Report and financial statements

31 December 2014
Registered number: 34161590
Registered office:
Luna Arena
Herikerbergweg 238
1101 CM
Amsterdam Zuidoost
The Netherlands
MORGAN STANLEY B.V.
Report and financial statements
31 December 2014
MORGAN STANLEY B.V.
CONTENTS PAGE
ANNUAL REPORT
Directors' report 1
Directors' responsibility statement 7
ANNUAL ACCOUNTS
Statement of comprehensive income 8
Statement of changes in equity 9
Statement of financial position 10
Statement of cash flows 11
Notes to the financial statements 12
OTHER INFORMATION
Additional information 53
Independent auditor's report 54
MORGAN STANLEY B.V.
DIRECTORS’ REPORT
1
The Directors present their report and financial statements (which comprise the
statement of comprehensive
income, statement of changes in equity, statement of financial position,
statement of cash flows and the
related notes, 1 to 19) for Morgan Stanley B.V. (the “Company”) for the year
ended 31 December 2014.
RESULTS AND DIVIDENDS
The profit for the year, after tax, was €4,993,000 (2013: €4,576,000).
During the year, no dividends were paid or proposed (2013: €nil).
PRINCIPAL ACTIVITY
The principal activity of the Company is the issuance of financial instruments
including notes, certificates
and warrants (“Structured Notes”) and the hedging of the obligations arising
pursuant to such issuances.
The Company was incorporated under Dutch law on 6 September 2001 and has its
statutory seat in
Amsterdam, the Netherlands. The business office of the Company is at Luna Arena,
Herikerbergweg 238,
1101 CM, Amsterdam, The Netherlands.
The Company’s ultimate parent undertaking and controlling entity is Morgan
Stanley, which, together with
the Company and Morgan Stanley’s other subsidiary undertakings, form the “Morgan
Stanley Group”.
FUTURE OUTLOOK
There have not been any significant changes in the Company’s principal activity,
financing or investment
activity in the year under review and no significant change is expected.
BUSINESS REVIEW
During 2014, global market and economic conditions displayed a continued but
choppy improvement from
2013, characterised by continued global central bank accommodations, low
inflation, geopolitical tensions,
and sharply lower oil prices during the final months of the year. The United
States (“US”) economy, which
started 2014 with a weather-impacted first quarter decline in gross domestic
product (“GDP”), ended the
year with annualised GDP growth. The Eurozone economy, by contrast, stalled in
the second quarter
before showing some signs of improvement in the second half of the year, as the
annexation of the Crimea
region in Ukraine by Russia and conflict in Eastern Ukraine raised anxiety and
tensions which weighed on
regional economies. In the United Kingdom (“UK”), GDP growth continued to
accelerate, while the
Japanese economy saw substantial volatility surrounding a national sales tax
hike, resulting in a GDP
growth rate near zero for all of 2014. In China, the government continued
reforms to change the structure
of the Chinese economy, accepting a somewhat less rapid growth pace as
deleveraging is pursued, but
targeted easing measures by the Chinese central bank supported a gain in real
GDP in 2014.
The statement of comprehensive income for the year is set out on page 8. The
Company made a profit
before income tax of €6,658,000 in the current year, an increase of €564,000
from the prior year due to an
increase in the average level of Structured Notes in issuance during the current
year on which management
charges are received. Management charges are reflected in ‘Other income’ in the
statement of
comprehensive income.
Net gains on financial instruments classified as held for trading and net losses
on financial instruments
designated at fair value through profit or loss offset to €nil, which is
consistent with the Company’s
function and the prior year. The Company hedges its Structured Notes with
derivatives, loans and prepaid
equity securities contracts. Net losses on financial instruments designated at
fair value through profit or loss
of €185,570,000 represents fair value movements for the year on the issued
Structured Notes, prepaid
equity securities contracts and loans designated at fair value (2013:
€509,271,000). This loss has arisen as a
result of unfavourable fair value movements on the assets underlying certain
Structured Notes issued that
are hedged by derivatives classified as held for trading, on which a
corresponding gain of €185,570,000 has
been recognised (2013: €509,271,000).
MORGAN STANLEY B.V.
DIRECTORS’ REPORT
2
BUSINESS REVIEW (CONTINUED)
Interest expense and interest income primarily relate to the yield payable on
Convertible Preferred Equity
Certificates (“CPECs”), and interest receivable on a loan to another Morgan
Stanley Group undertaking.
The statement of financial position for the Company is set out on page 10. The
Company’s total assets at 31
December 2014 are €8,081,802,000, a decrease of €88,808,000 or 1% when compared
to 31 December
2013. Total liabilities of €8,051,732,000 represent a decrease of €93,801,000 or
1%, when compared to
total liabilities at 31 December 2013. These movements are primarily
attributable to the value of issued
Structured Notes and the related hedging instruments held at 31 December 2014.
Structured Notes have
decreased since 31 December 2013 as a result of maturities and fair value
movements in the year partially
offset by new issuances. The decrease in the value of issued Structured Notes
has resulted in a net decrease
in the value of the related hedging instruments.
The performance of the Company is included in the results of the Morgan Stanley
Group which are
disclosed in the Morgan Stanley Group’s Annual Report on Form 10-K to the US
Securities and Exchange
Commission. The Morgan Stanley Group manages its key performance indicators on a
global basis but in
consideration of individual legal entities. For this reason, the Company’s
Directors believe that providing
further performance indicators for the Company itself would not enhance an
understanding of the
development, performance or position of the business of the Company.
The risk management section below sets out the Company's and the Morgan Stanley
Group's policies for the
management of liquidity and cash flow risk and other significant business risks.
Risk management
Risk is an inherent part of the Company’s business activity. The Company seeks
to identify, assess, monitor
and manage each of the various types of risk involved in its business
activities, in accordance with defined
policies and procedures. The Company has developed its own risk management
policy framework, which
leverages the risk management policies and procedures of the Morgan Stanley
Group, and which include
escalation to the Company’s Board of Directors and to appropriate senior
management personnel of the
Company as well as oversight through the Company’s Board of Directors.
Set out below is an overview of the Company’s policies for the management of
financial risk and other
significant business risks. More detailed qualitative and quantitative
disclosures about the Company’s
management of and exposure to financial risks are included in note 14 to the
financial statements.
Market risk
Market risk refers to the risk that a change in the level of one or more market
prices, rates, indices, implied
volatilities (the price volatility of the underlying instrument implied from
option prices), correlations or
other market factors, such as liquidity, will result in losses for a position or
portfolio.
Market risk management policies and procedures for the Company are consistent
with those of the Morgan
Stanley Group and include escalation to the Company’s Board of Directors and
appropriate senior
management personnel.
The Company manages the market risk associated with its trading activities at
both a trading division and
an individual product level.
It is the policy and objective of the Company not to be exposed to market risk.
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 management policies and procedures for the Company are consistent
with those of the Morgan
Stanley Group and include escalation to the Company’s Board of Directors and
appropriate senior
management personnel.
MORGAN STANLEY B.V.
DIRECTORS’ REPORT
3
BUSINESS REVIEW (CONTINUED)
Risk management (continued)
Credit risk (continued)
Credit risk exposure is managed on a global basis and in consideration of each
significant legal entity
within the Morgan Stanley Group. The credit risk management policies and
procedures establish the
framework for identifying, measuring, monitoring and controlling credit risk
whilst ensuring transparency
of material credit risks, ensuring compliance with established limits and
escalating risk concentrations to
appropriate senior management.
Liquidity and funding risk
Liquidity and funding risk refers to the risk that the Company will be unable to
finance its operations due to
a loss of access to the capital markets or difficulty in liquidating its assets.
Liquidity and funding risk also
encompasses the Company’s ability to meet its financial obligations without
experiencing significant
business disruption or reputational damage that may threaten its viability as a
going concern.
The primary goal of the Morgan Stanley Group’s liquidity and funding risk
management framework is to
ensure that the Morgan Stanley Group, including the Company, have access to
adequate funding across a
wide range of market conditions. The framework is designed to enable the Morgan
Stanley Group to fulfil
its financial obligations and support the execution of the Company’s business
strategies. The Company’s
capital management framework is further described in note 18.
The Company continues to actively manage its capital and liquidity position to
ensure adequate resources
are available to support its activities, to enable it to withstand market
stresses.
Operational risk
Operational risk refers to the risk of loss, or of damage to the Company’s
reputation, resulting from
inadequate or failed processes, people and systems or from external events. This
definition includes legal,
regulatory and compliance risks but excludes strategic risk. Operational risk
relates to the following risk
event categories as defined by Basel II: internal fraud; external fraud;
employment practices and workplace
safety; clients, products and business practices; business disruption and system
failure; damage to physical
assets; and execution, delivery and process management.
The Company may incur operational risk across the full scope of its business
activities. The Company’s
business is highly dependent on its ability to process, on a daily basis, a
large number of transactions across
numerous and diverse global markets. In addition, new products or services may
be introduced that impact
or change business processes, thereby resulting in new operational risks that
may not have been fully
anticipated or identified. In general, the transactions processed are
increasingly complex. The Company
relies on the ability of the Morgan Stanley Group employees, internal systems,
and systems at technology
centres operated by unaffiliated third parties to process a high volume of
transactions.
The Company also faces the risk of operational failure or termination of any of
the clearing agents,
exchanges, clearing houses or financial intermediaries it uses to facilitate
securities/ client transactions. In
the event of a breakdown, unauthorised or improper operation of the Company’s or
a third party’s systems
the Company could suffer financial loss, an impairment to its liquidity, a
disruption of its businesses,
regulatory sanctions and/ or reputational damage. In addition, the
interconnectivity of multiple financial
institutions with central agencies, exchanges and clearing houses, and the
increased interconnectivity of
these entities, increases the risk that an operational risk failure at one
institution or entity may cause an
industry-wide operational failure that could materially impact the Company’s
ability to conduct business.
MORGAN STANLEY B.V.
DIRECTORS’ REPORT
4
BUSINESS REVIEW (CONTINUED)
Risk management (continued)
Operational risk (continued)
The Company relies on the secure processing, storage and transmission of
confidential and other
information in its computer systems and the systems of third parties which the
Company does business with
or that facilitate its business activities, such as external vendors and with
third-party suppliers. Like other
financial services firms, the Company and its third party providers have been,
and continue to be, subject to
unauthorised access, mishandling or misuse of information, computer viruses or
malware, cyber attacks
designed to obtain confidential information, destroy data disrupt or degrade
service, sabotage systems or
cause other system damage. If one or more of these events occur, these events
could have a security impact
on the Company’s systems and jeopardise the Company’s clients’, business
partners or counterparties’
personal, confidential, proprietary or other information processed, stored in,
and transmitted through, third
party providers’ computer systems. Furthermore, such events could cause
interruptions or malfunctions in
the Company’s, and/ or the Company’s clients’, counterparties’ or third parties’
operations, which could
result in reputational damage with our clients and the market, client
dissatisfaction, additional cost to repair
systems, add new protective technologies and/ or personnel, regulatory
investigations, litigation and/ or
regulatory fines, all of which adversely affect the business, financial
condition and results of operations.
The Company is exposed to legal, regulatory and compliance risks, which include
the risk of legal or
regulatory sanctions, material financial loss; such as fines, penalties,
judgements, damages and/ or
settlements or loss to reputation the Company may suffer as a result of a
failure to comply with laws,
regulations, rules, self-regulatory organisations standards and codes of conduct
applicable to business
activities. Legal risk also includes contractual and commercial risks in the
event that a counterparty’s
performance obligations will be unenforceable. The Company is generally subject
to extensive regulation in
the different jurisdictions in which it conducts its business. In the current
environment of rapid and possibly
transformational regulatory changes, the Company also views regulatory changes
as a component of legal
risk.
The Company has established procedures designed to foster compliance with
applicable statutory and
regulatory requirements. The Company, principally through the Morgan Stanley
Group’s Legal and
Compliance Division, also has established procedures that are designed to
require that the Morgan Stanley
Group’s policies relating to business conduct, ethics and practices are followed
globally. In connection with
its businesses, the Company continuously develops various procedures addressing
issues such as regulatory
capital requirements, sales and trading practices, new products, information
barriers, potential conflicts of
interest, structured transactions, use and safekeeping of customer funds and
securities, lending and credit
granting, anti-money laundering, privacy and recordkeeping. In addition, the
Company has established
procedures to mitigate the risk that a counterparty’s performance obligations
will be unenforceable,
including consideration of counterparty legal authority and capacity, adequacy
of legal documentation, the
permissibility of a transaction under applicable law and whether applicable
bankruptcy or insolvency laws
limit or alter contractual remedies. The legal and regulatory focus on the
financial services industry
presents a continuing business challenge for the Company.
MORGAN STANLEY B.V.
DIRECTORS’ REPORT
5
BUSINESS REVIEW (CONTINUED)
Risk management (continued)
Culture, Values and Conduct of Employees
All of the Morgan Stanley Group’s employees have accountability for risk
management. The Morgan
Stanley Group strives to establish a culture of effective risk management
through its defined core values,
governance framework, management oversight, training and development programs,
policies, procedures,
and defined roles and responsibilities within the Morgan Stanley Group. The
actions and conduct of each
employee are essential to risk management. The Morgan Stanley Group’s Code of
Conduct (the “Code”)
has been established to provide a framework and standards for employee conduct
that further reinforces the
Morgan Stanley Group’s commitment to integrity and high ethical standards. Every
new hire and every
employee annually must certify to their understanding of and adherence to the
Code. The employee annual
review process includes evaluation of adherence to the Code. The Global
Incentive Compensation
Discretion Policy sets forth standards that specifically provide that managers
must consider whether the
employee effectively managed and supervised the risk control practices of
his/her employee reports during
the performance year. The Morgan Stanley Group has several mutually reinforcing
processes to identify
incidents of employee conduct that may have an impact on the employment status,
current year
compensation or prior year compensation. The Morgan Stanley Group’s clawback and
cancellation
provisions permit recovery of deferred incentive compensation where, for
example, an employee’s act or
omission (included with respect to direct supervisory responsibilities) causes a
restatement of the Morgan
Stanley Group’s consolidated financial results, constitutes a violation of the
Morgan Stanley Group’s global
risk management principles, policies and standards, or causes a loss of revenue
associated with a position
on which the employee was paid and the employee operated outside of internal
control policies.
Going concern
Business risks associated with the uncertain market and economic conditions are
being monitored and
managed by the Morgan Stanley Group and the Company. Retaining sufficient
liquidity and capital to
withstand these market pressures remains central to the Morgan Stanley Group’s
and the Company’s
strategy. In particular, the Morgan Stanley Group’s capital is deemed sufficient
to exceed the minimum
capital ratio under the most negative stressed scenario reviewed by the US
Federal Reserve. The Morgan
Stanley Group regularly performs stress testing to ensure it has sufficient
resources at its disposal to absorb
losses associated with certain stressed scenarios.
Taking all of these factors into consideration, the Directors believe it is
reasonable to assume that the
Company will have access to adequate resources to continue in operational
existence for the foreseeable
future. Accordingly they continue to adopt the going concern basis in preparing
the annual report and
financial statements.
DIRECTORS
The following Directors held office throughout the year and to the date of
approval of this report:
R H L de Groot
H Herrmann
P J G de Reus
Z Wu
TMF Management B.V.
MORGAN STANLEY B.V.
DIRECTORS’ REPORT
6
DIRECTORS (CONTINUED)
The Company has taken notice of Dutch legislation effective as of 1 January
2013, as a consequence of
which the Company should take into account as much as possible a balanced
composition of the Board of
Directors in terms of gender, when nominating or appointing Directors, to the
effect that at least 30 percent
of the positions should be held by women and at least 30 percent by men.
Currently the composition of the
Board of Directors deviates from the gender diversity objectives. When
appointing a Director, the Board of
Directors considers the gender diversity objectives, as appropriate.
EVENTS AFTER THE REPORTING DATE
There have been no significant events since the reporting date.
AUDIT COMMITTEE
The Company qualifies as an organisation of public interest pursuant to Dutch
and European Union (“EU”)
law. Morgan Stanley International Limited, a shareholder in the Company as at 31
December 2014, has an
audit committee that functioned as the audit committee of the Company. On 26
March 2015, Morgan
Stanley International Limited disposed of its shareholding in the Company;
accordingly, the Company can
no longer take the exemption available for groups and has established its own
audit committee which
complies with the applicable corporate governance rules.
AUDITOR
Deloitte Accountants B.V. have expressed their willingness to continue in office
as auditor of the Company
and a resolution to re-appoint them will be proposed at the forthcoming annual
general meeting.
Approved by the Board and signed on its behalf by
R H L de Groot H Herrmann P J G de Reus
Z Wu TMF Management B.V.
MORGAN STANLEY B.V.
DIRECTORS’ RESPONSIBILITY STATEMENT
7
The Directors, the names of whom are set out below, confirm to the best of their
knowledge:
- the financial statements have been prepared in accordance with International
Financial Reporting
Standards (“IFRSs”) as issued by the International Accounting Standards Board
(“IASB”) and as
endorsed by the EU and give a true and fair view of the assets, liabilities,
financial position and profit
or loss of the Company; and
- the management report represented by the Directors’ report includes a fair
review of the development
and performance of the business and the position of the Company together with a
description of the
principal risks and uncertainties that the Company faces.
Approved by the Board and signed on its behalf by
R H L de Groot H Herrmann P J G de Reus
Z Wu TMF Management B.V.
MORGAN STANLEY B.V.
STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 December 2014
8
Note 2014 2013
€'000 €'000
Net gains on financial instruments classified as held
for trading 185,570 509,271
Net losses on financial instruments designated at fair
value through profit or loss (185,570) (509,271)
Interest income 4 24,932 25,554
Interest expense 4 (24,832) (25,459)
Other income 5 6,658 6,094
Other expense 6 (100) (95)
PROFIT BEFORE INCOME TAX 6,658 6,094
Income tax expense 7 (1,665) (1,518)
PROFIT AND TOTAL COMPREHENSIVE INCOME FOR
THE YEAR 4,993 4,576
The notes on pages 12 to 52 form an integral part of the financial statements.
MORGAN STANLEY B.V.
STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2014
9
Share
capital
Retained
earnings
Total
equity
€'000 €'000 €'000
Balance at 1 January 2013 15,018 5,483 20,501
Profit and total comprehensive income for the year - 4,576 4,576
Balance at 31 December 2013 15,018 10,059 25,077
Profit and total comprehensive income for the year - 4,993 4,993
Balance at 31 December 2014 15,018 15,052 30,070
The notes on pages 12 to 52 form an integral part of the financial statements.
MORGAN STANLEY B.V.
Registered number: 34161590
STATEMENT OF FINANCIAL POSITION
As at 31 December 2014
(Including Proposed Appropriation of Results)
10
Note 2014 2013
€'000 €'000
ASSETS
Loans and receivables:
Cash and short-term deposits 510 1,585
Trade receivables 24,586 2,947
Other receivables 19 1,486,292 1,195,027
1,511,388 1,199,559
Financial assets classified as held for trading 9 527,856 979,451
Financial assets designated at fair value through profit or loss 10 6,042,485
5,990,950
Current tax assets 73 650
TOTAL ASSETS 8,081,802 8,170,610
LIABILITIES AND EQUITY
Financial liabilities at amortised cost:
Convertible preferred equity certificates 8 1,195,354 1,170,579
Trade payables 296,607 54,607
Other payables 19 10,024 21
1,501,985 1,225,207
Financial liabilities classified as held for trading 9 503,487 283,324
Financial liabilities designated at fair value through profit or loss 10
6,046,260 6,637,002
TOTAL LIABILITIES 8,051,732 8,145,533
EQUITY
Share capital 11 15,018 15,018
Retained earnings 15,052 10,059
Equity attributable to owners of the Company 30,070 25,077
TOTAL EQUITY 30,070 25,077
TOTAL LIABILITIES AND EQUITY 8,081,802 8,170,610
These financial statements were approved by the Board and authorised for issue
on
Signed on behalf of the Board
R H L de Groot H Herrmann P J G de Reus
Z Wu TMF Management B.V.
The notes on pages 12 to 52 form an integral part of the financial statements.
MORGAN STANLEY B.V.
STATEMENT OF CASH FLOWS
Year ended 31 December 2014
11
2014 2013
OPERATING ACTIVITIES
€'000 €'000
Profit for the year 4,993 4,576
Adjustments for:
Interest income (24,932) (25,554)
Interest expense 24,832 25,459
Income tax expense 1,665 1,518
Operating cash flows before changes in operating assets and
liabilities 6,558 5,999
Changes in operating assets
Increase in loans and receivables, excluding
cash and short-term deposits (287,972) (4,850)
Decrease/ (increase) in financial assets classified as held for
trading 451,595 (418,053)
Increase in financial assets designated at fair value
through profit or loss (51,535) (1,201,488)
112,088 (1,624,391)
Changes in operating liabilities
Increase in financial liabilities at amortised cost,
excluding bank loans and overdrafts 251,994 32,070
Increase in financial liabilities classified as held for
trading 220,163 17,974
(Decrease)/ increase in financial liabilities designated at fair value
through profit or loss (590,742) 1,571,410
(118,585) 1,621,454
Interest paid (48) (75)
Income taxes paid (1,088) (2,657)
(1,136) (2,732)
NET CASH FLOWS (USED IN)/ FROM OPERATING
ACTIVITIES (1,075) 330
NET (DECREASE)/ INCREASE IN CASH AND CASH
EQUIVALENTS (1,075) 330
CASH AND CASH EQUIVALENTS AT THE BEGINNING
OF THE YEAR 1,585 1,255
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 510 1,585
The notes on pages 12 to 52 form an integral part of the financial statements.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
12
1. CORPORATE INFORMATION
The Company is incorporated and domiciled in The Netherlands, at the following
address:
Luna Arena, Herikerbergweg 238, 1101 CM, Amsterdam, The Netherlands.
The Company is engaged in the issuance of Structured Notes and the hedging of
the obligations arising
pursuant to such issuances with prepaid equity securities contracts, loans
designated at fair value through
profit or loss and derivatives entered into with Morgan Stanley Group
undertakings.
The issued Structured Notes expose the Company to the risk of changes in market
prices of the underlying
securities, interest rate risk and, where denominated in currencies other than
Euros, the risk of changes in
rates of exchange between the Euro and the other relevant currencies. The
Company uses the contracts that
it purchases from other Morgan Stanley Group undertakings to hedge the market
price, interest rate and
foreign currency risks associated with the issuance of the Structured Notes. The
changes in fair value of the
Structured Notes issuances are fully hedged by the changes in fair value of
these contracts.
2. BASIS OF PREPARATION
Statement of compliance
The Company has prepared its annual financial statements in accordance with
IFRSs issued by the IASB as
adopted by the EU, Interpretations issued by the IFRS Interpretations Committee
and Dutch law.
New standards and interpretations adopted during the year
The following amendment to a standard relevant to the Company’s operations was
adopted during the year.
This amendment did not have a material impact on the Company’s financial
statements.
An amendment to IAS 32 ‘Financial instruments: Presentation – offsetting
financial instruments’ (“IAS
32”) was issued by the IASB in December 2011, for retrospective application in
annual periods beginning
on or after 1 January 2014. The amendment was endorsed by the EU in December
2012.
There were no other standards or interpretations relevant to the Company’s
operations which were adopted
during the year.
New standards and interpretations not yet adopted
At the date of authorisation of these financial statements, the following
standards and amendments to
standards relevant to the Company’s operations were issued by the IASB but not
yet mandatory. Except
where otherwise stated, the Company does not expect that the adoption of the
following standards and
amendments to standards will have a material impact on the Company’s financial
statements.
An amendment to IAS 1 ‘Disclosure initiative’ was issued by the IASB in December
2014, for application
in annual periods beginning on or after 1 January 2016.
IFRS 9 ‘Financial instruments’ (“IFRS 9”) was issued by the IASB in November
2009, amended in
November 2013, and revised and reissued by the IASB in July 2014. Retrospective
application is required
by IFRS 9, which is effective for annual periods beginning on or after 1 January
2018. Early adoption,
either in full or relating to own credit in isolation, is permitted. Although
there are expected to be
significant changes to the presentation of financial instruments by the Company,
there is not expected to be
a significant impact on net assets.
IFRS 15 ‘Revenue from Contracts with Customers’ was issued by the IASB in May
2014 for retrospective
application in annual periods beginning on or after 1 January 2017.
As part of the December 2013 Improvements to IFRSs, the IASB made amendments to
the following
standards that are relevant to the Company's operations IFRS 13 ‘Fair value
measurement’ and IAS 24
‘Related party disclosures’ (for application in accounting periods beginning on
or after 1 July 2014). The
improvements were endorsed by the EU in December 2014.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
13
2. BASIS OF PREPARATION (CONTINUED)
New standards and interpretations not yet adopted (continued)
As part of the September 2014 Improvements to IFRSs, the IASB made amendments to
the following
standards that are relevant to the Company’s operations: IFRS 7, ‘Financial
instruments: Disclosures’
(“IFRS 7”) and IAS 34 ‘Interim financial reporting’ (for application in
accounting periods beginning on or
after 1 January 2016).
Basis of measurement
The financial statements of the Company are prepared under the historical cost
basis except for certain
financial instruments that have been measured at fair value as explained in the
accounting policies below.
Use of estimates and sources of uncertainty
The preparation of the Company’s financial statements requires management to
make judgements,
estimates and assumptions regarding the valuation of certain financial
instruments, impairment of assets
and other matters that affect the financial statements and related disclosures.
The Company believes that the
estimates utilised in preparing the financial statements are reasonable,
relevant and reliable. Actual results
could differ from these estimates.
For further details on the judgements used in determining fair value of certain
assets and liabilities, see note
16.
The going concern assumption
The Company’s business activities, together with the factors likely to affect
its future development,
performance and position, are reflected in the Business Review section of the
Directors' report on pages 1
to 5. In addition, the notes to the financial statements include the Company’s
objectives, policies and
processes for managing its capital; its financial risk management objectives;
details of its financial
instruments; and its exposures to credit risk and liquidity risk.
As set out in the Directors' report, retaining sufficient liquidity and capital
to withstand market pressures
remains central to the Morgan Stanley Group’s and the Company’s strategy.
Taking all of these factors into consideration, the Directors believe it is
reasonable to assume that the
Company will have access to adequate resources to continue in operational
existence for the foreseeable
future. Accordingly, they continue to adopt the going concern basis in preparing
the annual report and
financial statements.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Functional currency
Items included in the financial statements are measured and presented in Euros,
the currency of the primary
economic environment in which the Company operates.
All currency amounts in the financial statements and Directors’ report are
rounded to the nearest thousand
Euros.
b. Foreign currencies
All monetary assets and liabilities denominated in currencies other than Euros
are translated into Euros at
the rates ruling at the reporting date. Transactions in currencies other than
Euros are recorded at the rates
prevailing at the dates of the transactions. All translation differences are
taken through the statement of
comprehensive income. Exchange differences recognised in the statement of
comprehensive income are
presented in ‘Other income’ or ‘Other expense’, except where noted in 3(c)
below.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
14
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
c. Financial instruments
The Company classifies its financial assets into the following categories on
initial recognition: financial
assets classified as held for trading, financial assets designated at fair value
through profit or loss and loans
and receivables.
The Company classifies its financial liabilities into the following categories
on initial recognition: financial
liabilities classified as held for trading; financial liabilities designated at
fair value through profit or loss
and financial liabilities at amortised cost.
More information regarding these classifications is included below:
i) Financial instruments classified as held for trading
Financial instruments classified as held for trading, including all derivatives,
are initially recorded on
trade date at fair value (see note 3(d) below). All subsequent changes in fair
value, foreign exchange
differences, interest and dividends are reflected in the statement of
comprehensive income in ‘Net gains
on financial instruments classified as held for trading’. Transaction costs are
excluded from the initial fair
value measurement of the financial instrument. Any such costs are recognised in
the statement of
comprehensive income in ‘Other expense’.
ii) Financial instruments designated at fair value through profit or loss
The Company has designated certain financial instruments at fair value through
profit or loss when the
financial instruments are managed, evaluated and reported internally on a fair
value basis.
From the date the transaction in a financial instrument designated at fair value
through profit or loss is
entered into (trade date) until settlement date, the Company recognises any
unrealised fair value changes
in the contract as financial instruments designated at fair value through profit
or loss. On settlement date,
the fair value of consideration given or received is recognised as a financial
instrument designated at fair
value through profit or loss (see note 3(d) below). All subsequent changes in
fair value, foreign exchange
differences, interest and dividends are reflected in the statement of
comprehensive income in ‘Net losses
on financial instruments designated at fair value through profit or loss’.
Transaction costs are excluded from the initial fair value measurement of the
financial instrument. Any
such costs are recognised in the statement of comprehensive income in ‘Other
expense’.
iii) Loans and receivables and financial liabilities at amortised cost
Financial assets classified as loans and receivables are recognised when the
Company becomes a party to
the contractual provisions of the instrument. They are initially measured at
fair value (see note 3(d)
below) and subsequently measured at amortised cost less allowance for
impairment. Interest is recognised
in the statement of comprehensive income in ‘Interest income’, using the
effective interest rate method as
described below. Transaction costs that are directly attributable to the
acquisition of the financial asset
are added to or deducted from the fair value on initial recognition. Any
impairment losses and reversals of
impairment losses on financial assets classified as loans and receivables are
recognised in the statement of
comprehensive income in ‘Other expense’.
Financial liabilities at amortised cost are recognised when the Company becomes
a party to the
contractual provisions of the instrument. They are initially measured at fair
value (see note 3(d) below)
and subsequently measured at amortised cost. Interest is recognised in the
statement of comprehensive
income in ‘Interest expense’ using the effective interest rate method as
described below. Transaction
costs that are directly attributable to the issue of the financial liability are
added to or deducted from the
fair value on initial recognition.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
15
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
c. Financial instruments (continued)
iii) Loans and receivables and financial liabilities at amortised cost
(continued)
The CPECs issued by the Company are classified as financial liabilities at
amortised cost in accordance
with the substance of the contractual arrangement and IAS 32. The yield on the
CPECs is recognised in
the statement of comprehensive income in ‘Interest expense’ using the effective
interest rate method as
described below.
The effective interest rate method is a method of calculating the amortised cost
of a financial instrument
(or a group of financial instruments) and of allocating the interest income or
interest expense over the
expected life of the financial instrument. The effective interest rate is the
rate that exactly discounts the
estimated future cash payments and receipts through the expected life of the
financial instrument (or,
where appropriate a shorter period) to the carrying amount of the financial
instrument. The effective
interest rate is established on initial recognition of the financial instrument.
The calculation of the
effective interest rate includes all fees and commissions paid or received,
transaction costs, and discounts
or premiums that are an integral part of the effective interest rate.
Transaction costs are incremental costs
that are directly attributable to the acquisition, issue or disposal of a
financial instrument.
d. Fair value
Fair value measurement
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability (i.e. the
“exit price”) in an orderly transaction between market participants at the
measurement date.
Where the Company manages a group of financial assets and financial liabilities
on the basis of its net
exposure to either market 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 maximises the use of relevant
observable inputs and minimises the
use of unobservable inputs by requiring that the most observable inputs be used
when available.
Observable inputs are inputs that market participants would use in pricing the
asset or liability developed
based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs
that reflect the Company’s assumptions about the assumptions other market
participants would use in
pricing the asset or liability, that are developed based on the best information
available in the
circumstances.
The hierarchy is broken down into three levels based on the observability of
inputs as follows:
· Level 1 – Quoted prices (unadjusted) in an active market for identical assets
or liabilities
Valuations based on quoted prices in active markets for identical assets or
liabilities that the
Morgan Stanley Group has the ability to access. Valuation adjustments and block
discounts are not
applied to Level 1 instruments. Since valuations are based on quoted prices that
are readily and
regularly available in an active market, valuation of these products does not
entail a significant
degree of judgement.
· Level 2 – Valuation techniques using observable inputs
Valuations based on one or more quoted prices in markets that are not active or
for which all
significant inputs are observable, either directly or indirectly.
· Level 3 – Valuation techniques with significant unobservable inputs
Valuations based on inputs that are unobservable and significant to the overall
fair value
measurement.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
16
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d. Fair value (continued)
The availability of observable inputs can vary from product to product and is
affected by a wide variety of
factors, including, for example, the type of product, whether the product is new
and not yet established in
the marketplace, the liquidity of markets and other characteristics particular
to the product. To the extent
that valuation is based on models or inputs that are less observable or
unobservable in the market, the
determination of fair value requires more judgement. Accordingly, the degree of
judgement exercised by
the Company in determining fair value is greatest for instruments categorised 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 Level 2 to Level 3 of the fair value hierarchy. In addition, a
downturn in market conditions
could lead to declines in the valuation of many instruments.
In certain cases, the inputs used to measure fair value may fall into different
levels of the fair value
hierarchy. In such cases, for disclosure purposes, the level in the fair value
hierarchy within which the fair
value measurement falls in its entirety is determined based on the lowest level
input that is significant to the
fair value measurement in its entirety.
Valuation techniques
Many cash instruments and over-the-counter (“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. For financial instruments
whose inputs are based on bid-ask prices, the Company does not require that the
fair value estimate always
be a predetermined point in the bid-ask range. The Company’s policy is to allow
for mid-market pricing
and to adjust to the point within the bid-ask range that meets the Company’s
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 (including maturity), 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. Where appropriate, valuation adjustments are made to account for
various factors such as
liquidity risk (bid-ask adjustments), credit quality, model uncertainty and
concentration risk.
Adjustments for liquidity risk adjust model-derived mid-market levels of Level 2
and Level 3 financial
instruments for the bid-mid or mid-ask spread required to properly reflect the
exit price of a risk position.
Bid-mid and mid-ask spreads are marked to levels observed in trade activity,
broker quotes or other
external third-party data. Where these spreads are unobservable for the
particular position in question,
spreads are derived from observable levels of similar positions.
Credit valuation adjustments are applied to both short-term instruments and long
-term borrowings
(primarily structured notes) which are designated at fair value through profit
or loss and to OTC
derivatives. The impact of changes in own credit spreads based upon observations
of secondary bond
market spreads is considered when measuring the fair value for short-term and
long-term borrowings. For
OTC derivatives, the impact of changes in both the Company’s and the
counterparty’s credit standing is
considered when measuring fair value. In determining the expected exposure the
Company simulates the
distribution of the future exposure to a counterparty, then applies market-based
default probabilities to the
future exposure, leveraging external third-party credit default swap (“CDS”)
spread data. Where CDS
spread data are unavailable for a specific counterparty, bond market spreads,
CDS spread data based on the
counterparty’s credit rating or CDS spread data that reference a comparable
counterparty may be utilised.
The Company also considers collateral held and legally enforceable master
netting agreements that mitigate
the Company’s exposure to each counterparty.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
17
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d. Fair value (continued)
Adjustments for model uncertainty are taken for positions whose underlying
models are reliant on
significant inputs that are neither directly nor indirectly observable, hence
requiring reliance on established
theoretical concepts in their derivation. These adjustments are derived by
making assessments of the
possible degree of variability using statistical approaches and market-based
information where possible.
The Company generally subjects all valuations and models to a review process
initially and on a periodic
basis thereafter.
The Company may apply a concentration adjustment to certain of its OTC
derivatives portfolios to reflect
the additional cost of closing out a particularly large risk exposure. Where
possible, these adjustments are
based on observable market information but in many instances significant
judgement is required to estimate
the costs of closing out concentrated risk exposures due to the lack of
liquidity in the marketplace.
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, the
Company’s own assumptions are set to reflect those that the Company believes
market participants would
use in pricing the asset or liability at the measurement date.
Valuation process
The Valuation Review Group (“VRG”) within the Financial Control Group (“FCG”) is
responsible for the
Company’s fair value valuation policies, processes and procedures. VRG is
independent of the business
units and reports to the Chief Financial Officer of the Morgan Stanley Group
(“CFO”), who has final
authority over the valuation of the Company’s financial instruments. VRG
implements valuation control
processes to validate the fair value of the Company’s financial instruments
measured at fair value including
those derived from pricing models. These control processes are designed to
assure that the values used for
financial reporting are based on observable inputs wherever possible. In the
event that observable inputs are
not available, the control processes are designed to ensure that the valuation
approach utilised is appropriate
and consistently applied and that the assumptions are reasonable.
The Company’s control processes apply to all financial instruments, unless
otherwise noted. These control
processes include:
Model Review. VRG, in conjunction with the Market Risk Department and, where
appropriate, the
Credit Risk Management Department, both of which report to the Chief Risk
Officer of the Morgan
Stanley Group (“CRO”), independently review valuation models’ theoretical
soundness, the
appropriateness of the valuation methodology and calibration techniques
developed by the business
units using observable inputs. Where inputs are not observable, VRG reviews the
appropriateness of
the proposed valuation methodology to ensure it is consistent with how a market
participant would
arrive at the unobservable input. The valuation methodologies utilised in the
absence of observable
inputs may include extrapolation techniques and the use of comparable observable
inputs. As part of
the review, VRG develops a methodology to independently verify the fair value
generated by the
business unit’s valuation models. Before trades are executed using new valuation
models, those
models are required to be independently reviewed. All of the Company’s valuation
models are
subject to an independent annual VRG review.
Independent Price Verification. The business units are responsible for
determining the fair value of
financial instruments using approved valuation models and valuation
methodologies. Generally on a
monthly basis, VRG independently validates the fair values of financial
instruments determined
using valuation models by determining the appropriateness of the inputs used by
the business units
and by testing compliance with the documented valuation methodologies approved
in the model
review process described above.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
18
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d. Fair value (continued)
VRG uses recently executed transactions, other observable market data such as
exchange data,
broker/ dealer quotes, third-party pricing vendors and aggregation services for
validating the fair
values of financial instruments generated using valuation models. VRG assesses
the external sources
and their valuation methodologies to determine if the external providers meet
the minimum
standards expected of a third-party pricing source. Pricing data provided by
approved external
sources are evaluated using a number of approaches; for example, by
corroborating the external
sources’ prices to executed trades, by analysing the methodology and assumptions
used by the
external source to generate a price and/ or by evaluating how active the third
-party pricing source (or
originating sources used by the third-party pricing source) is in the market.
Based on this analysis,
VRG generates a ranking of the observable market data to ensure that the highest
-ranked market data
source is used to validate the business unit’s fair value of financial
instruments.
For financial instruments where the fair value is based on unobservable inputs,
VRG reviews the
business unit’s valuation techniques to ensure these are consistent with market
participant
assumptions.
The results of this independent price verification and any adjustments made by
VRG to the fair value
generated by the business units are presented to management of the Morgan
Stanley Group’s three
business segments (i.e. Institutional Securities, Wealth Management and
Investment Management),
the CFO and the CRO on a regular basis.
Review of Transactions where the valuation is based on unobservable inputs. VRG
reviews the
models and valuation methodology used to price all new material Level 3
transactions and both the
FCG and Market Risk Department management must approve the fair value of the
trade that is
initially recognised.
Gains and losses on inception
In the normal course of business, the fair value of a financial instrument on
initial recognition is the
transaction price (i.e. the fair value of the consideration given or received).
In certain circumstances,
however, the fair value will be based on other observable current market
transactions in the same
instrument, without modification or repackaging, or on a valuation technique
whose variables include only
data from observable markets. When such evidence exists, the Company recognises
a gain or loss on
inception of the transaction.
When the use of unobservable market data has a significant impact on determining
fair value at the
inception of the transaction, the entire initial gain or loss indicated by the
valuation technique as at the
transaction date is not recognised immediately in the statement of comprehensive
income and is recognised
instead when the market data becomes observable.
e. Derecognition of financial assets and liabilities
The Company derecognises a financial asset only when the contractual rights to
the cash flows from the
asset expire, or when it transfers the financial asset and substantially all the
risk and rewards of ownership
of the asset.
The Company derecognises financial liabilities when the Company’s obligations
are discharged, cancelled
or they expire.
f. Impairment of financial assets
At each reporting date, an assessment is made as to whether there is any
objective evidence of impairment
in the value of a financial asset classified as loans and receivables.
Impairment losses are recognised if an
event has occurred which will have an adverse impact on the expected future cash
flows of an asset and the
expected impact can be reliably estimated.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
19
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
f. Impairment of financial assets (continued)
Impairment losses on loans and receivables are measured as the difference
between the carrying amount of
the loans and receivables and the present value of estimated cash flows
discounted at the asset’s original
effective interest rate. Such impairment losses are recognised in the statement
of comprehensive income
within ‘Other expense’ and are recognised against the carrying amount of the
impaired asset on the
statement of financial position. Interest on the impaired asset continues to be
accrued on the reduced
carrying amount based on the original effective interest rate of the asset.
If in a subsequent year, the amount of the estimated impairment loss decreases
because of an event
occurring after the impairment was recognised, the previously recognised
impairment loss is reversed as
detailed by financial asset in note 3(c)(iii). Any reversal is limited to the
extent that the value of the asset
may not exceed the original amortised cost of the asset had no impairment
occurred.
g. Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash equivalents
comprise cash and demand
deposits with banks, along with highly liquid investments, with original
maturities of three months or less,
that are readily convertible to known amounts of cash and subject to
insignificant risk of change in value.
h. Income tax
The tax expense represents the sum of the tax currently payable.
The tax currently payable is calculated based on taxable profit for the year.
Taxable profit may differ from
profit before income tax as reported in the statement of comprehensive income
because it excludes items of
income or expense that are taxable or deductible in other years and it further
excludes items that are never
taxable or deductible. The Company’s liability for current tax is calculated
using tax rates that have been
enacted or substantively enacted by the reporting date. Current tax is charged
or credited in the statement of
comprehensive income.
Current tax assets are offset against current tax liabilities when there is a
legally enforceable right to set off
current tax assets against current tax liabilities and the Company intends to
settle its current tax assets and
current tax liabilities on a net basis or to realise the asset and settle the
liability simultaneously.
i. Offsetting of financial assets and financial liabilities
Where there is a currently legally enforceable right to set off the recognised
amounts and an intention to
either settle on a net basis or to realise the asset and the liability
simultaneously, financial assets and
financial liabilities are offset and the net amount is presented on the
statement of financial position. In the
absence of such conditions, financial assets and financial liabilities are
presented on a gross basis.
4. INTEREST INCOME AND INTEREST EXPENSE
‘Interest income’ and ‘Interest expense’ represent total interest income and
total interest expense for
financial assets and financial liabilities that are not carried at fair value.
No other gains or losses have been recognised in respect of loans and
receivables other than as disclosed as
‘Interest income’ within the statement of comprehensive income.
No other gains or losses have been recognised in respect of financial
liabilities at amortised cost other than
as disclosed as ‘Interest expense’ within the statement of comprehensive income.
5. OTHER INCOME
2014 2013
€'000 €'000
Management charges to other Morgan Stanley Group undertakings 6,658 6,094
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
20
6. OTHER EXPENSE
2014 2013
€'000 €'000
Auditors remuneration:
Fees payable to the Company's auditor and its associates for the
audit of the Company’s financial statements 100 95
Of the auditors’ remuneration, €36,000 (2013: €35,000) was paid to Deloitte
Accountants B.V. for audit
services.
The Company employed no staff during the year (2013: none).
7. INCOME TAX EXPENSE
2014 2013
€'000 €'000
Current tax expense
Current year 1,665 1,524
Adjustments in respect of prior years - (6)
Income tax expense 1,665 1,518
Reconciliation of effective tax rate
The current year income tax expense is the same as (2013: lower than) that
resulting from applying the
average standard rate of corporation tax in The Netherlands for the year of
25.0% (2013: 25.0%). The main
differences are explained below:
2014 2013
€'000 €'000
Profit before income tax 6,658 6,094
Income tax using the average standard rate of corporation tax
in The Netherlands of 25.0% (2013: 25.0%)
1,665 1,524
Impact on tax of:
Tax over provided in prior years - (6)
Total income tax expense in the statement of comprehensive
income 1,665 1,518
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
21
8. CONVERTIBLE PREFERRED EQUITY CERTIFICATES
€'000
At 1 January 2013 1,145,195
Yield payable 25,384
At 31 December 2013 1,170,579
Yield payable 24,775
At 31 December 2014 1,195,354
On 30 March 2012, the Company issued 11,252,813 of CPECs of €100 each,
classified as financial
liabilities at amortised cost. The CPECs were issued to one of the Company's
shareholders, Archimedes
Investments Coöperatieve U.A. (a Morgan Stanley Group undertaking), in exchange
for cash consideration
of €1,125,281,000.
The holder of the CPECs is entitled to receive an annual yield on a date agreed
by the Company and the
holder. The yield for each CPEC is calculated as income deriving from the
Company's activities less the
necessary amounts to cover the costs of the Company divided by the number of
CPECs then in issue. Other
income relating to management charges received from other Morgan Stanley Group
undertakings and gains
or losses from financial instruments classified as held for trading or
designated at fair value through profit
or loss are excluded from the calculation.
The CPECs carry no voting rights. The Company and the holder have the right to
convert each issued
CPEC into one ordinary share with a nominal value of €100.
The maturity date of the CPECs is 150 years from the date of issuance, however,
the CPECs may be
redeemed earlier at the option of the Company or on liquidation of the Company.
The CPECs rank ahead of the ordinary shares in the event of liquidation.
9. FINANCIAL ASSETS AND FINANCIAL LIABILITIES CLASSIFIED AS HELD FOR
TRADING
Financial assets and financial liabilities classified as held for trading are
summarised as follows:
2014 2013
Assets Liabilities Assets Liabilities
€'000 €'000 €'000 €'000
Derivatives 527,856 503,487 979,451 283,324
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
22
10. FINANCIAL ASSETS AND FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE
THROUGH PROFIT OR LOSS
Financial instruments designated at fair value through profit or loss consist
primarily of the following
financial liabilities and financial assets:
Issued Structured Notes: These relate to financial liabilities which arise from
selling structured products
generally in the form of notes, certificates and warrants. These instruments
contain an embedded derivative
which significantly modifies the cash flows of the issuance. The return on the
instrument is linked to an
underlying that is not clearly and closely related to the debt host including,
but not limited to equity-linked
notes. The Structured Notes are designated at fair value through profit or loss
as the risks to which the
Company is a contractual party are risk managed on a fair value basis as part of
the Company’s trading
portfolio and the risk is reported to key management personnel on this basis.
Prepaid equity securities contracts: These contracts involve derivatives for
which an initial payment is paid
at inception. The contracts, along with the loans designated at fair value
through profit or loss and the
derivative contracts classified as held for trading, are part of the hedging
strategy for the obligations arising
pursuant to the issuance of the Structured Notes. The prepaid equity securities
contracts are designated at
fair value through profit or loss as the risks to which the Company is a
contractual party are managed on a
fair value basis as part of the Company’s trading portfolio and the risk is
reported to key management
personnel on this basis.
Loans: These are loans to other Morgan Stanley Group undertakings that, along
with the prepaid equity
securities contracts and the derivatives contracts classified as held for
trading, are part of the hedging
strategy for the obligations arising pursuant to the issuance of the Structured
Notes. These loans are
designated at fair value through profit or loss as the risks to which the
Company is a contractual party are
managed on a fair value basis as part of the Company’s trading portfolio and the
risk is reported to key
management personnel on this basis.
2014 2013
Assets Liabilities Assets Liabilities
€'000 €'000 €'000 €'000
Issued Structured Notes - 6,046,260 - 6,637,002
Prepaid equity securities contracts 253,314 - 1,805,691 -
Loans 5,789,171 - 4,185,259 -
6,042,485 6,046,260 5,990,950 6,637,002
The change in fair value of issued Structured Notes recognised through the
statement of comprehensive
income attributable to own credit risk is a gain of €1,416,000 (2013: loss of
€53,205,000) and cumulatively
is a gain of €90,350,000 (2013: cumulative gain of €88,934,000). This change is
determined as the amount
of change in fair value that is not attributable to changes in market conditions
that give rise to market risk.
The change in fair value of prepaid equity securities contracts and loans
recognised through the statement
of comprehensive income attributable to own credit risk is a loss of €14,296,000
(2013: gain of
€66,011,000) and cumulatively is a loss of €89,225,000 (2013: cumulative loss of
€74,929,000).
The change in fair value of financial instruments designated at fair value
through profit or loss attributable
to own credit risk for the year is offset by a net gain of €12,880,000 (2013:
loss of €12,806,000) and
cumulatively is a net loss of €1,125,000 (2013: cumulative loss of €14,005,000),
in changes in the fair
value of financial instruments classified as held for trading attributable to
own credit risk.
The carrying amount of financial liabilities designated at fair value was
€300,763,000 lower than the
contractual amount due at maturity (2013: €258,660,000 higher).
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
23
10. FINANCIAL ASSETS AND FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE
THROUGH PROFIT OR LOSS (CONTINUED)
The following tables present the carrying value of the Company’s financial
liabilities designated at fair
value through the profit or loss account, classified according to underlying
security type, including, single
name equities, equity indices and equity portfolio.
31 December 2014
Single
name
equities
Equity
indices
Equity
portfolio Other Total
€'000 €'000 €'000 €'000 €'000
Certificates and warrants 1,612,100 34,796 506,710 - 2,153,606
Notes 263,814 2,407,886 751,519 469,435 3,892,654
Total financial liabilities designated
at fair value through profit or loss 1,875,914 2,442,682 1,258,229 469,435
6,046,260
31 December 2013
Single
name
equities
Equity
indices
Equity
portfolio Other Total
€'000 €'000 €'000 €'000 €'000
Certificates and warrants 1,949,054 125,508 461,638 - 2,536,200
Notes 401,068 2,339,586 959,780 400,368 4,100,802
Total financial liabilities designated
at fair value through profit or loss 2,350,122 2,465,094 1,421,418 400,368
6,637,002
The majority of the Company’s financial liabilities designated at fair value
through the profit or loss
provide exposure to an underlying single name equity, an equity index or
portfolio of equities. The prepaid
equity securities contracts, derivative contracts classified as held for trading
and loans that the Company
enters into in order to hedge the Structured Notes are valued as detailed in
note 3(d) and note 16(a), and
have similar valuation inputs to the liabilities they hedge.
11. EQUITY
Ordinary share capital
Ordinary
shares of
€100 each
€'000
Issued and fully paid
At 1 January 2013, 31 December 2013 and 31 December 2014 15,018
On 9 December 2013 the Articles of Association of the Company were amended
whereby the concept of
authorised share capital was abolished and whereby the voting rights attached to
the Company’s shares
were amended. Following the amendment of the Articles of Association each share
confers the right to cast
one vote, provided that subject to mandatory law, all resolutions of the General
Meeting shall be adopted
by unanimous vote in a meeting in which the entire share capital is present or
represented.
The holders of ordinary shares are entitled to receive dividends as declared
from time to time.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
24
11. EQUITY (CONTINUED)
Reserves
The Company uses the contracts that it purchases from other Morgan Stanley Group
undertakings to hedge
the market price, interest rate, foreign currency and other market risks
associated with the issuance of the
Structured Notes, consistent with the Company’s risk management strategy. Both
the contracts and the
Structured Note issuances are valued at fair value through profit or loss. As
such the Company is not
exposed to any market risk on these financial instruments. The changes in fair
value of the Structured Note
issuances are fully hedged by the changes in fair value of these contracts.
Therefore, a legal revaluation
reserve under Part 9, Book 2 of the Dutch Civil Code (BW2, article 390(1)) is
not necessary.
12. EXPECTED MATURITY OF ASSETS AND LIABILITIES
The table below shows an analysis of assets and liabilities analysed according
to when they are expected to
be recovered, realised or settled.
At 31 December 2014 Less than
or equal to More than
twelve twelve
months months Total
€'000 €'000 €'000
ASSETS
Loans and receivables:
Cash and short-term deposits 510 - 510
Trade receivables 24,586 - 24,586
Other receivables 363,001 1,123,291 1,486,292
388,097 1,123,291 1,511,388
Financial assets classified as held for trading 171,550 356,306 527,856
Financial assets designated at fair value through profit or loss 1,733,307
4,309,178 6,042,485
Current tax assets 73 - 73
2,293,027 5,788,775 8,081,802
LIABILITIES
Financial liabilities at amortised cost:
Convertible preferred equity certificates 70,073 1,125,281 1,195,354
Trade payables 296,607 - 296,607
Other payables 10,024 - 10,024
376,704 1,125,281 1,501,985
Financial liabilities classified as held for trading 165,480 338,007 503,487
Financial liabilities designated at fair value through profit or loss 1,720,773
4,325,487 6,046,260
2,262,957 5,788,775 8,051,732
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
25
12. EXPECTED MATURITY OF ASSETS AND LIABILITIES (CONTINUED)
At 31 December 2013 Less than
or equal to More than
twelve twelve
months months Total
€'000 €'000 €'000
ASSETS
Loans and receivables:
Cash and short-term deposits 1,585 - 1,585
Trade receivables 2,947 - 2,947
Other receivables 26,212 1,168,815 1,195,027
30,744 1,168,815 1,199,559
Financial assets classified as held for trading 403,975 575,476 979,451
Financial assets designated at fair value through profit or loss 1,722,487
4,268,463 5,990,950
Current tax assets 650 - 650
2,157,856 6,012,754 8,170,610
LIABILITIES
Financial liabilities at amortised cost:
Convertible preferred equity certificates - 1,170,579 1,170,579
Trade payables 54,607 - 54,607
Other payables 21 - 21
54,628 1,170,579 1,225,207
Financial liabilities classified as held for trading 86,332 196,992 283,324
Financial liabilities designated at fair value through profit or loss 1,991,819
4,645,183 6,637,002
2,132,779 6,012,754 8,145,533
13. SEGMENT REPORTING
Segment information is presented in respect of the Company’s business and
geographical segments. The
business segments and geographical segments are based on the Company’s
management and internal
reporting structure.
Business segments
Morgan Stanley structures its business segments primarily based upon the nature
of the financial products
and services provided to customers and Morgan Stanley’s internal management
structure. The Company’s
own business segments are consistent with those of Morgan Stanley.
The Company has one reportable business segment, Institutional Securities, which
provides financial
services to financial institutions. Its business includes the issuance of
financial instruments and the hedging
of the obligations arising pursuant to such issuances.
Geographical segments
The Company operates in three geographic regions as listed below:
· Europe, Middle East and Africa (“EMEA”)
· Americas
· Asia
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
26
13. SEGMENT REPORTING (CONTINUED)
Geographical segments (continued)
The following table presents selected statement of comprehensive income and
statement of financial
position information of the Company’s operations by geographic area. The
external revenues (net of
interest expense) and total assets disclosed in the following table reflect the
regional view of the
Company’s operations, on a managed basis. The basis for attributing external
revenues (net of interest
expense) and total assets is determined by trading desk location.
EMEA Americas Asia Total
2014 2013 2014 2013 2014 2013 2014 2013
€'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000
External
revenues
net of interest 5,778 5,007 564 605 416 577 6,758 6,189
Profit before
income tax 5,692 4,930 556 596 410 568 6,658 6,094
Total assets 5,855,672 5,585,109 1,841,928 1,913,726 384,202 671,775 8,081,802
8,170,610
Of the Company’s external revenue, 100% (2013: 100%) arises from transactions
with other Morgan
Stanley Group undertakings. Further details of such transactions are disclosed
in the related party
disclosures note 19.
14. FINANCIAL RISK MANAGEMENT
Risk management procedures
Risk is an inherent part of the Company’s business activity. The Company seeks
to identify, assess, monitor
and manage each of the various types of risk involved in its business activities
in accordance with defined
policies and procedures. The Company has developed its own risk management
policy framework, which
is consistent with and leverages the risk management policies and procedures of
the Morgan Stanley Group
and which include escalation to the Company’s Board of Directors and to
appropriate senior management
personnel.
Significant risks faced by the Company resulting from its trading activities are
set out below.
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.
The credit risk management policies and procedures of the Company establish the
framework for ensuring
transparency of material credit risks, ensuring compliance with established
limits and escalating risk
concentrations to appropriate senior management.
The Company enters into the majority of its financial asset transactions with
other Morgan Stanley Group
undertakings, and both the Company and the other Morgan Stanley Group
undertakings are wholly-owned
subsidiaries of the same ultimate parent entity, Morgan Stanley. As a result of
the implicit support that
would be provided by Morgan Stanley, the Company is considered exposed to the
credit risk of Morgan
Stanley, except where the Company transacts with other Morgan Stanley Group
undertakings that have a
higher credit rating to that of Morgan Stanley.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
27
14. FINANCIAL RISK MANAGEMENT (CONTINUED)
Credit risk (continued)
Collateral and other credit enhancements
Due to regulations in the US, which impact certain counterparties to the
Company’s derivatives classified
as held for trading, the Company entered into a collateral arrangement with
another Morgan Stanley Group
undertaking. Collateral held is managed in accordance with the Morgan Stanley
Group’s guidelines and the
relevant underlying agreements.
Exposure to credit risk
The maximum exposure to credit risk of the Company at the reporting date is the
carrying amount of the
financial assets held in the statement of financial position. Where the Company
enters into credit
enhancements to manage the credit exposure on these financial instruments,
including receiving cash as
collateral and master netting agreements, the financial effect of the credit
enhancements is also disclosed
below. The net credit exposure represents the credit exposure remaining after
the effect of the credit
enhancements
The Company does not have any significant exposure arising from items not
recognised on the statement of
financial position.
Exposure to credit risk by class:
Class 2014 2013
Gross Net Gross Net
credit credit credit credit
exposure Credit exposure exposure Credit exposure
(1) enhancements (2) (1) enhancements (2)
€'000 €'000 €'000 €'000 €'000 €'000
Loans and receivables:
Cash and short-term deposits 510 - 510 1,585 - 1,585
Trade receivables 24,586 - 24,586 2,947 - 2,947
Other receivables 1,486,292 - 1,486,292 1,195,027 - 1,195,027
Financial assets classified as
held for trading:
Derivatives 527,856 (527,695) 161 979,451 - 979,451
Financial assets designated at fair
value through profit or loss
Prepaid equity securities contracts 253,314 (84,475) 168,839 1,805,691 -
1,805,691
Loans 5,789,171 - 5,789,171 4,185,259 - 4,185,259
8,081,729 (612,170) 7,469,559 8,169,960 - 8,169,960
(1) The carrying amount recognised in the statement of financial position best
represents the Company's maximum exposure to credit
risk.
(2) Of the residual net credit exposure, intercompany cross product netting
arrangements are in place which would allow for an
additional €nil (2013: €74,643,000) to be offset in the event of default by
certain Morgan Stanley counterparties.
The impact of master netting arrangements and similar agreements on the
Company’s ability to offset
financial assets and financial liabilities is disclosed in note 15.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
28
14. FINANCIAL RISK MANAGEMENT (CONTINUED)
Credit risk (continued)
Exposure to credit risk (continued)
Maximum exposure to credit risk by credit rating(1)
Gross credit exposure
Credit rating 2014 2013
€'000 €'000
AA 216 1,471
A 8,081,513 8,168,489
Total 8,081,729 8,169,960
(1) Internal credit rating derived using methodologies generally consistent with
those used by external agencies
At 31 December 2014, there were no financial assets past due but not impaired or
individually impaired
(2013: €nil).
Liquidity and funding risk
Liquidity and funding risk refers to the risk that the Company will be unable to
finance its operations due to
a loss of access to the capital markets or difficulty in liquidating its assets.
Liquidity and funding risk also
encompasses the Company’s ability to meet its financial obligations without
experiencing significant
business disruption or reputational damage that may threaten its viability as a
going concern.
The Company’s liquidity and funding risk management policies and procedures are
consistent with those of
the Morgan Stanley Group.
The primary goal of the Company’s liquidity risk and funding management
framework is to ensure that the
Company has access to adequate funding across a wide range of market conditions.
The framework is
designed to enable the Company to fulfil its financial obligations and support
the execution of the
Company’s business strategies.
The following principles guide the Company’s liquidity and funding risk
management framework:
· Sufficient liquid assets should be maintained to cover maturing liabilities
and other planned and
contingent outflows;
· Maturity profile of assets and liabilities should be aligned, with limited
reliance on short-term
funding;
· Source, counterparty, currency, region and term of funding should be
diversified; and
· Contingency Funding Plan (“CFP”) should anticipate, and account for, periods
of limited access to
finding.
The Company hedges all of its issued Structured Notes with financial instruments
entered into with other
Morgan Stanley Group undertakings, where both the Company and other Morgan
Stanley Group
undertakings are wholly-owned subsidiaries of the same group parent, Morgan
Stanley. Further, the
maturity profile of the financial assets matches the maturity profile of the
financial liabilities.
Liquidity management policies
The core components of the Morgan Stanley Group’s liquidity management
framework, which includes
consideration of the liquidity risk for each individual legal entity, are the
CFP, Liquidity Stress Tests and
the Global Liquidity Reserve, which support the Morgan Stanley Group’s target
liquidity profile.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
29
14. FINANCIAL RISK MANAGEMENT (CONTINUED)
Liquidity and funding risk (continued)
Contingency Funding Plan
The CFP describes the data and information flows, limits, targets, operating
environment indicators,
escalation procedures, roles and responsibilities, and available mitigating
actions in the event of a liquidity
stress. The CFP also sets forth the principal elements of the Morgan Stanley
Group’s liquidity stress testing
which identifies stress events of different severity and duration, assesses
current funding sources and uses
and establishes a plan for monitoring and managing a potential liquidity stress
event.
Liquidity Stress Tests
The Morgan Stanley Group uses Liquidity Stress Tests to model liquidity outflows
across multiple
scenarios over a range of time horizons. These scenarios contain various
combinations of idiosyncratic and
systemic stress events.
The assumptions underpinning the Liquidity Stress Tests include, but are not
limited to, the following:
· no government support;
· no access to equity and unsecured debt markets;
· repayment of all unsecured debt maturing within the stress horizon;
· higher haircuts and significantly lower availability of secured funding;
· additional collateral that would be required by trading counterparties,
certain exchanges and
clearing organisations related to credit rating downgrades;
· additional collateral that would be required due to collateral substitutions,
collateral disputes and
uncalled collateral;
· discretionary unsecured debt buybacks;
· drawdowns on unfunded commitments provided to third parties;
· client cash withdrawals and reduction in customer short positions that fund
long positions;
· limited access to the foreign exchange swap markets; and
· maturity roll-off of outstanding letters of credit with no further issuance.
The Liquidity Stress Tests are produced for Morgan Stanley and its major
operating subsidiaries, as well as
at major currency levels, to capture specific cash requirements and cash
availability at various legal entities,
including a limited number of asset sales in a stressed environment. The
Liquidity Stress Tests assume that
subsidiaries will use their own liquidity first to fund their obligations before
drawing liquidity from Morgan
Stanley. It is also assumed that Morgan Stanley will support its subsidiaries
and will not have access to
cash that may be held at certain subsidiaries. In addition to the assumptions
underpinning the Liquidity
Stress Tests, the settlement risk related to intra-day settlement and clearing
of securities and financial
activities is taken into consideration.
Since the Company hedges the liquidity risk of its financial liabilities with
financial assets that match the
maturity profile of the financial liabilities, the Company is not considered a
major operating subsidiary for
the purposes of liquidity risk. However, the Company would have access to the
cash or liquidity reserves
held by Morgan Stanley in the unlikely event that it was unable to access
adequate financing to service its
financial liabilities when they become payable.
The CFP and Liquidity Stress Tests are evaluated on an ongoing basis and
reported to the Firm Risk
Committee, Asset/Liability Management Committee, and other appropriate risk
committees.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
30
14. FINANCIAL RISK MANAGEMENT (CONTINUED)
Liquidity and funding risk (continued)
Global Liquidity Reserve
The Morgan Stanley Group maintains sufficient liquidity reserves (“the Global
Liquidity Reserve”) to
cover daily funding needs and to meet strategic liquidity targets sized by the
CFP and Liquidity Stress
Tests. The size of the Global Liquidity Reserve is actively managed by the
Morgan Stanley Group. The
following components are considered in sizing the Global Liquidity Reserve:
unsecured debt maturity
profile, balance sheet size and composition, funding needs in a stressed
environment inclusive of contingent
cash outflows and collateral requirements. In addition, the Morgan Stanley
Group’s Global Liquidity
Reserve includes an additional reserve, which is primarily a discretionary
surplus based on the Morgan
Stanley Group’s risk tolerance and is subject to change dependent on market and
firm-specific events.
The Morgan Stanley Group’s Global Liquidity Reserve, to which the Company has
access, is held within
Morgan Stanley and its major operating subsidiaries and is composed of
diversified cash and cash
equivalents and unencumbered highly liquid securities.
Eligible unencumbered highly liquid securities include US government securities,
US agency securities, US
agency mortgage-backed securities, non-US government securities and other highly
liquid investment grade
securities.
The ability to monetise assets during a liquidity crisis is critical. The Morgan
Stanley Group believes that
the assets held in its Global Liquidity Reserve can be monetised within five
business days in a stressed
environment given the highly liquid and diversified nature of the reserves.
Funding management policies
The Morgan Stanley Group manages its funding in a manner that reduces the risk
of disruption to the
Morgan Stanley Group’s and the Company’s operations. The Morgan Stanley Group
pursues a strategy of
diversification of secured and unsecured funding sources (by product, by
investor and by region) and
attempts to ensure that the tenor of the Morgan Stanley Group’s, and the
Company’s, liabilities equals or
exceeds the expected holding period of the assets being financed.
The Morgan Stanley Group funds its balance sheet on a global basis through
diverse sources, which
includes consideration of the funding risk of each legal entity. These sources
may include the Morgan
Stanley Group’s equity capital, long-term debt, repurchase agreements,
securities lending, deposits,
commercial paper, letters of credit and lines of credit. The Morgan Stanley
Group has active financing
programmes for both standard and structured products targeting global investors
and currencies.
Balance sheet management
In managing both the Morgan Stanley Group’s and the Company’s funding risk the
composition and size of
the entire balance sheet, not just financial liabilities, is monitored and
evaluated. A substantial portion of
the Morgan Stanley Group’s total assets consists of liquid marketable securities
arising principally from its
Institutional Securities business segment’s sales and trading activities. The
liquid nature of these assets
provides the Morgan Stanley Group and the Company with flexibility in managing
the size of its balance
sheet.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
31
14. FINANCIAL RISK MANAGEMENT (CONTINUED)
Liquidity and funding risk (continued)
Maturity analysis
In the following maturity analysis of financial assets and financial
liabilities, derivative contracts, financial
assets designated at fair value through profit or loss and financial liabilities
designated at fair value through
profit or loss are disclosed according to their earliest contractual maturity;
all such amounts are presented
at their fair value, consistent with how these financial instruments are
managed. All other amounts
represent undiscounted cash flows receivable and payable by the Company arising
from its financial assets
and financial liabilities to earliest contractual maturities as at 31 December
2014 and 31 December 2013.
Receipts of financial assets and repayments of financial liabilities that are
subject to immediate notice are
treated as if notice were given immediately and are classified as on demand.
This presentation is
considered by the Company to appropriately reflect the liquidity risk arising
from these financial assets and
financial liabilities, presented in a way that is consistent with how the
liquidity risk on these financial
assets and financial liabilities is managed by the Company.
Equal to Equal to
or more or more
than one than two
year years Equal to
but less but less or more
On Less than than two than five than five
demand one year years years years Total
31 December 2014 €'000 €'000 €'000 €'000 €'000 €'000
Financial assets
Loans and receivables:
Cash and short-term deposits 510 - - - - 510
Trade receivables 24,586 - - - - 24,586
Other receivables 1,486,292 - - - - 1,486,292
Financial assets classified as held for
trading:
Derivatives 256,640 42,506 33,669 141,012 54,029 527,856
Financial assets designated at fair
value through profit or loss:
Prepaid equity securities contracts 46,758 52,823 94,488 56,284 2,961 253,314
Loans 1,762,868 540,084 581,343 2,155,389 749,487 5,789,171
Total financial assets 3,577,654 635,413 709,500 2,352,685 806,477 8,081,729
Financial liabilities
Financial liabilities at amortised cost:
Convertible preferred equity certificates 1,195,354 - - - - 1,195,354
Trade payables 296,607 - - - - 296,607
Other payables 10,024 - - - - 10,024
Financial liabilities classified as held
for trading:
Derivatives 190,310 77,122 91,944 110,315 33,796 503,487
Financial liabilities designated at fair
value through profit or loss:
Issued Structured Notes 1,855,362 558,291 617,556 2,242,370 772,681 6,046,260
Total financial liabilities 3,547,657 635,413 709,500 2,352,685 806,477
8,051,732
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
32
14. FINANCIAL RISK MANAGEMENT (CONTINUED)
Liquidity and funding risk (continued)
Maturity analysis (continued)
Equal to
or more Equal to
than one or more
year than two Equal to
but less years but or more
On Less than than two less than than five
demand one year years five years years Total
31 December 2013 €'000 €'000 €'000 €'000 €'000 €'000
Financial assets
Loans and receivables:
Cash and short-term deposits 1,585 - - - - 1,585
Trade receivables 2,947 - - - - 2,947
Other receivables 1,195,027 - - - - 1,195,027
Financial assets classified as held for
trading:
Derivatives 481,555 54,372 41,334 189,957 212,233 979,451
Financial assets designated at fair
value through profit or loss:
Prepaid equity securities contracts 1,209,242 341,145 101,652 136,789 16,863
1,805,691
Loans 491,753 392,839 408,396 2,300,082 592,189 4,185,259
Total financial assets 3,382,109 788,356 551,382 2,626,828 821,285 8,169,960
Financial liabilities
Financial liabilities at amortised cost:
Convertible preferred equity certificates 1,170,579 - - - - 1,170,579
Trade payables 54,607 - - - - 54,607
Other payables 21 - - - - 21
Financial liabilities classified as held
for trading:
Derivatives 97,852 24,989 33,236 90,064 37,183 283,324
Financial liabilities designated at fair
value through profit or loss:
Issued Structured Notes 2,034,623 763,367 518,146 2,536,764 784,102 6,637,002
Total financial liabilities 3,357,682 788,356 551,382 2,626,828 821,285
8,145,533
Market risk
Market risk is defined by IFRS 7 as the risk that the fair value or future cash
flows of a financial instrument
will fluctuate because of changes in market prices.
Sound market risk management is an integral part of the Company’s culture. The
Company is responsible
for ensuring that market risk exposures are well-managed and prudent and more
broadly for ensuring
transparency of material market risks, monitoring compliance with established
limits, and escalating risk
concentrations to appropriate senior management.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
33
14. FINANCIAL RISK MANAGEMENT (CONTINUED)
Market risk (continued)
To execute these responsibilities, the Morgan Stanley Group monitors the market
risk of the firm against
limits on aggregate risk exposures, performs a variety of risk analyses,
routinely reports risk summaries and
maintains the Value at Risk (“VaR”) and scenario analysis systems. The Company
is managed within the
Morgan Stanley Group’s global framework. The market risk management policies and
procedures of the
Company include performing risk analyses and reporting any material risks
identified to appropriate key
management personnel of the Company.
The Company enters into the majority of its financial asset transactions with
other Morgan Stanley Group
undertakings, where both the Company and the other Morgan Stanley Group
undertakings are whollyowned
subsidiaries of the same group parent entity, Morgan Stanley.
The issued Structured Notes expose the Company to the risk of changes in market
prices of the underlying
securities, interest rate risk and, where denominated in currencies other than
Euros, the risk of changes in
rates of exchange between the Euro and the other relevant currencies. The
Company uses the contracts that
it purchases from other Morgan Stanley Group undertakings to hedge the market
price, interest rate and
foreign currency risks associated with the issuance of the Structured Notes,
consistent with the Company’s
risk management strategy. As such, the Company is not exposed to any market risk
on these financial
instruments.
15. FINANCIAL ASSETS AND FINANCIAL LIABILITIES SUBJECT TO OFFSETTING
In order to manage credit exposure arising from its business activities, the
Company applies various credit
risk management policies and procedures, see note 14 for further details.
Primarily in connection with
derivative contracts, prepaid equity securities contracts and issued Structured
Notes, the Company enters
into master netting arrangements and collateral arrangements with its
counterparties. These agreements
provide the Company with the right, in the ordinary course of business and/ or
in the event of a
counterparty default (such as bankruptcy or a counterparty’s failure to pay or
perform), to net a
counterparty’s rights and obligations under such agreement and, in the event of
counterparty default, set off
collateral held by the Company against the net amount owed by the counterparty.
However, in certain
circumstances, the Company may not have such an agreement in place; the relevant
insolvency regime
(which is based on type of counterparty entity and the jurisdiction of
organisation of the counterparty) may
not support the enforceability of the agreement; or the Company may not have
sought legal advice to
support the enforceability of the agreement. In cases where the Company has not
determined an agreement
to be enforceable, the related amounts are not offset in the tabular
disclosures. The enforceability of the
master netting agreement is taken into account in the Company’s risk management
practices and
application of counterparty credit limits.
In the statement of financial position, financial assets and financial
liabilities are only offset and presented
on a net basis where there is a current legally enforceable right to set off the
recognised amounts and an
intention to either settle on a net basis or to realise the asset and the
liability simultaneously. In the absence
of such conditions, financial assets and financial liabilities are presented on
a gross basis.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
34
15. FINANCIAL ASSETS AND FINANCIAL LIABILITIES SUBJECT TO OFFSETTING
(CONTINUED)
The following tables present information about the offsetting of financial
instruments and related collateral
amounts. The effect of master netting arrangements, collateral agreements and
other credit enhancements,
on the Company’s exposure to credit risk is disclosed in note 14.
Amounts offset in
the statement of
financial position
(2)
Net amounts
presented in the
statement of
financial
position
Amounts not offset in the
statement of financial
position (3) (4) (5) (6)
Gross
amounts (1)
Financial Cash Net
instruments collateral exposure(7)
€’000 €’000 €’000 €’000 €’000 €’000
31 December 2014
Assets
Financial assets classified as
held for trading:
Derivatives 527,856 - 527,856 (483,856) (43,839) 161
Financial assets designated
at fair value through
profit or loss:
Prepaid equity securities
contracts 343,974 (90,660) 253,314 (84,475) - 168,839
TOTAL 871,830 (90,660) 781,170 (568,331) (43,839) 169,000
Liabilities
Financial liabilities classified
as held for trading:
Derivatives 503,487 - 503,487 (483,856) - 19,631
Financial liabilities
designated at fair value
through profit or loss:
Issued Structured notes 6,136,920 (90,660) 6,046,260 (84,475) - 5,961,785
TOTAL 6,640,407 (90,660) 6,549,747 (568,331) - 5,981,416
(1) Amounts include €161,000 of financial assets classified as held for trading
– derivatives, €168,839,000 of financial assets designated at
fair value through profit or loss - prepaid equity securities contracts and
€4,875,264,000 of financial liabilities designated at fair value
through profit or loss - issued Structured Notes which are either not subject to
master netting agreements or are subject to such
agreements but the Company has not determined the agreements to be legally
enforceable.
(2) Amounts are reported on a net basis in the statement of financial position
when there is a legally enforceable master netting arrangement
that provides for the current right of offset and there is an intention to
either settle on a net basis or to realise the asset and liability
simultaneously.
(3) Amounts relate to master netting arrangements which have been determined by
the Company to be legally enforceable, but do not meet
all criteria required for net presentation within the statement of financial
position.
(4) The cash collateral is recognised in the statement of financial position
within trade payables.
(5) Certain trade receivables and payables that are not presented net within the
statement of financial position have legally enforceable
master netting agreements or similar arrangements in place which would allow for
an additional €22,237,000 to be offset in the event of
default.
(6) Amounts relate to intercompany cross-product master netting arrangements,
which include those amounts where the Morgan Stanley
Group undertaking from which the Company purchased the prepaid equity securities
contracts is also the holder of the issued Structured
Notes. These arrangements have been determined by the Company to be legally
enforceable but do not meet all the criteria required for
net presentation within the statement of financial position.
(7) Of the residual net exposure, intercompany cross-product legally enforceable
netting arrangements are in place which would allow for an
additional €nil to be offset in the ordinary course of business and/ or in the
event of default.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
35
15. FINANCIAL ASSETS AND FINANCIAL LIABILITIES SUBJECT TO OFFSETTING
(CONTINUED)
Gross
Amounts (1)
Amounts
offset in the
statement of
financial
position (2)
Net amounts
presented in
the
statement of
financial
position
Amounts not
offset in the
statement of
financial
position(3)(4)(5)
Net
exposure (6)
Financial
instruments
€'000 €'000 €'000 €'000 €'000
31 December 2013
Assets
Financial assets classified as held
for trading:
Derivatives 979,451 - 979,451 (283,324) 696,127
Financial assets designated at fair
value through profit or loss:
Prepaid equity securities
contracts 1,837,348 (31,657) 1,805,691 (1,313,717) 491,974
TOTAL 2,816,799 (31,657) 2,785,142 (1,597,041) 1,188,101
Liabilities
Financial liabilities classified as
held for trading:
Derivatives 283,324 - 283,324 (283,324) -
Financial liabilities designated at
fair value through profit or
loss:
Issued Structured Notes 6,668,659 (31,657) 6,637,002 (1,313,717) 5,323,285
TOTAL 6,951,983 (31,657) 6,920,326 (1,597,041) 5,323,285
(1) Amounts include €55,781,000 of financial assets classified as held for
trading – derivatives, €491,974,000 of financial assets
designated at fair value through profit or loss - prepaid equity securities
contracts and €5,008,237,000 of financial liabilities designated
at fair value through profit or loss - issued Structured Notes which are either
not subject to master netting agreements or are subject to
such agreements but the Company has not determined the agreements to be legally
enforceable.
(2) Amounts are reported on a net basis in the statement of financial position
when there is a legally enforceable master netting
arrangement that provides for the current right of offset and there is an
intention to either settle on a net basis or to realise the asset and
liability simultaneously.
(3) Amounts relate to master netting arrangements which have been determined by
the Company to be legally enforceable, but do not
meet all criteria required for net presentation within the statement of
financial position.
(4) Certain trade receivables and payables that are not presented net within the
statement of financial position have legally enforceable
master netting agreements or similar arrangements in place which would allow for
an additional €2,260,000 to be offset in the event of
default.
(5) Amounts relate to intercompany cross-product master netting arrangements,
which include those amounts where the Morgan Stanley
Group undertaking from which the Company purchased the prepaid equity securities
contracts is also the holder of the issued
Structured Notes. These arrangements have been determined by the Company to be
legally enforceable but do not meet all the criteria
required for net presentation within the statement of financial position.
(6) Of the residual net exposure, intercompany cross-product legally enforceable
netting arrangements are in place which would allow for
an additional €74,643,000 to be offset in the ordinary course of business and/
or in the event of default.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
36
16. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE
a. Financial assets and liabilities recognised at fair value on a recurring
basis
The following tables present the carrying value of the Company’s financial
assets and financial liabilities
recognised at fair value on a recurring basis, classified according to the fair
value hierarchy.
2014 Valuation
Valuation techniques
Quoted techniques with
prices in using significant
active observable unobservable
market inputs inputs
(Level 1) (Level 2) (Level 3) Total
€'000 €'000 €'000 €'000
Financial assets classified as held for trading:
Derivatives - 456,134 71,722 527,856
Financial assets designated at fair value
through profit or loss:
Prepaid equity securities contracts - 251,342 1,972 253,314
Loans - 5,789,171 - 5,789,171
Total financial assets measured at fair value - 6,496,647 73,694 6,570,341
Financial liabilities classified as held for
trading:
Derivatives - 462,770 40,717 503,487
Financial liabilities designated at fair value
through profit or loss:
Certificates and warrants - 2,153,606 - 2,153,606
Notes - 3,481,620 411,034 3,892,654
Total financial liabilities measured at fair value - 6,097,966 451,751 6,549,747
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
37
16. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
a. Financial assets and liabilities recognised at fair value on a recurring
basis (continued)
2013 Valuation
Valuation techniques
Quoted techniques with
prices in using significant
active observable unobservable
market inputs inputs
(Level 1) (Level 2) (Level 3) Total
€'000 €'000 €'000 €'000
Financial assets classified as held for trading:
Derivatives - 879,030 100,421 979,451
Financial assets designated at fair value
through profit or loss:
Prepaid equity securities contracts - 1,778,994 26,697 1,805,691
Loans - 4,185,259 - 4,185,259
Total financial assets measured at fair value - 6,843,283 127,118 6,970,401
Financial liabilities classified as held for trading:
Derivatives - 274,718 8,606 283,324
Financial liabilities designated at fair
value through profit or loss:
Certificates and warrants - 2,536,200 - 2,536,200
Notes - 3,679,098 421,704 4,100,802
Total financial liabilities measured at fair value - 6,490,016 430,310 6,920,326
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
38
16. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
a. Financial assets and liabilities recognised at fair value on a recurring
basis (continued)
The Company’s valuation approach and fair value hierarchy categorisation for
financial instruments
recognised at fair value on a recurring basis is as follows:
Financial assets and financial liabilities classified as held for trading
· Derivatives
OTC derivative contracts. OTC derivative contracts include forward, swap and
option contracts related
to interest rates, foreign currencies, equity prices or commodity prices.
Depending on the product and the terms of the transaction, the fair value of OTC
derivative products
can be either observed or modelled using a series of techniques, and model
inputs from comparable
benchmarks, including closed-form analytic formulas, such as the Black-Scholes
option-pricing model,
and simulation models or a combination thereof. Many pricing models do not
entail material
subjectivity because the methodologies employed do not necessitate significant
judgement, and the
pricing inputs are observed from actively quoted markets, as is the case for
generic interest rate swaps,
certain option contracts and certain CDSs. In the case of more established
derivative products, the
pricing models used by the Company are widely accepted by the financial services
industry. A
substantial majority of OTC derivative products valued using pricing models fall
into this category and
are categorised in Level 2 of the fair value hierarchy.
Other derivative products, including complex products that have become illiquid,
require more
judgement in the implementation of the valuation technique applied due to the
complexity of the
valuation assumptions and the reduced observability of inputs. In these
instances where significant
inputs are unobservable, they are categorised in Level 3 of the fair value
hierarchy.
Financial assets and financial liabilities designated at fair value through
profit or loss
· Prepaid equity securities contracts and issued Structured Notes
The Company issues Structured Notes and purchases prepaid equity securities
contracts that have
coupons or repayment terms linked to the performance of debt or equity
securities, indices, currencies
or commodities. Fair value of Structured Notes and prepaid equity securities
contracts is determined
using valuation models for the derivative and debt portions of the notes. These
models incorporate
observable inputs referencing identical or comparable securities, including
prices to which the notes
are linked, interest rate yield curves, option volatility and currency, and
commodity or equity prices.
Independent, external and traded prices for the notes are considered as well.
The impact of own credit
spreads is also included based on observed secondary bond market spreads. Most
prepaid equity
securities contracts are categorised in Level 2 of the fair value hierarchy. In
instances where significant
inputs are unobservable, they are categorised in Level 3 of the fair value
hierarchy. Further detail in
relation to the issued Structured Notes is included below.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
39
16. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
a. Financial assets and liabilities recognised at fair value on a recurring
basis (continued)
· Issued Structured Notes
Notes. Notes give a risk exposure tailored to market views and risk appetite and
mainly provide
exposure to the underlying single name equity, equity index or portfolio of
equities. Typically, the
redemption payment of the note is significantly dependent on the value of
embedded equity
derivatives. In general, call and put options, digital options, straddles and
callability features are
combined to create a bespoke coupon rate or redemption payoff for each note
issuance, with risk
exposure to one or more equity underlyings or indices. The Company values the
embedded derivatives
using market standard models, which are assessed for appropriateness at least
annually. Model inputs,
such as equity forward rates, equity implied volatility and equity correlations,
are marked such that the
fair value of the derivatives match prices observable in the inter-dealer
markets. In arriving at fair
value, the Company uses discount rates appropriate to the funding rates specific
to the instrument. In
general, this results in overnight rates being used to discount the Company
assets and liabilities. In
addition, since the notes bear Morgan Stanley’s credit risk, the Company
considers this when assessing
the fair value of the notes, by adjusting the discount rates to reflect the
prevailing credit spread at the
reporting date.
The Company has a small number of notes where the cash flows due on the notes is
dependent on
embedded derivatives linked to the interest rate, foreign exchange or commodity
markets. The
Company values these notes in the same way as for equity-linked notes, by using
market standard
models and marking the inputs to match prices observed in the inter-dealer OTC
markets. Similarly to
equity-linked notes, these issuances bear Morgan Stanley’s credit risk, and the
valuation is assessed
accordingly. Most notes are categorised in Level 2 of the fair value hierarchy.
In instances where
significant inputs are unobservable, they are categorised in Level 3 of the fair
value hierarchy.
Certificates and warrants. Certificates and warrants provide exposure to the
underlying single name
equity, equity index or portfolio of equities. They therefore provide risk
exposure to the value of the
underlying position and to the dividends paid or received. The Company values
the underlying
position using observable data where available (for instance, exchange closing
prices), or alternatively
using information from third parties (for example net asset values obtained from
fund administrators)
or using Morgan Stanley’s own valuation assumptions if required. The Company
estimates future
dividend payments using a variety of available data, including market prices for
forwards and futures,
analytical review and estimates of future tax rates, incorporating the Company’s
own assumptions
where required. The certificates and warrants can typically be redeemed at short
notice and so the
certificates and warrants provide minimal exposure to the credit risk of Morgan
Stanley. The
certificates and warrants are categorised in Level 2 of the fair value
hierarchy.
· Loans
The fair value of loans to other Morgan Stanley Group undertakings is estimated
based on the present
value of expected future cash flows using its best estimate of interest rate
yield curves. The loans are
categorised in Level 2 of the fair value hierarchy.
b. Transfers between Level 1 and Level 2 of the fair value hierarchy for
financial assets and
liabilities recognised at fair value on a recurring basis
There were no transfers between Level 1 and Level 2 of the fair value hierarchy
during the current and
prior year.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
40
16. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
c. Changes in Level 3 financial assets and liabilities recognised at fair value
on a recurring basis
The following tables present the changes in the fair value of the Company’s
Level 3 financial assets and
financial liabilities for the years ended 31 December 2014 and 31 December 2013.
Level 3 instruments may
be hedged with instruments classified in Level 2. As a result, the realised and
unrealised gains/ (losses) for
assets and liabilities within the Level 3 category presented in the tables below
do not reflect the related
realised and unrealised gains/ (losses) on hedging instruments that have been
classified by the Company
within the Level 2 category.
Additionally, both observable and unobservable inputs may be used to determine
the fair value of positions
that the Company has classified within the Level 3 category. As a result, the
unrealised gains/ (losses)
during the period for assets and liabilities within the Level 3 category
presented in the tables below may
include changes in fair value during the period that were attributable to both
observable (e.g., changes in
market interest rates) and unobservable (e.g., changes in unobservable long
-dated volatilities) inputs.
The Morgan Stanley Group operates a number of intra-group policies to ensure
that, where possible,
revenues and related costs are matched. Where the trading positions included in
the below table are risk
managed using financial instruments held by other Morgan Stanley Group
undertakings, these policies
potentially result in the recognition of offsetting gains or losses in the
Company.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
41
16. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
c. Changes in Level 3 financial assets and liabilities recognised at fair value
on a recurring basis
(continued)
2014 Unrealised
gains or
(losses) for
level 3 assets
Total gains or
Purchases
Issuances
Settlements
Net /liabilities
(losses) transfers outstanding
Balance recognised in in and / or Balance at as at 31
at 1 statement of out of 31 December
January comprehensive Level 3 December 2014
2014 income (1) (2) 2014 (3)
€'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000
Financial assets classified
as held for trading:
Net derivative contracts: (4)
Equity 91,815 (19,577) - - (39,885) (1,348) 31,005 (16,810)
Financial assets designated
at fair value through
profit or loss:
Prepaid equity securities
contracts 26,697 461 962 - (23,239) (2,909) 1,972 (153)
Total financial assets
measured at fair value 118,512 (19,116) 962 - (63,124) (4,257) 32,977 (16,963)
Financial liabilities designated
at fair value through
profit or loss:
Notes (421,704) 8,334 - (153,682) 105,346 50,672 (411,034) (121)
Total financial liabilities
measured at fair value (421,704) 8,334 - (153,682) 105,346 50,672 (411,034)
(121)
(1) The total gains or (losses) are recognised in the statement of comprehensive
income as detailed in the financial instruments accounting policy
(note 3c).
(2) For financial assets and financial liabilities that were transferred into
and out of Level 3 during the year, gains or (losses) are presented as if
the assets or liabilities had been transferred into or out of Level 3 as at the
beginning of the year.
(3) Amounts represent unrealised gains or (losses) for the year ended 31
December 2014 related to assets and liabilities still outstanding at 31
December 2014. The unrealised gains or (losses) are recognised in the statement
of comprehensive income as detailed in the financial instruments
accounting policy (note 3c).
(4) Net derivative contracts represent Financial assets classified as held for
trading – derivative contracts net of Financial liabilities classified as
held for trading – derivative contracts.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
42
16. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
c. Changes in Level 3 financial assets and liabilities recognised at fair value
on a recurring basis
(continued)
During the current year, the Company reclassified approximately €312,000 of net
derivative contracts and
€40,214,000 of issued Structured Notes from Level 2 to Level 3. The
reclassifications were due to a
reduction in the volume of recently executed transactions or a lack of available
broker quotes for these
instruments, such that certain significant inputs became unobservable.
During the current year, the Company reclassified approximately €1,660,000 of
net derivative contracts,
€2,909,000 of prepaid equity securities contracts and €90,886,000 of issued
Structured Notes from Level 3
to Level 2. The reclassifications were due to the availability of market
quotations for these or comparable
instruments, or available broker quotes, or consensus data such that certain
significant inputs became
observable.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
43
16. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
c. Changes in Level 3 financial assets and liabilities recognised at fair value
on a recurring basis
(continued)
2013 Unrealised
gains or
(losses) for
level 3 assets
Total gains or
Purchases
Issuances
Settlements
Net /liabilities
(losses) transfers outstanding
Balance recognised in in and / or Balance at as at 31
at 1 statement of out of 31 December
January comprehensive Level 3 December 2013
2013 income (1) (2) 2013 (3)
€'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000
Financial assets classified
as held for trading:
Net derivative contracts: (4)
Equity 94,656 33,363 - - (40,850) 4,646 91,815 3,486
Financial assets designated
at fair value through
profit or loss:
Prepaid equity securities
contracts 43,440 3,811 8,052 - (30,021) 1,415 26,697 2,285
Total financial assets
measured at fair value 138,096 37,174 8,052 - (70,871) 6,061 118,512 5,771
Financial liabilities
designated at fair value
through profit or loss:
Notes (841,531) (24,496) - (234,652) 146,163 532,812 (421,704) (18,264)
Total financial liabilities
measured at fair value (841,531) (24,496) - (234,652) 146,163 532,812 (421,704)
(18,264)
(1) The total gains or (losses) are recognised in the statement of comprehensive
income as detailed in the financial instruments accounting policy
(note 3c).
(2) For financial assets and financial liabilities that were transferred into
and out of Level 3 during the year, gains or (losses) are presented as if
the assets or liabilities had been transferred into or out of Level 3 as at the
beginning of the year.
(3) Amounts represent unrealised gains or (losses) for the year ended 31
December 2013 related to assets and liabilities still outstanding at 31
December 2013. The unrealised gains or (losses) are recognised in the statement
of comprehensive income as detailed in the financial instruments
accounting policy (note 3c).
(4) Net derivative contracts represent Financial assets classified as held for
trading – derivative contracts net of Financial liabilities classified as
held for trading – derivative contracts.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
44
16. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
c. Changes in Level 3 financial assets and liabilities recognised at fair value
on a recurring basis
(continued)
During the prior year, the Company reclassified approximately €736,000 of net
derivative contracts,
€2,366,000 of prepaid equity securities contracts and €19,527,000 of issued
Structured Notes from Level 2
to Level 3. The reclassifications were due to a reduction in the volume of
recently executed transactions or
a lack of available broker quotes for these instruments, such that certain
significant inputs became
unobservable.
During the prior year, the Company reclassified approximately €5,382,000 of net
derivative contracts,
€951,000 of prepaid equity securities contracts and €552,339,000 of issued
Structured Notes from Level 3
to Level 2. The reclassifications were due to the availability of market
quotations for these or comparable
instruments, or available broker quotes, or consensus data such that certain
significant inputs became
observable.
d. Valuation of Level 3 financial assets and liabilities recognised at fair
value on a recurring
basis
The disclosures below provide information on the sensitivity of fair value
measurements to key inputs and
assumptions.
1. Quantitative information about and qualitative sensitivity of significant
unobservable inputs
The tables below provide information on the valuation techniques, significant
unobservable inputs
and their 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. 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. The following disclosures also include qualitative information on the
sensitivity of the
fair value measurements to changes in the significant unobservable inputs.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
45
16. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
d. Valuation of Level 3 financial assets and liabilities recognised at fair
value on a recurring
basis (continued)
2014 Significant unobservable
input(s)/ Sensitivity of the
Fair Valuation fair value to changes in the
Value technique(s) unobservable inputs Range (2) Averages (3)
€'000
ASSETS
Financial assets classified
as held for trading:
Net derivative contracts: (1)
Equity (4) 31,005 Option model
Net asset value
("NAV")
At the money volatility / (B) (C)
Volatility skew / (B) (C)
Equity - Equity correlation / (B) (C)
Equity - Foreign exchange
correlation / (B) (C)
NAV value / (A) (C)
20% to 39%
-1% to 1%
40% to 90%
-70% to 56%
100%
27%
-1%
60%
-27%
100%
Financial assets designated at
fair value through
profit or loss:
Prepaid equity securities
contracts
1,972 Option model At the money volatility / (A) (C)
Volatility skew / (A) (C)
15% to 31%
-1% to 0%
20%
0%
LIABILITIES
Financial liabilities designated
at fair value through
profit or loss:
Notes (411,034) Option model
NAV
At the money volatility / (B) (C)
Volatility skew / (B) (C)
Equity - Equity correlation / (B) (C)
Equity - Foreign exchange
correlation / (B) (C)
NAV value / (A) (C)
15% to 39%
-1% to 1%
40% to 90%
-70% to 56%
100%
27%
-1%
60%
-27%
100%
(1) Net derivative contracts represent financial assets classified as held for
trading – derivative contracts net of financial liabilities classified
as held for trading – derivative contracts.
(2) The ranges of significant unobservable inputs are represented in
percentages.
(3) Amounts represent weighted averages which are calculated by weighting each
input by the fair value of the respective financial
instruments except for derivative instruments where inputs are weighted by risk.
(4) Includes derivative contracts with multiple risks (i.e. hybrid products)
Sensitivity of the fair value to changes in the unobservable inputs:
(A) Significant increase/ (decrease) in the unobservable input in isolation
would result in a significantly higher/ (lower) fair value
measurement.
(B) Significant increase/ (decrease) in the unobservable input in isolation
would result in a significantly lower/ (higher) fair value
measurement.
(C) There are no predictable relationships between the significant unobservable
inputs.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
46
16. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
d. Valuation of Level 3 financial assets and liabilities recognised at fair
value on a recurring
basis (continued)
2013 Significant unobservable
input(s)/ Sensitivity of the
Fair Valuation fair value to changes in the
Value technique(s) unobservable inputs Range (2) Averages (3)
€'000
ASSETS
Financial assets classified
as held for trading:
Net derivative contracts: (1)
Equity (4) 91,815 Option model
Net asset value
("NAV")
At the money volatility / (B) (C)
Volatility skew / (B) (C)
Equity - Equity correlation / (A) (C)
Equity - Foreign exchange
correlation / (B) (C)
NAV value / (A) (C)
19% to 31%
-1% to 0%
45% to 96%
-75% to 45%
€0 - €88
23%
-1%
73%
-31%
€46
Financial assets designated at
fair value through
profit or loss:
Prepaid equity securities
contracts
26,697 Option model
CDS model
At the money volatility / (A) (C)
Volatility skew / (A) (C)
Equity - Equity correlation / (B) (C)
Funding spread / (B) (C)
16% to 25%
-1% to 0%
24% to 95%
96bps to 147bps
20%
-1%
65%
129bps
LIABILITIES
Financial liabilities designated
at
fair value through profit or
loss:
Notes (421,704) Option model
NAV
At the money volatility / (B) (C)
Volatility skew / (B) (C)
Equity - Equity correlation / (B) (C)
Equity - Foreign exchange
correlation / (B) (C)
NAV value / (A) (C)
15% to 42%
-2% to 0%
46% to 96%
-70% to 30%
€0 - €88
21%
-1%
74%
-31%
€46
(1) Net derivative contracts represent financial assets classified as held for
trading – derivative contracts net of financial liabilities classified as
held for trading – derivative contracts.
(2) The ranges of significant unobservable inputs are represented in percentages
or bps. A basis point equals 1/100th of 1%; for example, 1,004
basis points would equal 10.04%.
(3) Amounts represent weighted averages which are calculated by weighting each
input by the fair value of the respective financial instruments
except for derivative instruments where inputs are weighted by risk.
(4) Includes derivative contracts with multiple risks (i.e. hybrid products)
Sensitivity of the fair value to changes in the unobservable inputs:
(A) Significant increase/ (decrease) in the unobservable input in isolation
would result in a significantly higher/ (lower) fair value measurement.
(B) Significant increase/ (decrease) in the unobservable input in isolation
would result in a significantly lower/ (higher) fair value measurement.
(C) There are no predictable relationships between the significant unobservable
inputs.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
47
16. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
d. Valuation of Level 3 financial assets and liabilities recognised at fair
value on a recurring
basis (continued)
The following provides a description of significant unobservable inputs included
in the table above for all
major categories of assets and liabilities:
· Correlation – a pricing input where the payoff is driven by more than one
underlying risk.
Correlation is a measure of the relationship between the movements of two
variables (i.e. how the
change in one variable influences a change in the other variable). The
correlation ranges may be
wide since any two underlying inputs may be highly correlated (either positively
or negatively) or
weakly correlated.
· Volatility – the measure of the variability in possible returns for an
instrument given how much
that instrument changes in value over time. Volatility is a pricing input for
options and, generally,
the lower the volatility, the less risky the option. The level of volatility
used in the valuation of a
particular option depends on a number of factors, including the nature of the
risk underlying that
option (e.g. the volatility of a particular underlying equity security may be
significantly different
from that of a particular underlying commodity index), the tenor and the strike
price of the option.
· Volatility skew – the measure of the difference in implied volatility for
options with identical
underliers and expiry dates but with different strikes. The implied volatility
for an option with a
strike price that is above or below the current price of an underlying asset
will typically deviate
from the implied volatility for an option with a strike price equal to the
current price of that same
underlying asset.
· Funding spread – the difference between the interbank funding rate and a
specific bank funding
rate. Embedded within this spread is the cost of the optionality for the client
to put back
certificates at any time to be repaid at par.
2. Sensitivity of fair values to changing significant assumptions to reasonably
possible alternatives
All financial instruments are valued in accordance with the techniques outlined
in the fair value
hierarchy. Some of these techniques, including those used to value instruments
categorised in
Level 3 of the fair value hierarchy, are dependent on unobservable parameters
and the fair value
for these financial instruments has been determined using parameters appropriate
for the valuation
methodology based on prevailing market evidence. It is recognised that the
unobservable
parameters could have a range of reasonably possible alternative values.
In estimating the change in fair value, to provide information about the
variability of the fair value
measurement, the unobservable parameters were varied to the extremes of the
ranges of
reasonably possible alternatives using statistical techniques, such as
dispersion in comparable
observable external inputs for similar asset classes, historic data or judgement
if a statistical
technique is not appropriate. Where a financial instrument has more than one
unobservable
parameter, the sensitivity analysis reflects the greatest reasonably possible
increase or decrease to
fair value by varying the assumptions individually. It is unlikely that all
unobservable parameters
would be concurrently at the extreme range of possible alternative assumptions
and therefore the
sensitivity shown below is likely to be greater than the actual uncertainty
relating to the financial
instruments.
The following tables present the sensitivity of the fair value of Level 3
financial assets and
financial liabilities to reasonably possible alternative assumptions, providing
quantitative
information on the potential variability of the fair value measurement.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
48
16. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
d. Valuation of Level 3 financial assets and liabilities recognised at fair
value on a recurring
basis (continued)
Effect of reasonably possible
alternative assumptions
2014
Fair value
Increase in fair
value
Decrease in fair
value
€'000 €'000 €'000
Financial assets classified as held for trading:
Net derivative contracts:(1)
Equity 31,005 425 (2,271)
Financial assets designated at fair value
through profit or loss:
Prepaid equity securities contracts 1,972 2 (90)
Financial liabilities designated at fair value
through profit or loss:
Notes (411,034) (427) 2,361
(1) Net derivative contracts represent financial assets classified as held for
trading – derivative contracts net of financial liabilities
classified as held for trading – derivative contracts.
Effect of reasonably possible
alternative assumptions
2013
Fair value
Increase in fair
value
Decrease in fair
value
€'000 €'000 €'000
Financial assets classified as held for trading:
Net derivative contracts:(1)
Equity 91,815 1,548 (1,991)
Financial assets designated at fair value
through profit or loss:
Prepaid equity securities contracts 26,697 322 (368)
Financial liabilities designated at fair value
through profit or loss:
Notes (421,704) (1,870) 2,359
(1) Net derivative contracts represent financial assets classified as held for
trading – derivative contracts net of financial liabilities
classified as held for trading – derivative contracts.
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
49
16. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED)
e. Assets and liabilities measured at fair value on a non-recurring basis
Non-recurring fair value measurements of assets and liabilities are those which
are required or permitted in
the statement of financial position in particular circumstances. There were no
assets or liabilities measured
at fair value on a non-recurring basis during the year or prior year.
17. ASSETS AND LIABILITIES NOT MEASURED AT FAIR VALUE
For all financial instruments not measured at fair value, the carrying amount is
considered to be a
reasonable approximation of fair value due to the short term nature of these
assets and liabilities.
18. CAPITAL MANAGEMENT
The Morgan Stanley Group manages its capital on a global basis with
consideration for its legal entities.
The capital managed by the Morgan Stanley Group broadly includes ordinary share
capital, preference
share capital, subordinated loans and reserves.
The Morgan Stanley Group’s required capital (“Required Capital”) estimation is
based on the Required
Capital Framework, an internal capital adequacy measure. This framework is a
risk-based and leverage use
of capital measure, which is compared with the Morgan Stanley Group’s regulatory
capital to ensure that
the Morgan Stanley Group maintains an amount of going concern capital after
absorbing potential losses
from extreme stress events where applicable, at a point in time. The Morgan
Stanley Group defines the
difference between its regulatory capital and aggregate Required Capital as
Parent capital.
The Required Capital Framework will evolve over time in response to changes in
the business and
regulatory environment and to incorporate enhancements in modelling techniques.
The Morgan Stanley
Group will continue to evaluate the framework with respect to the impact of
future regulatory requirements,
as appropriate.
The Morgan Stanley Group actively manages its consolidated capital position
based upon, among other
things, business opportunities, risks, capital availability and rates of return
together with internal capital
policies, regulatory requirements and rating agency guidelines and, therefore,
in the future may expand or
contract its capital base to address the changing needs of its businesses.
The Morgan Stanley Group determines the appropriate level of capital at a legal
entity level to safeguard
that entity’s ability to continue as a going concern and ensure that it meets
all regulatory capital
requirements, so that it can continue to provide returns for the Morgan Stanley
Group.
In order to maintain or adjust the capital structure as described above, the
Company may adjust the amount
of dividends paid, return capital to shareholders, issue new shares or sell
assets to reduce debt.
The Company manages the following items as capital:
2014 2013
€'000 €'000
Share capital 15,018 15,018
Reserves 15,052 10,059
30,070 25,077
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
50
19. RELATED PARTY DISCLOSURES
Parent and ultimate controlling entity
The Company’s immediate parent undertaking is Archimedes Investments
Coöperatieve U.A. which is
registered in The Netherlands.
The ultimate parent undertaking and controlling entity and the largest group of
which the Company is a
member and for which group financial statements are prepared is Morgan Stanley.
Morgan Stanley is
incorporated in the state of Delaware, the United States of America and copies
of its financial statements
can be obtained from www.morganstanley.com/investorrelations.
Key management compensation
Key management personnel are defined as those persons having authority and
responsibility for planning,
directing and controlling the activities of the Company. Key management
personnel include the Board of
Directors of the Company plus key business unit management.
Compensation paid to key management personnel in respect of their services
rendered to the Company is:
2014 2013
€'000 €'000
Short-term employee benefits 25 22
Post-employment benefits 1 1
Share-based payments 3 4
Other long-term employee benefits 3 2
TMF management fees 281 424
313 453
The share-based payment costs disclosed above reflect the amortisation of equity
-based awards granted to
key management personnel over the last three years and are therefore not
directly aligned with other staff
costs in the current year.
Key management personnel compensation is borne by other Morgan Stanley Group
undertakings in both
the current and prior year.
Transactions with related parties
The Morgan Stanley Group conducts business for clients globally through a
combination of both functional
and legal entity organisational structures. Accordingly, the Company is closely
integrated with the
operations of the Morgan Stanley Group and enters into transactions with other
Morgan Stanley Group
undertakings on an arm’s length basis for the purposes of utilising financing,
trading and risk management,
and infrastructure services. The nature of these relationships along with
information about the transactions
and outstanding balances is given below. The Company has not recognised any
expense and has made no
provision for impairment relating to the amount of outstanding balances from
related parties (2013: €nil).
In addition, the management and execution of business strategies on a global
basis results in many Morgan
Stanley transactions impacting a number of Morgan Stanley Group undertakings.
The Morgan Stanley
Group operates a number of intra-group policies to ensure that, where possible,
revenues and related costs
are matched. For the year ended 31 December 2014, a net loss of €1,135,000 was
recognised in the
statement of comprehensive income arising from such revenue transfer pricing
policies (2013: net gain of
€14,607,000).
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
51
19. RELATED PARTY DISCLOSURES (CONTINUED)
Transactions with related parties (continued)
Funding
The Company receives general funding from and provides funding to other Morgan
Stanley Group
undertakings.
General funding is undated, unsecured, floating rate lending. Funding may be
received or provided for
specific transaction related funding requirements, or for general operational
purposes. The interest rates are
established by the Morgan Stanley Group Treasury function for all entities
within the Morgan Stanley
Group and approximate the market rate of interest that the Morgan Stanley Group
incurs in funding its
business.
Other funding
Other funding includes CPECs issued to the Company’s direct parent undertaking,
Archimedes Investments
Coöperatieve U.A.. The specific terms of the related yield are detailed in note
8.
Details of the outstanding balances on these funding arrangements and the
related interest income or
expense recognised in the statement of comprehensive income during the year are
shown in the table
below:
2014 2013
Interest Balance Interest Balance
€'000 €'000 €'000 €'000
Amounts due from the Company’s indirect
parent undertaking 24,549 1,193,364 24,788 1,068,859
Amounts due from other Morgan Stanley
Group undertakings 383 292,928 766 126,168
24,932 1,486,292 25,554 1,195,027
Amounts due to the Company’s direct
parent undertaking 24,775 1,195,354 25,384 1,170,579
Amounts due to other Morgan Stanley
Group undertakings 9 10,024 - 21
24,784 1,205,378 25,384 1,170,600
MORGAN STANLEY B.V.
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2014
52
19. RELATED PARTY DISCLOSURES (CONTINUED)
Transactions with related parties (continued)
Trading and risk management
The Company issues Structured Notes and hedges the obligations arising from the
issuance by entering into
prepaid equity securities contracts, derivative contracts and loans designated
at fair value through profit or
loss with other Morgan Stanley Group undertakings. All such transactions are
entered into on an arm’s
length basis. The total amounts receivable and payable on issued Structured
Notes, prepaid equity securities
contracts, derivative contracts and loans designated at fair value through
profit or loss were as follows:
2014 2013
€'000 €'000
Amounts due from the Company’s indirect parent undertakings on
unsettled securities and derivative transactions - 13,379
Amounts due from other Morgan Stanley Group undertakings 6,594,927 6,959,969
6,594,927 6,973,348
Amounts due to the Company’s indirect parent undertakings on
unsettled securities and derivative transactions 2,585 9,291
Amounts due to other Morgan Stanley Group undertakings 2,112,114 2,097,213
2,114,699 2,106,504
Included in the table above is an amount of €250,917,000 (2013: €nil) in
relation to an obligation to return
collateral received from another Morgan Stanley Group undertaking to mitigate
credit risk on exposures
arising under derivatives contracts between the Company and other Morgan Stanley
Group undertakings.
Infrastructure services
The Company uses infrastructure services including the provision of office
facilities, operated by other
Morgan Stanley Group undertakings at no charge.
MORGAN STANLEY B.V.
ADDITIONAL INFORMATION
Year ended 31 December 2014
53
Independent auditor’s report
The independent auditor’s report is recorded on the next page.
Statutory rules concerning appropriation of the net result
The Articles of Association of the Company provide that the net result for the
year is at the disposition of
the General Meeting of Shareholders.
Distribution can only be made to the extent that the Shareholder’s equity
exceeds the reserves provided for
by the Articles of Association. The Board of Directors must grant its approval
which it can only withhold in
the event that it knows or reasonably should have known that, following the
distribution, the Company will
not be able to continue with the payments of its debts becoming due and payable
in the foreseeable future.
Appropriation of the net result for the year
The statement of financial position is presented after the proposed
appropriation of net result for the year
ended 31 December 2014. The Directors propose to add profit to the statement of
comprehensive income as
part of the equity shareholders’ funds.
Subsequent events
There have been no significant events since the reporting date.
3113903300/201523965/2/pl
Deloitte Accountants B.V.
Gustav Mahlerlaan 2970
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P.O.Box 58110
1040 HC Amsterdam
Netherlands
Tel: +31 (0)88 288 2888
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Independent auditor's report
To: the Shareholders Morgan Stanley B.V.
Report on the Audit of the Financial Statements 2014
Our Opinion
We have audited the accompanying financial statements 2014 of Morgan Stanley
B.V. (the
Company), based in Amsterdam.
In our opinion, the company financial statements give a true and fair view of
the financial
position of Morgan Stanley B.V. as at 31 December 2014, and of its result and
its cash flows for
2014 in accordance with International Financial Reporting Standards as adopted
by the European
Union (EU-IFRS) and with Part 9 of Book 2 of the Dutch Civil Code.
The company financial statements comprise:
1. the company statement of financial position as at 31 December 2014;
2. the following statements for 2014: statements of comprehensive income,
changes in equity
and cash flows for the year then ended;
3. the notes comprising a summary of the significant accounting policies and
other explanatory
information.
Basis for our Opinion
We conducted our audit in accordance with Dutch law, including the Dutch
Standards on
Auditing. Our responsibilities under those standards are further described in
the “Our
responsibilities for the Audit of the Financial Statements” section of our
report.
We are independent of Morgan Stanley B.V. in accordance with the “Verordening
inzake de
onafhankelijkheid van accountants bij assurance-opdrachten” (ViO) and other
relevant
independence regulations in the Netherlands. Furthermore, we have complied with
the
“Verordening gedrags- en beroepsregels accountants” (VGBA).
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a
basis for our opinion.
Materiality
Misstatements can arise from fraud or error and are considered material if,
individually or in the
aggregate, they could reasonably be expected to influence the economic decisions
of users taken
on the basis of these financial statements. The materiality affects the nature,
timing and extent of
our audit procedures and the evaluation of the effect of identified
misstatements on our opinion.
3113903300/201523965/2/pl
Based on our professional judgement we determined the materiality for the
financial statements
as a whole at EUR 80,588,030. The materiality is based on 1% of the total
assets. We have also
taken into account misstatements and/or possible misstatements that in our
opinion are material
for the users of the financial statements for qualitative reasons.
We agreed with the Board of Directors that misstatements in excess of EUR
1,611,761 which are
identified during the audit would be reported to them, as well as smaller
misstatements that in
our view must be reported on qualitative grounds.
Our Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of
most significance
in our audit of the financial statements. We have communicated the key audit
matters to the
Board of Directors. The key audit matters are not a comprehensive reflection of
all matters
discussed.
These matters were addressed in the context of our audit of the financial
statements as a whole
and in forming our opinion thereon, and we do not provide a separate opinion on
these matters.
Financial Instruments, including valuation and accounting
Key Audit Matter
The risk associated with the valuation assertion relates to the valuation of
fair value hierarchy
level 3 issuances because this can require significant management judgement. We
note that
although the entity does not apply hedge accounting, it reduces profit and loss
volatility through
economic hedging and recording the financial instruments held on the balance at
fair value.
Valuation of level 3 financial instruments often requires the usage of bespoke
valuation models
and unobservable inputs to determine the fair value which can be highly
subjective. The
valuations of these instruments are typically more complex and may not be
readily observable
due to illiquid markets or low trading volumes, and accordingly, are more
difficult to estimate.
The subjectivity involved in the valuation of level 3 inventory means there is
an inherently
greater risk of material misstatement.
Reference is made to note 3.d and note 16 of the financial statements of Morgan
Stanley B.V. as
per December 31, 2014.
3113903300/201523965/2/pl
Response
Our testing over the valuation assertion has included procedures in relation to
the controls over
positions carried at fair value, procedures in relation to model controls and
the performance of
substantive testing through independent revaluations, methodology reviews and
testing of key
inputs for a sample of positions As part of these procedures we challenged
management
assumptions in the determination of the valuation models with the support of
internal financial
instrument valuation experts.
Based on the work performed we observed that the hedge of the financial assets
and financial
liabilities does not net to nil at December 31, 2014 or December 31, 2013. This
is due to the
holding of cash and short-term deposits, and also pending trades which are
included within trade
receivables and trade payables. When these balances are included the trading
balance sheet nets
flat. We have performed a reconciliation to confirm this.
Responsibilities of the Directors for the Financial Statements
Management is responsible for the preparation and fair presentation of the
financial statements in
accordance with EU-IFRS and Part 9 of Book 2 of the Dutch Civil Code, and for
the preparation
of the management board report in accordance with Part 9 of Book 2 of the Dutch
Civil Code.
Furthermore, management is responsible for such internal control as management
determines is
necessary to enable the preparation of financial statements that are free from
material
misstatement, whether due to fraud or error.
As part of the preparation of the financial statements, management is
responsible for assessing
the company’s ability to continue as a going concern. Based on the financial
reporting
frameworks mentioned, management should prepare the financial statements using
the going
concern basis of accounting unless management either intends to liquidate the
Company or to
cease operations, or has no realistic alternative but to do so. Management
should disclose events
and circumstances that may cast significant doubt on the company’s ability to
continue as
a going concern in the financial statements.
The Board of Directors is responsible for overseeing the company’s financial
reporting process.
Our Responsibilities for the Audit of the Financial Statements
Our objective is to plan and perform the audit assignment in a manner that
allows us to obtain
sufficient and appropriate audit evidence for our opinion.
3113903300/201523965/2/pl
Our audit has been performed with a high, but not absolute, level of assurance,
which means we
may not have detected all errors and fraud. We have exercised professional
judgment and have
maintained professional scepticism throughout the audit, in accordance with
Dutch Standards on
Auditing, ethical requirements and independence requirements. Our audit included
e.g.:
 Identifying and assessing the risks of material misstatement of the financial
statements,
whether due to fraud or error, designing and performing audit procedures
responsive to those
risks, and obtaining audit evidence that is sufficient and appropriate to
provide a basis for our
opinion. 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.
 Obtaining 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.
 Evaluating the appropriateness of accounting policies used and the
reasonableness of
accounting estimates and related disclosures made by management.
 Concluding on the appropriateness of management’s use of the going concern
basis of
accounting, and based on the audit evidence obtained, whether a material
uncertainty exists
related to events or conditions that may cast significant doubt on the company’s
ability to
continue as a going concern. If we conclude that a material uncertainty exists,
we are required
to draw attention in our auditor’s report to the related disclosures in the
financial statements
or, if such disclosures are inadequate, to modify our opinion. Our conclusions
are based on
the audit evidence obtained up to the date of our auditor’s report. However,
future events or
conditions may cause the company ceasing to continue as a going concern.
 Evaluating the overall presentation, structure and content of the financial
statements,
including the disclosures; and
 Evaluating whether the financial statements represent the underlying
transactions and events
in a manner that achieves fair presentation.
We communicate with the Board of Directors regarding, among other matters, the
planned scope
and timing of the audit and significant audit findings, including any
significant findings in
internal control that we identify during our audit.
We provide the Board of Directors with a statement that we have complied with
relevant ethical
requirements regarding independence, and to communicate with them all
relationships and other
matters that may reasonably be thought to bear on our independence, and where
applicable,
related safeguards.
From the matters communicated with the Board of Directors, we determine those
matters that
were of most significance in the audit of the financial statements of the
current period and are
therefore the key audit matters. We describe these matters in our auditor’s
report unless law or
regulation precludes public disclosure about the matter or, in extremely rare
circumstances, when
non-mentioning is in the public interest.
3113903300/201523965/2/pl
Report on other legal and regulatory requirements
Report on the management board report and the other information
Pursuant to legal requirements of Part 9 of Book 2 of the Dutch Civil Code
(concerning our
obligation to report about the management board report and other information):
 We have no deficiencies to report as a result of our examination whether the
management
board report, to the extent we can assess, has been prepared in accordance with
Part 9 of
Book 2 of the Dutch Civil Code, and whether the information as required by Part
9 of Book 2
of the Dutch Civil Code has been annexed.
 We report that the management board report, to the extent we can assess, is
consistent with
the financial statements.
Engagement
We were engaged by the Board of Directors as auditor of Morgan Stanley B.V. for
2014 on 11
February 2015, and we have been the auditor of Morgan Stanley B.V. as of year
2001.
Amsterdam, April 28, 2015
Deloitte Accountants B.V.
Signed on the original: M. van Luijk
For Morgan Stanley B.V.,

Deloitte Accountants B.V.

Tel: +31 (0)88 288 2888