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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED Reports and financial statements 31 December 2016


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED REPORTS AND FINANCIAL STATEMENTS Year ended 31 December 2016 CONTENTS PAGE Directors' report 1 Independent auditor's report 3 Income statement 5 Statement of comprehensive income 6 Statement of changes in equity 7 Statement of financial position 8 Statement of cash flows 9 Notes to the financial statements 10 Unaudited supplementary financial information 51


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED DIRECTORS’ REPORT The Directors present the annual report and audited financial statements (which comprise the income statement, statement of comprehensive income, statement of changes in equity, statement of financial position, statement of cash flows and related notes 1 to 28) for Morgan Stanley Asia International Limited (the “Company”) for the year ended 31 December 2016. PRINCIPAL ACTIVITIES The Company is a restricted licence bank under the Banking Ordinance in Hong Kong, regulated by the Hong Kong Monetary Authority (“HKMA”). It is also a registered institution under the Hong Kong Securities and Futures Ordinance. The Company is a private limited company incorporated in Hong Kong, with a head office in Hong Kong and a branch in Singapore (“Branch”) which is regulated by the Monetary Authority of Singapore (“MAS”). The principal activities of the Company are to engage in the business of banking including deposit taking and lending. It also acts as introducing broker for other subsidiaries of the Morgan Stanley group of companies in connection with the provision of general investment, securities and futures dealing, and custody services, as well as discretionary management. 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 (the “Morgan Stanley Group”). RESULTS AND APPROPRIATIONS The results of the Company for the year ended 31 December 2016 are set out in the income statement on page 5. No interim dividends were paid to the shareholders during the year. The Directors do not recommend the payment of a final dividend and propose that the profits be retained. SHARE CAPITAL Details of the Company’s shares issued are set out in note 18 to the financial statements. There was no movement in the Company’s share capital during the year. DIRECTORS The following Directors held office throughout the year and up to the date of approval of this report (except where otherwise shown): Chui, Vincent Yik Chiu Clatworthy, David Peter (appointed on 22 April 2016) Fung, Choi Cheung Kwan, Yin Ping Laroia, Gokul Ong, Whatt Soon Ronald Vazirani, Ravi Harish (appointed on 25 August 2016) Wraight, David John (appointed on 15 November 2016) Jesse Jr, James William (resigned on 15 November 2016) Kohli, Arun (resigned on 22 April 2016) Sim, Hwee Hoon (resigned on 25 August 2016) All existing Directors continue in office except Wraight, David John who will retire at the forthcoming Annual General Meeting by virtue of Article 24.5.1 of the Company’s Articles of Association and will be eligible for re-appointment to the office. 1


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED DIRECTORS’ REPORT (CONTINUED) DIRECTORS’ MATERIAL INTERESTS IN TRANSACTIONS, ARRANGEMENTS AND CONTRACTS THAT ARE SIGNIFICANT IN RELATION TO THE COMPANY’S BUSINESS No transactions, arrangements and contracts of significance to which the Company, its holding companies or any subsidiaries of its holding companies were a party and in which a Director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. DIRECTORS’ RIGHTS TO ACQUIRE SHARES AND DEBENTURES Morgan Stanley, the Company’s ultimate holding company, has several senior executive incentive compensation programs under which senior executives receive, as part of their total compensation, incentive awards of restricted stock units and, in some cases, restricted stock options that in time are, or may be, converted into shares of Morgan Stanley. All Directors of the Company except independent non-executive directors, are eligible to participate in such incentive compensation programs and receive awards of restricted stock units and, in some cases, restricted stock options thereunder. Details of the deferred stock awards of the ultimate holding company, in which the Directors of the Company are entitled to participate, are set out in note 26 to the financial statements. Other than as disclosed above, at no time during the year was the Company, its holding companies or any subsidiaries of its holding companies a party to any arrangements to enable the Directors of the Company to acquire benefits by means of acquisition of shares in, or debentures of, the Company or any other body corporate. PERMITTED INDEMNITY PROVISION The Articles of Association of the Company provide that a director or former director of the Company may be indemnified out of the Company’s assets against any liability incurred by the Director to a person other than the Company or an associated company of the Company in connection with any negligence, default, breach of duty or breach of trust in relation to the Company or associated company (as the case may be). AUDITOR A resolution will be submitted to the Annual General Meeting to re-appoint Messrs. Deloitte Touche Tohmatsu as auditor of the Company. On behalf of the Board CHUI, VINCENT YIK CHIU DIRECTOR 19 April 2017 2


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    INDEPENDENT AUDITOR’S REPORT TO THE SOLE MEMBER OF MORGAN STANLEY ASIA INTERNATIONAL LIMITED (incorporated in Hong Kong with limited liability) Opinion We have audited the financial statements of Morgan Stanley Asia International Limited (the "Company") set out on pages 5 to 50, which comprise the statement of financial position as at 31 December 2016, and the income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the financial statements give a true and fair view of the financial position of the Company as at 31 December 2016, and of its financial performance and its cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards ("HKFRSs") issued by the Hong Kong Institute of Certified Public Accountants ("HKICPA") and have been properly prepared in compliance with the Hong Kong Companies Ordinance. Basis for Opinion We conducted our audit in accordance with Hong Kong Standards on Auditing ("HKSAs") issued by the HKICPA. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the HKICPA's Code of Ethics for Professional Accountants (the “Code"), and we have fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other Information The Directors are responsible for the other information. The other information comprises the information included in the annual report, but does not include the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of Directors and Those Charged with Governance for the Financial Statements The Directors are responsible for the preparation of the financial statements that give a true and fair view in accordance with HKFRSs issued by the HKICPA and the Hong Kong Companies Ordinance, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company's financial reporting process. 3


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    INDEPENDENT AUDITOR’S REPORT (CONTINUED) TO THE SOLE MEMBER OF MORGAN STANLEY ASIA INTERNATIONAL LIMITED (incorporated in Hong Kong with limited liability) Auditor's Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion solely to you in accordance with section 405 of the Hong Kong Companies Ordinance, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with HKSAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors.  Conclude on the appropriateness of the Directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Company to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong 19 April 2017 4


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED INCOME STATAMENT Year ended 31 December 2016 2016 2015 Note US$'000 US$'000 Interest income 4 20,584 17,866 Interest expense 4 (27,141) (19,658) Net interest expense (6,557) (1,792) Fee and commission income 5 197,232 218,350 Net gains on financial instruments classified as held for trading 9,647 50,922 Net losses on available-for-sale financial assets 6 (5,405) (62,514) Other income 7 12,052 17,833 Other expense 8 (203,544) (180,218) PROFIT BEFORE INCOME TAX 3,425 42,581 Income tax expense 9 (1,059) (6,838) PROFIT FOR THE YEAR 2,366 35,743 All operations were continuing in the current year and prior year. The notes on pages 10 to 50 form an integral part of the financial statements. 5


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED STATEMENT OF COMPREHENSIVE INCOME Year ended 31 December 2016 2016 2015 Note US$'000 US$'000 PROFIT FOR THE YEAR 2,366 35,743 OTHER COMPREHENSIVE INCOME, NET OF TAX Items that may be reclassified subsequently to profit or loss: Available-for-sale reserve: Net change in fair value of available-for-sale financial assets 9 (61) (407) Net amount reclassified to income statement 9 40 7 OTHER COMPREHENSIVE LOSS AFTER INCOME TAX FOR THE YEAR (21) (400) TOTAL COMPREHENSIVE INCOME FOR THE YEAR 2,345 35,343 The notes on pages 10 to 50 form an integral part of the financial statements. 6


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2016 (Accumulated Available- losses)/ Share for-sale retained Total capital reserve earnings equity Note US$’000 US$’000 US$’000 US$’000 Balance at 1 January 2015 13,000 - (20) 12,980 Profit for the year - - 35,743 35,743 Other comprehensive loss 9 - (400) - (400) Total comprehensive (loss)/ income - (400) 35,743 35,343 Transaction with owners: - Issue of capital 18 157,000 - - 157,000 - Share-based payments - - 382 382 Balance at 31 December 2015 170,000 (400) 36,105 205,705 Profit for the year - - 2,366 2,366 Other comprehensive loss 9 - (21) - (21) Total comprehensive (loss)/ income - (21) 2,366 2,345 Transactions with owners: - Share-based payments - - 147 147 Balance at 31 December 2016 170,000 (421) 38,618 208,197 The notes on pages 10 to 50 form an integral part of the financial statements. 7


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED STATEMENT OF FINANCIAL POSITION As at 31 December 2016 2016 2015 Note US$'000 US$'000 ASSETS Loans and receivables: Cash and short-term deposits 19(a) 267,416 798,943 Trade receivables 3,123 553 Loans and advances to customers 10 1,257,791 1,031,953 Other receivables 11 2,365 1,914 1,530,695 1,833,363 Financial assets classified as held for trading 12 35,047 9,558 Available-for-sale financial assets 13 3,099,511 4,031,391 Current tax asset 3,310 - Deferred tax assets 14 5,406 1,868 Prepayments 108 111 TOTAL ASSETS 4,674,077 5,876,291 LIABILITIES AND EQUITY Financial liabilities at amortised cost: Deposits 15 4,330,912 5,439,241 Trade payables 45,424 150,770 Other payables 16 87,673 63,403 4,464,009 5,653,414 Financial liabilities classified as held for trading 12 1,294 7,863 Current tax liabilities - 8,619 Accruals 577 690 TOTAL LIABILITIES 4,465,880 5,670,586 EQUITY Share capital 18 170,000 170,000 Available-for-sale reserve 18 (421) (400) Retained earnings 38,618 36,105 Equity attributable to owners of the Company 208,197 205,705 TOTAL EQUITY 208,197 205,705 TOTAL LIABILITIES AND EQUITY 4,674,077 5,876,291 These financial statements were approved by the Board and authorised for issue on 19 April 2017: Signed on behalf of the Board Chui, Vincent Yik Chiu Wraight, David John Director Director The notes on pages 10 to 50 form an integral part of the financial statements. 8


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED STATEMENT OF CASH FLOWS Year ended 31 December 2016 2016 2015 Note US$’000 US$’000 NET CASH FLOWS (USED IN)/ FROM OPERATING ACTIVITIES 19(b) (1,457,980) 1,352,953 INVESTING ACTIVITIES Purchase of available-for-sale financial assets 13 (10,994,445) (13,092,050) Proceeds from maturity/ sale of available-for-sale financial assets 13 11,912,101 11,165,234 Interest received from available-for-sale financial assets 13 8,797 9,172 Net cash flow arising from business combination - 1,193,634 NET CASH FLOWS FROM/ (USED IN) INVESTING ACTIVITIES 926,453 (724,010) FINANCING ACTIVITY Issue of ordinary share capital 18 - 157,000 NET CASH FLOWS FROM FINANCING ACTIVITY - 157,000 NET (DECREASE)/ INCREASE IN CASH AND CASH EQUIVALENTS (531,527) 785,943 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 798,943 13,000 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 19(a) 267,416 798,943 The notes on pages 10 to 50 form an integral part of the financial statements. 9


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 1. CORPORATE INFORMATION The Company is a private limited company with a head office in Hong Kong and a branch in Singapore (“Branch”). The Company was incorporated and is domiciled in Hong Kong, at the following principal place of business address: Level 31, International Commerce Centre, 1 Austin Road West, Kowloon, Hong Kong. The Company is a restricted licence bank under the Banking Ordinance in Hong Kong, regulated by the HKMA, with its Branch regulated by the MAS. It is also a registered institution under the Hong Kong Securities and Futures Ordinance. The principal activities of the Company are to engage in the business of banking including deposit taking and lending. It also acts as introducing broker for other subsidiaries of the Morgan Stanley Group in connection with the provision of general investment, securities and futures dealing, and custody services, as well as discretionary management. The Company’s immediate parent undertaking is Morgan Stanley Hong Kong Limited, which was incorporated in Hong Kong. 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. Morgan Stanley is incorporated in the State of Delaware, the United States of America. Copies of its financial statements can be obtained from http://www.morganstanley.com/investorrelations. 2. BASIS OF PREPARATION Statement of compliance The Company has prepared its annual financial statements in accordance with Hong Kong Financial Reporting Standards (“HKFRS”) and interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and the Hong Kong Companies Ordinance. New standards and interpretations adopted during the year The following amendments to standards and interpretations relevant to the Company’s operations were adopted during the year. Except where otherwise stated, these amendments to standards and interpretations did not have a material impact on the Company’s financial statements. An amendment to HKAS 1 ‘Presentation of financial statements’ was issued by the HKICPA in January 2015, as part of the Disclosure Initiative project. The amendment is applicable in annual periods beginning on or after 1 January 2016. As part of the 2012 – 2014 Annual Improvements Cycle published in October 2014, the HKICPA made amendments to the following standards that are relevant to the Company’s operations: HKFRS 7 ‘Financial instruments: Disclosures’, HKAS 19 ‘Employee benefits’ and HKAS 34 ‘Interim financial reporting’, for application in accounting periods beginning on or after 1 January 2016. There were no other standards or interpretations relevant to the Company’s operations which were adopted during the year. 10


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 2. BASIS OF PREPARATION (CONTINUED) 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 HKICPA 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 amendment to HKAS 7 ‘Statement of Cash Flows’ was issued by the HKICPA in June 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 HKAS 12 ‘Income Taxes’ was issued by the HKICPA in June 2016, for application in annual periods beginning on or after 1 January 2017. Early application is permitted. An amendment to HKFRS 2 ‘Share based payments’ was issued by the HKICPA in November 2016, for application in annual periods beginning on or after 1 January 2018. Early application is permitted. HKFRS 9 ‘Financial instruments’ (“HKFRS 9”) was issued by the HKICPA in November 2009, amended in December 2013, and revised and reissued by the HKICPA in July 2014. HKFRS 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 HKFRS 9 on its financial statements. HKFRS 15 ‘Revenue from Contracts with Customers’ (“HKFRS 15”) was issued by the HKICPA in July 2014 for retrospective application in annual periods beginning on or after 1 January 2018. In addition, amendments to HKFRS15 were issued by HKICPA in June 2016 requiring application in annual periods beginning on or after 1 January 2018. Early application of HKFRS15 and the amendments is permitted. The Company is currently assessing the impact of HKFRS 15 on its financial statements. 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, deferred tax assets, allowances for loan and advances, and other matters that affect the financial statements and related disclosures. The Company believes that the estimates utilised in preparing the financial statements are reasonable, relevant and reliable. Actual results could differ from these estimates. For further details on the judgements used in determining fair value of certain assets and liabilities, see notes 3(d) and 23. 11


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Functional currency Items included in the financial statements are measured and presented in US dollars, the currency of the primary economic environment in which the Company operates. All currency amounts in the financial statements are rounded to the nearest thousand US dollars. b. Foreign currencies All monetary assets and liabilities denominated in currencies other than US dollars are translated into US dollars at the rates ruling at the reporting date. Transactions and non-monetary assets and liabilities denominated in currencies other than US dollars are recorded at the rates prevailing at the dates of the transactions. Foreign exchange differences on available-for-sale financial assets are recorded in the ‘Available-for-sale reserve’ in equity, with the exception of translation differences on the amortised cost of monetary available-for-sale financial assets, which are recognised through the income statement. All other translation differences are taken through the income statement. Exchange differences recognised in the income statement 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, available-for-sale financial assets and loans and receivables. The Company classifies its financial liabilities into the following categories on initial recognition: financial liabilities classified as held for trading and financial liabilities at amortised cost. More information regarding these classifications is included below: i) Financial instruments classified as held for trading Financial instruments classified as held for trading, including all derivatives, are initially recorded on trade date at fair value (see note 3(d) below). All subsequent changes in fair value, foreign exchange differences, interest and dividends are reflected in the income statement in ‘Net gains/ (losses) on financial instruments classified as held for trading’. For all financial instruments classified as held for trading, transaction costs are excluded from the initial fair value measurement of the financial instrument. These costs are recognised in the income statement in ‘Other expense’. ii) Available-for-sale financial assets Financial assets classified as available-for-sale are non-derivative financial assets that are either designated in this category or not classified in any of the other categories of financial instruments. Financial assets classified as available-for-sale are recorded on trade date and are initially recognised and subsequently measured at fair value (see note 3(d) below). Transaction costs that are directly attributable to the acquisition of an available-for-sale financial asset are added to the fair value on initial recognition. For debt instruments, interest calculated using the effective interest rate method (see note 3(c) (iii) below), impairment losses and reversals of impairment losses and foreign exchange differences on the amortised cost of the asset are recognised in the income statement in ‘Net gains/ (losses) on available- for-sale financial assets’. All other gains and losses on debt instruments classified as available-for-sale are recognised in the ‘Available-for-sale reserve’ within equity. On disposal or impairment of an available-for-sale financial asset, the cumulative gain or loss in the ‘Available-for-sale reserve’ is reclassified to the income statement and reported in ‘Net gains/ (losses) on available-for-sale financial assets’. 12


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) c. Financial instruments (continued) iii) Loans and receivables and financial liabilities at amortised cost Financial assets classified as loans and receivables are recognised when the Company becomes a party to the contractual provisions of the instrument. They are initially measured at fair value (see note 3(d) below) and subsequently measured at amortised cost less allowance for impairment. Interest is recognised in the income statement in ‘Interest income’, using the effective interest rate method as described below. Transaction costs that are directly attributable to the acquisition of the financial asset are added to or deducted from the fair value on initial recognition. Impairment losses and reversals of impairment losses on financial assets classified as loans and receivables are recognised in the income statement in ‘Other expense’. Financial assets classified as loans and receivables include cash and short-term deposits, trade receivables, loans and advances to customers and other receivables. Financial liabilities at amortised cost are recognised when the Company becomes a party to the contractual provision 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 income statement 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 effective interest rate method is a method of calculating the amortised cost of a financial instrument (or a group of financial instruments) and of allocating the interest income or interest expense over the expected life of the financial instrument. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial instrument (or, where appropriate a shorter period) to the carrying amount of the financial instrument. The effective interest rate is established on initial recognition of the financial instrument. The calculation of the effective interest rate includes all fees and commissions paid or received, transaction costs, and discounts or premiums that are an integral part of the effective interest rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. d. Fair value Fair value measurement Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches and establishes a hierarchy for inputs used in measuring fair value that maximises the use of relevant observable inputs and minimises the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability that were developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions that the Company believes other market participants would use in pricing the asset or liability, that are developed based on the best information available in the circumstances. 13


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) d. Fair value (continued) Fair value measurement (continued) The hierarchy is broken down into three levels based on the observability of inputs as follows:  Level 1 - Quoted prices (unadjusted) in an active market for identical assets or liabilities Valuations based on quoted prices in active markets for identical assets or liabilities that the Morgan Stanley Group has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgement.  Level 2 - Valuation techniques using observable inputs Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.  Level 3 - Valuation techniques with significant unobservable inputs Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The availability of observable inputs can vary from product to product and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, the liquidity of markets and other characteristics particular to the product. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgement. Accordingly, the degree of judgement exercised by the Company in determining fair value is greatest for instruments categorised in Level 3 of the fair value hierarchy. The Company considers prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or Level 2 to Level 3 of the fair value hierarchy. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined based on the lowest level input that is significant to the fair value measurement in its entirety. For assets and liabilities that are transferred between levels in the fair value hierarchy during the period, fair values are ascribed as if the assets or liabilities had been transferred as of beginning of the period. Valuation techniques Many cash instruments and over-the-counter (“OTC”) derivative contracts have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that a party is willing to pay for an asset. Ask prices represent the lowest price that a party is willing to accept for an asset. 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. 14


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) d. Fair value (continued) Valuation techniques (continued) 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. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, assumptions are set to reflect those that the Company believes market participants would use in pricing the asset or liability at the measurement date. Where the Company manages a group of financial assets 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 measured at fair value including those derived from pricing models. These control processes are designed to assure that the values used for financial reporting are based on observable inputs wherever possible. In the event that observable inputs are not available, the control processes are designed to ensure the valuation approach utilised is appropriate and consistently applied and that the assumptions are reasonable. The Company’s control processes apply to all financial instruments, unless otherwise noted. These control processes include: Model Review. VRG, in conjunction with the Market Risk Department (‘MRD’) and, where appropriate, the Credit Risk Management Department, both of which report to the Chief Risk Officer of the Morgan Stanley Group (‘CRO’), independently review valuation models’ theoretical soundness, the appropriateness of the valuation methodology and calibration techniques developed by the business units using observable inputs. Where inputs are not observable, VRG reviews the appropriateness of the proposed valuation methodology to ensure it is consistent with how a market participant would arrive at the unobservable input. The valuation methodologies utilised in the absence of observable inputs may include extrapolation techniques and the use of comparable observable inputs. As part of the review, VRG develops a methodology to independently verify the fair value generated by the business unit’s valuation models. 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. 15


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) d. Fair value (continued) Valuation process (continued) VRG uses recently executed transactions, other observable market data such as exchange data, broker/ dealer quotes, third-party pricing vendors and aggregation services for validating the fair values of financial instruments generated using valuation models. VRG assesses the external sources and their valuation methodologies to determine if the external providers meet the minimum standards expected of a third-party pricing source. Pricing data provided by approved external sources are evaluated using a number of approaches; for example, by corroborating the external sources’ prices to executed trades, by analysing the methodology and assumptions used by the external source to generate a price and/ or by evaluating how active the third-party pricing source (or originating sources used by the third-party pricing source) is in the market. Based on this analysis, VRG generates a ranking of the observable market data to ensure that the highest-ranked market data source is used to validate the business unit’s fair value of financial instruments. For financial instruments categorised within Level 3 of the fair value hierarchy, VRG reviews the business unit’s valuation techniques to ensure these are consistent with market participant assumptions. The results of this independent price verification and any adjustments made by VRG to the fair value generated by the business units are presented to management of the Morgan Stanley Group’s three business segments (i.e. Institutional Securities, Wealth Management and Investment Management), the CFO and the CRO on a regular basis. Review of New Level 3 Transactions. VRG reviews the models and valuation methodology used to price all new material Level 3 transactions and both the FCG and MRD management must approve the fair value of the trade that is initially recognised. Gains and losses on inception In the normal course of business, the fair value of a financial instrument on initial recognition is the transaction price (i.e. the fair value of the consideration given or received). In certain circumstances, however, the fair value will be based on other observable current market transactions in the same instrument, without modification or repackaging, or on a valuation technique whose variables include only data from observable markets. When such evidence exists, the Company recognises a gain or loss on inception of the transaction. When the use of unobservable market data has a significant impact on determining fair value at the inception of the transaction, the entire initial gain or loss indicated by the valuation technique as at the transaction date is not recognised immediately in the income statement 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 when it transfers the financial asset and substantially all the risk and rewards of ownership of the asset. If the asset has been transferred, and the entity neither transfers nor retains substantially all of the risks and rewards of the asset, then the entity determines whether it has retained control of the asset. If the entity has retained control of the asset, it shall continue to recognise the financial asset to the extent of its continuing involvement in the financial asset. If the entity has not retained control of the asset, it derecognises the asset and separately recognises any rights or obligation created or retained in the transfer. The Company derecognises financial liabilities when the Company’s obligations are discharged, cancelled or they expire. 16


  • Page 19

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) f. Impairment of financial assets At each reporting date, an assessment is made as to whether there is any objective evidence of impairment in the value of a financial asset classified as either available-for-sale or loans and receivables. Impairment losses are recognised if an event has occurred which will have an adverse impact on the expected future cash flows of an asset and the expected impact can be reliably estimated. Impairment losses on available-for-sale financial assets are measured as the difference between cost (net of any principal repayment and amortisation) and the current fair value (see note 3(d) above). Where there is evidence that the available-for-sale financial asset is impaired, the cumulative loss that had been previously recognised in other comprehensive income is reclassified from the ‘Available-for- sale reserve’ and recognised in the income statement within ‘Net gains/ (losses) on available-for-sale financial assets’. Impairment losses on loans and receivables are measured as the difference between the carrying amount of the loans and receivables and the present value of estimated cash flows discounted at the asset’s original effective interest rate. Such impairment losses are recognised in the income statement within ‘Other expense’ and are recognised against the carrying amount of the impaired asset on the statement of financial position. Interest on the impaired asset continues to be accrued on the reduced carrying amount based on the original effective interest rate of the asset. For all financial assets, if in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed as described for the relevant categories of financial asset in note 3(c) (ii) and (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. Fees and commissions Fee and commission income includes sales commissions and introductory brokerage fees. These amounts are recognised as the related services are performed or received. h. Impairment of non-financial assets Non-financial assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Such impairment losses are recognised in the income statement within ‘Other expense’ and are recognised against the carrying amount of the impaired asset on the statement of financial position. Non-financial assets that have suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period. i. Cash and cash equivalents Cash and cash equivalents comprise cash and demand deposits with banks along with highly liquid investments, with original maturities of three months or less, that are readily convertible to known amounts of cash and subject to insignificant risk of change in value. j. Income tax The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is calculated based on taxable profit for the year. Taxable profit may differ from profit/ (loss) before income tax as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date. Current tax is charged or credited in the income statement, except when it relates to items charged or credited directly to other comprehensive income or equity, in which case the current tax is also recorded within other comprehensive income or equity respectively. 17


  • Page 20

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) j. Income tax (continued) Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and limited to the extent that it is probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to other comprehensive income or equity, in which case the deferred tax is reflected within other comprehensive income or equity, respectively. Current tax assets are offset against current tax liabilities when there is a legally enforceable right to set off current tax assets against current tax liabilities and the Company intends to settle its current tax assets and current tax liabilities on a net basis or to realise the asset and settle the liability simultaneously. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and current tax liabilities on a net basis. k. Provisions Provisions are recognised when the Company has a present obligation as a result of a past event, when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and when a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the year end date, taking into account the risks and uncertainties surrounding the obligation. l. Employee compensation plans i) Equity-settled share-based compensation plans Morgan Stanley operates equity-based compensation plans on behalf of the Company in relation to which, the Company pays Morgan Stanley in consideration of the procurement of the transfer of shares to employees. The cost of equity-based transactions with employees is measured based on the fair value of the equity instruments at grant date. Fair value of stock unit awards is based on the market price of Morgan Stanley shares. Non-market vesting conditions are not taken into account when measuring fair value, but are reflected by adjusting over time the number of equity instruments included in the measurement of the transaction such that the amount ultimately recognised reflects the number that actually vest. The expense is recorded within ‘Staff costs’, ‘Directors’ remuneration’ and ‘Management charges from other Morgan Stanley Group undertakings’ in ‘Other expense’ in the income statement; the corresponding credit to retained earnings is reduced to the extent that payments are due to Morgan Stanley in respect of these awards. ii) Deferred cash-based compensation plans Morgan Stanley also maintains deferred compensation plans on behalf of the Company for the benefit of certain current and former employees that provide a return to the participating employees based upon the performance of various referenced investments. Liabilities for these awards, which are included within ‘Other payables’ in the statement of financial position, are measured at fair value and recognised over time in accordance with the awards’ vesting conditions. The related expense is recorded within ‘Staff costs’ and ‘Directors’ remuneration’ in ‘Other expense’. 18


  • Page 21

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) m. Post-employment benefits The Company operates defined contribution post-employment plans. Additionally, the Branch of the Company participates in a defined contribution plan, the Singapore Central Provident Fund. Contributions due in relation to the Company’s defined contribution post-employment plan are recognised in ‘Other expense’ in the income statement when payable. Details of the plans are given in note 27 to these financial statements. n. Offsetting of financial assets and financial liabilities Where there is a currently legally enforceable right to set off the recognised amounts and an intention to either settle on a net basis or to realise the asset and the liability simultaneously, financial assets and financial liabilities are offset and the net amount is presented on the statement of financial position. In the absence of such conditions, financial assets and financial liabilities are presented on a gross basis. 4. INTEREST INCOME AND INTEREST EXPENSE ‘Interest income’ and ‘Interest expense’ represent total interest income and total interest expense for financial assets and financial liabilities that are not carried at fair value. No other gains or losses have been recognised in respect of loans and receivables other than as disclosed as ‘Interest income’ and foreign exchange differences disclosed in ‘Other income’ (note 7). No other gains or losses have been recognised in respect of financial liabilities at amortised cost other than as disclosed as “Interest expense” within the income statement and foreign exchange differences disclosed in “Other income” (note 7). 5. FEE AND COMMISSION INCOME 2016 2015 US$'000 US$'000 Sales commissions and introductory brokerage fees 197,194 218,342 Other fees 38 8 197,232 218,350 6. NET LOSSES ON AVAILABLE-FOR-SALE FINANCIAL ASSETS 2016 2015 US$'000 US$'000 Interest income 19,754 20,725 Foreign exchange revaluation (25,112) (83,231) Net fair value losses reclassified from the available-for-sale reserve on disposal of asset (47) (8) (5,405) (62,514) 7. OTHER INCOME 2016 2015 US$'000 US$'000 Net foreign exchange gains 5,817 16,766 Management charges to other Morgan Stanley Group undertakings 6,117 1,002 Other 118 65 12,052 17,833 19


  • Page 22

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 8. OTHER EXPENSE 2016 2015 US$'000 US$'000 Staff costs 115,962 95,688 Directors’ remuneration Fees 83 83 Contribution to defined contribution plan 52 41 Other 7,171 4,684 Auditors’ remuneration: Fees payable to the Company’s auditor for the audit of the Company’s annual financial statements 549 532 Fees payable to the Company’s auditor for other services to the Company 2 - Non-audit professional services 7,179 10,572 Management charges from other Morgan Stanley Group undertakings relating to staff costs 590 1,743 Management charges from other Morgan Stanley Group undertakings relating to other services 68,405 62,539 Other 3,551 4,336 203,544 180,218 Included within ‘Staff costs’, ‘Directors’ remuneration’ and ‘Management charges from other Morgan Stanley Group undertakings’ is an amount of US$14,001,000 (2015: US$12,651,000) in relation to equity-settled share-based compensation plans, and US$12,094,000 (2015: US$7,835,000) in relation to awards of non-equity based deferred compensation plans, granted to employees of the Company. Previous years’ awards were granted to the employees prior to their transfer to the Company. Refer to note 26 for more information about employee compensation plans. For the year ended 31 December 2016 and 31 December 2015, the Company has not paid any (a) payments or benefits in respect of the termination of the service of directors whether in the capacity of directors or in any other capacity while being a director of the Company, and (b) consideration provided to or receivable by any third party for making available the services of a person as a director or in any other capacity while being a director of the Company. During the year, the Company has not granted any loans, quasi-loans nor entered into any other dealings in favor of (a) the Directors, (b) entities controlled by the Directors; or (c) entities connected with the Directors (2015: Nil). 20


  • Page 23

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 9. INCOME TAX EXPENSE 2016 2015 US$'000 US$'000 Current tax expense Current year Hong Kong 3,773 8,551 Other jurisdiction 10 109 3,783 8,660 Adjustments in respect of prior years Hong Kong 894 - 4,677 8,660 Deferred tax benefit Origination and reversal of temporary differences (2,924) (1,822) Adjustments in respect of prior years (694) - (3,618) (1,822) Income tax expense 1,059 6,838 Reconciliation of effective tax rate The current year income tax expense is higher (2015: lower) than that resulting from applying the standard rate of profits tax in Hong Kong for the year of 16.5% (2015:16.5%). The main differences are explained below: 2016 2015 US$’000 US$’000 Profit before income tax 3,425 42,581 Income tax using the standard rate of profits tax in Hong Kong of 16.5% 565 7,026 Impact on tax of: Expenses not deductible for tax purposes 1,175 1,484 Utilisation of tax losses - (4) Tax exempt income (1,158) (1,765) Concessionary tax rate 347 88 Effect of tax rates in foreign jurisdiction (36) (12) Tax under provided in prior years 200 - Withholding tax expensed 10 20 Others (44) 1 Total income tax expense in the income statement 1,059 6,838 21


  • Page 24

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 9. INCOME TAX EXPENSE (CONTINUED) In addition to the amount charged to the income statement, the aggregate amount of current and deferred tax relating to each component of other comprehensive income was as follows: 2016 2015 Before Tax benefit/ Net of Before Tax benefit/ Net of tax (expense) tax tax (expense) tax US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 Available-for-sale reserve: Net change in fair value of available-for-sale financial assets (69) 8 (61) (463) 56 (407) Net amount transferred to income statement 47 (7) 40 8 (1) 7 Other comprehensive (loss)/ income (22) 1 (21) (455) 55 (400) 10. LOANS AND ADVANCES TO CUSTOMERS 2016 2015 US$'000 US$'000 Loans and advances to customers 1,257,791 1,031,953 There were no impaired loan and advances, collective and specific provisions, as at 31 December 2016 (31 December 2015: Nil). 11. OTHER RECEIVABLES 2016 2015 US$'000 US$'000 Amounts due from other Morgan Stanley Group undertakings 416 185 Interest receivable 1,869 1,576 Other amounts receivable 80 153 2,365 1,914 12. FINANCIAL ASSETS AND FINANCIAL LIABILITIES CLASSIFIED AS HELD FOR TRADING Financial assets and financial liabilities classified as held for trading are summarised as follows: 2016 2015 Notional Fair value Notional Fair value amount Assets Liabilities amount Assets Liabilities US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Derivatives: Foreign exchange contracts 1,911,651 34,773 1,290 2,874,841 9,036 7,197 Interest rate contracts 2,150,000 274 4 3,300,000 522 666 4,061,651 35,047 1,294 6,174,841 9,558 7,863 The derivatives are entered with other Morgan Stanley Group undertakings (see note 28). 22


  • Page 25

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 13. AVAILABLE-FOR-SALE FINANCIAL ASSETS Financial assets classified as available-for-sale are summarised as follows: 2016 2015 US$'000 US$'000 Government debt securities: Singapore government treasury bills 1,501,304 1,927,296 US treasury bills and securities 1,598,207 2,104,095 3,099,511 4,031,391 Movement in available-for-sale financial assets 2016 2015 US$'000 US$'000 Fair value At 1 January 4,031,391 - Additions through business combination - 2,176,716 Additions 10,994,445 13,092,050 Changes in fair value recognised in the income statement 19,754 20,725 Changes in fair value recognised in the available-for-sale reserve (69) (463) Foreign exchange revaluation recognised in the income statement (25,112) (83,231) Disposals and other settlements (11,920,898) (11,174,406) At 31 December 3,099,511 4,031,391 14. DEFERRED TAX ASSETS Deferred taxes are calculated on all temporary differences under the liability method. The movement in the deferred tax account is as follows: Deferred tax asset 2016 2015 US$'000 US$'000 At 1 January 1,868 4 Amount recognised in the income statement 3,618 1,822 Amount recognised in other comprehensive income: Available-for-sale financial assets 1 55 Foreign exchange revaluation (81) (13) At 31 December 5,406 1,868 23


  • Page 26

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 14. DEFERRED TAX ASSETS (CONTINUED) The deferred tax included in the statement of financial position and changes recorded in the income statement in ‘Income tax expense’ and statement of comprehensive income are as follows: 2016 2015 Deferred Other Deferred Other tax Income Comprehensive tax Income Comprehensive asset statement Income asset statement Income US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 Deferred compensation 4,581 2,776 - 1,813 1,826 - Available-for-sale financial assets 55 - 1 55 - 55 Tax losses carried forward/ (utilised) 770 842 - - (4) - 5,406 3,618 1 1,868 (70,189 1,822 55 The deferred tax assets recognised are based on management assessment that it is probable that the Company will have taxable profits against which the temporary differences can be utilised. 15. DEPOSITS 2016 2015 US$'000 US$'000 Deposits of banks Current account balances 14,227 6,854 Deposits of non-bank customers Current account balances 2,323,846 3,799,197 Term deposits 949,333 1,287,227 Deposits of other Morgan Stanley Group undertakings 1,043,506 345,963 4,330,912 5,439,241 16. OTHER PAYABLES 2016 2015 US$'000 US$'000 Amounts due to other Morgan Stanley Group undertakings 13,501 10,101 Staff compensation and benefits accruals 64,664 46,604 Interest payable 7,856 4,175 Other amounts payable 1,652 2,523 87,673 63,403 17. COMMITMENTS AND CONTINGENCIES At 31 December 2016, there are no commitments and contingencies (31 December 2015: Nil). 24


  • Page 27

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 18. EQUITY Ordinary share capital Ordinary Ordinary shares shares Number US$’000 Issued and fully paid At 1 January 2015 13,000,001 13,000 Issued in the year: 13 January 2015 156,999,998 157,000 Issued in the year: 9 February 2015 1 - At 31 December 2015 and 31 December 2016 170,000,000 170,000 The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at general meetings of the Company. All shares rank equally with regard to the Company’s residual assets. Available-for-sale reserve The ‘Available-for-sale reserve’ includes the cumulative net change in the fair value of available-for- sale financial assets held at the reporting date. The tax effect of these movements is also included in the ‘Available-for-sale reserve’. 19. ADDITIONAL CASH FLOW INFORMATION a. Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents comprise the following balances, which have less than three months maturity from the date of acquisition: 2016 2015 US$’000 US$’000 Cash with central bank 12,301 10,513 Cash at banks 161,095 345,180 Placements with banks 94,020 443,250 267,416 798,943 25


  • Page 28

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 19. ADDITIONAL CASH FLOW INFORMATION (CONTINUED) b. Reconciliation of cash flows from operating activities 2016 2015 US$’000 US$’000 Profit for the year 2,366 35,743 Adjustments for: Net losses on available-for-sale financial assets 5,405 62,514 Share-based payments 147 382 Interest income (20,584) (17,866) Interest expense 27,141 19,658 Income tax expense 1,059 6,838 Operating cash flows before changes in operating assets and liabilities 15,534 107,269 Changes in operating assets Increase in loans and receivables, excluding cash and short-term deposits (228,566) (49,931) Increase in financial assets classified as held for trading (25,489) (9,558) Decrease in prepayments 3 526 (254,052) (58,963) Changes in operating liabilities (Decrease)/ increase in financial liabilities at amortised cost (1,200,349) 1,292,391 (Decrease)/ increase in financial liabilities classified as held for trading (6,569) 7,863 (Decrease)/ increase in accruals (113) 690 (1,207,031) 1,300,944 Interest received 20,291 16,290 Interest paid (16,197) (12,559) Income tax paid (16,532) (20) Effect of foreign exchange movements 7 (8) Net cash flows (used in)/ from operating activities (1,457,980) 1,352,953 26


  • Page 29

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 20. EXPECTED MATURITY OF ASSETS AND LIABILITIES The table below shows an analysis of assets and liabilities analysed according to when they are expected to be recovered, realised or settled. At 31 December 2016 Less than or equal More than to twelve twelve months months Total US$’000 US$’000 US$’000 ASSETS Loans and receivables: Cash and short-term deposits 267,416 - 267,416 Trade receivables 3,123 - 3,123 Loans and advances to customers 1,257,791 - 1,257,791 Other receivables 2,365 - 2,365 1,530,695 - 1,530,695 Financial assets classified as held for trading 35,047 - 35,047 Available-for-sale financial assets 3,099,511 - 3,099,511 Current tax assets 3,310 - 3,310 Deferred tax assets - 5,406 5,406 Prepayments 108 - 108 4,668,671 5,406 4,674,077 LIABILITIES Financial liabilities at amortised cost: Deposits 4,330,912 - 4,330,912 Trade payables 45,424 - 45,424 Other payables 65,198 22,475 87,673 4,441,534 22,475 4,464,009 Financial liabilities classified as held for trading 1,294 - 1,294 Accruals 577 - 577 4,443,405 22,475 4,465,880 27


  • Page 30

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 20. EXPECTED MATURITY OF ASSETS AND LIABILITIES (CONTINUED) At 31 December 2015 Less than or equal More than to twelve twelve months months Total US$’000 US$’000 US$’000 ASSETS Loans and receivables: Cash and short-term deposits 798,943 - 798,943 Trade receivables 553 - 553 Loans and advances to customers 1,031,953 - 1,031,953 Other receivables 1,914 - 1,914 1,833,363 - 1,833,363 Financial assets classified as held for trading 9,558 - 9,558 Available-for-sale financial assets 4,031,391 - 4,031,391 Deferred tax assets 55 1,813 1,868 Prepayments 111 - 111 5,874,478 1,813 5,876,291 LIABILITIES Financial liabilities at amortised cost: Deposits 5,439,241 - 5,439,241 Trade payables 150,770 - 150,770 Other payables 51,772 11,631 63,403 5,641,783 11,631 5,653,414 Financial liabilities classified as held for trading 7,863 - 7,863 Current tax liabilities 8,619 - 8,619 Accruals 690 - 690 5,658,955 11,631 5,670,586 28


  • Page 31

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 21. FINANCIAL RISK MANAGEMENT Risk management procedures Risk is an inherent part of the Morgan Stanley Group’s and the Company’s business activities. The Company seeks to identify, measure, monitor, assess, challenge and manage each of the various types of risk involved in its business activities in accordance with defined policies and procedures. The Company has developed its own risk management policy framework, which is consistent with and leverages the risk management policies and procedures of the Morgan Stanley Group and which includes escalation to appropriate senior management personnel of the Company as well as oversight through the Company’s Board of Directors (the “Board”) and through a dedicated Risk Committee that reports to the Board. Significant risks faced by the Company resulting from its private wealth management and financing activities are set out below. Credit risk Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial obligations to the Company. Credit risk management policies and procedures for the Company are consistent with those of the Morgan Stanley Group and include escalation to the Company’s Board and appropriate key management personnel. The Company’s credit risk management policies 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 incurs credit risk exposure to institutions and sophisticated individuals mainly through its Wealth Management business segment. The Company incurs credit risk primarily through lending to individuals and entities, including, but not limited to, margin loans and other loans predominantly collateralised by cash and securities. The Company also may incur credit risk through a variety of activities, including, but not limited to, the following:  entering into derivative contracts with other Morgan Stanley Group undertakings under which counterparties have obligations to make payments to the Company;  posting margin and/or collateral to banks and other financial counterparties;  placing funds on deposit at other financial institutions; and  entering into securities transactions, whereby the value of these assets may fluctuate based on realised or expected defaults on the underlying obligations. Monitoring and Control In order to help protect the Company from losses, the Credit Risk Management Department establishes firm-wide practices to evaluate, monitor and control credit risk exposure at the transaction, obligor and portfolio levels. The Credit Risk Management Department approves extensions of credit, evaluates the creditworthiness of the Company’s counterparties and borrowers on a regular basis, and ensures that credit exposure is actively monitored and managed. The evaluation of counterparties and borrowers includes an assessment of the probability that an obligor will default on its financial obligations and any losses that may occur when an obligor defaults. In addition, credit risk exposure is actively managed by credit professionals and committees within the Credit Risk Management Department and through various risk committees, whose membership includes individuals from the Credit Risk Management Department. 29


  • Page 32

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 21. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk (continued) Monitoring and Control (continued) A comprehensive and global Credit Limits Framework is utilised to manage credit risk levels across the Morgan Stanley Group, including the Company. The Credit Limits Framework is calibrated within the Morgan Stanley Group’s risk tolerance and includes single-name limits and portfolio concentration limits by country, industry and product type. The Credit Risk Management Department ensures transparency of material credit risks, compliance with established limits and escalation of risk concentrations to appropriate senior management. The Credit Risk Management Department also works closely with the Market Risk Department and applicable business units to monitor risk exposures and to perform stress tests to identify, analyse and control credit risk concentrations arising in the Morgan Stanley Group’s lending and trading activities. Stress and scenario tests are conducted in accordance with established Morgan Stanley Group’s policies and procedures and comply with methodologies outlined in the Basel regulatory framework. Credit Evaluation The Morgan Stanley Group’s evaluation of corporate and institutional counterparties and borrowers includes assigning obligor credit ratings, which reflect an assessment of an obligor’s probability of default and loss given default. Credit evaluations typically involve the assessment of financial statements, leverage, liquidity, capital strength, asset composition and quality, market capitalisation, access to capital markets, adequacy of collateral, if applicable, and in the case of certain loans, cash flow projections and debt service requirements. The Credit Risk Management Department also evaluates strategy, market position, industry dynamics, management and other factors that could affect the obligor’s risk profile. Additionally, the Credit Risk Management Department evaluates the relative position of the Morgan Stanley Group’s exposure in the borrower’s capital structure and relative recovery prospects, as well as adequacy of collateral (if applicable) and other structural elements of the particular transaction. The Company’s Wealth Management business segment generates minimal credit exposure given the collateralised nature of the business, as such the credit evaluation focuses on the counterparties’ and borrowers’ background, the purpose of the borrowing and collateral evaluation, to ensure the exposures are well-collateralised. In addition to assessing and monitoring its credit exposure and risk at the individual obligor level, the Company also reviews its credit exposure and risk to geographic regions. As at 31 December 2016, credit exposure was concentrated in North American and Asian countries. In addition, the Company pays particular attention to smaller exposures in emerging markets given their unique risk profile. Sovereign ratings are derived using methodologies generally consistent with those employed by external rating agencies. The Company also reviews its credit exposure and risk to types of customers. At 31 December 2016, the Company’s material credit exposure was to sovereigns, sovereign related entities, corporate entities, financial institutions and individuals. Risk Mitigation The Morgan Stanley Group may seek to mitigate credit risk from its lending and trading activities in multiple ways, including collateral provisions, guarantees and hedges. In connection with its derivatives transactions with other Morgan Stanley Group undertakings, the Company generally enters into master netting agreements and collateral arrangements with counterparties. These agreements provide the Company with the ability to demand collateral, as well as to liquidate collateral and offset receivables and payables covered under the same master agreement in the event of a counterparty default. 30


  • Page 33

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 21. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk (continued) Risk Mitigation (continued) In connection with the Company’s Wealth Management business, the Company relies on the use of collateral to manage credit risk. The amount and type of collateral required by the Company depends on an assessment of the credit risk of the obligor. Collateral held is managed in accordance with the Company’s guidelines and the relevant underlying agreements. Collateral is primarily publicly traded debt and equity securities, as well as a small amount of other collateral including unlisted securities, notes, mutual funds and insurance policies that fulfill the risk management requirement of being valuable and realisable at short notice. The market value of securities received as collateral is monitored on a daily basis and securities received as collateral generally are not recognised on the statement of financial position. The Company monitors the creditworthiness of counterparties to these transactions on an ongoing basis and requests additional collateral in accordance with collateral arrangements when deemed necessary. Exposure to credit risk The maximum exposure to credit risk (“gross credit exposure”) of the Company as at 31 December 2016 and 31 December 2015 is disclosed below, based on the carrying amounts of the financial assets the Company believes are subject to credit risk. Where the Company enters into credit enhancements, including receiving cash and security as collateral and master netting agreements, to manage the credit exposure on these financial instruments the financial effect of the credit enhancements is also disclosed below. The net credit exposure represents the credit exposure remaining after the effect of the credit enhancements. The ‘unrated’ balance in the ‘Maximum exposure to credit risk by credit rating’ represents the pool of counterparties that either do not require a rating or are under review in accordance with the Morgan Stanley Group’s rating policies. These counterparties individually generate no material credit exposure and this pool is highly diversified, monitored and subject to limits. The Company does not have any significant exposure arising from items not recognised on the statement of financial position. Exposure to credit risk by class: Class 2016 2015 Gross Net Gross Net credit Credit Credit credit Credit Credit exposure(¹) enhancements Exposure exposure(¹) enhancements Exposure US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 Loans and receivables: Cash and short-term deposits 267,416 - 267,416 798,943 - 798,943 Trade receivables 3,123 (3,123) - 553 - 553 Loans and advances to customers (2) 1,257,791 (1,257,791) - 1,031,953 (1,031,953) - Other receivables 2,365 - 2,365 1,914 - 1,914 Financial assets classified as held for trading: Derivatives 35,047 (34,864) 183 9,558 - 9,558 Available-for-sale financial assets 3,099,511 - 3,099,511 4,031,391 - 4,031,391 4,665,253 (1,295,778) 3,369,475 5,874,312 (1,031,953) 4,842,359 (1) The carrying amount recognised in the statement of financial position best represents the Company's maximum exposure to credit risk. (2) The collateral held as security for loan and advances consists of cash of US$275,563,000 (2015: US$271,570,000), securities of US$634,667,000 (2015: US$498,144,000) and other collateral of US$347,561,000 (2015: US$262,239,000). The impact of master netting arrangements and similar agreements on the Company’s ability to offset financial assets and financial liabilities is disclosed in note 22. 31


  • Page 34

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 21. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk (continued) Risk Mitigation (continued) Exposure to credit risk by class (continued) Maximum exposure to credit risk by credit rating (1): Gross credit exposure Credit rating 2016 2015 US$’000 US$’000 AAA 3,111,812 4,121,910 AA 59,676 398,632 A 233,704 319,907 BBB 35 10 BB 910 1,447 B 3,498 - CCC 992,488 496,693 Unrated 263,130 535,713 Total 4,665,253 5,874,312 (1) Internal credit rating derived using methodologies generally consistent with those used by external rating agencies. At 31 December 2016, there were no financial assets past due but not impaired or individually impaired (2015: Nil). The main considerations for the impairment assessment include whether there are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of the original terms of the contract. For the Company’s Wealth Management lending activities, which are collateralised by cash and securities, a loan is assessed for impairment when a counterparty fails to meet a margin call and there is a remaining uncollateralised shortfall after liquidating the underlying collateral. In addition, a collective impairment assessment is considered and a collective impairment allowance is established if necessary to cover estimated credit losses incurred in the lending portfolio that have not yet been specifically identified as impaired. The impairment losses are evaluated at least at each reporting date. Liquidity risk Liquidity risk refers to the risk that the Company will be unable to finance its operations due to a loss of access to the capital markets or difficulty in liquidating its assets. Liquidity risk encompasses the Company’s ability (or perceived 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. Liquidity risk also encompasses the associated funding risks triggered by market or idiosyncratic stress events that may negatively affect the Company’s liquidity and may impact its ability to raise new funding. Generally, the Company incurs liquidity risk as a result of its trading, lending, investing and client facilitation activities. 32


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 21. FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk (continued) The Morgan Stanley Group’s Liquidity Risk Management Framework is critical to helping ensure that the Company maintains sufficient liquidity reserves and durable funding sources to meet its daily obligations and to withstand unanticipated stress events. In 2015, the Morgan Stanley Group established the Liquidity Risk Department as a distinct area in Risk Management to oversee and monitor liquidity risk. The Liquidity Risk Department is independent of the business units and reports to the Chief Risk Officer. The Liquidity Risk Department ensures transparency of material liquidity 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 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 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 risks arising from the Morgan Stanley Group’s business activities, and maintain processes and controls to manage the key risks inherent in their respective areas. The Liquidity Risk Department coordinates with the Treasury Department and these business units to help ensure a consistent and comprehensive framework for managing liquidity risk across the Morgan Stanley Group. The Company’s liquidity risk management policies and procedures are consistent with those of the Morgan Stanley Group. The Board of Directors of the Company is ultimately responsible for establishing the liquidity risk tolerance and ensuring the Company’s liquidity risk is appropriately managed. In addition to the internal liquidity risk management framework, the Company is locally subject to the liquidity regulations prescribed by the HKMA. The Company has daily monitoring and reporting processes in place to ensure compliance with its regulatory requirements. The primary goal of the Company’s liquidity risk management framework is to ensure that the Company has access to adequate funding across a wide range of market conditions. The framework is designed to enable the Company to fulfil its financial obligations and support the execution of the Company’s business strategies. The following principles guide the Company’s liquidity risk management framework:  Sufficient liquid assets should be maintained to cover maturing liabilities and other planned and contingent outflows;  Maturity profile of assets and liabilities should be aligned, with limited reliance on short-term funding;  Source, counterparty, currency, region, and term of funding should be diversified; and  Liquidity Stress Test should anticipate, and account for, periods of limited access to funding. The core components of the Company’s liquidity risk management framework, are the Contingency Funding Plan (“CFP”), Liquidity Stress Tests and the Liquidity Reserve (as defined below), which support the Company’s target liquidity profile. Contingency Funding Plan CFP describes the data and information flows, limits, targets, operating environment indicators, escalation procedures, roles and responsibilities, and available mitigating actions in the event of a liquidity stress. The CFP also sets forth the principal elements of the liquidity stress testing which identifies stress events of different severity and duration, assesses current funding sources and uses and establishes a plan for monitoring and managing a potential liquidity stress event. 33


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 21. FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk (continued) Liquidity Stress Tests The Company uses Liquidity Stress Tests to model liquidity inflows and outflows across multiple scenarios and a range of time horizons. These scenarios contain various combinations of idiosyncratic and systemic stress events of different severity and duration. The assumptions underpinning the Liquidity Stress Tests include, but are not limited to, the following:  withdrawal of customer deposits;  no government support;  no access to equity and unsecured debt markets;  repayment of all unsecured debt maturing within the stress horizon;  additional collateral that would be required by trading counterparties, certain exchanges and clearing organisations related to credit rating downgrades;  drawdowns on unfunded commitments provided to customers; and  limited access to the foreign exchange swap markets. Liquidity Stress Tests are produced for the Company, to capture specific cash requirements and cash availability. The Liquidity Stress Tests assume that a legal entity will use its own liquidity first to fund its obligations before drawing liquidity from its ultimate parent undertaking, Morgan Stanley. Morgan Stanley will support its subsidiaries and will not have access to subsidiaries’ liquidity reserve that are subject to any regulatory, legal or tax constraints. In addition to the assumptions underpinning the Liquidity Stress Tests, the Company takes into consideration the settlement risk related to intra-day settlement and clearing of securities and financing activities. At 31 December 2016 and 31 December 2015, the Company maintained sufficient liquidity to meet current and contingent funding obligations as modelled in its Liquidity Stress Tests. Liquidity Reserve The Company maintains sufficient liquidity reserves (“Liquidity Reserve”) to meet regulatory requirements, cover daily funding needs and to meet strategic liquidity targets sized by the CFP and Liquidity Stress Tests. The size of the Liquidity Reserve is actively managed by the Company. The following components are considered in sizing the Liquidity Reserve: unsecured debt maturity profile, balance sheet size and composition, funding needs in a stressed environment inclusive of contingent cash outflows; regulatory requirements; and collateral requirements. In addition, the Company’s Liquidity Reserve includes a discretionary surplus based on the Company’s risk tolerance and is subject to change dependent on market and firm-specific events. The Company holds its own Liquidity Reserve which is composed of diversified cash and cash equivalents and unencumbered highly liquid securities. Eligible unencumbered highly liquid securities include primarily non-US government securities in addition to US government securities and other highly liquid investment grade securities. Funding Management The Company manages its funding in a manner that reduces the risk of disruption to the Company’s operations. The Company 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 Company’s liabilities equals or exceeds the expected holding period of the assets being financed. The Company funds itself through diverse sources. These sources may include equity capital, long- term debt and deposits. 34


  • Page 37

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 21. FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk (continued) Balance sheet management In managing both the Morgan Stanley Group’s and the Company’s liquidity risk the composition and size of the entire balance sheet, not just financial liabilities, is monitored and evaluated. A substantial portion of the Morgan Stanley Group’s total assets consists of liquid marketable securities and short- term receivables arising principally from its Institutional Securities business segment’s sales and trading activities. The liquid nature of these assets provides the Morgan Stanley Group and the Company with flexibility in managing the size of its balance sheet. Maturity analysis In the following maturity analysis of financial assets and financial liabilities, derivatives not held as part of the Company’s trading activities are disclosed according to their earliest contractual maturity; all such amounts are presented at their fair value, consistent with how these financial assets and liabilities are managed. All other amounts represent undiscounted cash flows receivable and payable by the Company arising from its financial assets and financial liabilities to earliest contractual maturities as at 31 December 2016 and 31 December 2015. Receipts of financial assets and repayments of financial liabilities that are subject to immediate notice are treated as if notice were given immediately and are classified as on demand. This presentation is considered by the Company to appropriately reflect the liquidity risk arising from those 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. More than More than More than 1 month 3 months 1 year Not but not but not but not On more than more than more than more than demand 1 month 3 months 1 year 5 years Total 31 December 2016 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 Financial assets Loan and receivables: Cash and short-term deposits 173,396 94,029 - - - 267,425 Trade receivables 3,123 - - - - 3,123 Loan and advances to customers 1,089,249 93,079 27,157 48,627 - 1,258,112 Other receivables 2,083 63 166 53 - 2,365 Financial assets classified as held for trading: Derivatives - 21,797 11,697 1,553 - 35,047 Available-for-sale financial assets - 829,437 1,203,262 1,066,812 - 3,099,511 Total financial assets 1,267,851 1,038,405 1,242,282 1,117,045 - 4,665,583 Financial liabilities Financial liabilities at amortised cost: Deposits of banks 14,227 - - - - 14,227 Deposits of non-bank counterparties 2,323,846 352,441 216,415 1,438,219 - 4,330,921 Trade payables 45,424 - - - - 45,424 Other payables 13,567 22,601 25,071 3,959 22,475 87,673 Financial liabilities classified as held for trading: Derivatives - 627 116 551 - 1,294 Total financial liabilities 2,397,064 375,669 241,602 1,442,729 22,475 4,479,539 35


  • Page 38

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 21. FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk (continued) Maturity analysis (continued) More than More than More than 1 month 3 months 1 year Not but not but not but not On more than more than more than more than demand 1 month 3 months 1 year 5 years Total 31 December 2015 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 Financial assets Loan and receivables: Cash and short-term deposits 355,693 443,268 - - - 798,961 Trade receivables 553 - - - - 553 Loan and advances to customers 1,006,730 14,782 10,528 - - 1,032,040 Other receivables 1,670 33 211 - - 1,914 Financial assets classified as held for trading: Derivatives - 7,921 1,115 522 - 9,558 Available-for-sale financial assets - 994,011 1,585,215 1,452,165 - 4,031,391 Total financial assets 1,364,646 1,460,015 1,597,069 1,452,687 - 5,874,417 Financial liabilities Financial liabilities at amortised cost: Deposits of banks 6,854 - - - - 6,854 Deposits of non-bank counterparties 3,799,197 176,780 295,981 1,172,585 - 5,444,543 Trade payables 150,770 - - - - 150,770 Other payables 10,303 11,619 23,287 6,563 11,631 63,403 Financial liabilities classified as held for trading: Derivatives - 5,299 2,520 44 - 7,863 Total financial liabilities 3,967,124 193,698 321,788 1,179,192 11,631 5,673,433 Market Risk Market risk is defined by HKFRS 7 as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Sound market risk management is an integral part of the Company’s culture. The Company is responsible for ensuring that market risk exposures are well-managed and monitored. The Company also ensures transparency of material market risks, monitors compliance with established limits, and escalates risk concentrations to appropriate senior management. To execute these responsibilities, the Morgan Stanley Group monitors the market risk of the firm against limits on aggregate risk exposures, performs a variety of risk analyses, routinely reports risk summaries and maintains the Value at Risk (“VaR”) and scenario analysis methodologies. These limits are designed to control market risk. 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 management of the Company. The Company is exposed to the following types of market risk under this definition: interest rate risk and currency risk. 36


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 21. FINANCIAL RISK MANAGEMENT (CONTINUED) Market Risk (continued) Interest rate risk Interest rate risk is defined by HKFRS 7 as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is primarily exposed to interest rate risk under this definition as a result of changes in the future cash flows of floating rate deposits and loans, bank balance, changes in the fair value of fixed rate debt investments categorised as available-for-sale financial assets, and the basis swap which is paying out variable but earning fixed interest. The application of a parallel shift in interest rates of 50 basis points increase or decrease to these positions, would result in a net gain or loss of approximately US$5,751,000 (2015: US$13,273,000). Currency risk The Company has foreign currency exposure arising from its assets and liabilities in currencies other than US dollars, which it actively manages by hedging with other Morgan Stanley Group undertakings. The analysis below details the foreign currency exposure for the Company, by foreign currency. The analysis calculates the impact on total comprehensive income of a reasonably possible parallel shift of the foreign currency in relation to the US dollar, with all other variables held constant. This analysis does not take into account the effect of the foreign currency hedges held by other members of the Morgan Stanley Group. 2016 2015 Sensitivity to Sensitivity to applied applied percentage percentage Foreign Percentage change in Foreign Percentage change in currency change currency (+/-) currency change currency (+/-) exposure applied profit or loss exposure applied profit or loss US$'000 % US$'000 US$'000 % US$'000 Australian Dollar - 11 - (3) 11 - Canadian Dollar 1 19 - - 19 - Euro 5 10 1 3 12 - Hong Kong Dollar (4,416) - - (6,852) - - Japanese Yen 7 3 - 1 14 - New Zealand Dollar 3 12 - 3 12 - Singapore Dollar (2,101) 7 147 (2,045) 7 143 Sterling 2 16 - 1 6 - Yuan Renminbi (29) 6 2 (152) 6 9 (6,528) (9,044) The reasonably possible percentage change in the currency rate in relation to US dollars has been calculated based on the greatest annual percentage change over the 2 year period from 1 January 2015 to 31 December 2016 (2015: from 1 January 2014 to 31 December 2015). Thus, the percentage change applied may not be the same percentage as the actual change in the currency rate for year ended 31 December 2016, or for the year ended 31 December 2015. 37


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 21. FINANCIAL RISK MANAGEMENT (CONTINUED) Operational risk Operational risk refers to the risk of loss, or of damage to the Company’s reputation, resulting from inadequate or failed processes, people and systems or from external events (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 system failure; damage to physical assets; and execution, delivery and process management. Legal, regulatory and compliance risk is discussed below under “Legal, regulatory and compliance risk”. The Company may incur operational risk across the full scope of its business activities, including revenue-generating activities (e.g., private wealth management) and support and control groups (e.g., information technology and trade processing). The Company has established 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 employs a 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. The breadth and range of operational risk are such that the types of mitigating activities are wide-ranging. Examples of activities 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 unit, 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. The business unit has a designated operational risk coordinator. The operational risk coordinator regularly reviews operational risk issues and reports to the Company’s senior management. 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 Committee and senior management. In the event of reorganisation; or creation of a new product or a business activity, operational risks are considered, and any necessary changes in processes or controls are implemented. 38


  • Page 41

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 21. FINANCIAL RISK MANAGEMENT (CONTINUED) Operational risk (continued) The Operational Risk Department is independent of the divisions and reports to the Chief Risk Officer. 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 (vendor risk oversight and assessment) programme. Furthermore, the Operational Risk Department supports the collection and reporting of operational risk incidents and the execution of operational risk assessments; provides the infrastructure needed for risk measurement and risk management; and ensures ongoing validation and verification of the Company’s advanced measurement approach for operational risk capital. 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 place for critical facilities and resources, and redundancies are built into the systems as deemed appropriate. The key components of the Company’s Business Continuity Management Programme include: crisis management; business recovery plans; applications/data recovery; work area recovery; and other elements addressing management, analysis, training and testing. 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 Company utilises the services of external vendors, which it 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 that satisfies regulatory requirements. The programme is 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/ or settlements 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 and terrorist financing rules and regulations. 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. 39


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 21. F FINANCIAL RISK MANAGEMENT (CONTINUED) Operational risk (continued) Legal, regulatory and compliance risk (continued) 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. Culture, values and conduct of employees 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 employment status, 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 management principles, 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. 40


  • Page 43

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 22. FINANCIAL ASSETS AND FINANCIAL LIABILITIES SUBJECT TO OFFSETTING In order to manage credit exposure arising from its business activities, the Company applies various credit risk management policies and procedures, see note 21 for further details. Primarily in connection with derivative transactions, the Company enters into master netting arrangements and collateral arrangements with its counterparties. These agreements provide the Company with the right, in the ordinary course of business and/ or in the event of a counterparty default (such as bankruptcy or a counterparty’s failure to pay or perform), to net a counterparty’s rights and obligations under such agreement and, in the event of counterparty default, set off collateral held by the Company against the net amount owed by the counterparty. However, in certain circumstances, the Company may not have such an agreement in place; the relevant insolvency regime (which is based on type of counterparty entity and the jurisdiction of organisation of the counterparty) may not support the enforceability of the agreement; or the Company may not have sought legal advice to support the enforceability of the agreement. In cases where the Company has not determined an agreement to be enforceable, the related amounts are not offset in the narrative disclosures. The Company’s policy is generally to receive cash posted as collateral. In certain cases the Company may agree for such collateral to be posted to a third party custodian under a tri-party arrangement that enables the Company to take control of such collateral in the event of a counterparty default. 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. Due to the absence of such conditions, financial assets and financial liabilities are presented on a gross basis in the statement of financial position. Certain derivatives that are presented on a gross basis have associated enforceable master netting arrangements in place that allow US$1,294,000 (2015: US$7,719,000) of recognised assets and liabilities to be offset in the ordinary course of business and/ or in the event of default and an additional US$33,573,000 of associated cash to be set off against the net amount in the event of default (2015: US$144,000 of recognised financial liabilities available to be set off against the cash collateral placed by the Company with a counterparty). The effect of master netting agreements, collateral agreements and other credit enhancements on the Company’s exposure to credit risk is disclosed in note 21. 41


  • Page 44

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 23. 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. 2016 Valuation Valuation techniques Quoted techniques with prices in using significant active observable unobservable market inputs inputs (Level 1) (Level 2) (Level 3) Total US$’000 US$’000 US$’000 US$’000 Financial assets classified as held for trading: - Derivatives - 35,047 - 35,047 Available-for-sale financial assets: - Government debt securities 1,598,207 1,501,304 - 3,099,511 Total financial assets measured at fair value 1,598,207 1,536,351 - 3,134,558 Financial liabilities classified as held for trading: - Derivatives - 1,294 - 1,294 Total financial liabilities measured at fair value - 1,294 - 1,294 42


  • Page 45

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 23. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED) a. Financial assets and liabilities recognised at fair value on a recurring basis (continued) 2015 Valuation Valuation techniques Quoted techniques with prices in using significant active observable unobservable market inputs inputs (Level 1) (Level 2) (Level 3) Total US$’000 US$’000 US$’000 US$’000 Financial assets classified as held for trading: - Derivatives - 9,558 - 9,558 Available-for-sale financial assets: - Government debt securities 2,104,095 1,927,296 - 4,031,391 Total financial assets measured at fair - value 2,104,095 1,936,854 - 4,040,949 Financial liabilities classified as held for trading: - Derivatives - 7,863 - 7,863 Total financial liabilities measured at fair value - 7,863 - 7,863 The Company’s valuation approach and fair value hierarchy categorisation for certain significant classes of financial instruments recognised at fair value on a recurring basis is as follows: Financial assets and financial liabilities classified as held for trading and available-for-sale financial assets Asset/Liability Valuation Technique Valuation Hierarchy Classification Government debt securities US treasury securities Fair value is determined using quoted market Generally Level 1 prices; valuation adjustments are not applied. Non-US sovereign Fair value is determined using quoted prices in Generally Level 1 government obligations active markets when available. Level 2 - if the market is less active or prices are dispersed Level 3 - in instances where the inputs are unobservable Derivatives OTC derivative contracts Depending on the product and the terms of the Generally Level 2 - OTC (include swap contracts transaction, the fair value of OTC derivative derivative products valued using related to interest rates and products can be either observed or modeled pricing models; foreign currencies) using a series of techniques and model inputs Level 3 - OTC derivative products from comparable benchmarks, including with significant unobservable inputs; 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. In the case of more established derivative products, the pricing models used by the Company are widely accepted by the financial services industry. 43


  • Page 46

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 23. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED) 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 year and prior year. c. Changes in Level 3 financial assets and liabilities recognised at fair value on a recurring basis There were no transfers between Level 2 and Level 3 of the fair value hierarchy during the current year and prior year. d. Assets and liabilities measured at fair value on a non-recurring basis Non-recurring fair value measurements of assets or liabilities are those which are required or permitted in the statement of financial position in particular circumstances. There were no assets or liabilities measured at fair value on a non-recurring basis during the current year and prior year. 24. ASSETS AND LIABILITIES NOT MEASURED AT FAIR VALUE For all financial instruments not measured at fair value, the carrying amount is considered to be a reasonable approximation of fair value due to the short term nature of these assets and liabilities. 25. CAPITAL MANAGEMENT The Morgan Stanley Group manages its capital on a global basis with consideration for its legal entities. The capital managed by the Morgan Stanley Group broadly includes ordinary share capital, preference share capital, subordinated loans and reserves. The Morgan Stanley Group actively manages its consolidated capital position based upon, among other things, business opportunities, risks, capital availability and rates of return together with internal capital policies, regulatory requirements and rating agency guidelines and, therefore, in the future may expand or contract its capital base to address the changing needs of its businesses. The Morgan Stanley Group also aims to adequately capitalise at a legal entity level whilst safeguarding that entity’s ability to continue as a going concern and ensuring that it meets all regulatory capital requirements, so that it can continue to provide returns for the Morgan Stanley Group. In order to maintain or adjust the capital structure as described above, the Company may adjust the amount of dividends paid, return capital to shareholders, issue new shares, issue subordinated debt or sell assets to reduce debt. 44


  • Page 47

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 25. CAPITAL MANAGEMENT (CONTINUED) The Company is regulated by the HKMA and as such is subject to minimum capital requirements. The Company’s capital is monitored on an ongoing basis to ensure compliance with these requirements. At a minimum, the Company must ensure that capital is greater than the capital requirement covering credit, market and operational risk. The Company complied with all of its regulatory capital requirements during the current and prior year. The Company manages the following items as capital: 2016 2015 US$’000 US$’000 Ordinary share capital 170,000 170,000 Available-for-sale reserve (421) (400) Retained earnings 38,618 36,105 208,197 205,705 The Company has earmarked part of its retained earnings for maintaining its regulatory reserve for general banking risks to satisfy the provisions of the Banking Ordinance for prudential supervision purposes. At 31 December 2016, US$6,289,000 (2015: US$5,160,000) in the retained earnings was embarked for this purpose. 26. EMPLOYEE COMPENSATION PLANS Morgan Stanley maintains various deferred compensation plans for the benefit of certain current and former employees. The two principal forms of deferred compensation are granted under equity-settled share-based compensation and deferred cash based compensation plans. Equity-settled share-based compensation plans  Restricted stock units Morgan Stanley has granted restricted stock unit awards pursuant to several equity-based compensation plans. The plans provide for the deferral of a portion of certain employees’ incentive compensation with awards made in the form of restricted common stock or in the right to receive unrestricted shares of common stock in the future. Awards under these plans are generally subject to vesting over time, generally one to three years from the date of grant, and are generally contingent upon continued employment and to restrictions on sale, transfer or assignment until the end of a specified period. All or a portion of an award may be cancelled if employment is terminated before the end of the relevant vesting period and after the vesting period in certain situation. Recipients of stock-based awards may have voting rights, at the Morgan Stanley Group’s discretion, and generally receive dividend equivalents. During the year, Morgan Stanley granted 634,044 units (2015:10,679 units) of restricted stock units to employees of the Company with a weighted average fair value per unit of US$25.21 (2015: US$36.88), based on the market value of Morgan Stanley shares at grant date. Included within ‘Staff costs’, ‘Directors’ remuneration’ and ‘Management charges from other Morgan Stanley Group undertakings’ within the ‘Other expense’ note is an amount of US$14,001,000 (2015: US$12,651,000) in relation to restricted stock units equity based compensation plans, granted to employees of the Company. 45


  • Page 48

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 26. EMPLOYEE COMPENSATION PLANS (CONTINUED) Deferred cash-based compensation plans The Company has granted deferred cash-based compensation awards to certain current and former employees which defer a portion of the employees’ discretionary compensation. The plans generally provide a return based upon the performance of various referenced investments. Awards under these plans are generally subject to a sole vesting condition of service over time, which normally ranges from six months to three years from the date of grant. All or a portion of an award may be cancelled if employment is terminated before the end of the relevant vesting period. The awards are settled in cash at the end of the relevant vesting period. Awards with a value of US$15,984,000 (2015: US$469,000) have been granted to employees during the year and an expense of US$12,094,000 (2015: US$7,835,000) has been recognised within ‘Staff costs’ and ‘Directors’ remuneration’ in ‘Other expense’ in the income statement in relation to current and previous years’ awards. The liability to employees at the end of the year, reported within ‘Other payables’ in the statement of financial position, is US$15,968,000 (2015: US$10,952,000). 27. POST-EMPLOYMENT BENEFITS Defined contribution plans The Morgan Stanley Group operates the Morgan Stanley Defined Contribution Plan (the ‘Plan’), which requires contributions to be made to funds held in trust, separate from the assets of the Company. The Plan is a defined contribution plan. Additionally, the employees of the Branch are members of a state-managed retirement benefit plan, the Central Provident Board Fund, operated by the Government of Singapore. The Branch is required to contribute a specified percentage of payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of the Branch with respect to the retirement plan is to make the specified contributions. The defined contribution pension charge recognised within ‘Staff costs’ and ‘Directors’ remuneration’ in ‘Other expense’ in the income statement was US$4,467,000 for the year (2015: US$3,315,000) of which US$183,000 was accrued at 31 December 2016 (2015: US$192,000). 28. RELATED PARTY DISCLOSURES Parent and subsidiary relationships Parent and ultimate controlling entity The Company’s immediate parent undertaking is Morgan Stanley Hong Kong Limited, which was incorporated in Hong Kong. The ultimate parent undertaking and controlling entity and the largest group of which the Company is a member and for which group financial statements are prepared is Morgan Stanley. Morgan Stanley was incorporated in the State of Delaware, the United States of America. Copies of its financial statements can be obtained from www.morganstanley.com/investorrelations. 46


  • Page 49

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 28. RELATED PARTY DISCLOSURES (CONTINUED) Key management compensation Key management personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of the Company. Key management personnel include the Board of Directors of the Company. Compensation paid to key management personnel in the Morgan Stanley Group in respect of their services rendered to the Company is: 2016 2015 US$’000 US$’000 Short-term employee benefits 3,540 2,880 Post-employment benefits 59 29 Share-based payments 4,002 1,148 Other long-term employee benefits 2,122 294 Termination benefits - - 9,723 4,351 The share-based payment costs disclosed above reflect the amortisation of equity-based awards granted to key management personnel over the last three years, prior to their transfer to the Company and are therefore not directly aligned with other staff costs in the current year. In addition to the above, directors not in the Morgan Stanley Group provided key management personnel services to the Company for which a fee of US$83,000 was charged for the year (2015: US$83,000) and of which nil was accrued at 31 December 2016 (2015: Nil). Transactions with related parties The Morgan Stanley Group conducts business for clients globally through a combination of both functional and legal entity organisational structures. Accordingly, the Company is closely integrated with the operations of the Morgan Stanley Group and enters into transactions with other Morgan Stanley Group undertakings on an arm’s length basis for the purposes of utilising financing, trading and risk management, and infrastructure services. The nature of these relationships along with information about the transactions and outstanding balances is given below. Settlement of the outstanding balances will be made in cash. The Company has not recognised any expense and has made no provision for impairment relating to the amount of outstanding balances from related parties (2015: Nil). 47


  • Page 50

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2016 28. RELATED PARTY DISCLOSURES (CONTINUED) Transactions with related parties (continued) Cash The Company receives deposits from other Morgan Stanley Group undertakings. All such transactions are entered into on an arm’s length basis. 2016 2015 Interest Balance Interest Balance US$’000 US$’000 US$’000 US$’000 Amounts due to the Company’s direct and indirect parent undertakings 77 80,174 74 - Amounts due to other Morgan Stanley Group undertakings 8,508 963,332 7,953 345,963 8,585 1,043,506 8,027 345,963 Trading and risk management The Company enters into purchases and sales of securities and derivative transactions with other Morgan Stanley Group undertakings primarily to meet local regulatory requirements and to manage the market risks associated with such transactions. The Company also has a cash sweep service with other Morgan Stanley Group undertakings to facilitate provision of financial services to clients on a global basis. All such transactions are entered into on an arm’s length basis. The total amounts receivable and payable on such securities transactions not yet settled and the fair value of such derivatives contracts outstanding at the year end were as follows: 2016 2015 US$’000 US$’000 Amounts due from other Morgan Stanley Group undertakings 38,170 9,558 Amounts due to other Morgan Stanley Group undertakings 1,294 158,633 The Company has received collateral of US$45,424,000 (2015: Nil) from other Morgan Stanley Group undertakings and has pledged nil collateral (2015: US$553,000) to other Morgan Stanley Group undertakings to mitigate credit risk on exposures arising under derivatives contracts between the Company and other Morgan Stanley Group undertakings. This is reported in the statement of financial position in ‘Trade receivables’/ ‘Trade payables’. 48

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