# MORGAN STANLEY SMITH BARNEY LLC X-17A-5 (2023-02-24) — Broker-dealer annual report - Company: MORGAN STANLEY SMITH BARNEY LLC - Form: X-17A-5 - Filed: 2023-02-24 - Accession: 0001193125-23-048892 - CIK: 1457496 - File #: 8-68191 - Website: morganstanley.com Original filing: https://www.sec.gov/Archives/edgar/data/1457496/000119312523048892/d444563dfull.pdf --- {0}------------------------------------------------ ### MORGAN STANLEY SMITH BARNEY LLC (SEC I.D. No. 8-68191) ### CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF DECEMBER 31, 2022 AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM \*\*\*\*\*\*\*\*\*\* Filed Pursuant to Rule 17a-5(e)(3) under the Securities Exchange Act of 1934 and Regulation 1.10(g) under the Commodity Exchange Act as a Public Document. {1}------------------------------------------------ **Deloitte & Touche LLP** 30 Rockefeller Plaza New York, NY 10112-0015 USA Tel: +1 212 492 4000 Fax: +1 212 489 1687 www.deloitte.com # **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM** To the Board of Directors and Member of Morgan Stanley Smith Barney LLC ### **Opinion on the Financial Statement** We have audited the accompanying consolidated statement of financial condition of Morgan Stanley Smith Barney LLC and subsidiaries (the "Company") as of December 31, 2022, and the related notes (collectively referred to as the "financial statement"). In our opinion, the financial statement presents fairly, in all material respects, the financial position of the Company as of December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. ### **Basis for Opinion** The financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statement, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statement. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement. We believe our audit of the financial statement provides a reasonable basis for our opinion. ### **Emphasis of Matter** As discussed in Note 1 to the financial statement, on February 1, 2023, FINRA approved the transfer of E\*TRADE Securities LLC's ("ETS") customer accounts, assets, and liabilities to the Company (the "Transfer"). ETS is an indirect wholly owned subsidiary of Morgan Stanley. Subsequently, as of February 24, 2023, the Company's Board of Directors approved the Transfer and subsequent merger of ETS with and into the Company, which is scheduled to be completed on or about January 1, 2024. February 24, 2023 We have served as the Company's auditor since 2009. {2}------------------------------------------------ ## MORGAN STANLEY SMITH BARNEY LLC CONSOLIDATED STATEMENT OF FINANCIAL CONDITION As of December 31, 2022 (In millions of dollars) | ASSETS | | | |-----------------------------------------------------------------------------------------------------------------|------|--------| | Cash | ക്ക | 1,098 | | Cash deposited with clearing organizations or segregated under federal and
other regulations or requirements | | 677 | | Financial instruments owned, at fair value | | 90 | | Securities purchased under agreements to resell | | 6,997 | | Securities borrowed | | 317 | | Receivables: | | | | Customers | | 10,715 | | Brokers, dealers and clearing organizations | | 65 | | Fees, interest and other | | 864 | | Affiliates | | 35 | | Loans | | 8,910 | | Goodwill | | 4,609 | | Intangible assets (net of accumulated amortization of \$3,353) | | 596 | | Other assets | | 1,033 | | Total assets | ಲ್ಲಿ | 36,006 | | LIABILITIES AND MEMBER'S EQUITY | | | | Financial instruments sold, not yet purchased, at fair value | ക്ക | 18 | | Securities loaned | | 1,611 | | Other secured financings, at fair value | | 60 | | Payables: | | | | Customers | | 7,192 | | Brokers, dealers and clearing organizations | | 347 | | Total liabilities | 17.018 | |------------------------------------------|--------| | Borrowings (includes \$11 at fair value) | 315 | | Other liabilities and accrued expenses | 6.696 | | Affiliates | 520 | | Interest and dividends | 259 | ### Commitments and contingent liabilities (See Note 13) | Subordinated liabilities | 8.000 | |---------------------------------------|--------| | | | | Member's equity | 10,988 | | Total liabilities and member's equity | 36.006 | See Notes to Consolidated Statement of Financial Condition. {3}------------------------------------------------ # 1. Introduction and Basis of Presentation ### The Company MSSB, together with its wholly owned subsidiaries (the "Company"), provides a wide variety of financial products and services to a large and diversified group of clients and customers including financial institutions and individuals. The Company offers financial advisor-led brokerage and investment advisory services; securities-based lending; self-directed brokerage services covering various investment alternatives; financial and wealth planning services; workplace services including stock plan administration; annuity and insurance products; cash management; and retirement plan services through a network of approximately sixteen thousand financial advisors in the U.S. The Company also performs sales and trading activities, primarily on an agency basis, in the equity and fixed income businesses and new issue distribution of fixed income and equity products. See the "Glossary of Common Terms and Acronyms" for the definition of certain terms and acronyms used throughout the notes to the consolidated statement of financial condition. MSSB is registered with the SEC as a wealth management broker-dealer and an investment adviser. The Company is also registered as an introducing broker with the CFTC and clears futures transactions through an affiliate, MS&Co. MSSB is also a member of FINRA, SIPC and various securities exchanges. MSSB is a wholly owned subsidiary of MSDHI (the "Parent") which is an indirect subsidiary of Morgan Stanley (the "Ultimate Parent"). ## Basis of Financial Information The consolidated statement of financial condition is prepared in accordance with U.S. GAAP, which requires the Company to make estimates and assumptions regarding the valuations of certain financial instruments, the valuation of goodwill and intangible assets, the outcome of legal and tax matters, deferred tax assets and other matters that affect its consolidated statement of financial condition and related disclosures. The Company believes that the estimates utilized in the preparation of its consolidated statement of financial condition are prudent and reasonable. Actual results could differ materially from these estimates The Company has evaluated subsequent events for adjustment to or disclosure in the consolidated statement of financial condition through the date of this report and the Company has not identified any recordable or disclosable events, not otherwise reported in the consolidated statement of financial condition or the notes thereto except for the below. On January 23, 2023, a \$9B Loan to Ultimate Parent and \$8B Subordinated Liabilities with Parent were settled. On February 1, 2023, FINRA approved the transfer of E\*TRADE Securities LLC's ("ETS") customer accounts, assets, and liabilities to the Company (the "Transfer"). ETS is an indirect wholly owned subsidiary of the Ultimate Parent. Subsequently, as of February 24, 2023, the Company's Board of Directors approved the Transfer and subsequent merger of ETS with and into the Company, which is scheduled to be completed on or about January 1, 2024. ### Consolidation The consolidated statement of financial condition include the accounts of MSSB and its wholly owned licensed insurance subsidiaries in which MSSB has a controlling financial interest. At December 31, 2022, the Company's consolidated subsidiaries reported \$10 of assets, \$6 of liabilities and \$4 of equity on a stand-alone basis. All material intercompany balances with its subsidiaries have been eliminated in consolidation. # 2. Significant Accounting Policies ### Fair Value of Financial Instruments Instruments within Financial instruments owned and Financial instruments sold, not yet purchased, are measured at fair value, either as required or allowed by accounting guidance. These financial instruments represent the Company's trading positions to facilitate customer transactions and include both cash and derivative products. The fair value of OTC financial instruments, including derivative contracts related to financial instruments, is presented in the accompanying consolidated statement of financial condition on a net-by-counterparty basis, when appropriate. Additionally, the Company nets the fair value of cash collateral paid or received against the fair value amounts recognized for net derivative positions executed with the same counterparty under the same master netting agreement. ### Fair Value Option The Company has elected the fair value option to measure other secured financings. Please see Note 4 for additional information. ### Fair Value Measurement – Definition and Hierarchy Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date. {4}------------------------------------------------ Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, assumptions are set to reflect those that the Company believes market participants would use in pricing the asset or liability at the measurement date. Where the Company manages a group of financial assets, financial liabilities, and nonfinancial items accounted for as derivatives on the basis of its net exposure to either market risk or credit risk, the Company measures the fair value of that group of financial instruments consistently with how market participants would price the net risk exposure at the measurement date. In determining fair value, the Company uses various valuation approaches and establishes a hierarchy for inputs used in measuring fair value that requires the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability that were developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect assumptions the Company believes other market participants would use in pricing the asset or liability that are developed based on the best information available in the circumstances. The fair value hierarchy is broken down into three levels based on the observability of inputs as follows, with Level 1 being the highest and Level 3 being the lowest: Level 1. Valuations based on quoted prices in active markets that the Company 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 judgment. Level 2. Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 3. Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The availability of observable inputs can vary from product to product and is affected by a wide variety of factors, including the type of product, whether the product is new and not yet established in the marketplace, the liquidity of markets and other characteristics particular to the product. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3 of the fair value hierarchy. The Company considers prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3 of the fair value hierarchy. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the total fair value amount is disclosed in the level appropriate for the lowest level input that is significant to the total fair value of the asset or liability. #### Valuation Techniques 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 Company carries positions at the point within the bid-ask range that meets its best estimate of fair value. For offsetting positions in the same financial instrument, the same price within the bid-ask spread is used to measure both the long and short positions. Fair value for 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 Company, option volatility and currency rates. See Note 4 for a description of valuation techniques applied to the major categories of financial instruments measured at fair value #### Offsetting of Derivative Instruments In connection with its derivative activities, the Company generally enters into master netting agreements and collateral agreements with its counterparties. These agreements provide the Company with the right, in the event of a default by the counterparty, to net a counterparty's rights and obligations under the agreement and to liquidate and set off cash collateral against any net amount owed by the counterparty. Derivatives with enforceable master netting agreements are reported net of cash collateral received and posted. For information related to offsetting of derivatives, see Note 5. #### Income Taxes Deferred tax assets and liabilities are recorded based upon the temporary differences between the financial statement and income tax bases of assets and liabilities using currently enacted tax rates in effect for the year in which the differences are expected to reverse. {5}------------------------------------------------ The Company recognizes net deferred tax assets to the extent that it believes these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and results of recent operations. When performing the assessment, the Company considers all types of deferred tax assets in combination with each other, regardless of the origin of the underlying temporary difference. If a deferred tax asset is determined to be unrealizable, a valuation allowance is established. If the Company subsequently determines that it would be able to realize deferred tax assets in excess of their net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. Uncertain tax positions are recorded on the basis of a two-step process whereby (i) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position, and (ii) for those tax positions that meet this threshold, the Company recognizes the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement with the related tax authority. ### Cash and Cash Deposited with Clearing Organizations or Segregated Under Federal and Other Regulations or Requirements Cash represents funds deposited with financial institutions. Cash deposited with clearing organizations or segregated under federal and other regulations or requirements ("restricted cash") includes cash segregated in compliance with federal and other regulations, and initial margin deposited with clearing organizations.At December 31, 2022, total cash and restricted cash of \$1,775 consists of \$1,098 in cash and \$677 in restricted cash. ### Contracts with Customers Receivables from contracts with customers are are primarily recognized as Fees, interest and other receivable balances in the consolidated statement of financial condition when the underlying performance obligations have been satisfied and the Company has the right per the contract to bill the customer. Contract assets are recognized in Other assets when the Company has satisfied its performance obligations but payment is conditional and Other liabilities and accrued expenses when the Company has collected payment from a customer based on the terms of the contract, but the underlying performance obligations are not yet satisfied. #### Collateralized Financings Securities borrowed, Securities purchased under agreements to resell ("reverse repurchase agreements"), Securities loaned, Securities sold under agreements to repurchase ("repurchase agreements") and other secured financings are treated as collateralized financings. Reverse repurchase agreements and repurchase agreements are carried in the consolidated statement of financial condition at the amounts of cash paid or received, plus accrued interest. Where appropriate, repurchase agreements and reverse repurchase agreements with the same counterparty are reported on a net basis. Securities borrowed and Securities loaned are recorded at the amount of cash collateral advanced or received The Company manages credit exposure arising from such transactions by, in appropriate circumstances, entering into master netting agreements and collateral agreements with its counterparties. These agreements provide the Company with the right to net a counterparty's rights and obligations under the agreement and to liquidate and set-off collateral held by the Company against the net amount owed by the counterparty. The Company's policy is generally to take possession of securities purchased or borrowed in connection with reverse repurchase agreements and securities borrowed transactions, respectively, and to receive cash and/or securities delivered under repurchase agreements or securities loaned transactions (with rights of rehypothecation). The Company executes purchases and sales of investment securities on behalf of its customers. Customers may elect to reinvest dividends by purchasing shares through dividend reinvestment programs (DRIPs). These transactions may result in fractional shares of equity securities held by customers. Fractional shares held by customers do not meet the criteria for derecognition under ASC 860, Transfers and Servicing, and are accounted for as a secured borrowing (repurchase obligation) with the underlying financial assets pledged as collateral. Fractional shares are presented as financial instruments owned (investments in fractional shares held by customers) with a corresponding repurchase obligation recorded in other secured financings (for investments held by customers) in the statement of financial condition. For information related to offsetting of certain collateralized transactions, see Note 7. ### Receivables and Payables - Customers Receivables from customers primarily include margin loans (net of related customer cash and short sale proceeds). Payables to customers primarily include cash and short sale activity (net of related customer margin loans). Customers' securities transactions are recorded on a settlement date basis. Securities owned by customers, including those that collateralize margin loans, are not reflected in the consolidated statement of financial condition. {6}------------------------------------------------ ### Receivables and Payables - Brokers, Dealers and Clearing Organizations Receivables from and payables to brokers, dealers and clearing organizations primarily include amounts on unsettled trades, and amounts for securities failed to deliver by the Company to the purchaser or failed to receive by the Company from the seller by the settlement date. Receivables and payables arising from unsettled trades are reported on a net basis. ### Goodwill and Intangible Assets The Company tests goodwill for impairment on an annual basis and on an interim basis when certain events or circumstances exist. The Company tests goodwill for impairment at the reporting unit level, which is at the Company level. For both the annual and interim tests, the Company has the option to either (a) perform a quantitative impairment test or (b) first perform a qualitative assessment to determine whether it is more likely than not that the fair value is less than its carrying amount, in which case the quantitative test would be performed. When performing a quantitative impairment test, the Company compares the fair value with its carrying amount, including goodwill. If the fair value is less than its carrying amount, the impairment loss is equal to the excess of the carrying value over the fair value limited by the carrying amount. The estimated fair value is derived based on valuation techniques the Company believes market participants would use. The estimated fair values are generally determined by utilizing a discounted cash flow methodology. Goodwill is not amortized. Finite lived intangible assets are amortized over their estimated useful lives and are reviewed for impairment on an interim basis when impairment indicators are present. See Note 9 for further information on Goodwill and Intangible assets ### Deferred Compensation Plans Certain current and former employees of the Company and affiliates participate in various deferred stock-based and cashbased compensation plans. For year-end stock-based awards and deferred cash-based compensation awards anticipated to be granted to retirement eligible employees under award terms that do not contain a future service requirement, the Firm accrues the estimated cost of the awards over the course of the calendar year preceding the grant date, which reflects the period over which the compensation is earned. The deferred cash-based compensation plans generally provide a return to the plan participants based upon the performance of each participant's referenced investments. The Company enters into a variety of OTC derivative contracts with affiliates to economically hedge certain obligations under the deferred cash-based compensation plans. The Company measures compensation for stock-based awards at fair value. The Company determines the fair value of Restricted Stock Units based on the grant-date fair value of the common stock of the Ultimate Parent, measured as the volume-weighted average price on the date of grant ("VWAP"). ### Accounting Development Updates The FASB has issued certain accounting updates that apply to the Company. The Company adopted the following accounting update on January 1, 2023: ### Financial Instruments - Credit Losses This accounting update eliminates the accounting guidance for Troubled Debt Restructurings ("TDRs") and requires new disclosures regarding certain modifications of financing receivables (i.e., principal forgiveness, interest rate reductions, other-than-insignificant payment delays and term extensions) to borrowers experiencing financial difficulty. The update also requires disclosure of current period gross charge-offs by year of origination for financing receivables measured at amortized cost. The Company has adopted this update on a prospective basis and noted no impact on its financial condition upon adoption. ### 3. Related Party Transactions The Company enters into transactions with the Ultimate Parent and its consolidated subsidiaries (the "Firm") in order to, among other things, manage risk, facilitate client demand, satisfy regulatory and liquidity requirements, and fund business activities. These transactions include OTC derivatives and collateralized financings, as described in Notes 5 and 7, respectively. On January 19, 2022, the Company entered into a \$8,000 Subordinated Loan Agreement with the Parent to optimize capital resources in the Company. On the same day, the Company executed a distribution of \$8,000 to the Parent. The Company paid additional distributions of \$1,300 to the Parent during the year. On December 14, 2022 the Parent made a member's contribution of \$9,000 to MSSB for the Company to meet certain requirements to conduct business. On the same day, the Company also lent \$9,000 to the Ultimate Parent, to optimize liquidity resources at the Firm. {7}------------------------------------------------ The Company is a party to deposit sweep agreements with MSBNA and MSPBNA, both bank affiliates. Under these sweep agreements, each bank sources certain deposits from the Company. These deposits are primarily garnered through the Deposit Program whereby certain cash balances are primarily swept into separate money market deposit accounts and demand deposit accounts. The Company receives fees from each bank for the deposits obtained through the Deposit Program. In addition, MSBNA and MSPBNA issue certain types of loans and lending commitments to clients of the Company. The Company participates in various deferred stock-based and cash-based compensation plans for the benefit of certain current and former employees, as described in Notes 2 and 15, as well as employee benefit plans as described in Note 16. The Company enters into OTC derivative contracts with affiliates to economically hedge certain obligations under the deferred cashbased compensation plans. See Note 5 for additional disclosures on fair value and notional amounts related to the derivatives associated with these deferred compensation plans, included within equity contracts. Additionally, the Company has recognized liabilities to the Ultimate Parent for the deferred stock-based compensation plans which are recorded in Other liabilities and accrued expenses in the consolidated statement of financial condition. The Company has agreements with affiliates for other activities, including a tax sharing agreement with the Ultimate Parent as described in Note 17, global transfer pricing policies, and other activities as described further below.Unsettled amounts for these activities are recorded within Receivables from or Payables to affiliates, are payable on demand. The Company applies global transfer pricing policies among affiliates. 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. The Company has various agreements with an affiliated brokerdealer, MS&Co., in which MSSB provides certain sales and distribution services for MS&Co.'s equities and fixed income trading activities, and MS&Co. provides certain sales and trading services to the Company. The Company receives fees from MSDI and EVD, affiliated broker-dealers, to distribute shares of various funds and provide shareholder services to customers The Company receives fees from MSIM Inc., MS AIP GP LP, and MSIM Ltd., investment advisor affiliates, for providing advisory services to customers investing in various fund products managed by those affiliates. The Company has agreements with affiliated service entities, MSSG and MSSBF. MSSG provides the Company with certain services including infrastructure group support, healthcare and life insurance benefits for the employees of the Company, information processing, communications, and occupancy and equipment. MSSBF provides other services including information processing, communications, and occupancy and equipment. Certain employees of the Company provide services for business activities conducted on two affiliates, MSBNA and MSPBNA. The Company is reimbursed by these affiliates for expenses related to these services. | | At December
31, 2022 | | |---------------------------------------------------|-------------------------|-------| | Assets and receivables from affiliated companies: | | | | Restricted cash | ಕಾ | 56 | | Financial instruments owned, at fair value | | 11 | | Reverse repurchase agreements | | 6.997 | | Securities borrowed | | 317 | | Receivables - Customers | | 2 | | Receivables - Fees, interest and other | | 5 | | Receivables - Affiliates | | 35 | | Loans | | 8,910 | | Other assets | | 15 | | | | | | Liabilities and payables to affiliated companies: | | | | Financial instruments sold, at fair value | | | | Financial instruments sold, at fair value | க | |-------------------------------------------|-------| | Securities loaned | 1,611 | | Payables - Customers | 90 | | Payables - Interest and Dividends | 235 | | Payables - Affiliates | 520 | | Other liabilities and accrued expenses | 780 | | Subordinated liabilities | 8.000 | {8}------------------------------------------------ ### 4. Fair Values #### Fair Value Measurement ### Assets and Liabilities Measured at Fair Value | | At December 31, 2022 | | | | | | | |-----------------------------------------------------|----------------------|---------|-------|----------|----------|----------------|-------| | | | Level 1 | | Level 2 | Level 32 | Netting ' | Total | | Assets at fair value | | | | | | | | | Financial instruments owned: | | | | | | | | | U.S. Treasury and agency securities | ക്ക | ー | ಕೆ | ക്ക | | ક્તિ
ಿ | 1 | | Corporate and other debt | | | | 13 | 8 | | 21 | | Corporate equities | | 62 | | | | | 62 | | Derivative contracts: | | | | | | | | | Foreign exchange | | | | 11 | | | 11 | | Equity3 | | | | 16 | | | 16 | | Netting' | | | | (20) | | (1) | 21) | | Total derivative contracts | | | | 7 | | (1) | 6 | | Total financial instruments owned | ಕ್ಕಾ | 63 | ക | 20
ಕೆ | 8 | ക
(1) \$ | 90 | | Liabilities at fair value | | | | | | | | | Financial instruments sold, not yet purchased: | | | | | | | | | U.S. government and agency securities | ക്ക | 1 | સ્ત્ર | ക്ക | | ಕ್ಕಾ
ಿತ | 1 | | Corporate and other debt | | | | 2 | | | 2 | | Corporate equities | | 2 | | | | | 2 | | Derivative contracts: | | | | | | | | | Foreign exchange | | | | 11 | | | 11 | | Equity3 | | | | 52 | | | 52 | | Netting | | | | (20) | | (30) | (50) | | Total derivative contracts | | | | 43 | | (30) | 13 | | Total financial instruments sold, not yet purchased | ಕಾ | 3 | ക | 45
ಕೆ | | ಕಾ
(30) \$ | 18 | | Other secured financings | | | | 60 | | | 60 | | Borrowings | | | | 11 | | | 11 | 1. For positions with the same counterparty that cross over the fair value hierarchy, both counterpary neting and cash collateral neting are included in the column titled "Netting". Positions classified within the same counterparty are netted within that level. For further information on derivative instruments, see Note 5. 2. Primarily consists of purchases during the year. 3. Represents fair value of derivatives associated with deferred compensation plans as mentioned in Note 3. {9}------------------------------------------------ ### **%'2;':/54#+).4/7;+9,5899+:9'4\*/'(/2/:/+9+'9;8+\*':'/8%'2;+** ### **\$"#8+'9;8?'4\*-+4)?"+);8/:/+9** *#\$&#)&#%\$* ,0;D0C8>=\*427=8@D4B J 08AE0;D48B34C4A<8=43DB8=6@D>C43<0A:4C?A824B ,0;D0C8>= 84A0A27H;0BB85820C8>= J #4E4; 0B8=?DCB0A4>1B4AE01;40=38=0=02C8E4 <0A:4C ### *)&#%\$* ,0;D0C8>=\*427=8@D4B - J %>= 20;;01;4064=2H 8BBD43341CB42DA8C84B0A464=4A0;;H E0;D43DB8=6@D>C43<0A:4C?A824B 0=320;;01;4064=2H 8BBD43341CB42DA8C84B0A4E0;D431H14=27<0A:8=6 <>34; 34A8E43?A824BC>@D>C43<0A:4C?A824B0=3CA034 30C05>A2>5064=2H<>AC6064?0BB C7A>D67?>>; B42DA8C84B8B<>34; 3A8E4=10B43>=B?A403B>5 2> 14 0==>D=243B42DA8C84B ,0;D0C8>= 84A0A27H;0BB85820C8>= J #4E4; >= C74 AD=064=2H8BBD43341CB42DA8C84B85 02C8E4;HCA03430=38=?DCB0A4>1B4AE01;4 ### **58658':+'4\*5:.+8\*+(:** ,0;D0C8>=\*427=8@D4B J >A?>A0C40=3>C74A341C8=2;D34BCA0=B54AB>558=0=280; 0BB4CBC70C508;43C><44CC74022>D=C8=62A8C4A805>A0 ?DA270B4 ,0;D0C8>= 84A0A27H;0BB85820C8>= - J #4E4; 85E0;D410B43>=>1B4AE01;4<0A:4C30C05>A 2>AB86=85820=CB?A403 8=?DCB0A4D=>1B4AE01;4 ### **58658':+7;/:/+9** ,0;D0C8>=\*427=8@D4B J G270=64 CA0343 4@D8CH B42DA8C84B 0A4 64=4A0;;H E0;D43 10B43>=@D>C43?A824B5A>= 84A0A27H;0BB85820C8>= J #4E4; 02C8E4;HCA03434G270=64 CA0343B42DA8C84B ### **+8/<':/<+54:8'):9** *#'%' ! %#%\$* ,0;D0C8>=\*427=8@D4B - J &\* 34A8E0C8E4 2>=CA02CB 8=2;D34 5>AF0A3 BF0? 0=3 >?C8>= 2>=CA02CB A4;0C43C> 5>A486= 2DAA4=284B >A 4@D8CH ?A824B - J 4?4=38=6 >= C74 ?A>3D2C 0=3 C74 C4A5 C74 CA0=B02C8>= C74 508A E0;D4 >5 &\* 34A8E0C8E4 ?A>3D2CB 20=14<>34;;43DB8=60B4A84B>5C427=8@D4B 8=2;D38=6 2;>B43 5>A< 0=0;HC82 5>A;4B >?C8>= ?A828=6 <>34; B8= <>34;B >A 0 2><18=0C8>=C74A4>5\$0=H?A828=6<>34;B3>=>C4=C08; <0C4A80;BD1942C8E8CH0BC74<4C7>3>;>684B4H433> =>C=424BB8C0C4B86=85820=C9D36<4=CB8=24<>34;8=?DCB <0H14>1B4AE435A><02C8E4;H@D>C43<0A:4CB 0B8BC74 20B4 5>A 64=4A82 8=C4A4BC A0C4 BF0?B <0=H 4@D8CH 2><<>38CH0=35>A486=2DAA4=2H>?C8>=2>=CA02CB!=C74 20B4>5<>A44BC01;8B74334A8E0C8E4?A>3D2CB C74?A828=6 <>34;B DB43 1H C74 >= 84A0A27H;0BB85820C8>= J #4E4; F74=E0;D43DB8=6>1B4AE01;48=?DCB>AF74A4 C74D=>1B4AE01;48=?DC8B=>C344<43B86=85820=C >A 5DAC74A 8=5>A<0C8>= >= C74 E0;D0C8>= C427=8@D4B 5>A &\* 34A8E0C8E4?A>3D2CB B44%>C4 ### **:.+89+);8+\*,/4'4)/4-9** ,0;D0C8>=\*427=8@D4B J &C74A B42DA43 58=0=28=6B A4?A4B4=C A4?DA270B4 >1;860C8>=B5>A8=E4BC<4=CB74;31H2DBC><4AB ,0;D0C8>= 84A0A27H;0BB85820C8>= J #4E4; 2;0BB858430B#4E4;0BC74;8018;8CH8B=>C 02C8E4;HCA03438=C74<0A:4C ### **5885=/4-9** ,0;D0C8>=\*427=8@D4B J >AA>F8=6B0A42>=CA02CBC70C0A4=>C2;0BB858430B&\* 34A8E0C8E4B1420DB4C74H508;=4C8=E4BC<4=C2A8C4A80)44 C744A8E0C8E4>=CA02CBB42C8>=01>E45>A034B2A8?C8>= >5 C74 E0;D0C8>= C427=8@D4 0??;843 C> C74 >AA>F8=6B ,0;D0C8>= 84A0A27H;0BB85820C8>= J #4E4; F74= E0;D43 DB8=6 >1B4AE01;4 8=?DCB >A F74A4C74D=>1B4AE01;48=?DC8B=>C344<43B86=85820=C {10}------------------------------------------------ ### Financial Instruments Not Measured at Fair Value | | At December 31, 2022 | | | | | | | | | |---------------------------------------------|----------------------|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----|------------|-----------|---------|--|--| | | | | Fair Value | | | | | | | | | | Carrying Value | Level 1 | | Level 2 | Level 3 | Total | | | | Financial assets | | | | | | | | | | | Cash | ക്ക | ക
1,098 | 1,098 | ക്ക | ക്ക
- | ക്ക | 1,098 | | | | Restricted cash | | 677 | 677 | | | | 677 | | | | Reverse repurchase agreements | | 6,997 | | | 6,997 | | 6,997 | | | | Securities borrowed | | 317 | | | 317 | | 317 | | | | Receivables: | | | | | | | | | | | Customers | | 10,715 | | | 10,715 | | 10,715 | | | | Brokers, dealers and clearing organizations | | 65 | | | 65 | | 65 | | | | Fees, interest and other | | 864 | | | 864 | | 864 | | | | Affiliates | | 35 | | | 35 | | 35 | | | | Loans | | 8,910 | | | 8,925 | | 8,925 | | | | Other assets | | 23 | | | 23 | | 23 | | | | | | | | | | | | | | | Financial liabilities | | | | | | | | | | | Securities loaned | ತಿ | 1,611
ക | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ക്ക | ക
1,611 | ക്ക
-- | 1,611 | | | | Payables: | | | | | | | | | | | Customers | | 7,192 | | | 7,192 | | 7,192 | | | | Brokers, dealers and clearing organizations | | 347 | | | 347 | | 347 | | | | Interest and dividends | | 259 | | | 259 | | 259 | | | | Affiliates | | 520 | | | 520 | | 520 | | | | Other liabilities and accrued expenses | | 999 | | | 999 | | පිරිවිධ | | | | Borrowings | | 304 | | | 304 | | 304 | | | | Subordinated liabilities | | 8,000 | | | 7,495 | | 7,495 | | | The previous table excludes certain financial instruments such as deferred compensation arrangements. ### 5. Derivative Instruments The Company may trade exchange-traded futures and options, as well as OTC swaps, forwards, options and other derivatives referencing, among other things, interest rates, equities, currencies, and bonds. The Company uses these instruments to economically hedge their client facilitation activity and obligations under certain deferred cash-based compensation plans. The Company does not apply hedge accounting. The Company 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). | | Derivative at December 31, 2022 | | | | | | | | | |-------------------------------------|---------------------------------|-----------|---------------|----------|---------------|-------------|---------------|-------|--| | | Asset | | | | | Liabilities | | | | | | Fair
Value | | Notional
2 | | Fair
Value | | Notional
2 | | | | | | Bilateral | | OTC | | Bilateral | | OTC | | | Derivative contracts | | | | | | | | | | | Foreign exchange | ಲ್ಲಿ | 11 | ಕಾ | 568 | ಕ್ | 11 | S | 568 | | | Equity' | | 16 | | 1,278 | | 52 | | 2.567 | | | | | | | | | | | | | | Total gross derivative
contracts | ಲ್ಲಿ | 27 | | \$ 1,846 | ಕ್ಕೆ | 63 | ಕೆ | 3.135 | | | Counterparty netting | | (20) | | | | (20) | | | | | Cash collateral netting | | (1) | | | | (30) | | | | | Total derivative contracts | ಲ್ಲಾ | റ | | | S | 13 | | | | 1.Bilateral OTC Equity contracts represent derivative assets associated with deferred compensation plans, as mentioned in Note 3. 2. The Company believes that the notional amounts of derivative contracts generally overstate its exposure. In most circumstances, notional amounts are used only as a reference point from which to calculate amounts owed between the parties to the contract. Furthermore, notional amounts do not reflect the benefit of legally enforceable netting arrangements or risk mitigating transactions. {11}------------------------------------------------ ### 6. Receivables from Contracts with Customer Receivables from contracts with customers, which are included across the various types of Receivables balances in the Company's consolidated statement of financial condition, arise when the Company has both recorded revenues and has the right per the contract to bill customers. At January 1, 2022 and December 31, 2022, the balances related to Receivables from contracts with customers were \$615 and \$547, respectively. ### 7. Collateralized Transactions The Company enters into reverse repurchase agreements, repurchase agreements, securities borrowed and securities loaned transactions with affiliates to, among other things, acquire securities to cover short positions and settle other securities obligations, accommodate customers' needs, finance its inventory positions, and meet liquidity and regulatory requirements. The Company monitors the fair value of the underlying securities as compared with the related receivable or payable, including accrued interest, and requests or posts additional collateral as provided under the applicable agreement to ensure such transactions are adequately collateralized, or that excess collateral is returned. The risk related to a decline in the market value of collateral pledged or received is managed by setting appropriate marketbased margin requirements. Increases in collateral margin calls on repurchase agreements and securities loaned transactions (collectively, "secured financing payables") due to market value declines may be mitigated by increases in collateral margin calls on reverse repurchase agreements and securities borrowed transactions with similar quality collateral. Additionally, the Company may request lower quality collateral pledged be replaced with higher quality collateral through collateral substitution rights in the underlying agreements. The Company actively manages its secured financing payables in a manner that reduces the potential refinancing risk of secured financing payables of less liquid assets and also considers the quality of collateral when negotiating collateral eligibility with counterparties. The Company utilizes shorter-term secured financing payables for highly liquid assets and establishes longer tenor limits for less liquid assets, for which funding may be at risk in the event of a market disruption. #### Offsetting of Certain Collateralized Transactions | | At December 31, 2022 | | | | | | | | | | |-------------------------------------|----------------------|------------------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----|-----------------------------|------|---------------------------|--|----------------| | | | Gross
Amounts | | Amounts
Offset | | Net
Amounts
Presented | | Amounts
Not
Offset' | | Net
Amounts | | Assets | | | | | | | | | | | | Reverse
repurchase
agreements | ക | 6,997 | မခ | မှာ | | 6.997 | ಲ್ಲಿ | (6,880) \$ | | 117 | | Securities
borrowed | | 317 | | | | 317 | | (312) | | 5 | | Liabilities | | | | | | | | | | | | Securities
loaned | ಳಿ | 1,611 \$ = | | | မှာ | | | 1,611 \$ (1,575) \$ | | રૂદિ | | Other secured
financings | | 60 | | | | 60 | | (60) | | | | Amarinta ca ata | | | | 144000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000 | | | | manta that harra | | 44044 | 1. Amounts relate to master netting agreements that have been determined by the Company to be legally enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance. For information related to offsetting of derivatives, see Note 5. #### Gross Secured Financing Payables by Remaining Contractual Maturity | | | At December 31, 2022 | | | | | | | | | | |--------------------------------|---|-------------------------------|--|-----------|---------------|-----------------|----|-------|--|--|--| | | | Overnight
and Open 30 Days | | Less than | 30-90
Days | Over 90
Days | | Total | | | | | Securities
loaned | | \$ 1,611 \$ = | | | | | မာ | 1,611 | | | | | Other
secured
financings | | 60 | | | | | | 60 | | | | | Total | ക | 1,671 \$ | | | မခ | မှာ | မှ | 1,671 | | | | ## Gross Secured Financing Payables by Class of | Collateral Pledged | |--------------------| |--------------------| | | At December
31, 2022 | | | | |---------------------------------------------|-------------------------|-------|--|--| | Securities loaned | | | | | | Corporate equities | ಕ್ಕಾ | 1,410 | | | | Corporate and other debt | | 195 | | | | Other sovereign government obligations | | 6 | | | | Total | ಿ | 1,611 | | | | | | | | | | Other secured financings | ಿ | 60 | | | | Total included in the offsetting disclosure | S | 1.671 | | | #### Fair Value of Collateral Received with Right to Sell or Repledge | | At December
31, 2022 | | | |----------------------------------------------------|-------------------------|--------|--| | Collateral received with right to sell or repledge | ಲ್ಲಾ | 19.596 | | | Collateral that was sold or repledged ' | | 1.887 | | 1. Does not include securities segregated under federal and other regulations on requirements. {12}------------------------------------------------ \*74 >;;0C4A0; 8= C74 5>A< >5 B42DA8C84B 8= 2>==42C8>= F8C7 A4E4AB4 A4?DA270B4 06A44<4=CB B42DA8C84B 1>AA>F43 0=3 2DBC><4A <0A68= ;>0=B != <0=H 20B4B C74 >B4;;>AA4?;4364C74B4B42DA8C84B74;30B 2>;;0C4A0; 0=3 DB4 C74 B42DA8C84B C> 2>;;0C4A0;8I4 A4?DA270B4 06A44<4=CB B42DA8C84B ;>0=43 0=3 34A8E0C8E4B 0B F4;; 0B 5>A 34;8E4AH C> 2>D=C4A?0AC84B C> 2>E4A B7>AC ?>B8C8>=B 74;3 1H 2DBC><4AB B ?0AC >5 C74 B42DA43 1>AA>F8=6 CA0=B02C8>=B 58=0=280; 8=BCAD<4=CB >F=43 A4?A4B4=C8=6 5A02C8>=0; B70A4B 8=E4BC<4=CB 74;3 1H C74 2DBC><4A 2>;;0C4A0;8I4 C74 A4;0C43 A4?DA270B4 >1;860C8>= C70C 8B A42>A343 0B >C74A B42DA43 58=0=28=6B 8= C74 2>=B>;830C43 BC0C4<4=C >5 58=0=280; 2>=38C8>= \*74 A4?DA270B4 >1;860C8>=8B2>;;0C4A0;8I431HC742DBC><4AB4@D8CHB42DA8C84B #### **;9:53+8'8-/4+4\*/4-** \*74 >E834B <0A68= ;4=38=6 0AA0=64<4=CB F7827 0;;>F 2DBC><4AB C> 1>AA>F 0608=BC C74 E0;D4 >5 @D0;85H8=6 B42DA8C84B (4248E01;4B 5A>< C74B4 0AA0=64<4=CB 0A4 8=2;D343 F8C78=(4248E01;4B DBC><4AB8=C74>=B>;830C43 BC0C4<4=C >5 58=0=280; 2>=38C8>= +=34AC74B4 0AA0=64<4=CB C74 >;;0C4A0; 8=2;D38=6 +) \*A40BDAH 0=3 064=2H B42DA8C84B >C74A B>E4A486= 6>E4A=<4=C >1;860C8>=B 2>A?>A0C4 0=3 >C74A 341C 0=3 2>A?>A0C4 4@D8C84B \$0A68= ;>0=B 0A4 2>;;0C4A0;8I43 1H 2DBC><4A >F=43 B42DA8C84B 74;3 1H C74 >=8C>AB A4@D8A43 <0A68= ;4E4;B 0=3 4BC01;8B743 2A438C C4A BD27 6D834;8=4B A4@D8A4B 2DBC><4AB C> 34?>B8C 0338C8>=0; 2>;;0C4A0; >A A43D24 ?>B8C8>=B F74==424BB0AH \$0A68=;>0=B0A44GC4=343>=034<0=310B8B0=364=4A0;;H0A4 =>C 2><<8CC43 5028;8C84B 02C>AB 2>=B834A43 8= C74 A4E84F >5 <0A68=;>0=B 0A4C74 0<>D=C >5C74;>0= C748=C4=343 ?DA?>B4 C74 346A44 >5 ;4E4A064 148=6 4H43 8= C74 022>D=C 0=3 C74 0<>D=C >5 2>;;0C4A0; 0B F4;; 0B 0= >E4A0;; 4E0;D0C8>= >5 C74 ?>AC5>;8> C> 4=BDA4 ?A>?4A 38E4AB85820C8>= >A 8= C74 20B4 >5 2>=24=CA0C43 ?>B8C8>=B 0??A>?A80C4 ;8@D838CH >5 C74 D=34A;H8=6 2>;;0C4A0;>A?>C4=C80;74368=6BCA0C4684BC>A43D24A8B: +=34A;H8=6 2>;;0C4A0; 5>A<0A68=;>0=B8B A4E84F43F8C7 A4B?42C C>C74;8@D838CH>5C74?A>?>B432>;;0C4A0;?>B8C8>=B E0;D0C8>=>5 B42DA8C84B 78BC>A82 CA038=6 A0=64 E>;0C8;8CH 0=0;HB8B 0=3 0= 4E0;D0C8>= >5 8=3DBCAH 2>=24=CA0C8>=B >A C74B4 CA0=B02C8>=B 0374A4=24 C> C74 >;;0C4A0; ?>;8284B B86=85820=C;H ;8<8CB8CB2A438C4G?>BDA48=C744E4=C>502DBC><4A3450D;C\*74 >=0; <0A68= 2>;;0C4A0; 5A>< 2DBC><4AB 85 0??A>?A80C4 0=3 85 =424BB0AH <0H B4;; B42DA8C84B C70C 70E4 =>C 144= ?083 5>A >A ?DA270B4 B42DA8C84B B>;3 1DC =>C 34;8E4A43 5A>< 2DBC><4AB C 424<14A C74 10;0=24 A4;0C43C>2DBC><4AA4248E01;4BA4?A4B4=C8=6<0A68=;>0=B=4C>5 A4;0C432DBC><4A20B70=3B7>ACB0;4?A>2443BF0B- ### **5'49** #>0=B>5- 0C424<14A ?A8<0A8;H2>=B8BC>5 D=B42DA43;>0=BC>C74+;C8<0C4'0A4=C 0CE0A801;4A0C4B0=3 <0CDA8=68=;4BBC70= 30HBC>>?C8<8I4;8@D838CHA4B>DA24B0C C748A< \*74 8=C4A4BC A0C4B 5>A ;4=38=6 C> C74 +;C8<0C4 '0A4=C 0A4 4BC01;8B743 1H C74 CA40BDAH 5D=2C8>= >5 C74 8A< \*74B4 A0C4B A45;42C C74 A0C4 >5 8=C4A4BC C70C C74 8A< 8=2DAB 8= 5D=38=6 8CB 1DB8=4BBC74L8AGHA0C4M ### **55\*=/22'4\*4:'4-/(2+9** \*74>>3F8;;85"D;H \*74A470E4144==>270=64B8=C7420AAH8=6 0<>D=C>5C74>>3F8;; F7827F0B- 0C 424<14A 3E4AB4<0A:4C>A42>=><824E4=CB2>D;3 A4BD;C8=83B ### **5885=/4-9** >AA>F8=6B?A8<0A8;H2>=B8BC>520B7>E4A3A05CB ### **:.+8/'(/2/:/+9'4\*))8;+\*>6+49+9** &C74A ;8018;8C84B 0=3 022AD43 4G?4=B4B ?A8<0A8;H 2>=B8BCB >5 022AD432>=?0H01;4 #### **";(58\*/4':+\*/'(/2/:/+9** &= "0=D0AH C74 > 0 - )D1>A38=0C8>= 6A44<4=C F8C7 C74 '0A4=C C> >?C8<8I4 20?8C0; A4B>DA24B8=C74>E4<14A C74 > 0 - )D1>A38=0C43(4E>;E8=6A438C6A44<4=CF8C7C74'0A4=C \*748=C4A4BCA0C45>AC7406A44<4=C8B8=;8=4F8C7C748AGH A0C4 \*74<0CDA8CH30C4 8=C4A4BCA0C40=31>>:E0;D4>5C74>DCBC0=38=6 10;0=240C424<14A 0A40B5>;;>FB | 7%14',0\$6('
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| {13}------------------------------------------------ ### 13. Commitments, Guarantees and Contingencies ### Commitments Central Counterparty. At December 31, 2022, the Company has outstanding commitments of \$19, with original maturities of five years or more. These commitments relate to the Company's membership in certain clearing houses and are contingent upon the default of a clearing house member or other stress events ### Guarantees The Company has obligations under certain guarantee arrangements, including contracts and indemnity agreements that contingently require the Company to make payments to the guaranteed party based on changes in an underlying measure (such as an interest or foreign exchange rate, security or commodity price, an index or the occurrence or non-occurrence of a specified event) related to an asset, liability or equity security of a guaranteed party. Indemnities. The Company provides indemnities to two affiliates, MSBNA and MSPBNA, related to services that certain employees and vendors of the Company provide for business activities conducted by these affiliates. MSBNA and MSPBNA have the right to seek indemnification from the Company for losses arising out of the provision of such services by the Company, its employees or its vendors, including for any operational losses caused by human error, failed process management, information technology malfunctions/limitations, fraud, or violations of legal or regulatory requirements. The maximum potential amount of future payment that the Company could be required to make under these indemnities cannot be estimated. The Company has not recorded any contingent liability in its consolidated statement of financial condition for these indemnities ### Contingencies ### Legal In addition to the matters described below, in the normal course of business, the Company 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 financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or are in financial distress. The Company 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 Company's business, and involving, among other matters, sales, trading, financing, prime brokerage, marketmaking activities, investment banking advisory services, capital market activities, financial products or offerings sponsored, underwritten or sold by the Company, wealth and investment management services, and accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions, limitations on our ability to conduct certain business, or other relief. While the Company has identified below any individual proceedings or investigations where the Company believes a material loss to be reasonably possible and reasonably estimable. there can be no assurance that additional material losses will not be incurred from claims that have not yet been asserted or those where potential losses have not yet been determined to be probable or possible and reasonably estimable. The Company contests liability and/or the amount of damages as appropriate in each pending matter. Where available information indicates that it is probable a liability had been incurred at the date of the consolidated statement of financial condition and the Company can reasonably estimate the amount of that loss, the Company accrues the estimated loss by a charge to income. In many proceedings and investigations, however, it is inherently difficult to determine whether any loss is probable or even possible, or to estimate the amount of any loss. In addition, even where loss is possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss contingency, it is not always possible to reasonably estimate the size of the possible loss or range of loss particularly for proceedings and investigations where the factual record is being developed or contested or where plaintiffs or government entities seek substantial or indeterminate damages, restitution, disgorgement or penalties. Numerous issues may need to be resolved 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. For certain other legal proceedings and investigations, the Company can estimate reasonably possible losses, additional losses, ranges of loss or ranges of additional loss in excess of amounts accrued, but does not believe, based on current knowledge and after consultation with counsel, that such losses will have a material adverse effect on the Company's consolidated statement of financial condition as a whole, other than the matters referred to in the following paragraphs. On May 27, 2014, the Company was named as a defendant in a civil case styled Tracy Chen, as an aggrieved employee, v. Morgan Stanley Smith Barney LLC, et al., which is pending in the Superior Court of California, County of Orange, seeking civil penalties on behalf of the State of California and all current and former California employees pursuant to the California Private {14}------------------------------------------------ Attorney General Act, Cal. Labor Code section 2699 et seq. Plaintiff asserts that the Company's expense reimbursement and final pay policies, and specifically, the Firm's Alternative Flexible Grid program, violate the California Labor Code under various factual and legal theories, including by passing the Company's costs of doing business onto Financial Advisors, and by paying some terminated Financial Advisors outside the statutorily prescribed time period for final wages. On November 21, 2018, the parties in a related federal litigation against the Company styled Brandon Harvey, individually and on behalf of others similarly situated, v. Morgan Stanley Smith Barney LLC, pending in the United States District Court for the Northern District of California, reached a settlement in principle for approximately \$10. The federal court settlement, if approved, would resolve the representative claims in Plaintiff's action, which has been stayed. Following an appeal challenging the proposed settlement at the United States Court of Appeals for the Ninth Circuit, the matter was remanded for further consideration of whether proposed settlement participants had all suffered an actual injury. Beginning on July 29, 2020, various plaintiffs filed complaints against the Company in the United States District Court for the Southern District of New York, asserting claims arising out of two data breach incidents in 2016 and 2019. On September 17, 2020, the Court consolidated the cases under the caption In re Morgan Stanley Data Security Litigation. On November 2, 2020, class plaintiffs filed a consolidated amended class action complaint asserting claims of negligence, invasion of privacy, unjust enrichment, breach of confidence, and various claims under state unfair and deceptive practices laws and data breach protection and notification statutes. On August 5, 2022, the court granted final approval of an agreement between the parties to settle the matter. On September 20, 2022, the Company's settlement with the Securities Exchange Commission to resolve related allegations became effective. The Company also has a related regulatory inquiry from various State Attorneys General. ### 14. Risk Management Risk is an inherent part of the Company's business activities. Management believes effective risk management is vital to the success of the Company's business activities. Accordingly, the Company has policies and procedures in place to identify, measure, monitor, advise, challenge, and control the principal risks involved in the activities of its business and support functions. The principal risks involved in the Company's business activities include credit, operational, model, compliance, cybersecurity, liquidity, strategic and reputational risk The Company's risk management policies and related procedures are aligned with those of the Firm. These policies and related procedures are administered on a coordinated global and legal entity basis with consideration given to each subsidiary's, including the Company's, specific capital, and regulatory requirements. For the Risk Management discussion which follows, the term "Company" includes the Ultimate Parent and its subsidiaries. The cornerstone of the Company's risk management philosophy is the pursuit of risk-adjusted returns through prudent risk-taking that protects the Company's capital base and franchise. This is implemented utilizing five key principles: integrity, comprehensiveness, independence, accountability, and transparency. To help ensure the efficacy of risk management, which is an essential component of the Company's reputation, senior management requires thorough and frequent communication and the appropriate escalation of risk matters. The fast-paced, complex, and constantly-evolving nature of global financial markets requires the Company to maintain a risk management culture that is incisive, knowledgeable about specialized products and markets, and subject to ongoing review and enhancement. ### Risk Management Process The following is a discussion of the Company's risk management policies and procedures for the Company's primary risks ### Risk Limits Framework Risk limits and quantitative metrics provide the basis for monitoring risk taking activity and avoiding outsized risk-taking. Risk limits and associated limit frameworks are reviewed on at least an annual basis, with more frequent updates as necessary. Board-level risk limits and approved frameworks address the most important Company-wide aggregations of risk. Additional risk limits approved by risk management may address more specific types of risk and are bound by the higher-level Board risk limits. ### Credit Risk Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial obligations to the Company. Credit Risk includes Country Risk, which is the risk that the events in, or that affect a foreign country (any country other than the U.S.) might adversely affect the Company. The Company primarily incurs credit risk exposure to institutions and individuals. This risk may arise from a variety of business activities, including, but not limited to, entering into swap or derivative contracts under which counterparties may have obligations to make payments to the Company; 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 loan repayment amount; posting margin and/or collateral to clearinghouses, clearing agencies, exchanges, banks, securities firms and other financial counterparties; placing funds on deposit at other financial institutions to support its clearing and settlement obligations; and investing or trading in securities and loan pools, whereby the value of these assets may fluctuate based {15}------------------------------------------------ >=A40;8I43>A4G?42C433450D;CB>=C74D=34A;H8=6>1;860C8>=B>A ;>0=B \*78B CH?4 >5 A8B: A4@D8A4B 2A438C 0=0;HB8B >5 B?428582 2>D=C4A?0AC84B 1>C7 8=8C80;;H 0=3 >= 0= >=6>8=6 10B8B \*74 > 8=2DAB 2A438C A8B: C7A>D67 <0A68= 0=3 >C74A 2DBC><4A B42DA8C84B 10B43 ;4=38=6 CA0=B02C8>=B F7827 0A4 2>;;0C4A0;8I431HB42DA8C84B \*74 > 4E0;D0C4 <>=8C>A 0=3 2>=CA>; 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2>=38C8>= B BD27 C74 >A34AC>A42>A38CBA4;0C43 2DAA4=C0=33454AA435434A0; BC0C40=3;>20;C0G4B\*74>=B>;830C435434A0;8=2><4C0GA4CDA=58;431H C74 +;C8<0C4 '0A4=C 434A0; 8=2><4 C0G4B 70E4 64=4A0;;H 144= ?A>E8343 >= 0 <>385843 B4?0A0C4 4=C8CH 10B8B \*74 ><18=43BC0C40=3;>20;8=2><4C0GA4CDA=BF8C7 C74+;C8<0C4'0A4=C0=324AC08=>C74ABD1B8380A84B>5C74+;C8<0C4 '0A4=C )C0C4 0=3 ;>20; 8=2><4 C0G4B 70E4 144= ?A>E8343 >= B4?0A0C44=C8CH8=2><40CC7445542C8E4C0GA0C4>5C74><18=4358;8=66A>D? != 022>A30=24 F8C7 C74 C4A5 C74 \*0G )70A8=6 6A44<4=C 2DAA4=C C0G4B 5434A0; 2><18=43 0=3 D=8C0AH BC0C4B 0A4 B4CC;43 ?4A8>3820;;H F8C7C74 +;C8<0C4 '0A4=C F7> ?0HBC74B4C0G4B >= 1470;5>5C74>31, 2022 | |------------------------------------------------|------|-------------------------| | Gross deferred tax assets: | | | | Employee compensation and benefit plans | ക | 1.080 | | Allowance for credit losses and other reserves | | 27 | | Total deferred tax assets | ક્તિ | 1.107 | | Deferred tax assets valuation allowance | | (2) | | Deferred tax assets after valuation allowance | | 1.105 | | Gross deferred tax liabilities: | | | | Intangibles and Goodwill | | 361 | | Total deferred tax liabilities | ಕ್ಕಾ | 361 | | Net deferred tax assets | \$ | 744 | Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the applicable enacted tax rates and laws that will be in effect when such differences are expected to reverse. The Company's net deferred tax assets are included in Other assets within the consolidated statement of financial condition. The Company believes the recognized net deferred tax assets (after valuation allowance) of \$744 at December 31, 2022 is more likely than not to be realized based on expectations as to future taxable income in the jurisdictions in which it operates. The Company is subject to the income and indirect tax laws of the U.S., its states and municipalities in which the Company has significant business operations. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. The Company must make judgments and interpretations about the application of these inherently complex tax laws when determining the provision for income taxes and the expense for indirect taxes and must also make estimates about when certain items affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be settled with the taxing authority upon examination or audit. The Company periodically evaluates the likelihood of assessments in each taxing jurisdiction resulting from current and subsequent years' examinations, and unrecognized tax benefits related to potential losses that may arise from tax audits are established in accordance with the relevant accounting guidance. Once established, unrecognized tax benefits are adjusted when there is more information available or when an event occurs requiring a change. | | | Rollforward of Unrecognized Tax Benefits | | | |--|--|------------------------------------------|--|--| |--|--|------------------------------------------|--|--| | Balance at December 31, 2021 | ಲ್ಲಿ | 38 | |-----------------------------------------------------------|------|-----| | Increases based on tax positions related to the current | | 2 | | Decreases based on tax positions related to prior periods | | 1) | | Decreases based on settlements with Taxing Authority | | (Q) | | Balance at December 31, 2022 | ಕಿ | 33 | | Net unrecognized tax benefits | ತಿ | 26 | 1. Represent ending unrecognized tax benefits adjusted for the impact of the federal benefit of state issues. If recognized, these net benefits would favorably impact the effective tax rate in future periods. It is reasonably possible that significant changes in the balance of unrecognized tax benefits may occur within the next 12 months. At this time, however, it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits and the impact on the Company's effective tax rate over the next 12 months. ### Earliest Tax Year Subject to Examination in Major Tax Jurisdictions | Jurisdiction | Tax Year | |-------------------------------------------|----------| | United States | 2017 | | New York State and City | 2014 | | New York City Unincorporated Business Tax | 2010 | The Company, through its inclusion in the return of the Ultimate Parent, is routinely under examination by the IRS and other tax authorities in certain states and localities in which the Company has significant business operations, such as New York. The Company believes that the resolution of these tax examinations will not have a material effect on the annual consolidated statement of financial condition ### 18. Regulatory Requirements #### MSSB Regulatory Capital MSSB is a registered U.S. broker-dealer and, accordingly, is subject to the minimum net capital requirements of the SEC. Under SEA Rule 15c3-1, MSSB is required to maintain minimum Net Capital, as defined, of the greater of 2% of aggregate debit items arising from customer transactions, plus excess margin collateral on reverse repurchase agreements, or \$1. At December 31, 2022, MSSB's Net Capital was \$2.341, which exceeded the minimum requirement of \$164 by \$2,177. #### MSSB Customer Protection As a registered U.S. broker dealer, MSSB is subject to the customer protection provisions under SEA Rule 15c3-3, which requires MSSB to compute a reserve requirement for customers and deposit cash or securities into a special reserve bank account for the exclusive benefit of customers. As of December 31, 2022, MSSB had \$3,227 in the special reserve bank account for the exclusive benefit of customers consisting of \$50 in cash and \$3,177 in qualified U.S. Government securities. These qualified securities are sourced from reverse repurchase agreements in the Company's consolidated statement of financial condition. {18}------------------------------------------------ B02;40A8=60=320AAH8=61A>:4A340;4A \$))8B0;B>A4@D8A43 C>2>A'D=34A)(D;4 2 B>5424<14A \$))34?>B8C43-8= 20B78=0B?4280;10=:022>D=C5>A'B {19}------------------------------------------------ ### Glossary of Common Terms and Acronyms | ASC | Accounting Standards Codification | MSPBNA | Morgan Stanley Private Bank, National | |-----------------|---------------------------------------------------|-----------|--------------------------------------------------------------------------------------------------------------------------------| | ASU | Accounting Standards Update | MSSB | Morgan Stanley Smith Barney LLC | | CFTC | Commodity Futures Trading Commission | MSSBF | Morgan Stanley Smith Barney Financing, LLC | | EVD | Eaton Vance Distributors, Inc. | MSSG | Morgan Stanley Services Group Inc. | | FASB | Financial Accounting Standards Board | OFCD | Organization for Economic Cooperation and
Development | | Firm | Ultimate Parent and its consolidated Subsidiaries | OTC | Over-the-counter | | FINRA | Financial Industry Regulatory Authority, Inc. | PAB | Proprietary Accounts of Broker Dealers | | IRS | Internal Revenue Service | PSTI | Performance-based stock units | | MRM | Model Risk Management department | RSU | Restricted stock units | | MS&Co. | Morgan Stanley & Co. LLC | SEA | U.S. Securities and Exchange Act | | MS AIP GP
LP | Morgan Stanley AIP GP LP | SEC | U.S. Securities and Exchange Commission | | MSBNA | Morgan Stanley Bank, N.A. | SIPC | Securities Investor Protection Corporation | | MSDHI | Morgan Stanley Domestic Holdings, Inc. | U.S. | United States of America, which includes the
District of Columbia, Puerto Rico, and the U.S.
territories and possessions | | MSDI | Morgan Stanley Distribution, Inc. | U.S. GAAP | Accounting principles generally accepted in the
United States of America | | MSIM Inc. | Morgan Stanley Investment Management Inc. | VWAP | Volume-weighted average price | | MSIM Ltd. | Morgan Stanley Investment Management
Limited | | | A copy of our December 31, 2022, consolidated statement of financial condition filed pursuant to Rule 17a-5 of the Securities Exchange Act of 1934 is available for examination at the New York Office of the Securities and Exchange Commission or at our principal office at 2000 Westchester Avenue, Purchase, N.Y. 10577. A copy of this Morgan Stanley Smith Barney LLC Consolidated Statement of Financial Condition can be viewed online at the Morgan Stanley website at: http://www.morganstanley.com/about-us-ir/shareholder/morganstanley\_smithbarney\_llc.pdf Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.