# MORGAN STANLEY CAPITAL SERVICES, LLC X-17A-5 (2023-02-27) — Broker-dealer annual report - Company: MORGAN STANLEY CAPITAL SERVICES, LLC - Form: X-17A-5 - Filed: 2023-02-27 - Accession: 0001193125-23-050987 - CIK: 1891397 Original filing: https://www.sec.gov/Archives/edgar/data/1891397/000119312523050987/d427440dfull.pdf --- {0}------------------------------------------------ # MORGAN STANLEY CAPITAL SERVICES LLC ## 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 as a Public Document. Note: A copy of this report, the Morgan Stanley Capital Services LLC Statement of Financial Condition as of December 10 you at no cost by calling 1 (833) 445-2492. {1}------------------------------------------------ ![](_page_1_Picture_0.jpeg) Deloitte & Touche LLP 30 Rockefeller Plaza New York, NY 10112-0015 USA Tel: +1 212 492 4000 Fax: +1 212 489 1687 # INDEPENDENT AUDITOR'S REPORT To the Directors and Sole Member of Morgan Stanley Capital Services LLC ## Opinion We have audited the accompanying statement of financial condition of Morgan Stanley Capital Services LLC (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 accordance with accounting principles generally accepted in the United States of America. ## Basis for Opinion We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statement section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. ## Responsibilities of Management for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statement in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statement that is free from material misstatement, whether due to fraud or error. In preparing the financial statement, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern for one year after the date that the financial statement is issued. ## Auditor's Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statement 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 absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statement. {2}------------------------------------------------ In performing an audit in accordance with GAAS, we: - x Exercise professional judgment and maintain professional skepticism throughout the audit. - x Identify and assess the risks of material misstatement of the financial statement, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statement. - x Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, no such opinion is expressed. - x Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statement. - x Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern for a reasonable period of time. We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit. February 24, 2023 {3}------------------------------------------------ | ;;.<; | | |---------------------------------------------------------|----------| | .@5 |

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| {4}------------------------------------------------ ## 1. Introduction and Basis of Presentation ## The Company MSCS, a Delaware Limited Liability Company (the "Company"), engages primarily in OTC derivative transactions as a market maker. The Company provides trading related services to a broad range of customers and clients, including affiliates. See the "Glossary of Common Terms and Acronyms" for the definition of certain terms and acronyms used throughout the Notes to the Company's statement of financial condition. MSCS is conditionally registered with the SEC as a securitybased swap dealer and is registered as an OTC derivative dealer. MSCS is also provisionally registered with the CFTC as a swap dealer and is a member with ICE Clear Europe Ltd, ICE Clear Credit, LLC and LCH Clearnet Group Ltd. MSCS is a wholly owned subsidiary of MSDHI. MSDHI (the "Parent") is an indirect subsidiary of Morgan Stanley (the "Ultimate Parent"). On February 12, 2018, S&P Global Rating assigned its 'A+' long term and 'A-1' short term issuer ratings to the Company. The outlook on the ratings is stable, which is linked to the Ultimate Parent credit profile. On October 02, 2020, Moody's Investor Service, Inc. ("Moody's") affirmed its 'Prime-1' short-term issuer rating as well as its Prime-1(cr) short-term CR Assessment to the Company and also upgraded its 'A1' long-term issuer rating to 'Aa3' as well as its Aa3 (cr) long-term Counter Party Risk Assessment (CR Assessment) to Aa2 (cr). The outlook on the ratings is stable, which is linked to the Ultimate Parent's credit profile. On July 1, 2022, MSCAP, an OTC derivatives dealer, merged into the Company resulting in net asset transfer of \$184. ## Basis of Financial Information The 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 outcome of legal and tax matters, and other matters that affect its statement of financial condition and related disclosures. The Company believes that the estimates utilized in the preparation of its statement of financial condition are prudent and reasonable. Actual results could differ materially from these estimates. The Notes are an integral part of the Company's statement of financial condition. The Company has evaluated subsequent events for adjustment to or disclosure in these statement of financial condition through the date of this report and has not identified any recordable or disclosable events not otherwise reported in these statement of financial condition or the notes thereto ## 2. Significant Accounting Policies ## Fair Value of Financial Instruments Instruments within Trading assets and Trading liabilities are measured at fair value, either as required or allowed by accounting guidance. These financial instruments primarily represent the Company's trading positions and include both cash and derivative products. The fair value of OTC financial instruments, including derivative contracts related to financial instruments and commodities, is presented in the accompanying 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 to measure certain eligible instruments at fair value, including certain borrowings and other secured financings. The Company elected the fair value option for certain eligible instruments that are risk managed on a fair value basis to mitigate income statement volatility caused by measurement basis differences between the elected instruments and their associated risk management transactions and to eliminate complexities of applying certain accounting models. ## Fair Value Measurement - Definition and Hierarchy Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, assumptions are set to reflect those that the Company believes market participants would use in pricing the asset or liability at the measurement date. 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| | 'B/ | {9}------------------------------------------------ ## 4. Fair Value ### Assets and Liabilities Measured at Fair Value | | At December 31, 2022 | | | | | | | | | |----------------------------|----------------------|---------|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----|---------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------| | | | Level 1 | | Level 2 | | Level 3 | | Netting | Total | | Assets at fair value: | | | | | | | | | | | Trading assets: | | | | | | | | | | | U.S. treasury securities | ಕ್ಕಾ | 25,215 | ಕ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ക്ക | - | ക | ക്ക
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 25,215 | | Other debt | | | | 2,986 | | 314 | | | 3,300 | | Corporate equities ' | | 28,180 | | 357 | | 18 | | | 28,555 | | Derivative contracts: | | | | | | | | | | | Interest rate | | 1,020 | | 227,567 | | 698 | | | 229,285 | | Credit | | | | 10,573 | | 311 | | | 10,884 | | Foreign exchange | | 49 | | 83,633 | | 225 | | | 83,907 | | Equity | | 7 | | 10,671 | | 53 | | | 10,731 | | Commodity and other | | | | 2,460 | | 256 | | | 2,716 | | Netting2 | | (475) | | (279,448) | | (978) | | (47,293) | (328,194) | | Total derivative contracts | | 601 | | 55,456 | | 565 | | (47,293) | 9,329 | | Total trading assets | ക്ക | 53,996 | | 58,799 | है | 897 | ട് | (47,293) \$ | 66,399 | | | At December 31, 2022 | | | | | | | | | |----------------------------|----------------------|---------|---|-----------|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----|-------------|-----------| | | | Level 1 | | Level 2 | | Level 3 | | Netting | Tota | | Liabilities at fair value: | | | | | | | | | | | Trading liabilities: | | | | | | | | | | | U.S. treasury securities | ക | 7,394 | ਫ | - | ക | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ക | ക്ക
- | 7,394 | | Corporate equities1 | | 16,924 | | 74 | | 1 | | | 16,999 | | Derivative contracts: | | | | | | | | | | | Interest rate | | 443 | | 201,520 | | 699 | | | 202,662 | | Credit | | | | 10,423 | | 374 | | | 10,797 | | Foreign exchange | | 82 | | 81,617 | | 158 | | | 81,857 | | Equity | | | | 11,889 | | 29 | | | 11,918 | | Commodity and other | | | | 2,398 | | 234 | | | 2,632 | | Netting2 | | (475) | | (279,448) | | (978) | | (19,490) | (300,391) | | Total derivative contracts | | 50 | | 28,399 | | 516 | | (19,490) | 9,475 | | Total trading liabilities | ക | 24,368 | ਫ | 28,473 | ಕ್ಕೆ | 517 | ട് | (19,490) \$ | 33,868 | | Other secured financings | | | | 39 | | 188 | | | 227 | | Borrowings | | | | 602 | | | | | 602 | 1. For trading purposes, the Company holds or sells short equity securities in diverse industries and of varying sizes. Corporate equities are generally used to economically hedge equity derivative contracts. 2. For positions with the same counterparty that cross over the lair value hierachy, both counterpary netting and cash collateral neting are included in the column titled "Netting". Position the same level that are with the same counterparty are netted within the column for that level. For further information on derivative instruments, see Note 5. {10}------------------------------------------------ ### **(09%(3<,,(:<9,4,5;:** ### **%(3<(;065#,\*/508<,:-69::,;:(5+0()030;0,:,(:<9,+(;(09%(3<,** | ;;.<*6-2*+242

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B;@64;6360.;A | {11}------------------------------------------------ ## Significant Unobservable Inputs Used in Recurring Level 3 Fair Value Measurements at December 31, 2022 The following disclosures provide information on the valuation techniques, significant unobservable inputs, and the ranges and averages for each major category of assets and liabilities measured at fair value on a recurring basis with a significant Level 3 balance. The level of aggregation and breadth of products cause the range of inputs to be wide and not evenly distributed across the inventory of financial instruments. Further, the range of unobservable inputs may differ across firms in the financial services industry because of diversity in the types of products included in each firm's inventory. Generally, there are no predictable relationships between multiple significant unobservable inputs attributable to a given valuation technique. A single amount is disclosed when there is no significant difference between the minimum, maximum and average. | | | Balance / Range (Average) | | | | | |-----------------------------|----------------------|----------------------------|--|--|--|--| | | At December 31, 2022 | | | | | | | Assets at fair value | | | | | | | | Trading assets: | | | | | | | | Other debt | ಕ್ಕಾ | 314 | | | | | | Discounted Cash flow: | | | | | | | | I oss Given Default | | 54% to 84% (62% / 54%) | | | | | | Corporate equities | ക്ക | 18 | | | | | | Comparable pricing: | | | | | | | | Equity price | | 100% | | | | | | Net derivative contracts: | | | | | | | | Interest rate2 | ക്ക | (1) | | | | | | Option model: | | | | | | | | IR volatility skew | | 95% to 115% (101% / 104%) | | | | | | IR curve correlation | | 56% to 94% (78% / 81%) | | | | | | Inflation volatility | | 22% to 65% (43% / 38%) | | | | | | IR - foreign exchange | | 28% to 63% (46% / 43%) | | | | | | IR quanto correlation | | -8% to 37% (11% / 17%) | | | | | | Credit | ക്ക | (63) | | | | | | Credit default swap model: | | | | | | | | Cash synthetic basis | | 6.5 points (6.5 points) | | | | | | Comparable pricing: | | | | | | | | Bond price | | 0 to 83 points (44 points) | | | | | | Credit spread | | 2 to 547 bps (111 bps) | | | | | | Foreign exchange2 | ക്ക | 67 | | | | | | Option model: | | | | | | | | Deal contingent probability | | 95 % | | | | | | IR - FX correlation | | 28% to 63% (40% / 34%) | | | | | | IR curve | | -1% to 6% (3% / 4%) | | | | | | Foreign Exchange volatility | | 8% to 15% (10% / 10%) | | | | | | Equity | ಕ್ಕಾ | 24 | |----------------------------|------|--------------------------------| | Option model: | | | | At the money volatility | | 19% to 73% (29%) | | Volatility skew | | -5% to -1% (-3%) | | Comparable pricing: | | | | Comparable equity pricing | | 100% (100%) | | Growth Spread | | 0%
(0%) | | Commodity and other | ಕ್ಕಾ | 22 | | Discounted Cash flow: | | | | Loss Given Default | | 54% to 84% (62% / 54%) | | Discounted Cash flow: | | | | Funding spread | | 3 to 613 bps (56 bps / 53 bps) | | Liabilities at fair value: | | | | Other secured financings | ಕ್ಕಾ | 188 | | Discounted cash flow: | | | | Loss Given Default | | 54% to 84% (62% / 54%) | | Points - Percentage of par | | | IR - Interest rate FX - Foreign exchange 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 are more relevant. 2. Includes derivatives contracts with multiple risks (i.e., hybrid products). An increase (decrease) to the following significant unobservable 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. 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 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 hond - · 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. - · Contingency Probability: Probability associated with the realization of an underlying event upon which the value of an asset is contingent. An increase (decrease) to the following significant unobservable inputs would generally result in a lower (higher) fair value. {12}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| | <.,.5+.:
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| | | | | | | {14}------------------------------------------------ | | Derivative Liabilities at December 31, 2022 | | | | | | | | | | |---------------------------------------------------------------------------------------------------------------------|---------------------------------------------|----------------|---------------------|------------|------------------|-----------------|---------------------|----------------------|--|--| | | | | Fair Value | | Notional2 | | | | | | | | Bilateral
OTC | Cleared
OTC | Exchange-
Traded | Total | Bilateral
OTC | Cleared
OTC | Exchange-
Traded | Total | | | | Derivative contracts: | | | | | | | | | | | | Interest rate contracts | \$ 202,218 | ക്ക | S
443 | \$ 202,662 | \$ 6,292,354 | \$ 4,954,191 | ಕೆ
179,369 | \$11,425,914 | | | | Credit contracts | 8,392 | 2,405 | | 10,797 | 339,657 | 115,884 | | 455,541 | | | | Foreign exchange contracts | 81,775 | | 82 | 81,857 | 2,689,783 | | 30,870 | 2,720,653 | | | | Equity contracts | 11,782 | | 136 | 11,918 | 276,309 | | 869 | 277,178 | | | | Commodity and other contracts | 2,632 | | | 2,632 | 25,778 | | | 25,778 | | | | Total gross derivative contracts | 306,799 | 2,406 | 661 | 309,866 | \$ 9,623,881 | \$ 5,070,075 \$ | | 211,108 \$14,905,064 | | | | Amounts offset | | | | | | | | | | | | Counterparty netting | (283,939) | (2,037) | (591) | (286,567) | | | | | | | | Cash collateral netting | (13,455) | (368) | | (13,824) | | | | | | | | Total derivative liabilities | 9,405 | | 70 | 9,475 | | | | | | | | Amounts not offset | | | | | | | | | | | | Financial instruments collateral | (935) | | | (935) | | | | | | | | Other cash collateral | | | | | | | | | | | | Net amounts | છે
8,470 | ક | 5
70 | 8,540
ક | | | | | | | | Net amounts for which master netting or collateral agreements are not in place on
may not he legally enforceable | | | | 4
167 | | | | | | | 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. 2. Notional amounts of derivative contracts generally overstate the Company's exposure. In most circumstances, notional amounts are only used as a reference point from which to calculate amounts owed betwen the contract. Furthermore, notonal amounts do not reflect the benefit of legally enforceable netting arrangements or risk mitigating transactions. ## Credit Risk-Related Contingencies The following table presents the aggregate fair value of OTC derivative contracts that contain credit risk-related contingent features that are in a net liability position for which the Company has posted collateral in the normal course of business. ## Net Derivative Liabilities and Collateral Posted | | At
December
31, 2022 | | | | | |----------------------------------------|----------------------------|-------|--|--|--| | Net derivative liabilities with credit | | | | | | | risk-related contingent features | સ્ત્ર | 6.497 | | | | | Collateral posted | | 4.139 | | | | The additional collateral or termination payments which may be called in the event of a future credit rating downgrade vary by contract and can be based on either the counterparty's or the Ultimate Parent's ratings by either or both of Moody's and S&P. The table below shows the future potential collateral amounts and termination payments for the Company that could be called or required by counterparties or exchange and clearing organizations in the event of one-notch or two-notch downgrade scenarios based on the relevant contractual downgrade triggers. Incremental Collateral or Termination Payments upon Potential Future Ratings Downgrades | | At December
31, 2022 | | | | |-----------------------------------------------------------------|-------------------------|-----|--|--| | One-notch downgrade | ತಿ | 100 | | | | Two-notch downgrade | | 33 | | | | Bilateral downgrade agreements included in the
amounts above | ತಿ | 123 | | | 1. Amounts represent arrangements between the Company and counterparties where upon the downgrade of the counterparty or the Ultimate Parent, the counterparty or the Company must deliver collateral to the other party. These bilateral downgrade arrangements are used by the Company to manage the risk of counterparty downgrades. ### Credit Derivatives and Other Credit Contracts The Company enters into credit derivatives, principally CDS, under which it receives or provides protection against the risk of default on a set of debt obligations issued by a specified reference entity or entities. A majority of the Company's counterparties are banks, broker-dealers and other financial institutions. {15}------------------------------------------------ ### Maximum Potential Payout/Notional of Credit Protection Sold | | | | | | | | | | | | | Fair Value | |---------------------------------------------------------|----------------------------------------|--------|----|---------|------|---------|------|--------|------|---------|------|----------------| | | Years to Maturity at December 31, 2022 | | | | | | | Asset/ | | | | | | | < 1 | | | 1-3 | | 3-5 | | Over 5 | | Total | | (Liability)1,2 | | Single name CDS 3: | | | | | | | | | | | | | | Investment grade | S | 20.152 | ಕೆ | 45.024 | ಲ್ಲಿ | 47.195 | ക | 11,889 | ಲ್ಲಿ | 124,260 | ല്ല | 1,324 | | Non-investment grade | | 12,074 | | 28,370 | | 23,590 | | 3.419 | | 67.453 | | (2,361 | | Total | | 32,226 | | 73,394 | | 70,785 | | 15,308 | | 191,713 | | (1,037 | | Index and basket CDS3: | | | | | | | | | | | | | | Investment grade | | 4,108 | | 24,955 | | 42,995 | | 9,666 | | 81,724 | | 1,016 | | Non-investment grade | | 13,399 | | 30,751 | | 113,518 | | 26,341 | | 184,009 | | (1,799) | | Total | | 17,507 | | 55,706 | | 156,513 | | 36.007 | | 265,733 | | (783) | | Total CDS sold | ಕ್ಕಿ | 49.733 | ಕಾ | 129.100 | e | 227,298 | ਵਿ | 51,315 | ಕಾ | 457,446 | ಕೆ | (1,820) | | Other credit contracts | ಿತ | | ಕಾ | | ಲ್ಲಿ | | લ્લે | | ക | | 1 \$ | | | Total credit derivatives and | | | | | | | | | | | | | | other credit contracts | ಿ | 49.733 | ਫ | 129,100 | ಕ | 227,298 | | 51,316 | ಕ್ಕೆ | 457,447 | ಲ್ಲಿ | (1,820) | | CDS protection sold with identical protection purchased | | | | | | | | | ಕ್ಕಾ | 400,211 | | | 1. Fair value amounts are shown on a gross basis prior to cash collateral or counterparty netting. 2. Fair value amounts of certain CDS where the Company sold protection have an asset carrying value because of the underlying reference entity or entities tightened during the terms of the contracts. 3. Investment grade hon-investment grade on the internal credit rating of the reference obligation. Internal credit ratings serve as the CRVs assessment of credit risk and the basis for a comprehens used to control credit risk. The Company uses quantitative models and judgement to estimate the various risk parameters related to each obligor. 4. Other credit contracts are CDS that are considered hybrid instruments. ### Protection Purchased with CDS | | At December 31, 2022 | | | | | | |------------------------------|----------------------|------------|-------------------|-------|--|--| | | | | Fair Value | | | | | | | Notional | Asset/(Liability) | | | | | Single Name CDS | S | 193.005 \$ | | 977 | | | | Indices and Baskets | | 233,306 | | 1.152 | | | | Tranched Indices and Baskets | | 25,718 | | (222) | | | | Total | S | 452.029 \$ | | 1.907 | | | The purchase of credit protection does not represent the sole manner in which the Company risk manages its exposure to credit derivatives. The Company manages its exposure to these derivative contracts through a variety of risk mitigation strategies, which include managing the credit and correlation risk across single name, non-tranched indices and baskets, tranched indices and baskets, and cash positions. Aggregate market risk limits have been established for credit derivatives, and market risk measures are routinely monitored against these limits. The Company may also recover amounts on the underlying reference obligation delivered to the Company under CDS where credit protection was sold. Single Name CDS. A CDS protects the buyer against the loss of principal on a bond or loan in case of a default by the issuer. The protection buyer pays a periodic premium (generally quarterly) over the life of the contract and is protected for the period. The Company, in turn, performs under a CDS if a credit event as defined under the contract occurs. Typical credit events include bankruptcy, dissolution or insolvency of the referenced entity, failure to pay and restructuring of the obligations of the referenced entity. Index and Basket CDS. Index and basket CDS are products where credit protection is provided on a portfolio of single name CDS. Generally, in the event of a default on one of the underlying names, the Company pays a pro rata portion of the total notional amount of the CDS. The Company also enters into tranched index and basket CDS where the credit protection is provided on a particular portion of the portfolio loss distribution. The most junior tranches cover initial defaults, and once losses exceed the notional of the tranche, they are passed on to the next most senior tranche in the capital structure. ## 6. 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, meet collateral requirements with respect to its OTC derivatives, finance its inventory positions and meet liquidity and regulatory requirements. 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Rate | | Variable
Rate | | Total at
December
31, 2022 | | |-----------------------------------------------|---------------|-----|------------------|-------|----------------------------------|-------| | Original maturities of one year or
ess: | | | | | | | | Next 12 months | ಲ್ಲಿ | 326 | ക്ക | 1,735 | ਦੇ | 2,061 | | Original maturities greater than
one year: | | | | | | | | Due in 2023 | | | | | | | | Due in 2024 | | | | 5.435 | | 5.435 | | Due in 2025 | | | | 12 | | 12 | | Total | ಿತ | | ક | 5.447 | ക | 5.447 | | Total Borrowings | \$ | 326 | \$ | 7,182 | S | 7,508 | | Weighted average coupon at
period-end" | | | | 5.75% | | 5.75% | | Weighted average stated
maturity, in years | | | | | | 1.1 | 1. Includes only borrowings with original maturities greater than one year. Weighted average coupon was calculated utilizing U.S. dollar interest rates and excludes financial instruments for which the fair value option was elected. Borrowings with original maturities of one year or less primarily consist of unsecured borrowings from the Parent that mature in less than 12 months and hybrid financial instruments with embedded derivatives which are not classified as OTC derivatives because they fail net investment criteria. Borrowings with original maturities greater than one year primarily consist of unsecured borrowings from Parent and contracts which are not classified as OTC derivatives because they fail net investment criteria. The unsecured borrowings from Parent are callable with maturities of 13 months or more from when it is called. The interest rates for the unsecured borrowings from the Parent are in line with the Firm proxy rate. ## Other Secured Financings Other secured financings are stated at fair value and include hybrid financial contracts with embedded derivatives which are not classified as OTC derivatives because they fail net investment criteria. Maturities and Terms of Other Secured Financings | | At December 31, 2022 | | | | | | |-----------------------------------------------|----------------------|--------|--------------------------------|----|------|-----| | | | | Fixed Rate Variable Rate Total | | | | | Original maturities of one
year or less: | | | | | | | | Next 12 months | ല്ല | | ಳಿ | | ಕೆ | | | Original maturities greater
than one year: | | | | | | | | Due in 2024 | | 35 | | 0 | | 35 | | Due in 2025 | | 153 | | 39 | | 192 | | Thereafter | | | | | | | | Total Other secured
financings | ക്ക | 188 \$ | | 39 | ಕ್ಕಾ | 277 | ## 8. Subordinated Liabilities The Company entered into agreements with its Parent for subordinated liabilities. The agreements consist of a \$6,800 subordinated loan and a \$10,000 subordinated revolving note, of which \$6,000 was drawn. The interest rates for the agreements are in line with the Firm proxy rate. The maturity dates, interest rates and book value of the subordinated Notes at December 31, 2022 are as follows: | Subordinated Notes | Maturity Date | Interest
Rate | Book Value | |--------------------------------------------|----------------------|------------------|--------------| | Cash subordination
agreement | September 9.
2031 | 5.75 % \$ | 6,800 | | Subordinated revolvinq
credit agreement | September 9,
2031 | 5.75 % | 6.000 | | Total | | | ತಿ
12.800 | ## 9. Commitments, Guarantees and Contingencies ## Commitments | | Years to Maturity | | | | | | | | | |--------------------------|-------------------|-----|--|-----|--|-----------------|------------------------------|--|-------| | Type of Commitment | | < 1 | | 1-3 | | 3-5 | Over 5 | | Total | | Forward-starting secured | | | | | | | | | | | financing receivables' | | | | | | | \$ 19 \$ - \$ - \$ - \$ - \$ | | 19 | | Total | ಕೆ | | | | | 19 \$ - \$ - \$ | - \$ | | 19 | 1. Forward-starting secured financing receivables are generally settled within three business days ## Type of Commitments Forward-Starting Secured Financing Receivables. This amount represents reverse repurchase agreements that the Company has entered into prior to the date of the statement of financial condition that will settle after the statement of financial condition. These transactions are primarily secured by collateral {18}------------------------------------------------ from U.S. government agency securities and other sovereign government obligations when they are funded. ### Guarantees ### Obligations under Guarantee Arrangements at December 31, 2022 | | Maximum Potential Payout/Notional | | | | | | | | |------------------------------------|--------------------------------------------------------|-----|-----|--------|-------|--|--|--| | | Years to Maturity | | | | | | | | | Type of Guarantee | < 1 | 1-3 | 3-5 | Over 5 | Total | | | | | Non-credit derivative
contracts | \$ 1,307,579 \$796,784 \$442,911 \$827,781 \$3,375,055 | | | | | | | | | | Carrying Amount Asset / (Liability) | | |-------------------------------------------------------------------------------------|-------------------------------------|-------------| | Non-credit derivative contracts' | | \$ (61,574) | | 1. Carrying amount of derivative contracts that meet the accounting definition of a | | | quarantee are shown on a gross basis prior to cash collateral or counterparty netting. For further information on derivative contracts, see Note 5. ## Types of Guarantees ## Non-Credit Derivative Certain derivative contracts meet the accounting definition of a guarantee, including certain written options, contingent forward contracts and CDS (see Note 5 regarding credit derivatives in which the Company has sold credit protection to the counterparty). For non-credit derivative contracts that meet the accounting definition of a guarantee the notional amount is used as the maximum potential payout for certain derivative contracts, such as written interest rate caps and written foreign currency options. The Company evaluates collateral requirements for all derivatives, including derivatives that do not meet the accounting definition of a guarantee. For the effects of cash collateral and counterparty netting, see Note 5. In certain situations, collateral may be held by the Company for those contracts that meet the definition of a guarantee. Generally, the Company sets collateral requirements by counterparty so that the collateral covers various transactions and products and is not allocated specifically to individual contracts. Also, the Company may recover amounts related to the underlying asset delivered to the Company under the derivative contract. ## Other Guarantees ## Clearinghouse Member Guarantees The Company is a member of various U.S. and non-U.S. clearinghouses that trade and clear securities and/or derivative contracts. Associated with its membership, the Company may be required to pay a proportionate share of the financial obligations of another member who may default on its obligations to the clearinghouse. While the rules governing different clearinghouse memberships vary, in general the Company's obligations under these rules would arise only if the clearinghouse had previously exhausted its resources. The maximum potential payout under these membership agreements cannot be estimated. The Company has not recorded any contingent liability in the statement of financial condition for these agreements and believes that any potential requirement to make payments under these agreements is remote. ## Contingencies ### Legal In addition to the matter 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 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, {19}------------------------------------------------ @1BD93E<1B7C1>49>F5CD971D9?>CG85B5D85 613DE1< B53?B4 9C 259>7 45F5D5CD54 ?B G85B5 @<19>D966C ?B 7?F5B>=5>D 5>D9D95C C55; CE2CD1>D91< ?B 9>45D5B=9>1D5 41=175C B5CD9DED9?> 49C7?B75=5>D?B@5>1554 D?25B5C?1<75?61< B1>75 ?6 25 B51C?>127 ?B 9>F5CD971D9?> 9>37 D8B?E78 @?D5>D91<7D8I49C3?F5BI1>445D5B=9>1D9?>?69=@?BD1>D613DE1<=1DD5BC 45D5B=9>1D9?> ?6 9CCE5C B5<1D54 D? 3<1CC 35BD96931D9?> 1>4 D85 31<3E<1D9?>?641=175C?B?D85BB5<956 1>43?>C945B1D9?>?6>?F5< ?B E>C5DD<54 <571< AE5CD9?>C B5<5F1>D D? 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District of Columbia, Puerto Rico, and the U.S.
territories and possessions | | LCH | London Clearing House | U.S. GAAP | Accounting principles generally accepted in the
United States of America | | LIBOR | London Inter-bank Offered Rate | VaR | Value at Risk | | M&A | Merger, acquisition and restructuring transaction | VIE | Variable interest entity | | MRM | Model Risk Management department | | | | MS&Co. | Morgan Stanley & Co. LLC | | | | MSCAP | Morgan Stanley Capital Products LLC | | | | MSCS | Morgan Stanley Capital Services LLC | | | | MSDHI | Morgan Stanley Domestic Holdings, Inc. | | | | MSES | Morgan Stanley Equity Services LLC | | | | OECD | Organization for Economic Cooperation and
Development | | | | | | | | \*\*\*\*\*\*\* Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.