plan, with
no legal or constructive obligation to pay further
contributions.
The
defined
contribution
pension
charge
recognised
within
‘Direct
Staff
costs’
in
‘Operating expense’ in the income statement was
$24.5 million for the year (2021: $23.7 million) of
which $nil was accrued at 31 December 2022
(2021: $nil).
As described in note 7, the Group utilises the
services of staff who are employed by other
Morgan
Stanley
Group
undertakings.
Management charges are incurred in respect of
the services of these employees which include
the cost of the Plan.
Defined Benefit Section of the Plan (“DB
Plan”)
Under
contractual
group
recharging
arrangements, a material proportion of the net
defined benefit cost for the DB Plan as a whole,
whether recognised in the profit for the year or
other comprehensive income, is recharged to the
Group. Information on the DB plan is provided
below.
The DB Plan has been closed to new members
and future accrual since 1996. The DB Plan was
previously open to permanent employees of the
Morgan Stanley Group employed in the UK, and
with the consent of the Trustees, other Morgan
Stanley employees located outside of the UK
who had previously been employed in the UK
and who at some point had been members of the
DB Plan.
The DB Plan provides post-employment benefits
to members on retirement which are dependent
on years of service and salary at the time of
closure of the DB Plan in 1996.
Additionally, the
DB Plan also includes a Guaranteed Minimum
Pension (“GMP”) underpin in respect of certain
defined contribution members who transferred
their benefits from the defined benefit section in
the past.
Under the GMP underpin, if the value
of each member’s investment at retirement is
less than the amount needed to secure the GMP
benefits that accrued under the defined benefit
section, the shortfall must be covered by the DB
Plan.
The DB Plan is administered by the Trustees and
the assets are held in a fund which is legally
separate from MSUKL. The Trustees of the fund
are required by law to act in the interest of the
fund and of all relevant stakeholders in the
scheme.
The Trustees of the scheme are
responsible
for
the
investment
policy
with
regards to the scheme assets.
The DB Plan exposes MSUKL to actuarial risks
such as: investment risk, interest rate risk,
inflation risk, longevity risk, liquidity risk and
credit risk.
As a result of the DB Plan's
investment strategy (outlined on the following
page) the interest rate and inflation risks are
largely hedged for the majority of the defined
benefit liabilities on a funding basis. The GMP
underpin liabilities are volatile because they
represent the difference between a defined
benefit liability and the value of members'
defined contribution assets (which depends on
how
the
individual
invests)
and
are
only
approximately hedged.
As required by the UK regulatory framework, a
full actuarial valuation of the DB Plan is
conducted at least every three years and
updated annually between full triennial valuations
to determine the position of the DB Plan on a
funding
basis.
The
funding
basis
uses
assumptions reflective of the cost of securing the
benefits built up in the DB Plan with an insurance
company and is reviewed each year as part of
the annual funding update.
The most recent full actuarial valuation of the DB
Plan, carried out at 31 December 2021, showed
a surplus of scheme assets over liabilities.
Accordingly, no new schedule of contributions
was agreed and there were no contributions
payable to the DB Plan during 2022 (2021: $nil).
In addition, an actuarial valuation of the DB Plan
is carried out annually on an accounting basis by
a qualified actuary. Under the accounting basis,
the obligations are measured by discounting the
best estimate of future cash flows to be paid out
by the DB Plan using the projected unit credit
method. As accrual of future benefits ceased in
1996, no benefit has been attributed to service
during subsequent reporting periods and the
accumulated benefit obligation is an actuarial
measure of the present value of benefits for
service already rendered.
On an accounting basis, the DB Plan has a
surplus of scheme assets over liabilities.
The following table provides a summary of the
present value of the defined benefit obligation
and fair value of DB Plan assets included in the
statement of financial position of MSUKL:
in $ millions
2022
2021
Present value of the funded
defined benefit obligation
(142)
(315)
Fair value of plan assets
215
418
Plan surplus
73
103
Impact of asset ceiling
(61)
(80)
Net DB Plan Asset
12
23
The surplus recognised in the MSUKL statement
of financial position is limited to the amount of
future economic benefits available to the entity in
the form of reduced contributions.
Of the defined benefit obligation, $134 million
(2021: $304 million) relates to deferred members
and $9 million (2021: $11 million) relates to
retired members.
Upon reaching retirement, up
until 31 December 2018, most retiring members
were settled through the purchase of an annuity
contract in the name of the member, with MSUKL
having no further obligation. Following a High
Court ruling on 26 October 2018 confirmed that
pensions schemes are required to equalise male
and female members’ GMP benefits (“GMP
equalisation”).
The
Trustee
has
temporarily
suspended the practice of individually buying out
members’ benefits until the legal position and
benefit
entitlements
with
respect
to
GMP
equalisation are clearer. Since the end of 2018,
individuals who have reached benefit age have
been retained as members in the DB Plan.
The weighted average duration of the defined
benefit obligation at 31 December 2022 is 22
years (2021: 28 years).
Movement in the Net Defined Benefit Asset
and Impact of Asset Ceiling
The following tables provide a summary of the
present value of the obligation, the fair value of
the DB Plan assets and the impact of the asset
ceiling recognised by MSUKL:
2022
Present value
of obligation
Fair value of
plan assets
Total
Impact of
asset ceiling
Total
in $ millions
At 1 January 2022
(315)
418
103
(80)
23
Past service costs
—
—
—
—
—
Net interest (expense)/income
(5)
7
2
(1)
1
Amounts recognised in the income
statement
(5)
7
2
(1)
1
Remeasurements:
The return on scheme assets (excluding
amounts included in net interest expense)
—
(163)
(163)
—
(163)
Actuarial gain arising from changes in
demographic assumptions
4
—
4
—
4
Actuarial gain arising from changes in
financial assumptions
152
—
152
—
152
Actuarial gain arising from experience
adjustments
(14)
—
(14)
—
(14)
Adjustments for restrictions on the defined
benefit asset
—
—
—
12
12
Amounts recognised in the statement of
comprehensive income
142
(163)
(21)
12
(9)
Foreign exchange rate changes
30
(41)
(11)
8
(3)
Benefit payments
6
(6)
—
—
—
At 31 December 2022
(142)
215
73
(61)
12
2021
Present value
of obligation
Fair value of
plan assets
Total
Impact of
asset ceiling
Total
in $ millions
At 1 January 2021
(354)
453
99
(79)
20
Past service costs
(1)
—
(1)
—
(1)
Net interest (expense)/income
(4)
5
1
(1)
—
Amounts recognised in the income
statement
(5)
5
—
(1)
(1)
Remeasurements:
The return on scheme assets (excluding
amounts included in net interest expense)
—
(28)
(28)
—
(28)
Actuarial gain arising from changes in
demographic assumptions
1
—
1
—
1
Actuarial (loss) arising from changes in
financial assumptions
26
—
26
—
26
Actuarial gain arising from experience
adjustments
6
—
6
—
6
Adjustments for restrictions on the defined
benefit asset
—
—
—
(1)
(1)
Amounts recognised in the statement of
comprehensive income
33
(28)
5
(1)
4
Foreign exchange rate changes
3
(4)
(1)
1
—
Benefit payments
8
(8)
—
—
—
At 31 December 2021
(315)
418
103
(80)
23
A further High Court ruling on 20 November 2020
confirmed that pension schemes are required to
equalise
male
and
female
members’
GMP
benefits in respect of historic statutory transfers
paid out, since 17 May 1990. An additional
liability has been estimated to incorporate the
impact which is treated as a plan amendment.
An estimate of $1 million was recognised as a
past service cost in 2021. This estimate may be
revised as the Trustee works with the plan
actuary and administrator to review historical
data and fully assess the impact of the ruling on
the plan.
Actuarial Assumptions
The
following
table
presents
the
principal
actuarial assumptions used in the valuation of
the DB Plan:
2022
2021
%
%
Pre-retirement discount rate
5.0%
1.8%
Post-retirement discount rate
(RPI)
4.2%
1.3%
Inflation (RPI)
3.3%
3.5%
Revaluation in deferment -
inflation(CPI)
2.7%
2.9%
The
mortality
assumptions
used
give
the
following life expectancy:
Life expectancy at
age 65 for a male
member currently:
Life expectancy at
age 65 for a
female member
currently:
Aged 65
Aged 45
Aged 65
Aged 45
At 31 December
2022
UK
88.1
90.6
89.5
91.5
At 31 December
2021
UK
89.4
90.6
90.9
92.3
The
sensitivities
regarding
the
principal
assumptions used to measure the defined benefit
obligation are as follows:
2022
Assumption
Change in
assumption
Impact on scheme
liabilities
Discount rate
Increase/decrease
by 0.25%
Decrease/increase
by 5.26%/5.59%
Inflation
assumption
Increase/decrease
by 0.25%
Increase/decrease
by 0.83%/0.83%
Life expectancy
Increase/decrease
by 1 year
Increase/decrease
by 3.27%/3.32%
2021
Assumption
Change in
assumption
Impact on scheme
liabilities
Discount rate
Increase/decrease
by 0.25%
Decrease/increase
by 6.5%/ 7.0%
Inflation
assumption
Increase/decrease
by 0.25%
Increase/decrease
by 1.1%/ 1.1%
Life expectancy
Increase/decrease
by 1 year
Increase/decrease
by 4.3%/4.3%
The sensitivity analysis presented above has
been determined based on reasonably possible
changes
of
the
assumptions
occurring
at
31 December 2022 and 31 December 2021,
assuming that all other assumptions are held
constant. The methods and types of assumptions
used in preparing the sensitivity analysis did not
change compared to the prior year.
DB Plan Assets
MSUKL and the Trustees, in consultation with
their independent investment consultants and
actuaries, determine the asset allocation targets
based on their assessment of business and
financial conditions, demographic and actuarial
data, funding characteristics and related risk
factors. Other relevant factors, including industry
practices
and
long-term
historical
and
prospective capital market returns, are also
considered. The overall investment objective is
expected to minimise the volatility of the Plan’s
surplus or deficit through asset liability matching.
The investment strategy is considered to be low
risk.
Specific risks which are managed through the
asset allocation targets include:
•
Interest rate and inflation risk
– Plan liabilities
will change in response to changes in interest
rates and inflation. The investment strategy is
to hedge this risk as far as possible;
•
Asset volatility
– investment in asset classes
such as equities gives rise to volatility in the
value of the assets. The investment strategy
is to invest in asset classes which closely
match the Plan’s liabilities;
•
Credit risk
– any default or downgrade in
instruments such as corporate bonds and
money market instruments may result in
losses. The investment strategy is to partially
mitigate this risk by investment in a range of
different credit instruments via pooled funds;
•
Liquidity risk
– the liquidity of investments
may change over time which may have an
impact on the expected transaction costs. The
Trustees and MSUKL have reviewed the likely
cash requirements of the Plan and are
satisfied that the investment arrangements
provide sufficient liquidity;
•
Longevity risk
– the longevity experience may
differ from expectations and expectations may
change over time. The purchase of annuities
for pensioners mitigates a substantial portion
of this risk.
In line with the above investment objectives, the
DB Plan holds investments in a range of pooled
investment
vehicles
of
varying
maturities
intended to broadly reflect the expected liability
profile of the Plan. The major categories and fair
values of scheme assets at the end of the
reporting period are set out below.
Fair value of Plan assets
2022
2021
in $
millions
Quoted
in an
active
market
Other
Total
Quoted
in an
active
market
Other
Total
Cash and
cash
equivalents
—
4
4
—
53
53
Corporate
bonds
40
—
40
103
—
103
Government
bonds
171
—
171
262
—
262
211
4 215
365
53 418
MSUKL and the Trustees conducted a full asset-
liability review for the DB plan during 2022 with
underlying investments updated in December
2022.
Overall
investment
strategies
remain
unchanged with the primary objective being to
invest the DB Plan’s assets to minimise the
volatility of the DB Plan’s net surplus or deficit.
The trustee also removed all exposure to swaps
within the plan’s hedging portfolio. The asset-
liability review occurs every three years with the
next scheduled review due to take place in 2025.
These studies are used to assist the Trustees
and the Company in determining the optimal
long-term asset allocation with regard to the
structure of liabilities within the scheme.
The main strategic choices formulated in the
actuarial and technical policy documents of the
scheme are:
a)
Interest rate sensitivity impacting the actuarial
value of the defined benefit obligation should
be reduced by the use of debt instruments
such as gilts
b) In
respect
of
GMP
underpin
liabilities,
investment in long-dated corporate bonds to
approximately hedge annuity prices, provide a
degree of liquidity and generate modest
degree of excess investment return.
Parent and Subsidiary Relationships
Parent and ultimate controlling entity
For information on the Group’s parent and
ultimate controlling entity, refer to note 1.
Key management personnel are defined as those
persons having authority and responsibility for
planning, directing and controlling the activities of
the Group.
The
Morgan
Stanley
Group’s
corporate
governance framework gives consideration to
legal, geographical and business lines through a
combination of boards of directors, and regional
and
global
management
committees.
Accordingly, in addition to the Directors of the
Company, key management personnel of the
Group is considered to include: the boards of
Directors of certain parent companies, including
that of Morgan Stanley, certain members of key
Morgan Stanley Group management committees,
those designated as senior managers under the
UK’s
Senior
Manager
regime
and
certain
executive officers of Morgan Stanley.
The boards of the Group’s parent companies, the
management committees and the executive
officers cover the full range of the Morgan
Stanley Group’s business activities. Only those
members with responsibility for the Institutional
Securities
business,
being
the
reportable
business segment of the Group, are considered
to be key management personnel of the Group.
The aggregate compensation below represents
the proportion of compensation paid to these key
management personnel, including the Directors
of the Company, in respect of their services to
the Group.
Key management personnel compensation in
respect of their services rendered to the Group
comprised the following:
in $ millions
2022
2021
Short-term employee benefits
79
85
Share-based payments
46
115
Other long-term employee
benefits
—
5
125
205
The share-based payment costs disclosed above
reflect the amortisation of equity-based awards
granted to key management personnel and are
therefore not directly aligned with other staff
costs in the current year.
Key management personnel compensation is
borne directly by the Group as well as other
Morgan Stanley Group undertakings in the
current year. Management recharges in respect
of key management personnel compensation
borne
by
other
Morgan
Stanley
Group
undertakings
are
included
in
‘Management
charges from other Morgan Stanley Group
undertakings
relating
to
staff
costs
within
‘Operating expense’, as disclosed in note 7.
Directors' Remuneration
in $ millions
2022
2021
Total remuneration of all
Directors:
Aggregate remuneration
18
16
Long term incentive schemes
—
1
18
17
Disclosures in respect of the
highest paid Director:
Aggregate remuneration
5
7
Long term incentive schemes
—
1
5
8
Directors’ remuneration has been calculated as
the sum of cash, bonuses and benefits in kind.
All Directors who are employees of the Morgan
Stanley Group are eligible for shares of the
parent company, Morgan Stanley, awarded under
the Morgan Stanley Group’s equity-based long
term incentive schemes. In accordance with
Schedule 5 paragraph 1(3)(a) of The Large and
Medium-sized Companies and Groups (Accounts
and Reports) Regulations 2008, the above
disclosures do not include the value of shares
awarded.
During
the
year,
eight
Directors
received restricted stock unit awards in respect
of qualifying services (2021: seven).
The value of assets (other than shares) awarded
under other long term incentive schemes has
been included in the above disclosures when the
awards vest, which is generally within three
years from the date of the award.
There are two Directors to whom retirement
benefits are accruing under a non-UK defined
benefits scheme (2021: two). In addition, one
Director
has
benefits
accruing
under
the
Alternative Retirement Plan, a defined benefit
scheme, operated by MSUKL (2021: one).
The Morgan Stanley Group operates a defined
contribution
pension
scheme,
the
Morgan
Stanley UK Group Pension Plan. There are eight
Directors
to
whom
retirement
benefits
are
accruing under this scheme (2021: six). One
Director has benefits accruing under a non-UK
defined contribution scheme (2021: one).
The Group has not provided any loans or other
credit advances to its Directors during the year
Transactions with Related Parties
The Morgan Stanley Group conducts business
for clients globally through a combination of both
functional
and
legal
entity
organisational
structures. Accordingly, the Group is closely
integrated with the operations of the Morgan
Stanley Group and enters into transactions with
other Morgan Stanley Group undertakings on an
arm’s length basis for the purposes of utilising
financing, trading and risk management, and
infrastructure services. The nature of these
relationships along with information about the
transactions and outstanding balances is given
below. The Group has not recognised any
expense
and
has
made
no
provision
for
impairment relating to the amount of outstanding
balances from related parties (2021: $nil).
Cash
The Group places cash with other Morgan
Stanley
Group
undertakings.
All
such
transactions are entered into on an arm’s length
basis.
2022
2021
in $ millions
Interest
Balance
Interest
Balance
Amounts due from
other Morgan
Stanley Group
undertakings
—
1,103
2
100
Funding
The Group receives funding from and provides
funding
to
other
Morgan
Stanley
Group
undertakings in the following forms:
General Funding
General funding is undated, unsecured, floating-
rate lending, other than certain funding which is
dated on a rolling 60, 190 or 395 day term.
Funding may be received or provided for specific
transaction related funding requirements, or for
general operational purposes. The interest rates
are established by the Morgan Stanley Group
Treasury function for all entities within the
Morgan Stanley Group and approximate the
market rate of interest that the Morgan Stanley
Group incurs in funding its business.
Details of the outstanding balances on these
funding arrangements and the related interest
income
or
expense
recognised
in
the
consolidated income statement during the year
are shown in the table below:
2022
2021
in $ millions
Interest
Balance
Interest
Balance
Undated
Amounts due from
the Group’s direct
and indirect parent
undertakings
—
15
—
156
Amounts due from
other Morgan
Stanley Group
undertakings
1
126
1
155
1
141
1
311
Rolling 395 day
term
Amounts due from
the Group’s direct
and indirect parent
undertakings
1
—
1
32
Amounts due from
other Morgan
Stanley Group
undertakings
1
62
—
38
2
62
1
70
2022
2021
in $ millions
Interest
Balance
Interest
Balance
Undated
Amounts due to the
Group’s direct and
indirect parent
undertakings
1
383
—
410
Amounts due to
other Morgan
Stanley Group
undertakings
8
613
10
537
9
996
10
947
40 day termed
Amounts due to
other Morgan
Stanley Group
undertakings
—
—
4
303
60 day termed
Amounts due to the
Group’s direct and
indirect parent
undertakings
210
3,264
39
1,431
190 day termed
Amounts due to the
Group’s direct and
indirect parent
undertakings
17
1
76
—
Rolling 395 day
term
Amounts due to the
Group’s direct and
indirect parent
undertakings
567 17,119
347 28,938
Amounts due to
other Morgan
Stanley Group
undertakings
—
227
7
405
567 17,346
354 29,343
Subordinated Loans
The Group received a subordinated loan and a
senior subordinated loan from another Morgan
Stanley Group undertaking. Details of the terms
of these loans, including the contractual maturity
and the interest rate are shown in note 17.
Trading and Risk Management
In the course of funding its business, the Group
enters into collateralised financing transactions
with other Morgan Stanley Group undertakings.
All such transactions are entered into on an
arm’s length basis.
Details of the outstanding on such transactions
and
the
related
interest
income/expense
recognised in the consolidated income statement
during the year are shown in the table below:
2022
2021
in $ millions
Interest
Balance
Interest
Balance
Financial assets measured at fair value
Amounts due to the
Group’s direct and
indirect parent
undertakings
1
1,300
—
285
Amounts due from
other Morgan Stanley
Group undertakings
708 66,587
(212) 49,016
709 67,887
(212) 49,301
Financial assets measured at amortised cost
Amounts due to other
Morgan Stanley
Group undertakings
84
4,848
(28)
7,112
Financial liabilities measured at fair value
Amounts due to the
Group’s direct and
indirect parent
undertakings
23
1,581
1
—
Amounts due to other
Morgan Stanley
Group undertakings
309 28,117
(112) 28,532
332 29,698
(111) 28,532
The Group enters into purchases and sales of
securities and derivative transactions with other
Morgan Stanley Group undertakings to facilitate
the provision of financial services to clients on a
global basis and to manage the market risks
associated with such business. The Group also
enters into derivative transactions with other
Morgan Stanley Group undertakings to manage
the market risks associated with certain of its
compensation plans. All such transactions are
entered into on an arm’s length basis.
The total
amounts receivable and payable from such
transactions not yet settled and the fair value of
such derivatives contracts outstanding at the
year end were as follows:
in $ millions
2022
2021
Amounts due from the Group’s direct
and indirect parent undertakings on
securities and derivative transactions
1,981
812
Amounts due from other Morgan Stanley
Group undertakings on securities and
derivative transactions
116,725
125,582
118,706
126,394
Amounts due to the Group’s direct and
indirect parent undertakings on
securities and derivative transactions
1,636
731
Amounts due to other Morgan Stanley
Group undertakings on securities and
derivative transactions
120,534
124,463
122,170
125,194
The Group has received collateral of $996 million
(2021: $11 million) from the Group’s direct and
indirect parent undertaking and $8,817 million
(2021: $6,862 million) from other Morgan Stanley
Group undertakings. The Group has pledged
collateral of $nil (2021: $446 million) to the
Group’s direct and indirect parent undertakings
and $30,736 million (2021: $33,464 million) to
other Morgan Stanley Group undertakings. The
Group has received and pledged collateral to
mitigate credit risk on exposures arising under
derivatives contracts between the Group and
other Morgan Stanley Group undertakings.
In addition, the management and execution of
business strategies on a global basis results in
many Morgan Stanley transactions impacting a
number of Morgan Stanley Group entities. The
Morgan Stanley Group has Global Transfer
Pricing Policies in place among the Ultimate
Parent and its consolidated subsidiaries to
ensure arm’s length pricing. These policies are
consistent with 2017 OECD transfer pricing
guidelines for multinational enterprises and tax
administrations. The Firm has also engaged in
negotiations of Advanced Pricing Agreements
with selected tax authorities in respect of its key
transfer pricing methodologies. Negotiations may
result in changes to methodologies or inputs that
could have an impact on the Group’s revenues in
the future.
For the year ended 31 December 2022, a net
amount of $1,339 million was transferred to other
Morgan Stanley Group undertakings relating to
such
revenue
transfer
pricing
policies
and
recognised in the consolidated income statement
arising from such policies (2021: net transfer to
other Morgan Stanley Group undertakings of
$921 million).
Infrastructure Services
The Group receives and incurs management
charges to and from other Morgan Stanley Group
undertakings for infrastructure services, including
the
provision
of
staff
and
office
facilities.
Management recharges received and incurred
during the year are as follows:
2022
2021
in $ millions
Staff
costs
Other
services
Staff
costs
Other
services
Amounts recharged
from the Group’s
direct and indirect
parent undertakings
6
—
11
—
Amounts recharged
from other Morgan
Stanley Group
undertakings
(1)
525
1,523
613
1,396
531
1,523
624
1,396
(1)
Amounts related to Other services include expenses reported as
'Commission and other similar arrangements' of $245 million
Table of contents
MORGAN STANLEY & CO. INTERNATIONAL plc
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2022
139
DocuSign Envelope ID: FEE48148-B0EF-411E-B1D1-5D218C6A2759
List of subsidiaries, including indirect subsidiaries, as at 31 December 2022 and 31 December 2021:
Name of Company
2022
2021
Nature of Business
Morgan Stanley Taiwan Limited
14th & 22nd Floors, Taipei Metro, 207
Tun Hwa South Road, Sec. 2, Taipei,
106, Taiwan
100%
100%
Financial Services
Morgan Stanley Strategic Investments
Limited
100%
100%
Financial Services
Morgan Stanley Turnberry Limited
N/A
(4)
100%
Holding company
Morgan Stanley Mallard Investments
Limited
N/A
(4)
100%
Holding company
Morgan Stanley Montgomerie
Investments Limited
N/A
(4)
100%
Holding company
Morgan Stanley Northcote
Investments Limited (In Liquidation 30
December 2020)
25 Farringdon Street, London EC4A
4AB, United Kingdom
N/A
(5)
100%
Holding company
Morgan Stanley Silvermere Limited
(In Liquidation 30 December 2020)
25 Farringdon Street, London EC4A
4AB, United Kingdom
N/A
(5)
100%
Holding company
Morgan Stanley Humboldt
Investments Limited
100%
100%
Financial Services
Morgan Stanley Rivelino Investments
Limited
N/A
(5)
100%
Holding company
Morgan Stanley Havel GmbH
Grosse Gallusstrasse 18, 60312,
Frankfurt am Main, Germany
100%
100%
Holding company
Morgan Stanley Langtree Investments
B.V.
N/A
(4)
100%
Financial Services
Morgan Stanley Equity Investments
(UK) Limited
Maples Corporate Services Limited,
PO Box 309, Ugland House, Grand
Cayman, KY1-1104, Cayman Islands
100%
100%
Financial Services
Clearcreek, S.L.U.
Travessera de Gracia, No. 11, 5th
floor, 08021, Barcelona, Spain
N/A
(6)
100%
Financial Services
Morgan Stanley Millbrae Investments
B.V. (3)
N/A
(4)
100%
Financial Services
Morgan Stanley Derivative Products
(Netherlands) B.V.
Luna Arena, Herikerbergweg 238,
1101 CM, Amsterdam , Netherlands
100%
100%
Financial Services
Morgan Stanley Longcross Limited
100%
100%
Holding company
Morgan Stanley Derivative Products
Spain S.L.
Serrano 55, 28006, Madrid, Spain
100%
100%
Financial Services
Morgan Stanley Equity Investments
Unlimited Company
Custom House, Plaza Block 6, ,
International Financial Services
Centre, Dublin, DUBLIN 1, Ireland
100%
100%
Holding company
Morgan Stanley Langton Limited
100%
100%
Holding company
Morgan Stanley Equity Finance
(Malta) Limited
SmartCity Malta, SCM 01 TMF Group
(Malta) 401, Ricasoli, Kalkara SCM
1001, Malta
100%
100%
Financial Services
Morgan Stanley Equity Derivative
Services (Luxembourg) S.a r.l
Citco Luxembourg, 20, rue de la
Poste, L-2346, Luxembourg
N/A
(4)
100%
Financial Services
Morgan Stanley Equity Financing
Limited (In Liquidation 30 December
2020)
25 Farringdon Street, London EC4A
4AB, United Kingdom
N/A
(5)
100%
Financial Services
Drake II Investments Limited
Maples Corporate Services Limited,
PO Box 309, Ugland House, Grand
Cayman, KY1-1104, Cayman Islands
100%
100%
Financial Services
Morgan Stanley Grund S.a.r.L
46A, Avenue J.F. Kennedy, L-1855,
Luxembourg
100%
100%
Financial Services
Morgan Stanley Corporate Holdings
Unlimited Company
Custom House, Plaza Block 6,
International Financial Services
Centre, Dublin, DUBLIN 1, Ireland
100%
100%
Holding company
Morgan Stanley Heythorp
Investments Unlimited Company
Custom House, Plaza Block 6,
International Financial Services
Centre, Dublin, DUBLIN 1, Ireland
100%
100%
Holding company
Proportion of shares
held by the Group
(1)(3)
Address of undertaking’s registered
office/ principal place of business
(2)
Table of contents
MORGAN STANLEY & CO. INTERNATIONAL plc
APPENDIX TO THE FINANCIAL STATEMENTS
Year ended 31 December 2022
140
DocuSign Envelope ID: FEE48148-B0EF-411E-B1D1-5D218C6A2759
Name of Company
2022
2021
Nature of Business
Morgan Stanley Equity Holding
(Netherlands) B.V.
Luna Arena, Herikerbergweg 238,
1101 CM, Amsterdam, Netherlands
100%
100%
Financial Services
Morstan Nominees Limited
25 Cabot Square, Canary Wharf,
London, E14 4QA, United Kingdom
100%
100%
Nominee company
Global Equity High Yield Fund B.V.
Coolsingel 63, 7th Floor (Right), 3012
AB, Rotterdam, Netherlands
100%
100%
Financial Services
Morgan Stanley Client Securities
Nominees Limited
25 Cabot Square, Canary Wharf,
London, E14 4QA, United Kingdom
100%
100%
Nominee company
Morgan Stanley Euro Financing
Unlimited Company
Custom House, Plaza Block 6,
International Financial Services
Centre, Dublin, DUBLIN 1, Ireland
100%
100%
Holding company
Proportion of shares
held by the Group
(1)(3)
Address of undertaking’s registered
office/ principal place of business
(2)
(1)
The proportion of voting rights held by the Group is the same as the proportion of shares held by the Group unless otherwise stated.
(2)
All entities have a registered address of 20 Bank Street, Canary Wharf, London, E14 4AD, United Kingdom, unless otherwise stated.
(3)
All shares held in each Company are ordinary shares with the exception of Morgan Stanley Millbrae Investments B.V. where ordinary and
preference shares were held.
(4)
During 2022, Morgan Stanley Turnberry Limited, Morgan Stanley Mallard Investments Limited, Morgan Stanley Montgomerie Investments
Limited, Morgan Stanley Langtree Investments B.V., Morgan Stanley Millbrae Investments B.V. and Morgan Stanley Equity Derivative
Services (Luxembourg) S.a r.l were transferred to Morgan Stanley International Holdings Inc.
(5)
During 2022, Morgan Stanley Rivelino Investments Limited, Morgan Stanley Northcote Investments Limited, Morgan Stanley Silvermere
Limited and Morgan Stanley Equity Financing Limited were dissolved.
(6)
During 2022, Clearcreek, S.L.U. was sold.
Table of contents
MORGAN STANLEY & CO. INTERNATIONAL plc
APPENDIX TO THE FINANCIAL STATEMENTS
Year ended 31 December 2022
141
DocuSign Envelope ID: FEE48148-B0EF-411E-B1D1-5D218C6A2759