avatar Morgan Stanley Emerging Markets Domestic Debt Fund, Inc. Finance, Insurance, And Real Estate
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    Registered number: 34161590 Registeredoffice: Luna Arena Herikerbergweg 238 1101 CM Amsterdam The Netherlands MORGANSTANLEYB.V. Report and financial statements 31 December 2015


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    MORGAN STANLEY B.V. CONTENTS PAGE ANNUAL REPORT Directors' report Directors' responsibility statement ANNUAL ACCOUNTS Statement of comprehensive income Statement of changes in equity 10 Statement of financial position 11 Statement of cash flows 12 Notes to the financial statements 13 OTHER INFORMATION Additional information 57 Independentauditor's report 58


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    MORGAN STANLEY B.V, DIRECTORS’ REPORT The Directors presenttheir report and financial statements (which comprise the statement of comprehensive income, the statement of changes in equity, the statement of financial position, the statementof cash flows, and the related notes, 1 to 20) for the Morgan Stanley B.V. (the “Company”) for the year ended 31 December 2015. RESULTS AND DIVIDENDS Theprofit for the year, after tax, was €7,620,000 (2014: €4,993,000). During the year, no dividends were paid or proposed (2014: €nil). PRINCIPAL ACTIVITY The principal activity of the Companyis the issuance of financial instruments including notes, certificates and warrants (“Structured Notes”) and the hedgingofthe 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 nosignificant changeis expected. BUSINESS REVIEW During the first half of 2015, global growth was supported by a rebound in the United States (“US”) and firmer growth in the euro zone and the United Kingdom economies, partially offset by sluggishness in major emerging market economies. During the secondhalf of 2015, global growth slowed asa result of the continued sluggishness of emerging market economies, declines in energy prices, and the slowdown of China’s economic growth. Global real gross domestic product growth decelerated in 2015 from 2014. Growth in emerging market economies slowed for a fourth straight year, while growth in developed market economies was steady but sluggish. Notable trends during the year included falling oil and other commodity prices, an appreciating US dollar weighing on global trade flows and increasing policy challenges in a numberof major emerging market economies, most notably China. The US Federal Reserve announced a rate increase in December 2015 based on cumulative labour market progress and rising confidence in achieving its inflation target. However, with Europe and Japan still struggling and China decelerating, the European Central Bank (“ECB”), the Bank of Japan and the People’s Bank of China acted to continue their targeted monetary policy easing measures. Subsequent to 31 December 2015, the Bank of Japan announced a programme of Quantitative and Qualitative Monetary Easing (“QE”) with a Negative Interest Rate that introduceda three tier policy rate system for bank reserves with a low rate of negative 0.1%. Additionally, in March 2016 the ECB announceda further QE programmeand reduced interest rates with the deposit facility rate falling from negative 0.3% to negative 0.4% and the benchmarkinterest rate falling from 0.05% to zero%. Theissued Structured Notes expose the Company to the risk of changes in marketprices 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 Companyuses the contracts that it purchases from other Morgan Stanley Group undertakings to hedge the market price, interest rate and foreign currencyrisks associated with the issuance of the Structured Notes.


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    MORGAN STANLEYB.V. DIRECTORS’ REPORT BUSINESS REVIEW (CONTINUED) The statement of comprehensive income for the year is set out on page 9. The Company madea profit before income tax of €10,151,000 in the current ycar, an increase of €3,493,000 from the prior year. The profit before income tax is primarily driven by the average level of Structured Notes in issuance on which management charges of €5,711,000 (2014: €6,658,000) reflected in ‘Other income’ are received. In addition, in the current year a changein fair value of certain Structured Notes attributable to own credit tisk of €4,440,000 (2014: €nil) is reflected in ‘Net gains / (losses) on financial instruments designated at fair value through profit or loss.’ In certain limited circumstances, Structured Notes have been issued to other Morgan Stanley Group undertakings and hedged by prepaid equity securities contracts, both of which are designated at fair value through profit and loss. The Company has entered into collateral arrangements on these prepaid equity securities contracts with other Morgan Stanley Group undertakings. As a result of the collateral arrangements associated with these prepaid equity securities contracts, whilst the Companyrecognises changesin fair value attributable to own credit risk of the issued Structured Notes in the statement of comprehensive income, no offsetting change in fair value attributable to counterparty credit risk of the prepaid equity securities contracts is recognised in the statement of comprehensive income. In addition to management charges, ‘Other income’ also includes a net foreign exchange gain of €14,152,000 as a result of hedging assets andliabilities recognised for Morgan Stanley Group reporting purposes. Consistent with the calculation of the yield payable on Convertible Preferred Equity Certificates (“CPECs”) explained in note 8, this has resulted in an increase in ‘Interest expense’ which primarily relates to the yield of €36,821,000 (2014: €24,775,000). The statementof financial position for the Company is set out on page 11. The Company’s total assets at 31 December 2015 are €8,770,208,000, an increase of €688,406,000 or 9% when compared to 31 December 2014. Total liabilities of €8,732,518,000 represent an increase of €680,786,000 or 8%, when compared to total liabilities at 31 December 2014. Structured Notes have increased since 31 December 2014 as a result of new issuances and fair value movements in the year partially offset by maturities. The increase in the value of issued Structured Notes has resulted in a net increase 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 managesits 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, performanceor position of the business of the Company. The risk managementsection below sets out the Company's and the Morgan Stanley Group's policies for the managementof liquidity and cash flow risk and other significant businessrisks. Risk management Riskis an inherent part of the Company’s business activity. The Companyseeks 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 developedits own risk managementpolicy framework, which leverages the risk managementpolicies and procedures of the Morgan Stanley Group, and which includes escalation to the Company’s Board of Directors and to appropriate senior management personnel of the Companyas well as oversight through the Company’s Board of Directors.


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    MORGAN STANLEY B.V. DIRECTORS’ REPORT BUSINESS REVIEW (CONTINUED) 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 15 to the financial statements. Marketrisk Marketrisk refers to the risk of losses for a position or portfolio due to changesin rates, foreign exchange, equities, implied volatilities, correlations or other market factors. Market risk managementpolicies 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 marketrisk associated with its trading activities at both a trading division and an individual productlevel. It is the policy and objective of the Company notto be exposedto net marketrisk. Credit risk Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meetits financial obligations to the Company. Credit risk includes the risk that economic, social and political conditions and events in a foreign country will adversely affect an obligor’s ability and willingnessto fulfil their obligations. Credit risk management policies and procedures for the Companyare consistent with those of the Morgan Stanley Group and include escalation to the Company’s Board of Directors and appropriate senior management personnel, 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 andfunding risk Liquidity and fundingrisk refers to the risk that the Company will be unable to financeits operations due to a loss of accessto 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 framework is further described in note 19. The Company continuesto actively manage its capital and liquidity position to ensure adequate resources are available to support its activities, to enable it to withstand marketstresses. Operationalrisk 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 (e.g. fraud, theft, legal and compliance risks or damage to physical assets), Operational risk relates to the following risk event categories as defined by Basel Capital Standards: internal fraud; external fraud; employment practices and workplace safety; clients, products and business practices; business disruption and systemfailure; damage to physical assets; and execution, delivery and process management. Legal, regulatory and compliancerisk is discussed below under “Legal, regulatory and compliance risk”, The Company may incur operational risk across the full scope ofits business activities.


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    MORGAN STANLEY B.V. DIRECTORS’ REPORT BUSINESS REVIEW (CONTINUED) Operational risk (continued) The Companyhas cstablished an operational risk framework to identify measure, monitor and control risk across the Company. This framework is consistent with the framework established by the Morgan Stanley Group and includes escalation to the Company’s Board of directors and appropriate senior management personnel. Effective operational risk management is essential to reducing the impact of operational risk incidents and mitigating legal and reputational risks. The framework is continually evolving to account for changes in the Company and to respond to the changing regulatory and business environment. The Company has implemented operational risk data and assessment systems to monitor and analyse internal and external operational risk events, to assess business environment and internal control factors and to perform scenario analysis. The collected data elements are incorporated in the operational risk capital model. The model encompasses both quantitative and qualitative elements. Internal loss data and scenario analysis results are direct inputs to the capital model, while external operational incidents, business environment and internal control factors are evaluated as part of the scenario analysis process. In addition, the Company employsa variety of risk processes and mitigants to manage its operational risk exposures. These include a strong governance framework, a comprehensive risk management programme and insurance. Operational risks and associated risk exposures are assessed relative to the risk tolerance established by the Board andareprioritised accordingly. The breadth and range of operational risk are such that the types of mitigating activities are wide-ranging. Examples ofactivities include enhancing defences against cyberattacks; use of legal agreements and. contracts to transfer and/ or limit operational risk exposures; due diligence; implementation of enhanced policies and procedures; exception management processing controls; and segregation of duties. Primary responsibility for the management of operational risk is with the business segments, the control groups and the business managers therein. The business managers maintain processes and controls designed to identify, assess, manage, mitigate and report operational risk. Each of the business segments has a designated operational. risk coordinator. The operational risk coordinator regularly reviews operationalrisk issues and reports to the Company’s senior management within each business. Each control group also has a designated operational risk coordinator and a forum for discussing operational risk matters with the Company’s senior management. Oversight of operational risk is provided by the Operational Risk Oversight Committee, regional risk committees and senior management. In the event of a merger; joint venture; divestiture; reorganisation; or creation of a new legal entity, a new product or a business activity, operationalrisks are considered, and any necessary changes in processes or controls are implemented. The Operational Risk Department is independent of the divisions and reports to the Chief Risk Officer of the Morgan Stanley Group (“CRO”). The Operational Risk Department provides oversight of operational risk management and independently assesses measures and monitors operational risk. The Operational Risk Department works with the divisions and control groups to help ensure a transparent, consistent and comprehensive framework for managing operational risk within each area and across the Company. The Operational Risk Department scope includes oversight of technology and data risks (e.g. cybersecurity) and a supplier management (vendorrisk oversight and assessment) programme. Furthermore, the Operational Risk Department supports the collection and reporting of operational tisk incidents and the execution of operational risk assessments; provides the infrastructure needed for risk measurement and risk management; and ensures ongoing validation and verification of the Company’s advanced measurement approach for operational risk capital.


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    MORGAN STANLEY B.V. DIRECTORS’ REPORT BUSINESS REVIEW (CONTINUED) Operational risk (continued) Business Continuity Management is responsible for identifying key risks and threats to the Company’s resiliency and planning to ensure that a recovery strategy and required resources are in place for the resumption of critical business functions following a disaster or other business interruption. Disaster recovery plans are in placefor critical facilities and resources, and redundancies are built into the systems as deemed appropriate. The key components of the Company’s Business Continuity Management Programmeinclude: crisis management; business recovery plans; applications/ data recovery; work area recovery; and other elements addressing management, analysis, training andtesting. The Company maintains an information security programme that coordinates the management of information security risks and is designed to address regulatory requirements. Information security policies are designed to protect the Company’s information assets against unauthorised disclosure, modification or misuse. These policies cover a broad range of areas, including: application entitlements, data protection, incident response, Internet and electronic communications, remote access and portable devices. The Company has also established policies, procedures and technologies to protect its computers and other assets from unauthorised access. In connection with its ongoing operations, the Companyutilises the services of external vendors, whichit anticipates will continue and may increase in the future. These services include, for example, outsourced processing and support functions and consulting and other professional services. The Company manages its exposures to these services through a variety of means such as the performance of due diligence, consideration of operational risk, implementation of service level and other contractual agreements, and ongoing monitoring of the vendors’ performance. The Company maintains a supplier risk management programme with policies, procedures, organisation, governance and supporting technology thatsatisfies regulatory requirements. The programmeis designed to ensure that adequate risk management controls over the services exist, including, but not limited to information security, operational failure, financial stability, disaster recoverability, reputational risk, safeguards against corruption and termination. Legal, regulatory and compliance risk Legal, regulatory and compliance risk includes the risk of legal or regulatory sanctions, material financial loss; including fines, penalties, judgements, damages and/ orsettlements or loss to reputation the Company may suffer as a result of a failure to comply with laws, regulations, rules, related self-regulatory organisation standards and codes of conduct applicable to our business activities. This risk also includes contractual and commercial risk, such as the risk that a counterparty’s performance obligations will be unenforceable, It also includes compliance with Anti-Money Laundering andterrorist financing rules and regulations. The Company is generally subject to extensive regulation in the different jurisdictions in which it conducts its business. The Company, principally through the Morgan Stanley Group’s Legal and Compliance Division, has established procedures based on legal and regulatory requirements on a worldwide basis that are designed to facilitate compliance with applicable statutory and regulatory requirements and to require that the Company’s policies relating to business conduct, ethics and practices are followed globally. 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 heightened legal and regulatory focus on the financial services industry presents a continuing business challenge for the Company.


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    MORGAN STANLEYB.V. DIRECTORS’ REPORT BUSINESS REVIEW (CONTINUED) Culture, values and conductofemployees All employees of the Morgan Stanley Group are accountable for conducting themselves in accordance with the Morgan Stanley Group’s core values Putting Clients First, Doing the Right Thing, Leading with Exceptional Ideas, and Giving Back. The Morgan Stanley Group is committed to establishing a strong culture anchored in these core values, and in its governance framework, which includes management oversight, effective risk management and controls, training and development programmes, policies, procedures, and defined roles and responsibilities. The Morgan Stanley Group’s Code of Conduct(the “Code”) establishes standards for employee conduct that further reinforce the Morgan Stanley Group’s commitment to integrity and ethical conduct. Every new hire and every employee annually must attest to their understanding of and adherence to the Code. The annual employee performance appraisal process includes an evaluation of adherence to the Code and the Morgan Stanley Group’s core values. The Global Incentive Compensation Discretion Policy sets forth standards that specifically provide that managers must consider whether their employees effectively managed and/or supervised risk control practices during the performance year. The Morgan Stanley Group also has several mutually reinforcing processes to identify employee conduct that may have an impact on employmentstatus, current year compensation and/or prior year compensation. The Morgan Stanley Group’s clawback and cancellation provisions permit recovery of deferred incentive compensation where an employee’s act or omission (including 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 managementprinciples, policies and standards, or causes a loss of revenues associated with a position on which the employee was paid and the employee operated outside of internal control policies. Going Concern Retaining sufficient liquidity and capital to withstand market pressures remains central to the Morgan Stanley Group’s and the Company’s strategy. Additionally, the Company has access to further Morgan Stanley Group capital and liquidity as required. Taking all of these factors into consideration, the Directors believe it is reasonable to assume that the 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 except where otherwise shown: RELL. de Groot (resigned 17 August 2015) H. Herrmann S, Ibanez. (appointed 17 August 2015) P.J.G. de Reus L.P.A. Rolfes (appointed 21 July 2015) Z. Wu (resigned 30 June 2015) TMF Management B.V. 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.


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    MORGAN STANLEY B.V. DIRECTORS’ REPORT - EVENTS AFTER THE REPORTING DATE There have heen no significant events since the reporting date. AUDIT COMMITTEE The Companyqualifies as an organisation of public interest pursuant to Dutch and European Union (“EU”) law. Morgan Stanley International Limited, a shareholder in the Company during the current year, 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 as detailed in the Articles of Association of the Company. 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. Approvedby the Board and signed onits behalf by: H. Herrmann S. Ibanez PJG. de Reus L.P.A. Rolfes TMF Management B.V.


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    MORGAN STANLEY B.V. DIRECTORS’ RESPONSIBILITY STATEMENT 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 andgive a true and fair view ofthe assets,liabilities, financial position and profit or loss of the Company;and - the managementreport represented by the Directors’ report includes a fair review of the development and performance of the business andthe position of the Company together with a description of the principal risks and uncertainties that the Company faces. Approved bythe Boardand signed onits behalf by H. Herrmann S. Ibanez P.J.G. de Reus L.P.A. Rolfes TMF Management B,V.


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    MORGAN STANLEY B.V. STATEMENT OF COMPREHENSIVE INCOME Year ended 31 December 2015 Note 2015 2014 €'000 €'000 Net (losses)/ gains on financial instruments classified as held for trading (478,444) 185,570 Net gains/ (losses) on financial instruments designated atfair value through profit or loss 482,884 (185,570) Interest income 4 23,190 24,932 Interest expense 4 (37,178) (24,832) Other income 5 19,863 6,658 Other expense 6 (164) (100) PROFIT BEFORE INCOME TAX 10,151 6,658 Incometax expense 7 (2,531) (1,665) PROFIT AND TOTAL COMPREHENSIVE INCOME FOR THE YEAR 7,620 4,993 The notes on pages 13 to 56 form anintegral part of the financial statements.


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    MORGAN STANLEY B.V. STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2015 Share Retained Total capital earnings equity €'000 €'000 €'000 Balance at 1 January 2014 15,018 10,059 25,077 Profit and total comprehensive incomefor the year - 4,993 4,993 Balance at 31 December 2014 15,018 15,052 30,070. Profit and total comprehensive incomefor the year - 7,620 7,620 Balance at 31 December 2015 15018 22,672 37,600 The notes on pages 13 to 56 form an integral part of the financial statements.


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    MORGAN STANLEY B.V. Registered number: 34161590 STATEMENT OF FINANCIAL POSITION Asat 31 December 2015 Note 2015 2014 €'000 €000 ASSETS Loans and receivables: Cashandshort-term deposits 499 510 Trade receivables 293,998 24,586 Otherreceivables 20 1,166,478 1,486,292 1,460,975 1,511,388 Financial assets classified as held for trading 9 495,297 527,856 Financial assets designated at fair value through profit or loss 10 6,813,936 6,042,485 Current tax assets - 73 TOTAL ASSETS 8,770,208 8,081,802 LIABILITIES AND EQUITY Financialliabilities at amortised cost: Convertible preferred equity certificates 8 1,125,281 1,195,354 Trade payables 38,374 296,607 Other payables 264,324 10,024 1,427,979 1,501,985 Financialliabilities classified as held for trading 9 939,843 503,487 Financialliabilities designated at fair value through profit or loss 10 6,364,543 6,046,260 Currenttaxliabilities 153 - TOTALLIABILITIES 8,732,518 8,051,732 EQUITY Share capital 11 15,018 15,018 Retained earnings 22,672 15,052 Equity attributable to owners of the Company 37,690 30,070 TOTAL EQUITY 37,690 30,070 TOTAL LIABILITIES AND EQUITY 8,770,208 8,081,802 These financial statements were approved by the Board and authorised for issue on Signed on behalf of the Board H. Herrmann S. Ibanez P.J.G. de Reus L.P.A. Rolfes TMF Management B.V. The notes on pages 13 to 56 formanintegral part of the financial statements. 11


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    MORGANSTANLEYB.V. STATEMENT OF CASH FLOWS Year ended 31 December 2015 Note 2015 2014 €'000 €'000 NET CASH FLOWS FROM/ (USED IN) OPERATING ACTIVITIES 12b 1,978 (1,075) NET CASH FLOWSFROM INVESTING ACTIVITIES 72,704 NET CASH FLOWSUSEDIN FINANCING ACTIVITIES Yield paid on convertible preferred equity certificates (74,693) NET DECREASE IN CASH AND CASH EQUIVALENTS (11) (1,075) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 510 1,585 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 499 510 The notes on pages 13 to 56 form anintegral part of the financial statements. 12


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    MORGAN STANLEY B.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 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 Companyto the risk of changes in marketprices 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 Companyuses the contracts that it purchases from other Morgan Stanley Group undertakings to hedge the marketprice, interest rate and foreign currencyrisks associated with the issuance of the Structured Notes. 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 standardsand interpretations adopted during the year The following amendments to standards relevant to the Company’s operations were adopted during the year. Except where otherwise stated, these amendments to standards did not have a material impact on the Company’s financial statements. Aspart of the 2010 - 2012 Annual Improvements Cycle published in December 2013, the IASB made amendments to the following standardsthat are relevant to the Company’s operations: IFRS 13 ‘Fair value measurement’ (“IFRS 13”) 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 requiring application on or after 1 February 2015, with earlier application permitted. The Company adopted the 2010 — 2012 Annual Improvements with effect from 1 January 2015. As part of the 2011 — 2013 Annual Improvements Cycle published in December 2013, the IASB made amendments to the following standard that is relevant to the Company's operations: IFRS 13 (for application in accounting periods beginning on or after 1 July 2014). The improvements were endorsed by the EU in December 2014 requiring application on or after 1 January 2015, with earlier application permitted. The Company adopted the 2011 — 2013 Annual Improvements with effect from 1 January 2015. There were no other standards orinterpretations 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, amendments to standards and interpretations relevant to the Company’s operations were issued by the JASB but not yet mandatory. Except where otherwise stated, the Company does not expect that the adoption of the following standards, amendments to standards and interpretations will have a material impact on the Company’s financial statements. An amendmentto [AS 1 ‘Presentation offinancial statements’ in relation to the ‘Disclosure initiative’ was issued by the IASB in December 2014, for application in annual periods beginning on or after 1 January 2016. The amendment was endorsed by the EU in December 2015. 13


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    MORGANSTANLEYB.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 2. BASIS OF PREPARATION (CONTINUED) New standards and interpretations not yet adopted (continued) An amendmentto IAS 7 ‘Statement of cashflows’ was issued by the IASB in February 2016,as part of the Disclosure Initiative project. The amendment is applicable for annual periods beginning on or after 1 January 2017. Early application is permitted. An amendment to IAS 12 ‘Income taxes’ was issued by the IASB in January 2016,for application in annual periods beginningonor after 1 January 2017. Early application is permitted. 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. IFRS 9 is applicable retrospectively, except where otherwise prescribed by transitional provisions of the standard, and 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. The Company is currently assessing the impact of IFRS 9 on its financial statements. As part of the 2012 — 2014 Annual Improvements Cycle published in September 2014, 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), The improvements were endorsed by the EU in December 2015. 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 believesthat 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 andliabilities, see note 17. 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 6. 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 creditrisk and liquidity risk. Asset 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. 14


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    MORGAN STANLEY B.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 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 environmentin 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 and non-monetary assets and liabilities denominated 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. 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 designatedat fair value through profit or loss and loans and receivables. The Company classifies its financial liabilities into the following categories oninitial recognition: financial liabilities classified as held for trading; financial liabilities designated at fair value through profit or loss andfinancial liabilities at amortised cost. Moreinformation 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 (losses)/ gains on financial instruments classified as held for trading’. Transaction costs are excluded from the initial fair value measurement ofthe financial instrument. These costs are recognisedin the statement of comprehensive incomein ‘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 gains/ (losses) on financial instruments designated at fair value throughprofit or loss’. Transaction costs are excluded from the initial fair value measurementof the financial instrument. Any such costs are recognisedin the statement of comprehensive income in ‘Other expense’. 15


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    MORGANSTANLEYB.Y. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 3. SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ©. Financial instruments (continued) iii) Loansand receivables and financialliabilities at amortised cost Financial assets classified as loans and receivables are recognised when the Company becomesa 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 costless allowance for impairment. Interest is recognised in the statement of comprehensive incomein ‘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. 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 assets classified as loans and receivables include trade receivables. 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. The CPECs issued by the Companyare classified as financial liabilities at amortised cost in accordance with the substance of the contractual arrangement and IAS 32 ‘Financial instruments: Presentation — offsettingfinancial instruments’, The yield on the CPECsis recognised in the statement of comprehensive incomein ‘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 ofallocating the interest income or interest expense over the expectedlife 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 instrament. The calculation of the effective interest rate includes all fees and commissionspaid or received, transaction costs, and discounts or premiumsthat 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 bereceivedtosell an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between marketparticipants at the measurementdate. In determining fair value, the Company uses various valuation approaches andestablishes 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 that were developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect assumptions the Companybelieves other market participants would use in pricing the assetorliability, that are developed basedonthe best information available in the circumstances, 16


  • Page 19

    MORGAN STANLEY B.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) d. Fair value (continued) The hierarchy is broken downinto three levels based on the observability of inputs as follows: e Level 1 — Quoted prices (unadjusted) in an active market for identical assets orliabilities 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 ofjudgement. « Level 2 — Valuation techniques using observable inputs Valuations based on one or more quoted prices in markets that are not active or for whichall significant inputs are observable, either directly or indirectly. e Level 3 — Valuation techniques with significant unobservable inputs Valuations based on inputs that are unobservable and significant to the overall fair value measurement, The availability of observable inputs can vary from product to product and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, the liquidity of markets and other characteristics particular to the product. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgement. Accordingly, the degree of judgement exercised by the 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 marketdislocation, 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 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 measurementfalls in its entirety is determined based on the lowest level inputthat is significant to the fair value measurementin its entirety. Forassets and liabilities that are transferred between Levels in the fair value hierarchy during the period, fair values are ascribedasif the assets orliabilities had been transferred as of the beginning ofthe period. 17


  • Page 20

    MORGAN STANLEY B.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 3. SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) d. Fair value (continued) Valuation techniques Manycash instruments and over-the-counter (“OTC”) derivative contracts have bid andaskprices that can. be observed in the marketplace. Bid prices reflect the highest price that a party is willing to pay for an asset. Ask prices represent the lowest price that a party is willing to accept for an asset. The Company carries positions at the point within the bid-ask range that meets its best estimate of fair value. For offsetting positions in the same financial instrument, the same price within the bid-ask spread is used to measure both the long and short positions. Fair value for many cash instruments and OTC derivative contracts is derived using pricing models. Pricing models take into account the contract terms, as well as multiple inputs including, where applicable, commodity prices, equity prices, interest rate yield curves, credit curves, correlation, creditworthiness of the counterparty, creditworthiness of the Company, option volatility and currency rates. 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. The Company applies credit related valuation adjustments to its short-term and long-term borrowings (primarily Structured Notes) for which the fair value option was elected and to OTC derivatives. The Company considers the impact of changes in its own credit spreads based upon observations of the secondary bond market spreads when measuring the fair value for short-term and long-term borrowings. For OTC derivatives, the impact of changes in both the Company’s and the counterparty’s credit rating 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 masternetting agreements that mitigate its exposure to each counterparty. Adjustments for model uncertainty are taken for positions whose underlying models are reliant on significant inputs that are neither directly nor indirectly observable, hence requiring reliance on established theoretical concepts in their derivation. These adjustments are derived by making assessments of the possible degree of variability using statistical approaches and market-based information where possible. The Company generally subjects all valuations and models to a review processinitially 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 judgementis required to estimate the costs of closing out concentrated risk exposures due to the lack of liquidity in the marketplace. 18


  • Page 21

    MORGAN STANLEY B.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) d. Fair value (continued) During 2014, the Company incorporated funding valuation adjustments (“FVA”) into the fair value measurements of OTC uncollateralised or partially collateralised derivatives and in collateralised derivatives where the terms of the agreement do not permit the reuse of the collateral received. The Company’s implementation of FVA reflects the inclusion of FVA in the pricing and valuations by the majority of market participants involved in its principal exit market for these instruments. In general, FVA reflects a market funding risk premium inherent in the noted derivative instruments. The methodology for measuring FVA leverages the Company’s existing credit-related valuation adjustment calculation methodologies, which apply to both assets andliabilities. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, assumptions are set to reflect those that the Company believes market participants would use in pricing the asset or liability at the measurementdate. Where the Company manages a group of financial assets and financial liabilities on the basis of its net exposure to either market risks or credit risk, the 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. 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 measuredat 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 whereverpossible. In the event that observable inputs are not available, the control processes are designed to ensure that the valuation approachutilised is appropriate and consistently applied and that the assumptions are reasonable. The Company’s control processes apply to financial instruments categorised in Level 1, Level 2 or Level 3 of the valuation hierarchy, unless otherwise noted. These control processes include: Model Review. VRG, in conjunction with the Market Risk Department (“MRD”) and, where appropriate, the Credit Risk Management Department, both of which report to the 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 methodologiesutilised in the absence of observable inputs may include extrapolation techniques and the use of comparable observable inputs. As part ofthe review, VRG develops a methodology to independently verify the fair value generated by the business unit’s valuation models. All of the Company’s valuation models are subject to an independent annual 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. 19


  • Page 22

    MORGAN STANLEY B.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 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 howactive the third-party pricing source (or originating sources used by the third-party pricing source) is in the market. Based onthis 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 categorised within Level 3 of the fair value hierarchy, VRG reviewsthe business unit’s valuation techniques to ensure these are consistent with market participant assumptions. Theresults of this independentprice verification and any adjustments made by VRGto the fair value generated by the business units are presented to managementof 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 new Level 3 transactions. VRG reviews the models and valuation methodology used to price all new material Level 3 transactions and both FCG and MRD management must approve the fair value ofthe tradethatis 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 when the contractual rights to the cash flows from the asset expire, or whenit 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 offinancial 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 ofan asset and the expected impact can bereliably estimated. 20


  • Page 23

    MORGAN STANLEY B.V, NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) f. Impairment offinancialassets (continued) Impairmentlosses 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 catrying amountbasedonthe 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 impairmentloss 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 Cash and cash equivalents comprise cash and demand deposits with banks, net of outstanding bank overdrafts, along with highly liquid investments, with original maturities of three months or less, that are readily convertible to known amounts of cash and subject to insignificantrisk 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. Currenttax is charged or credited in the statement of comprehensive income. Currenttax 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 intendsto settle its current tax assets and current tax Habilities on a net basis or to realise the asset and settle the liability simultaneously. i. Offsetting of financial assets and financialliabilities 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 theliability simultaneously, financial assets and financialliabilities are offset and the net amount is presented on the statementof financial position. In the absence of such conditions, financial assets and financialliabilities 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. “Interest expense’ includes the yield payable on CPECs(see note 8). Noother 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. Noother 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. 21


  • Page 24

    MORGANSTANLEYB.V. NOTESTO THE FINANCIAL STATEMENTS Year ended 31 December 2015 5. OTHER INCOME 2015 2014 €'000 €'000 Management charges to other Morgan Stanley Group undertakings 5,711 6,658 Net foreign exchange gains 14,152 - 19,863 6,658 The Company actively manages its foreign currency exposure risk arising on its assets andliabilities in currencies other than Euro. Net foreign exchange gainsincludestranslation differences that have arisen due to foreign exchange exposure created as a result of hedging assets and liabilities recognised for Morgan Stanley Group reporting purposes, 6. OTHER EXPENSE 2015 2014 €'000 €'000 Auditors remuneration: Feespayable to the Company's auditor and its associates for the audit of the Company's financial statements 108 100 Other 56 - 164 100 Of the auditors’ remuneration, €108,000 (2014: €100,000) was paid to Deloitte Accountants B.V. and related Deloitte member firmsfor audit services. The Company employed nostaff during the year (2014: none). 7. INCOME TAX EXPENSE 2015 2014 €'000 €'000 Current tax expense Current year 2,538 1,665 Adjustments in respect of prior years (1) - Incometax expense 2,531 1,665 Reconciliation of effective tax rate The current year income tax expense is lower than (2014: the same as) that resulting from applying the average standard rate of corporation tax in The Netherlands for the year of 25.0% (2014: 25.0%). 22


  • Page 25

    MORGANSTANLEYB.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 7. INCOME TAX EXPENSE (CONTINUED) 2015 2014 €'000 €000 Profit before income tax 10,151 6,658 Incometax using the average standard rate of corporation tax in The Netherlands of 25.0% (2014: 25.0%) 2,538 1,665 Impact on tax of: Tax over provided in prior years (7) - Total income tax expense in the statement of comprehensive income 2,531 1,665 8. CONVERTIBLE PREFERRED EQUITY CERTIFICATES €'000 At 1 January 2014 1,170,579 Yield payable 24,775 At 31 December 2014 1,195,354 Yield payable from 1 January 2015 to 27 March 2015 4,620 Yield paid (74,693) At 31 December 2015 1,125,281 Yield payable from 28 March 2015 to 31 December 2015 classified as ‘Other payables’ 32,201 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. On 27 March 2015, the Company made a CPEC yield payment of €74,693,000 to Archimedes Investments Coöperatieve U.A., which included an amount of €4,620,000 for the period from 1 January 2015 to 27 March 2015. An amount of €32,201,000 for the period from 28 March 2015 to 31 December 2015 remains payable to the holder of the CPECs at year end and has been recognised in ‘Other payables’, which is a change of classification from the prior year. (2014: yield payable of €70,073,000 had been recognised in ‘Convertible preferred equity certificates’) The CPECyield for the year of €36,821,000 is recognised in the statement of comprehensive income in ‘Interest expense’ (2014: €24,775,000). 23


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    MORGANSTANLEYB.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 8. CONVERTIBLE PREFERRED EQUITY CERTIFICATES (CONTINUED) The holder of the CPECsis 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 coverthe costs of the Company divided by the number of CPECsthen in issue. Other incomerelating 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 CPECinto one ordinary share with a nominal value of €100. The maturity date of the CPECsis 150 years from the date of issue, however, the CPECs may be redeemed earlier at the option of the Company or onliquidation of the Company. The CPECsrank aheadof the ordinary shares in the eventof 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: 2015 2014 Assets Liabilities Assets Liabilities €'000 €'000 €'000 €'000 Derivatives 495,297 939,843 527,856 503,487 10. FINANCIAL ASSETS AND FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS Financial instruments designated at fair value through profit or loss consists 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 instrumentis 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 managementpersonnelonthis 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 throughprofit or loss and the derivative contracts classified as held for trading, are part of the hedging strategy for the obligationsarising pursuantto the issuance of the Structured Notes. The prepaid equity securities contracts are designated at fair value throughprofit 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. 24


  • Page 27

    MORGAN STANLEY B.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 10. FINANCIAL ASSETS AND FENANCIAL LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS (CONTINUED) 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. 2015 2014 Assets Liabilities Assets Liabilities €'000 €'000 €'000 €'000 Issued Structured Notes - 6,364,543 - 6,046,260 Prepaid equity securities contracts 154,095 - 253,314 - Loans 6,659,841 - 5,789,171 6,813,936 6,364,543 6,042,485 6,046,260 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 €57,220,000 (2014: gain of €46,717,000) and cumulatively is a loss of €29,987,000 (2014: cumulative loss of €87,207,000). This changeis determined as the amount of change in fair value that is not attributable to changes in market conditionsthat giverise to marketrisk. The changein fair value of prepaid equity securities contracts and loans recognised through the statement of comprehensive income attributable to counterparty credit risk is a loss of €52,780,000 (2014: loss of €46,717,000) and cumulatively is a gain of €34,427,000 (2014: cumulative gain of €87,207,000). The Company has entered into collateral arrangements to manage the credit exposure on certain financial instruments used to hedge issued Structured Notes, and accordingly there are no cumulative gains or losses for own credit risk as at 31 December 2015 on the related hedging instruments. The change in fair value recognised through the statement of comprehensive income attributable to own credit risk is a gain of €4,440,000 (2014: €nil) This relates to the change in fair value attributable to own credit risk of issued Structured Notes for which there is no offsetting change on the related hedging instrument due to collateral arrangements made. The Structured Notes in which own credit risk is recognised have been issued to another Morgan Stanley Group undertaking and have a short term maturity date therefore the credit risk exposureis similarly short term and within the control of the Morgan Stanley Group. The carrying amount of financial liabilities designated at fair value was €110,908,000 lower than the contractual amount due at maturity (2014: €300,763,000 lower). Single 31 December 2015 name Equity Equity Other Total age indices portfolio equities €'000 €'000 €'000 €'000 €'000 Certificates and warrants 1,550,856 201,768 637,510 - 2,390,134 Notes 278,798 2,578,742 603,741 513,128 3,974,409 Total financial liabilities designated at fair value through profit or loss 1,829,654 2,780,510 1,241,251 513,128 6,364,543 25


  • Page 28

    MORGANSTANLEYB.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December2015 10. FINANCIAL ASSETS AND FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS (CONTINUED) Single 31 December 2014 name Equity Equity Other Total sie indices portfolio equities €'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 Totalfinancial liabilities designated at fair value through profit or loss 1,875,914 2,442,682 1,258,229 469,435 6,046,260 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 17(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 2014, 31 December 2014 and 31 December 2015 15,018 On 9 December 2013 the Articles of Association of the Company were amended whereby the concept of authorised share capital was abolished. 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 timeto time. Reserves The Companyuses the contracts that it purchases from other Morgan Stanley Group undertakings to hedge the marketprice, interest rate, foreign currency and other market risks associated with the issuance ofthe Structured Notes, consistent with the Company’s risk management strategy. Both the contracts and the Structured Note issuances are valuedat fair value throughprofit or loss and no net cumulative gain or loss is expected to be realised overthelife of the financial instrument contracts. Therefore, a legal revaluation reserve under Part 9, Book 2 of the Dutch Civil Code (BW2,article 390(1)) is not necessary. 26


  • Page 29

    MORGANSTANLEYB.V. NOTESTO THE FINANCIAL STATEMENTS Year ended 31 December 2015 12. ADDITIONAL CASH FLOW INFORMATION a. Cash and cash equivalents For the purposes ofthe statement of cash flows, cash and cash equivalents comprise the following balances, whichhave less than three months maturity from the date of acquisition: 2015 2014 €'000 €'000 Cash and short-term deposits 499 510 b. Reconciliation of cash flows from operating activities 2015 2014 €'000 €'000 Profit for the year 7,620 4,993 Adjustmentsfor: Interest income (23,190) (24,932) Interest expense 37,178 24,832 Income tax expense 2,531 1,665 Operating cash flows before changes in operating assets and liabilities 24,139 6,558 Changesin operating assets Decrease / (increase) in loans and receivables, excluding cash and short-term deposits 854 (287,972) Decreasein financial assets classified as held for trading 32,559 451,595 Increase in financial assets designated at fair value throughprofit or loss (771,451) (51,535) (738,038) 112,088 Changesin operating liabilities (Decrease)/ increase in financial liabilities at amortised cost, excluding bank loans and overdrafts (36,452) 251,994 Increasein financial liabilities classified as held for trading 436,356 220,163 Increase / (decrease) in financialliabilities designated at fair value through profit or loss 318,283 (590,742) 718,187 (118,585) Interest received 34 - Interest paid (39) (48) Incometaxes paid (2,305) (1,088) (2,310) (1,136) Net cash flows from / (used in) operating activities 1,978 (1,075) 27


  • Page 30

    MORGANSTANLEYB.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December2015 13. 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 orsettled. At 31 December 2015 Less than or equal to More than twelve twelve months months Total €'000 €'000 €'000 ASSETS Loans and receivables: Cash and short-term deposits 499 499 Trade receivables 293,998 293,998 Other receivables 41,197 1,125,281 1,166,478 335,694 1,125,281 1,460,975 Financial assets classified as held for trading 220,198 275,099 495,297 Financial assets designated at fair value through profit or loss 2,192,681 4,621,255 6,813,936 2,748,573 6,021,635 8,770,208 LIABILITIES Financialliabilities at amortised cost: Convertible preferred equity certificates 1,125,281 1,125,281 Trade payables 38,374 38,374 Other payables 264,324 264,324 302,698 1,125,281 1,427,979 Financial liabilities classified as held for trading 468,106 471,737 939,843 Financial liabilities designated at fair value through profit or loss 1,939,926 4,424,617 6,364,543 Current tax liabilities 153 153 2,710,883 6,021,635 8,732,518 28


  • Page 31

    MORGANSTANLEYB.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 13. EXPECTED MATURITY OF ASSETS AND LIABILITIES (CONTINUED) At 31 December 2014 Less than or equal to Morethan 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 designatedat 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 Financialliabilities classified as held for trading 165,480 338,007 503,487 Financialliabilities 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 14, SEGMENT REPORTING Segment information is presented in respect of the Company’s business and geographical segments. The business segments and geographical segments ate 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. 29


  • Page 32

    MORGAN STANLEY B.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 14, SEGMENT REPORTING (CONTINUED) Geographical segments The Company operates in three geographic regionsas listed below: e Europe, Middle East and Africa (“EMEA”) Americas Asia 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 2015 2014 2015 2014 2015 2014 2015 2014 €'000 €'000 €'000 €'000 €'000 €'000 €'000 €'000 External revenues net of interest 9,639 5,778 400 564 276 416 10,315 6,758 Profit before income tax 9,475 5,692 400 556 276 410 10,151 6,658 Total assets 6,703,218 5,855,672 1,742,891 1,841,928 324,099 384,202 8,770,208 8,081,802 Of the Company's external revenue, 100% (2014: 100%) arises from transactions with other Morgan Stanley Group undertakings. Further details of such transactions are disclosed in the related party disclosures note 20. 15. FINANCIAL RISK MANAGEMENT Risk management procedures Risk is an inherentpart of the Company’s business activity. The Companyseeks to identify, assess, monitor and manage eachof the varioustypesof 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 leveragesthe risk managementpolicies and procedures of the Morgan Stanley Group and which include escalation to the Company’s Board of Directors and to appropriate senior management personnel. Significantrisks faced by the Companyresulting 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 meetits financial obligations to the Company. The Companyprimarily incurs credit risk exposure to institutions throughits Institutional Securities business segment. 30


  • Page 33

    MORGAN STANLEY B.V, NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 15. FINANCIAL RISK MANAGEMENT(CONTINUED) Credit risk (continued) The Company’s credit risk managementpolicies and procedures establish the framework for ensuring transparency of material credit risks, ensuring compliance with established limits and escalation of risk concentrations to appropriate senior management. The Company enters into the majority ofits 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 Companytransacts with other Morgan Stanley Group undertakings that have a higher credit rating to that of Morgan Stanley. Collateral andother credit enhancements The Company has entered into collateral arrangements with other Morgan Stanley Group undertakings. Collateral held is managed in accordance with the Morgan Stanley Group’s guidelines and the relevant underlying agreements. Exposureto credit risk The maximum exposure to credit risk of the Companyat 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 managethe credit exposure on these financial instruments, including receiving cash as collateral and master netting agreements, the financial effect of the credit enhancementsis also disclosed below. The net credit exposure represents the credit exposure remaining after the effect of the credit enhancements. The Company doesnot have any significant exposurearising from items not recognised on the statement of financial position. Exposure to credit risk by class Class 2015 2014 Gross Net Gross Net credit credit credit credit exposure Credit exposure exposure Credit exposure ® enhancements a ® enhancements o €'000 €'000 €'000 €'000 €000 €000 Loans and receivables: Cash andshort-term deposits 499 - 499 510 - 510 Trade receivables 293,998 - 293,998 24,586 - 24,586 Other receivables 1,166,478 - 1,166,478 1,486,292 - 1,486,292 Financial assets classified as held for trading: Derivativos 495,297 (489,354) 5,943 527,856 (527,695) 161 Financial assets designated at fair value through profit or loss Prepaid equity securities contracts 154,095 (95,655) 58,440 253,314 (84,475) 168,839 Loans 6,659,841 - 6,659,841 5,789,171 n 5,789,171 8,770,208 (585,009) 8,185,199 8,081,729 (612,170) 7,469,559 (1) The carrying amount recognisedin the statementoffinancial position best represents the Company's maximum exposure to credit risk. (2) Ofthe residual net credit exposure, intercompany cross product netting arrangements are in place which would allow for an additional €28,204,000 (2014: €nil) to be offset in the event of default by certain Morgan Stanley counterparties. (3) Trade receivables include cash collateral pledged of €256,024,000 against derivative assets classified as held for trading of €429,618,000, prepaid equity securities contracts of €95,655,000 and derivativeliabilities classified as held for trading of €779,710,000. In 2014, cash collateral received of €250,917,000 was recognised in trade payables in the statementof financialposition. 31


  • Page 34

    MORGAN STANLEY B.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 15, FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk (continued) The impact of master netting arrangements and similar agreements on the Company’s ability to offset financial assets andfinancialliabilities is disclosed in note 16. Maximum exposure to credit risk by credit rating” Gross credit exposure Credit rating 2015 2014 €'000 €'000 AA - 216 A 8,770,208 8,081,513 Total 8,770,208 8,081,729 (1) Internal credit rating derived using methodologies generally consistent with those used by extemal agencies At 31 December 2015 there were no financial assets past due but not impaired or individually impaired (2014: €nil). Liquidity and funding risk Liquidity and fundingrisk 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 fundingrisk also encompasses the Company’s ability to meet its financial obligations without experiencing significant business disruption or reputational damage that may threaten the Company’s viability as a going concern. Market or idiosyncratic stress events may negatively affect the Company’s liquidity and may impactits ability to raise new funding. The Morgan Stanley Group’s Liquidity Risk Management Frameworkis critical to helping ensure that the Company maintains sufficient liquidity reserves and durable funding sources to meetits daily obligations and to withstand unanticipated stress events. In 2015, the Morgan Stanley Group established the Liquidity Risk Departmentas a distinct area in Risk Management to oversee and monitorliquidity and fundingrisk. The Liquidity Risk Departmentis independent of the business units and reports to the CRO. The Liquidity Risk Department ensures transparency of material liquidity and funding risks, compliance with established risk limits and escalation of risk concentrations to appropriate senior management. To execute these responsibilities, the Liquidity Risk Department establishes limits in line with the Morgan Stanley Group’s risk appetite, identifies and analyses emerging liquidity and funding risks to ensure such risks are appropriately mitigated, monitors and reports risk exposures against metrics and limits, and reviews the methodologies and assumptions underpinning the Morgan Stanley Group’s Liquidity Stress Tests to ensure sufficient liquidity and funding under a range of adverse scenarios. The liquidity and funding risks identified by these processes are summarised in reports produced by the Liquidity Risk Department that are circulated to and discussed with senior management, as appropriate. The Treasury Department and applicable business units have primary responsibility for evaluating, monitoring and controlling the liquidity and funding risks arising from the Morgan Stanley Group’s business activities, and maintain processes and controls to manage the key risks inherentin their respective areas. The Liquidity Risk Department coordinates with the Treasury Department andthese business units to help ensure a consistent and comprehensive framework for managing liquidity and funding risk across the Morgan Stanley Group. 32


  • Page 35

    MORGANSTANLEYB.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 15. FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity and funding risk (continued) The Company’s liquidity and funding risk managementpolicies and procedures are consistent with those of the Morgan Stanley Group. The primary goal of the Company’s liquidity risk and funding managementframeworkis 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 its business strategies. The followingprinciples guide the Company’s liquidity and funding risk management framework: e 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 e Liquidity Stress Tests should anticipate, and account for, periods oflimited access to funding. The Company hedgesall of its financial liabilities with financial assets 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 parent, Morgan Stanley. Further, the maturity profile of the financial assets matches the maturity profile of the financial liabilities. Liquidity managementpolicies 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 Required Liquidity Framework, Liquidity Stress Tests and the Global Liquidity Reserve, which support the Morgan Stanley Group’s target liquidity profile. Required Liquidity Framework The Required Liquidity Frameworkreflects the amountof liquidity the Morgan Stanley Group must hold in both normal and stressed environments to ensure that its financial condition and overall soundness is not adversely affected by an inability (or perceived inability) to meet its financial obligations in a timely manner. The Required Liquidity Framework considers the most constraining liquidity requirement to satisfy all regulatory and internallimits at a consolidated and legal entity level. Liquidity Stress Tests The Morgan Stanley Group uses Liquidity Stress Tests to model liquidity inflows and outflows across multiple scenarios over a range of time horizons. These scenarios contain various combinations of idiosyncratic and systemic stress events of different severity and duration. 33


  • Page 36

    MORGANSTANLEYB.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 15. FINANCIAL RISK MANAGEMENT(CONTINUED) Liquidity and funding risk (continued) The assumptions underpinning the Liquidity Stress Tests include, but are notlimited to, the following: no government support, no access to equity and unsecured debt markets; repaymentof all unsecured debt maturing within the stress horizon; higher haircuts andsignificantly loweravailability 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; drawdownson lending commitments provided to third parties; client cash withdrawals and reduction in customershort positions that fund long positions; limited access to the foreign exchange swap markets; and maturity roll-off of outstandingletters 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 currencylevels, to capture specific cash requirements and cash availability at various legal entities. 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 beheld 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 hedgesthe liquidity risk of its financial liabilities with financial assets that match the maturity profile of the financialliabilities, the Company is not considered a major operating subsidiary for „the purposes of liquidity risk. However, the Company would have access to the cash orliquidity reserves held by Morgan Stanley in the unlikely event that it was unable to access adequate financing to serviceits financial liabilities when they becomepayable. The Required Liquidity Framework 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. 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 Required Liquidity Framework 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 a discretionary surplus based on the Morgan Stanley Group’s risk tolerance and is subject to change dependent on marketand firm-specific events. The Morgan Stanley Group’s Global Liquidity Reserve, to which the Companyhasaccess, 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-backedsecurities, non-US government securities and other highly liquid investment grade securities. 34


  • Page 37

    MORGANSTANLEYB.V. NOTESTO THE FINANCIAL STATEMENTS Year ended 31 December 2015 15, FINANCIAL RISK MANAGEMENT(CONTINUED) Liquidity and funding risk (continued) Theability 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 environmentgiven the highly liquid and diversified nature ofthe reserves. Funding managementpolicies 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 periodof 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, securities sold under agreements to repurchase (“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 abilities, is monitored and evaluated. A substantial portion of the Morgan Stanley Group’s total assets consists of liquid marketable securities and short-term receivables arising principally from the 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. 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, Ali other amounts represent undiscounted cash flows receivable and payable by the Companyarising fromits financial assets and financial liabilities to earliest contractual maturities as at 31 December 2015 and 31 December 2014. Receipts of financial assets and repayments offinancial 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 Companyto 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. 35


  • Page 38

    MORGANSTANLEYB.V. NOTES TO THE FINANCIA: TEME Year ended 31 December 2015 15, FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity and funding risk (continued) Equalto or more Equal to than one or more year than two Equal to butless years but or more On Less than than two less than than five demand one year years five years years Total 31 December 2015 €'000 €'000 €000 €000 €'000 €'000 Financialassets Loans and receivables: Cash and short-term deposits 499 - - - - 499 Trade receivables 293,998 - - - - 293,998 Otherreceivables 1,166,478 - - - - 1,166,478 Financialassets classified as held for trading: Derivatives 274,563 25,384 34,096 94,991 66,263 495,297 Financial assets designatedat fair value throughprofit or loss: Prepaid equity securities contracts 39,059 65,741 35,511 409 13,375 154,095 Loans 2,137,040 932,411 785,954 2,196,663 607,773 6,659,841 Totalfinancial assets 3,911,637 1,023,536 855,561 2,292,063 687411 8,770,208 Financialliabilities Financialliabilities at amortised cost: Convertible preferred, equity certificates 1,125,281 - - - - 1125/81 Trade payables 38,374 - - - - 38,374 Other payables 264,324 - - - - 264,324 Financial liabilities classified as held for trading: Derivatives 395,769 168,724 102,727 245,015 27,608 939,843 Financialliabilities designated at fair value through profit or loss: Issued Structured Notes 2,054 A86 850,372 752,834 2,047,048 659,803 6,364,543 Total financialliabitities 3,878,234 1,019,096 855,561 2,292,063 687411 8,732,365 36


  • Page 39

    MORGANSTANLEYB.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 15. FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity and funding risk (continued) Equal to or more Equal to than one or more year thantwo Equalto but less years but or more On Lessthan thantwo less than than five demand one year years five 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 Otherreceivables 1,486,292 - - - ~ 1,486,292 Financialassets classified as held for trading: Derivatives 256,640 42,506 33,669 141,012 54,029 527,856 Financialassets 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 2,155,389 149,487 5,789,171 Total financial assets 3,577,654 635,413 709,500 2,352,685 806,477 8,081,729 Financialliabilities Financialliabilities 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 Financialliabilities classified as held fortrading: Derivatives 190,310 77,122 91,944 110,315 33,796 503,487 Financialliabilities 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 Totalfinancialliabilities 3,547,657 635,413 709,500 2,352,685 806,477 8,051,732 Marketrisk Marketrisk is defined by IFRS 7 astherisk that the fair value or future cash flows ofa financial instrument will fluctuate because of changes in market prices. Sound marketrisk managementis an integral part of the Company’s culture. The Companyis responsible for ensuring that market risk exposures are well-managed and monitored. The Company also ensures transparency of material market risks, monitors compliance with established limits, and escalates risk concentrations to appropriate senior management. 37


  • Page 40

    MORGAN STANLEY B.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 15. FINANCIAL RISK MANAGEMENT(CONTINUED) Marketrisk (continued) To execute these responsibilities, the Morgan Stanley Group monitors the marketrisk 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 methodologies. These limits are designed to control marketrisk. 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 senior managementof the Company. The Company enters into the majority ofits financial asset transactions with other Morgan Stanley Group undertakings, where both the Company and the other Morgan Stanley Group undertakings are wholly- owned subsidiaries of the same group parententity, Morgan Stanley. The issued Structured Notes expose the Companyto the risk of changes in marketprices 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 companyuses the contracts that it purchases from other Morgan Stanley Group undertakings to hedge the market price, interest rate and foreign currencyrisks associated with the issuance of the Structured Notes, consistent with the Company’s risk managementstrategy. As such, the Company is not exposed to any net market risk on these financial instruments. The net foreign exchange gains recognised in ‘Other income’ have arisen as a result of exposure to hedging on assets andliabilities recognised for Morgan Stanley Group purposes, under the Morgan Stanley Group’s local reporting requirements. 16. 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 managementpolicies and procedures, see note 15 for further details. Primarily in connection with derivatives 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 amountsare not offset in the tabular disclosures. 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 financialliabilities are presented on a gross basis. 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 15, 38


  • Page 41

    MORGANSTANLEYB.V. NOTESTO THE FINANCIA. ATEM Year ended 31 December 2015 16. FINANCIAL ASSETS AND FINANCIAL LIABILITIES SUBJECT TO OFFSETTING (CONTINUED) Amounts Netamounts Amounts notoffset in the offset in the presented in statement offinancial statementof the statement position Gross financial of financial Financial Cash Net amounts position © position instruments collateral ® exposure ©? €'000 €'000 €'000 €'000 €'000 €'000 31 December 2015 Assets Financial assets classified as held for trading: Derivatives 495,297 - 495,297 (59,736) (429,618) 5,943 Financial assets designated at fair value through profit or loss: Prepaid equity securities contracts 231,854 (77,759) 154,095 - (95,655) 58,440 TOTAL 727,151 (77,759) 649,392 (59,736) (525,273) 64,383 Liabilities Financial liabilities classified as held for trading: Derivatives 939,843 - 939,843 (59,736) (779,710) 100,397 Financial liabilities designated at fair value through profit or loss: Issued Structured Notes 6442302 (77,759) 6,364,543 - - 6,364,543 TOTAL 7,382,145 (77,759) 7,304,386 (59,736) (779,710) 6,464,940 (1) Amounts include €5,943,000 of financial assets classified as held for trading - derivatives, €58,440,000 of financialassets designated at fair value through profit or loss - prepaid equity securities contracts, €19,961,000 of financialliabilities classified as held for trading - derivatives and €5,200,875,000 of financialliabilities classified as designated at fair value through profit or loss - Issued Structured Notes which are either not subject to master netting agreements or collateral agreements or are subject to such agreements but the Companyhas 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 arrangementthat provides for the currentright of offset and there is an intention to either settle on a net basis orto realise the asset andliability simultaneously. (3) Amounts relate to master netting arrangements and collateral arrangements which have been determined by the Company to he legally enforceable, but do not meetall criteria required for net presentation within the statementof financialposition. (4) Cashcollateral used to mitigate credit risk on exposuresarising underderivatives contracts and prepaid equity securities contracts is determined andsettled on a net basis and has been recognisedin the statement of financial position within trade receivables. (5) In addition to the balances disclosed in the table related to cash collateral, certain trade receivables and payables of €36,606,000 not presented net within the statement of financial position have legally enforceable master netting agreements in place and can be offset in the ordinary courseof business and/orin the event of default. (6) Amounts relate to intercompany cross-product master netting arrangements, which include those amounts where Morgan Stanley Group undertaking from which the Company purchasedthe prepaid equity securities contracts is also the holderofthe Issued Structured Notes. These arrangements have been determined by the Companyto be legally enforceable but do not meet all the criteria required for net presentation within the statementof financial position. (7) Of the residual net exposure, intercompany cross-product legally enforceable netting arrangements are in place which would allow for an additional €28,204,000 to be offset in the ordinary course of business and/orin the eventof default, 39


  • Page 42

    MORGANSTANLEYB.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 16. FINANCIAL ASSETS AND FINANCIAL LIABILITIES SUBJECT TO OFFSETTING (CONTINUED) Amounts Net amounts Amounts not offset in the offset in the presented in statement offinancial statement of the statement position Gross financial of financial Financial Cash Net amounts ® position ® position instruments collateral exposure o €'000 €'000 €'000 €'000 €'000 €'000 31 December 2014 Assets Financial assets classified as held fortrading: 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 Financialliabilities 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 (D 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 offinancial 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 Companyhas not determined the agreementsto be legally enforceable. o Amounts are reported on a netbasis in the statementof financial position when there is a legally enforceable master netting arrangement that provides for the currentright of offset andthere is an intention to either settle on a net basisor to realise the asset and liability simultaneously. a Amounts relate to master netting arrangements and collateral arrangements which have heen determined hy the Company to be legally enforceable but do not meetall criteria required for net presentation within the statementoffinancialposition. 4) Cash collateralis determinedandsettled on a net basis and has been recognisedin the statementoffinancial position within trade payables. (O) In addition to the balances disclosed in the table related to cash collateral, certam trade receivables and payables that are not presented net within the statementof 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 ofdefault. (6) Amounts relate to intercompany cross-product master netting arrangements, which include those amounts where the Morgan Stanley Group undertaking from which the Companypurchased the prepaid equity securities contracts is also the holderofthe issued Structured Notes. These arrangements have been determined by the Company to be legally enforceable but do not meetall the criteria required for net presentation within the statementof financial position. m 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/ orin the eventof default. 40


  • Page 43

    MORGAN STANLEY B.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 17. 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. 2015 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 fortrading: Derivatives - 434,008 61,289 495,297 Financial assets designated at fair value through profit or loss: Prepaid equity security contracts - 133,825 20,270 154,095 Loans - 6,659,841 - 6,659,841 Total financial assets measured atfair value - 7,227,674 81,559 7,309,233 Financial liabilities classified as held for trading: Derivatives - 850,099 89,744 939,843 Financial liabilities designated at fair value throughprofit or loss: Certificates and warrants - 2,390,134 - 2,390,134 Notes - 3,654,352 320,057 3,974,409 Total financial liabilities measured at fair value - 6,894,585 409,801 7,304,386 41


  • Page 44

    MORGANSTANLEYB.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 17. ASSETS AND LIABILITIES MEASUREDAT FAIR VALUE (CONTINUED) a. Financial assets and liabilittes recognised at fair value on a recurring basis (continued) 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 security contracts - 251,342 1,972 253,314 Loans - 5,789,171 - 5,789,171 Total financial assets measuredat fair value - 6,496,647 73,694 6,570,341 Financialliabilities classified as held for trading: Derivatives - 462,770 40,117 503,487 Financial liabilities designated at fair value throughprofit 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 - 6,097,996 451,751 6,549,747 42


  • Page 45

    MORGAN STANLEY B.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 17, ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED) a. Financial assets and liabilities recognised at fair value on a recurring basis (continued) Valuation Techniques for Assets and Liabilities Measured at Fair Value on a Recurring Basis, Asset/Liability Valuation Technique Valuation HierarchyClassification Financial assets andfinancialliabilities classified as heldfor trading Derivatives OTC Derivative Contracts OTC derivative contracts include forward, swap and option Generally Level 2 - OTC derivative contracts related to interest rates, foreign currencies, credit products valued using pricing models standing of reference entities, equity prices or commodity ; prices. Level 3 - OTC derivative products with significant unobservable inputs 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 credit default swaps. In the case of more established derivative products, the pricing models used by the Company are widely accepted by the financial services industry. 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. Financial assets andfinancial liabilities designated atfair value through profit or loss Prepaid equity securities contracts and The Company issues Structured Notes and trades prepaid Generally Level 2 issued Structured Notes equity securities contracts that have coupons or repayment terms linked to the performance of debt or equity securities, Level 3 — Prepaid equity securities contracts with significant unobservable indices, currencies or commodities. inputs Fair value of Structured Notes and prepaid equity securities contracts is determined using valuation models for the derivative and debt portions of the Structured 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 - commodity or equity prices Independent, extemal and traded prices for the Structured Notes are considered as well. The impact of own credit spreads is also included based on observed secondary bond market spreads, 43


  • Page 46

    MORGANSTANLEYB.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 17. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED) a. Financial assets and liabilities recognised at fair value on a recurring basis (continued) Asset/Liability Valuation Technique Valuation Hierarchy Classification Issued Siructured Notes Notes Notes give a risk exposure tailored to market views and risk Generally Level 2 appetite and mainly provide exposure to the underlying Level 3 — Notes with significant single name equity, equity index or portfolio of equities. unobservable inputs 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 Companyhas 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 observedin the inter- dealer OTC markets. Similarly to equity-linked notes, these issuances bear Morgan Stanley’s credit risk, and the valuation is assessed accordingly. Certificates and warrants Certificates and warrants provide exposure to the underlying Level 2 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 exposureto the credit risk of Morgan Stanley. 44


  • Page 47

    MORGAN STANLEY B.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 17. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED) a. Financial assets and liabilities recognised at fair value on a recurring basis (continued) Asset/Liability Valuation Technique Valuation Hierarchy Classification Loans The fair value of loans to other Morgan Stanley Group Level2 undertakings is estimated based on the present value of expected future cash flows usingits best estimate of interest rate yield curves. 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. ce. Changes in Level 3 financial assets andliabilities 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 financialliabilities for the years ended 31 December 2015 and 31 December 2014. Level 3 instruments may be hedged with instruments classified in Level 1 and 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 notreflect the related realised and unrealised gains/ (losses) on hedging instruments that have been classified by the Company within 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 andliabilities within the Level 3 category presented in the tables below may include changes in fair value during the period that wereattributable to both observable (e.g. changes in market interest rates) and unobservable (e.g. changes in unobservable long-dated volatilities) inputs. 45


  • Page 48

    MORGANSTANLEYB.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 17. 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) 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. 2015 Unrealised gains / (losses) for Level 3 assets Total gains or Net Hiabilities (losses) transfers outstanding Balance recognised in in and/or Balance at asat3l atl statement of 8 8 $ out of 31 December January comprehensive 4 8 E Level3 December 2015 2015 income ® È 3 è ® 2015 o €000 €000 €000 €000 €000 €000 €000 €000 Financial assetsclassified as held fortrading: Net derivative contracts: ® Equity 31,005 (62,309) - - (9,458) 12,307 (28,455) (57,851) Financial] assets designated at fair value through profit or loss: Prepaid equity securities contracts 1,972 (3,283) 23,951 - (1,581) (789) 20,270 (4,187) Total financial assets measured at fair value 32,977 (65,592) 23,951 -__(11,039) 11,518 (8,185) (62,038) Totalfinancial abilities designatedat fair value throughprofit or loss: Notes (411,034) 56,374 - (131,714) 98,608 67,709 (320,057) 48,393 Total financial liabilities measured at fair value (411,034) 56,374 - (131,714) 98,608 67,709 (320,057) 48,393 (1) The total gains or (losses) are recognised in the statement of comprehensive incomeas detailed in the financial instruments accounting policy (note 3c). (2) Forfinancial assets and financialliabilities that were transferred into and out of Level 3 during the year, gains or (losses) are presented asif the assets orliabilities had been transferred into or out of Level3 as at the beginning ofthe year. (3) Amounts represent unrealised gains or (losses) for the year ended 31 December 2015 related to assets andliabilitiesstill outstanding at 31 December 2015. The unrealised gains or (losses) are recognised in the statement of comprehensive incomeas 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. 46


  • Page 49

    MORGANSTANLEYB.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 17. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED) €. Changes in Level 3 financial assets and liabilities recognised at fair value on a recurring basis (continued) During the year, the Company reclassified approximately €823,000 of net derivative contracts and €22,722,000 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. Duringthe year, the Companyreclassified approximately €13,130,000 of net derivative contracts, €789,000 of prepaid equity securities contracts and €90,431,000 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. 2014 Unrealised gains / (losses) for Level3 assets Total gains or Net liabilities (losses) transfers outstanding Balance recognised in g inand/or Balanceat asat 31 at 1 statement of ES 8 5 out of 31 December January comprehensive È 8 3 Level3 December 2014 2014 income ® È È 8 a 2014 9 €000 €000 €000 €000 €000 €000 €000 €000 Financial assets classified as held for trading: ‘Net derivative contracts: Equity 91,815 (19,577) - - (39,885) (1,348) 31,005 (16,810) Financial assets designated atfair 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) Financialliabilities designated atfair value through profitorloss: 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) (21) (1) The total gains or (losses) are recognised in the statement of comprehensive incomeas 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 orliabilities had been transferred into or out of Level 3 as at the beginningof the year. (3) Amounts represent unrealised gains or(losses) for the year ended 31 December 2014relatedto assets andliabilities 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. 47


  • Page 50

    MORGANSTANLEYB.V. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2015 17. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED) c. Changes in Level3 financial assets and liabilities recognised at fair value on a recurring basis (continued) During the prior year, the Companyreclassified 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 prior 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. 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. Thetable below provides information on the valuation techniques, significant unobservable inputs and their ranges and averages for each major category of assets andliabilities 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. 48

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