avatar Morgan Stanley Emerging Markets Domestic Debt Fund, Inc. Finance, Insurance, And Real Estate
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    MORGAN STANLEY BANK ASIA LIMITED Reports and financial statements 31 December 2020


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    MORGAN STANLEY BANK ASIA LIMITED REPORTS AND FINANCIAL STATEMENTS Year ended 31 December 2020 CONTENTS PAGES Directors’ report 1 Independent auditor’s report 3 Income statement 6 Statement of comprehensive income 7 Statement of changes in equity 8 Statement of financial position 9 Statement of cash flows 10 Notes to the financial statements 11 Unaudited supplementary financial information 63


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    MORGAN STANLEY BANK ASIA 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 33) for Morgan Stanley Bank Asia Limited (the “Company” or “MSBAL”) for the year ended 31 December 2020. PRINCIPAL ACTIVITIES The Company is a private limited company incorporated in Hong Kong, with a head office in Hong Kong and a branch in Singapore (“Branch”). The Company is a full licensed bank under the Banking Ordinance in Hong Kong, regulated by the Hong Kong Monetary Authority (“HKMA”). The Branch is licensed as a wholesale bank in Singapore, regulated by the Monetary Authority of Singapore (“MAS”). The Company 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 (a) as agent on behalf of its customers in connection with the provision of general investment, securities and futures dealing, as well as discretionary management and (b) as introducing broker to Morgan Stanley & Co. International plc for the provision of clearance, settlement and custody services in relation to the aforementioned transactions. 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 2020 are set out in the income statement on page 6. No interim dividends were paid to the sole shareholder 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 21 to the financial statements. DIRECTORS The following Directors held office throughout the year and up to the date of approval of this report: Almeida, Niall (Appointed on 10 March 2021) Chui, Yik Chiu Vincent Clatworthy, David Peter (Resigned on 5 May 2020) Fung, Choi Cheung Gazzi, Robert Kwan, Yin Ping Laroia, Gokul Ong, Whatt Soon Ronald Rajaram, Harish Taylor, George Alexander (Appointed on 5 May 2020) Wraight, David John (Resigned on 10 March 2021) 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. 1


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    MORGAN STANLEY BANK ASIA LIMITED DIRECTORS’ REPORT (CONTINUED) 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. 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 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 31 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 of Directors CHUI, VINCENT YIK CHIU DIRECTOR 22 April 2021 2


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    INDEPENDENT AUDITOR’S REPORT TO THE SOLE MEMBER OF MORGAN STANLEY BANK ASIA LIMITED (incorporated in Hong Kong with limited liability) Opinion We have audited the financial statements of Morgan Stanley Bank Asia Limited (the "Company") set out on pages 6 to 62, which comprise the statement of financial position as at 31 December 2020, 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 2020, 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 (the "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. 3


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    INDEPENDENT AUDITOR’S REPORT (CONTINUED) TO THE SOLE MEMBER OF MORGAN STANLEY BANK ASIA LIMITED (incorporated in Hong Kong with limited liability) 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. 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. 4


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    INDEPENDENT AUDITOR’S REPORT (CONTINUED) TO THE SOLE MEMBER OF MORGAN STANLEY BANK ASIA LIMITED (incorporated in Hong Kong with limited liability) Auditor's Responsibilities for the Audit of the Financial Statements – continued  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 22 April 2021 5


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    MORGAN STANLEY BANK ASIA LIMITED INCOME STATEMENT Year ended 31 December 2020 2020 2019 Notes US$’000 US$’000 Interest income 59,647 105,120 Interest expense (16,949) (20,241) Net interest income 4 42,698 84,879 Fee and commission income 415,506 272,666 Fee and commission expense (1,090) (1,950) Net fee and commission income 5 414,416 270,716 Net trading expense (9,076) (1,461) Net gains on derecognition of financial assets measured at fair value through other comprehensive income (“FVOCI”) 6 - 6 Other revenue 7 18,467 9,568 Total non-interest revenues 423,807 278,829 Net revenues 466,505 363,708 Non-interest expense: Other expense 8 (310,418) (263,682) Net impairment loss on financial instruments 9 (37) - PROFIT BEFORE INCOME TAX 156,050 100,026 Income tax 10 (24,403) (15,568) PROFIT FOR THE YEAR 131,647 84,458 All results were derived from continuing operations. The notes on pages 11 to 62 form an integral part of the financial statements. 6


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    MORGAN STANLEY BANK ASIA LIMITED STATEMENT OF COMPREHENSIVE INCOME Year ended 31 December 2020 2020 2019 Note US$’000 US$’000 PROFIT FOR THE YEAR 131,647 84,458 Items that may be reclassified subsequently to profit or loss: FVOCI reserve: 10 Net change in fair value (1,295) 367 Net amount reclassified to income statement - (5) OTHER COMPREHENSIVE INCOME AFTER INCOME TAX (1,295) 362 TOTAL COMPREHENSIVE INCOME FOR THE YEAR ATTRIBUTABLE TO OWNER OF THE COMPANY 130,352 84,820 The notes on pages 11 to 62 form an integral part of the financial statements. 7


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    MORGAN STANLEY BANK ASIA LIMITED STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2020 Share FVOCI Retained Total capital reserve earnings equity Note US$’000 US$’000 US$’000 US$’000 Balance at 1 January 2019 170,000 968 137,937 308,905 Profit for the year - - 84,458 84,458 Other comprehensive income for the year: 10 FVOCI reserve: Net change in fair value - 367 - 367 Net amount reclassified to income statement - (5) - (5) Total comprehensive income for the year - 362 84,458 84,820 Transaction with owner: Issue of share capital 500,000 - - 500,000 Balance at 31 December 2019 and 1 January 2020 670,000 1,330 222,395 893,725 Profit for the year - - 131,647 131,647 Other comprehensive income for the year: 10 FVOCI reserve: Net change in fair value - (1,295) - (1,295) Net amount reclassified to income statement - - - - Total comprehensive income for the year - (1,295) 131,647 130,352 Balance at 31 December 2020 670,000 35 354,042 1,024,077 The notes on pages 11 to 62 form an integral part of the financial statements. 8


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    MORGAN STANLEY BANK ASIA LIMITED STATEMENT OF FINANCIAL POSITION As at 31 December 2020 2020 2019 Notes US$’000 US$’000 ASSETS Cash and short-term deposits 22(a) 1,256,705 633,898 Trading financial assets 12 1,709 441 Secured financing 13 582,265 362,047 Loans and advances 14 3,438,202 2,770,325 Investment securities 15 2,616,724 854,769 Trade and other receivables 16 88,733 62,570 Deferred tax assets 19 7,801 5,002 Prepayments 1,086 835 TOTAL ASSETS 7,993,225 4,689,887 LIABILITIES AND EQUITY Deposits 17 6,808,011 3,665,736 Trading financial liabilities 12 11,272 3,552 Trade and other payables 18 130,616 104,689 Current tax liabilities 16,889 21,251 Accruals 2,360 934 TOTAL LIABILITIES 6,969,148 3,796,162 EQUITY Share capital 21 670,000 670,000 FVOCI reserve 21 35 1,330 Retained earnings 354,042 222,395 Equity attributable to owner of the Company 1,024,077 893,725 TOTAL EQUITY 1,024,077 893,725 TOTAL LIABILITIES AND EQUITY 7,993,225 4,689,887 These financial statements were approved by the Board of Directors and authorised for issue on 22 April 2021: Signed on behalf of the Board of Directors Chui, Vincent Yik Chiu Rajaram, Harish Director Director The notes on pages 11 to 62 form an integral part of the financial statements. 9


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    MORGAN STANLEY BANK ASIA LIMITED STATEMENT OF CASH FLOWS Year ended 31 December 2020 2020 2019 Note US$’000 US$’000 NET CASH FLOWS FROM/(USED IN) OPERATING ACTIVITIES 22(b) 2,364,912 (892,967) INVESTING ACTIVITIES Purchase of investment securities (7,017,094) (2,750,300) Proceeds from maturity/sale of investment securities 5,270,360 3,229,426 Interest received from investment securities 4,629 9,254 NET CASH FLOWS (USED IN)/FROM INVESTING ACTIVITIES (1,742,105) 488,380 FINANCING ACTIVITIES Issue of ordinary share capital - 500,000 NET CASH FLOWS FROM FINANCING ACTIVITIES - 500,000 NET INCREASE IN CASH AND CASH EQUIVALENTS 622,807 95,413 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 633,898 538,485 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 22(a) 1,256,705 633,898 The notes on pages 11 to 62 form an integral part of the financial statements. 10


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    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 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: Level 31, International Commerce Centre, 1 Austin Road West, Kowloon, Hong Kong. The Company is a full licensed bank under the Banking Ordinance in Hong Kong, regulated by the HKMA. The Branch is licensed as a wholesale bank in Singapore, regulated by the MAS. The Company 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 (a) as agent on behalf of its customers in connection with the provision of general investment, securities and futures dealing, as well as discretionary management and (b) as introducing broker to Morgan Stanley & Co. International plc for the provision of clearance, settlement and custody services in relation to the aforementioned transactions. The Company’s immediate parent undertaking is Morgan Stanley Hong Kong 1238 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 standards, amendments to standards and interpretations did not have a material impact on the Company’s financial statements. Amendments to HKAS 1 ‘Presentation of Financial Statements’ and HKAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ were issued by the HKICPA in January 2019, for application in accounting periods beginning on or after 1 January 2020. There were no other standards, amendments to standards or interpretations relevant to the Company’s operations which were adopted during the year. 11


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    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 2. BASIS OF PREPARATION (CONTINUED) New standards and interpretations not yet adopted At the date of authorisation of these financial statements, the following amendments to standards relevant to the Company’s operations were issued by the HKICPA but not mandatory for accounting periods beginning 1 January 2020. 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. Amendments to HKAS 1 ‘Presentation of Financial Statements’: Classification of Liabilities as Current or Non-current were issued by the HKICPA in August 2020, for retrospective application in accounting periods beginning on or after 1 January 2023. Amendments to HKAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’: Onerous Contracts – Cost of Fulfilling a Contract were issued by the HKICPA in June 2020, for modified retrospective application in accounting periods beginning on or after 1 January 2022. Early application is permitted. As part of the 2018-2020 Annual Improvements Cycle published in June 2020, the HKICPA made an amendment to HKFRS 9 ‘Financial Instruments’, relating to the treatment of fees in the assessment of whether financial liabilities are modified or exchanged, where such transactions occur on or after 1 January 2022. Early application is permitted. 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. Critical accounting judgements and key sources of estimation uncertainty In preparing the financial statements, the Company makes judgements and estimates that affect the application of accounting policies and reported amounts. Critical accounting judgements are key decisions made by management in the application of the Company’s accounting policies, other than those involving estimations, which have the most significant effects on the amounts recognised in the financial statements. Key sources of estimation uncertainty represent assumptions and estimations made by management that have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next financial year. The critical judgements in applying the Company’s accounting policies are existences of impairment of financial assets, see note 3(f). The key sources of estimation uncertainty are the valuation of certain financial instruments. For further details on the assumptions and estimation uncertainties in determining the fair value of certain assets and liabilities, see notes 3(d) and 28. The Company evaluates the critical accounting judgements and key sources of estimation uncertainty on an ongoing basis and believes that these are reasonable. 12


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    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 2. BASIS OF PREPARATION (CONTINUED) COVID-19 The COVID-19 pandemic and related voluntary and government-imposed social and business restrictions has impacted global economic conditions, resulting in volatility in the global financial markets, increased unemployment, and operational challenges such as the temporary and permanent closures of businesses, sheltering-in-place directives and increased remote work protocols. Governments around the world have been working to develop, manufacture, and distribute COVID-19 vaccines. Moreover, governments and central banks around the world have reacted to the economic crisis caused by the pandemic by implementing stimulus and liquidity programs and cutting interest rates, though it is unclear whether these or future actions will be successful in countering the economic disruption. If the pandemic continues to be prolonged or the actions of governments and central banks are unsuccessful, including actions to facilitate the comprehensive distribution of effective vaccines, the adverse impact on the global economy will deepen, and the future results of operations and financial condition of Morgan Stanley and the Company may be adversely affected. Should global market conditions worsen, or the pandemic lead to additional market disruptions, Morgan Stanley and the Company could experience reduced client activity and demand for products and services, impairments of other financial assets and other negative impacts on its financial position, including possible constraints on capital and liquidity, as well as a higher cost of capital, and possible changes or downgrades to credit ratings. In addition, continued low interest rates will limit interest margins in the lending businesses. A slowdown of commercial activity could cause a decline in client balances which could also reduce fee and financing revenues. Operationally, Morgan Stanley and the Company have initiated a work remotely protocol and restricted business travel of the workforce, with a return-to -workplace program, which is phased based on role, location and employee willingness and ability to return. While Morgan Stanley and the Company have not experienced a decrease in productivity as a result of the remote work environment, there can be no assurance that the transition will not have an adverse effect in the long term. If significant portions of the workforce, including key personnel, are unable to work effectively because of illness, government actions, or other restrictions in connection with the pandemic, the business impact of the pandemic could be exacerbated. In response to the significant economic impact of the COVID-19 pandemic, global regulators have released a suite of regulatory updates and programs to facilitate market continuation and to provide incentives for banks to continue lending to business and consumers. The impact of these regulatory measures is included in the Company’s Pillar 3 disclosures under section H of the unaudited supplementary financial information. Morgan Stanley and the Company continue to use their Risk Management framework, including stress testing, to manage the significant uncertainty in the present economic and market conditions. The going concern assumption The notes to the financial statements include the Company’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments; and its exposures to credit risk and liquidity risk. Retaining sufficient liquidity and capital to withstand market pressures remains central to the Morgan Stanley Group’s and the Company’s strategy. Taking the above factors into consideration, the Directors believe it is reasonable to assume that the Company will have access to adequate resources to continue in operational existence for the foreseeable future and continue to adopt the going concern basis in preparing the annual report and financial statements. The existing and potential effects of COVID-19 on the business of the Company, as described in the ‘COVID-19’ note above, have been considered as part of the going concern analysis. 13


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    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 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 arising from remeasurement of the amortised cost of fair value through other comprehensive income (“FVOCI”) assets are recognised in the income statement. All other gains and losses from movements in foreign exchange rates on FVOCI assets are recorded in other comprehensive income. All other translation differences are taken through the income statement. Exchange differences recognised in the income statement are presented in ‘Other revenue’ or ‘Other expense’, except where noted in 3(c) below. c. Financial instruments i) Financial instruments mandatorily at fair value through profit and loss Trading financial instruments Trading financial instruments include all derivatives contracts. Trading financial instruments are initially recorded on trade date at fair value (see note 3(d) below). All subsequent changes in fair value and foreign exchange differences are reflected in the income statement in ‘Net trading income/(expense)’. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. For all trading financial instruments, 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’. Non-trading financial assets at fair value through profit or loss Non-trading financial assets at fair value through profit or loss (“FVPL”) include secured financing transactions such as securities purchased under agreements to resell. Non-trading financial assets at FVPL are principally financial assets where the Company makes decisions based upon the assets’ fair values and are generally recognised on settlement date at fair value (see note 3(d) below), since they are neither regular way nor are they derivatives. From the date the terms are agreed (trade date), until the financial asset is funded (settlement date), the Company recognises any unrealised fair value changes in the financial asset as non-trading financial assets at FVPL. On settlement date, the fair value of consideration given is recognised as a non-trading financial asset at FVPL. Realised interest is included within ‘Interest income’ or ‘Interest expense’. For all non-trading financial assets at FVPL, transaction costs are excluded from the initial fair value measurement of the financial assets. These costs are recognised in the income statement in ‘Other expense’ (note 8). 14


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    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) c. Financial instruments (continued) ii) Financial assets measured at FVOCI Financial assets measured at FVOCI include government debt securities. Financial assets measured at FVOCI are financial instruments which are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets and the contractual terms of which give rise on specified dates to cash flows that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding. Financial assets measured at FVOCI 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 a financial asset measured at FVOCI are added to the fair value on initial recognition. Interest calculated using the effective interest rate (“EIR”) method (see note 3(c)(iii) below) is recognised in the income statement in ‘Interest income’. Foreign exchange differences on the amortised cost of the asset are recognised in the income statement in ‘Other revenue’ or ‘Other expense’. Movement in expected credit loss (“ECL”) allowance is recognised in both the income statement in ‘Net impairment loss on financial instruments’ and in the statement of comprehensive income in the ‘FVOCI reserve’. All other gains and losses on financial assets measured at FVOCI are recognised in the ‘FVOCI reserve’ within equity. On derecognition of a financial asset measured at FVOCI, the cumulative gain or loss in the ‘FVOCI reserve’ is reclassified to the income statement and reported in ‘Net gains on derecognition of financial assets measured at FVOCI’. iii) Financial assets and financial liabilities at amortised cost Financial assets at amortised cost include cash and short-term deposits, loans and advances and trade and other receivables. Financial assets are recognised at amortised cost when the Company’s business model objective is to collect the contractual cash flows of the assets and where these cash flows are SPPI on the principal amount outstanding until maturity. Such assets are recognised when the Company becomes a party to the contractual provisions of the instrument. The instruments are initially measured at fair value (see note 3(d) below) and subsequently measured at amortised cost less ECL allowance. Interest is recognised in the income statement in ‘Interest income’, using the EIR method as described below. Transaction costs that are directly attributable to the acquisition of the financial asset are added to the fair value on initial recognition. ECL and reversals thereof are recognised in the income statement in ‘Net impairment loss on financial instruments’. Financial liabilities classified at amortised cost include deposits and trade and other payables. Financial liabilities are classified as being subsequently measured at amortised cost, except where they are held for trading or are designated as measured at FVPL. They are recognised when the Company becomes a party to the contractual provisions of the instrument and 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 EIR method as described below. Transaction costs that are directly attributable to the issue of a financial liability are deducted from the fair value on initial recognition. The EIR 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 EIR 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 EIR is established on initial recognition of the financial instrument. The calculation of the EIR includes all fees and commissions paid or received, transaction costs, and discounts or premiums that are an integral part of the EIR. 15


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    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) c. Financial instruments (continued) iv) Secured financing In the course of financing its business, the Company enters into arrangements which involve the purchase of securities with resale agreements. Securities received by the Company under resale arrangements are generally not recognised on the statement of financial position. Where cash collateralised, the resulting cash collateral receivable and accrued interest arising under resale agreements are classified as ‘Non-trading at FVPL’ as they are managed on a fair value basis. 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. 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. In determining fair value, the Company uses various valuation approaches and establishes a hierarchy for inputs used in measuring fair value that requires the most observable inputs be used when available Observable inputs are inputs that market participants would use in pricing the asset or liability that were developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect assumptions the Company believes other market participants would use in pricing the asset or liability, that are developed based on the best information available in the circumstances. The fair value hierarchy is broken down into three levels based on the observability of inputs as follows, with Level 1 being the highest and Level 3 being the lowest level:  Level 1 - Quoted prices (unadjusted) in an active market for identical assets or liabilities Valuations based on quoted prices in active markets that the Morgan Stanley Group has the ability to access for identical assets or liabilities. Valuation adjustments, block discounts and discounts for equity-specific restrictions that would not transfer to market participants 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. 16


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    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) d. Fair value (continued) Fair value measurement (continued) The availability of observable inputs can vary from product to product and is affected by a wide variety of factors, including the type of product, whether the product is new and not yet established in the marketplace, the liquidity of markets and other characteristics particular to the product. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more 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 from Level 2 to Level 3 of the fair value hierarchy. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the total fair amount is disclosed in the level appropriate for the lowest level input that is significant to the total fair value of the asset or liability. 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 the beginning of the period. Valuation techniques Many cash instruments and OTC derivative contracts have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that a party is willing to pay for an asset. Ask prices represent the lowest price that a party is willing to accept for an asset. The Company carries positions at the point within the bid-ask range that meets its best estimate of fair value. For offsetting positions in the same financial instrument, the same price within the bid-ask spread is used to measure both the long and short positions. Fair value for many cash instruments and OTC derivative contracts is derived using pricing models. Pricing models take into account the contract terms, as well as multiple inputs including, where applicable, commodity prices, equity prices, interest rate yield curves, credit curves, correlation, creditworthiness of the counterparty, creditworthiness of the Company, option volatility and currency rates. 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 and funding. Adjustments for liquidity risk adjust model-derived mid-market amounts 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. 17


  • Page 20

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) d. Fair value (continued) Valuation process Valuation Control (“VC”) within Finance is responsible for the Company’s fair value valuation policies, processes and procedures. VC 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. VC implements valuation control processes designed to validate the fair value of the Company’s financial instruments measured at fair value including those derived from pricing models. Model Review. VC, in conjunction with the Model Risk Management Department (“MRM”), which reports to the Chief Risk Officer of the Morgan Stanley Group (“CRO”), independently reviews 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, VC reviews the appropriateness of the proposed valuation methodology to determine that 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, VC develops a methodology to independently verify the fair value generated by the business unit’s valuation models. The Company generally subjects valuations and models to a review process initially and on a periodic basis thereafter. 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, VC 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. The results of this independent price verification and any adjustments made by VC 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. VC 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. VC 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, VC generates a ranking of the observable market data designed to ensure that the highest-ranked market data source is used to validate the business unit’s fair value of financial instruments. VC reviews the models and valuation methodology used to price new material Level 2 and Level 3 transactions and both Finance and MRM must approve the fair value of the trade that is initially recognised. Level 3 Transactions. VC reviews the business unit’s valuation techniques to assess whether these are consistent with market participant assumptions. 18


  • Page 21

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) d. Fair value (continued) 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, but is deferred and recognised over the life of the instrument or at the earlier of when the unobservable market data become observable, maturity or disposal of the instrument. 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 Company neither transfers nor retains substantially all of the risks and rewards of the asset, then the Company determines whether it has retained control of the asset. If the Company 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 Company 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 renegotiation or modification of the contractual cash flows of a financial instrument can lead to derecognition where the modification is “substantial”, determined by qualitative assessment of whether the revised contractual terms of a financial instrument, such as a loan, are significantly different from those of the original financial instrument. In the event that the qualitative assessment is unclear, a quantitative 10% cash flow test is performed. Where modifications do not result in derecognition of the financial instrument, the gross carrying amount of the financial instrument is recalculated and a modification gain/ (loss) is recognised in the income statement. Upon derecognition of a financial asset, the difference between the previous carrying amount and the sum of any consideration received, together with the transfer of any cumulative gain/loss previously recognised in equity, are recognised in the income statement within ‘Net gains/(losses) on derecognition of financial assets measured at FVOCI’. The Company derecognises financial liabilities when the Company’s obligations are discharged or cancelled or when they expire. 19


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    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) f. Impairment of financial instruments The Company recognises loss allowances for ECL for the following financial instruments that are not measured at FVPL:  financial assets measured at amortised cost; and  financial assets measured at FVOCI. Measurement of ECL For financial assets, ECL are the present value of cash shortfalls (i.e. the difference between contractual and expected cash flows) over the expected life of the financial instrument, discounted at the asset’s EIR. Where a financial asset is credit-impaired at the reporting date, the ECL is measured as the difference between the asset’s gross carrying amount and the present value of future cash flows, discounted at the original EIR. The Company applies a three stage approach to measuring ECL based on the change in credit risk since initial recognition:  Stage 1: if the credit risk of the financial instrument at the reporting date has not increased significantly since initial recognition then the loss allowance is calculated as the lifetime cash shortfalls that will result if a default occurs in the next 12 months, weighted by the probability of that default occurring.  Stage 2: if there has been a significant increase in credit risk (“SICR”) since initial recognition, the loss allowance is calculated as the ECL over the remaining life of the financial instrument. If it is subsequently determined that there has no longer been a SICR since initial recognition, then the loss allowance reverts to reflecting 12-month expected losses.  Stage 3: if there has been a SICR since initial recognition and the financial instrument is deemed credit-impaired (see below for definition of credit-impaired), the loss allowance is calculated as the ECL over the remaining life of the financial instrument. If it is subsequently determined that there has no longer been a SICR since initial recognition, then the loss allowance reverts to reflecting 12-month expected losses. Assessment of significant increase in credit risk When assessing SICR, the Company considers both quantitative and qualitative information and analysis based on the Company’s historical experience and expert credit risk assessment, including forward- looking information. The probability of default (“PD”) is derived from internal credit rating grades (based on available information about the borrower) and multiple forward-looking macroeconomic scenarios which are probability weighted. Credit risk is considered to have increased significantly if the PD has significantly increased at the reporting date relative to the PD of the facility, at the date of initial recognition. The assessment of whether a change in PD is “significant” is based both on a consideration of the relative change in PD and on qualitative indicators of the credit risk of the facility, which indicate whether a loan is performing or in difficulty. In addition, as a backstop, the Company considers that SICR has occurred in all cases when an asset is more than 30 days past due. The Company’s accounting policy is to not use the ‘low’ credit risk practical expedient. As a result, the Company monitors all financial instruments which are subject to impairment for SICR, with the exception of loans and advances and the corresponding interest receivable, for which a lifetime ECL is always calculated. In general, ECL are measured so that they reflect:  A probability-weighted range of possible outcomes;  The time value of money; and  Relevant information relating to past, current and future economic conditions 20


  • Page 23

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) f. Impairment of financial instruments (continued) Calculation of ECL ECL are calculated using three main components:  Probability of default (“PD”): for accounting purposes, the 12-month and lifetime PD represent the expected point-in-time probability of a default over the next 12 months and over the remaining lifetime of the financial instrument respectively, based on conditions existing at the balance sheet date and future economic conditions.  Expected loss given default (“LGD”): the LGD represents expected loss conditional on default, taking into account the mitigating effect of collateral, including the expected value of the collateral when realised and the time value of money.  Estimated exposure at default (“EAD”): this represents the expected EAD, taking into account the expected repayment of principal and interest from the balance sheet date to the default event together with any expected drawdowns of the facility over that period. These parameters are generally derived from internally developed statistical models, incorporating historical, current and forward-looking macro-economic data and country risk expert judgement. The macro-economic scenarios are reviewed quarterly. The 12-month ECL are equal to the sum over the next 12 months of quarterly PD multiplied by LGD and EAD, with such expected losses being discounted at the EIR. Lifetime ECL are calculated using the discounted present value of total quarterly PDs multiplied by LGD and EAD, over the full remaining life of the facility. When measuring ECL, the Company considers multiple scenarios, except where practical expedients are used to determine ECL. Practical expedients are used where they are consistent with the principles described above. The Company measures ECL on an individual asset basis and has no purchased or originated credit- impaired (“POCI”) financial assets. More information on measurement of ECL is provided in note 24. Presentation of ECL ECL is recognised in the income statement within ‘Net impairment loss on financial instruments’. ECL on financial assets measured at amortised cost are presented as an ECL allowance. The allowance reduces the net carrying amount on the face of the statement of financial position. Where the financial asset is measured at FVOCI, the loss allowance is recognised as an accumulated impairment amount in other comprehensive income and does not reduce the carrying amount of the financial asset on the statement of financial position. Credit-impaired financial instruments In assessing the impairment of financial instruments under the ECL model, the Company defines credit- impaired financial instruments in accordance with the Credit Risk Management Department’s policies and procedures. A financial instrument is credit-impaired when, based on current information and events, it is probable that the Company will be unable to collect all scheduled payments of principal or interest when due according to the contractual terms of the agreement. 21


  • Page 24

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) f. Impairment of financial instruments (continued) Definition of Default In assessing the impairment of financial instruments under the ECL model, the Company defines default in accordance with Credit Risk Management Department’s policies and procedures. This considers whether the borrower is unlikely to pay its credit obligations to the Company in full and takes into account qualitative indicators, such as breaches of covenants. The definition of default also includes a presumption that a financial asset which is more than 90 days past due (“DPD”) has defaulted. Write-offs Loans and government debt securities are written off (either partially or in full) when they are deemed uncollectible which generally occurs when all commercially reasonable means of recovering the balance have been exhausted. Such determination is based on an indication that the borrower can no longer pay the obligation, or that the proceeds from collateral will not be sufficient to pay the balance. Partial write-offs are made when a portion of the balance is uncollectable. However, financial assets that are written off could still be subject to enforcement activities for recoveries of amounts due. If the amount to be written off is greater than the accumulated loss allowance, the difference is reflected directly in the income statement within ‘Net impairment loss on financial instruments’ and is not recognised in the loss allowance account. Any subsequent recoveries are credited to ‘Net impairment loss on financial instruments’ within the income statement. g. Revenue recognition Revenues are recognised when the promised services are delivered to the Company’s customers, in an amount that is based on the consideration the Company expects to receive in exchange for those services when such amounts are not probable of significant reversal. Fee and commission income Fee and commission income results from transaction-based arrangements in which the client is charged a fee for the execution of transactions. Such revenues primarily arise from the Company providing services in connection with the provision of general investment, securities and futures dealing, as well as discretionary management to its customers and as introducing broker to Morgan Stanley & Co. International plc for the provision of clearance, settlement and custody services in relation to the aforementioned transactions. Fee and commission income is recognised on trade date when the performance obligation is satisfied. h. Fees and commission expense Fees and commission expense in the income statement include service fees. Amounts are recognised as the related services are received. 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. 22


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    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. Taxable profit is also adjusted if it is considered that it is not probable that a taxation authority will accept an uncertain tax treatment. 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. 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, based on the laws that have been enacted or substantively enacted by the reporting date. 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 and commitments Provisions are recognised when the Company has an identified 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 that 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. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount reflects the present value of those cash flows, where the effect of discounting is material. A commitment is any legal obligation to potentially make or receive cash payments or transfer cash. Commitments are not recognised in the financial statements. Disclosure is made unless the probability of settlement is remote. 23


  • Page 26

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) l. 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. m. Employee compensation plans i) Equity-settled share-based compensation plans Morgan Stanley issues awards in the form of restricted stock units (“RSUs”) to employees of the Morgan Stanley Group for services rendered to the Company. Awards are equity-settled and the cost of the equity-based transactions with employees is measured based on the fair value of the equity instruments at grant date. The fair value of RSUs is based on the market price of Morgan Stanley common stock on the date the award is granted, measured as the volume-weighted average price on the date of grant (“VWAP”). The fair value of RSUs not entitled to dividends until conversion is measured at VWAP reduced by the present value of dividends expected to be paid on the underlying shares prior to the scheduled conversion date. Awards generally contain clawback and cancellation provisions. Certain awards provide Morgan Stanley the discretion to clawback or cancel all or a portion of the award under specified circumstances. Compensation expense for these awards is adjusted for changes in the fair value of the Morgan Stanley’s common stock until conversion. The Company recognises compensation cost over the relevant vesting period for each separately vesting portion of the award. An estimation of awards that will be forfeited prior to vesting due to the failure to satisfy service conditions is considered in calculating the total compensation cost to be amortised over the relevant vesting period. Under Morgan Stanley Group chargeback agreements, the Company pays Morgan Stanley for the procurement of shares. The Company pays Morgan Stanley the grant date fair value and any subsequent movement in fair value up to the time of conversion of the award and delivery of shares to the employees. Share-based compensation expense is recorded within ‘Other expense’ in the income statement. ii) Deferred cash-based compensation plans Morgan Stanley awards deferred cash-based compensation on behalf of the Company for the benefit of employees, providing a return to the participating employees based upon the performance of various referenced investments. Compensation expense for deferred cash-based compensation awards is calculated based on the notional value of the award granted, adjusted for changes in the fair value of the referenced investments that employees select. The Company recognises compensation cost over the relevant vesting period for each separately vesting portion of the award. Forfeitures due to failure to satisfy service conditions are accounted for as they occur. Deferred cash-based compensation expense is recorded within in ‘Other expense’ in the income statement. The liability for the awards is measured at fair value and is included within ‘Other liabilities’ in the statement of financial position. n. 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 benefit plan are recognised in ‘Other expense’ in the income statement when payable. Details of the plans are given in note 32 to these financial statements. 24


  • Page 27

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 4. INTEREST INCOME AND INTEREST EXPENSE The table below presents interest income and expense by accounting classification. Interest income and expense is calculated using the EIR method for financial assets and financial liabilities measured at amortised cost and financial assets measured at FVOCI. Interest income includes realised interest on certain financial assets measured at FVPL. 2020 2019 US$’000 US$’000 Financial assets measured at amortised cost 49,366 68,903 Financial assets measured at FVOCI 8,126 23,747 Financial assets not measured at FVPL 57,492 92,650 Non-trading financial assets measured at FVPL 2,155 12,470 Financial assets measured at FVPL 2,155 12,470 Total interest income 59,647 105,120 Financial liabilities measured at amortised cost (16,949) (20,241) Total interest expense (16,949) (20,241) Net interest income 42,698 84,879 No other gains or losses have been recognised in respect of financial assets measured at amortised cost other than as disclosed as ‘Interest income’ and foreign exchange differences disclosed in ‘Other revenue’ (note 7). No other gains or losses have been recognised in respect of financial liabilities measured at amortised cost other than as disclosed as ‘Interest expense’, and foreign exchange differences disclosed in ‘Other revenue’ (note 7). 5. FEE AND COMMISSIONS 2020 2019 US$’000 US$’000 Fee and commission income: Sales commissions and fees 415,484 272,656 Other fees 22 10 Total fee and commission income 415,506 272,666 Of which, revenue from contracts with customers 14,678 14,077 Fee and commission expense: Sales commissions and fees (1,090) (1,950) Total fee and commission expense (1,090) (1,950) Net fee and commission income 414,416 270,716 25


  • Page 28

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 6. NET GAINS ON DERECOGNITION OF FINANCIAL ASSETS MEASURED AT FVOCI The table below summarises the carrying amount of the derecognised financial assets measured at FVOCI and the gain on derecognition. 2020 2019 Carrying Carrying amount of Gains arising amount of Gains arising financial from financial from assets sold derecognition assets sold derecognition US$’000 US$’000 US$’000 US$’000 Investment securities 100 - 99,976 6 7. OTHER REVENUE 2020 2019 US$’000 US$’000 Net foreign exchange gains 11,641 3,023 Management charges to other Morgan Stanley Group undertakings 6,719 6,465 Others 107 80 18,467 9,568 Of which, revenue from contracts with customers 6,719 6,465 26


  • Page 29

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 8. OTHER EXPENSE 2020 2019 US$’000 US$’000 Staff costs 203,884 165,609 Directors’ remuneration Fees 169 167 Contribution to defined contribution plan 71 70 Others 13,277 9,796 Auditors’ remuneration: Fees payable to the Company’s auditor for the audit of the Company’s annual financial statements 614 580 Fees payable to the Company’s auditor for other services to the Company 27 1 Non-audit professional services 7,084 6,890 Management charges from other Morgan Stanley Group undertakings relating to staff costs 496 298 Management charges from other Morgan Stanley Group undertakings relating to other services 80,655 75,926 Others 4,141 4,345 310,418 263,682 Included within ‘Staff costs’, ‘Directors’ remuneration’ and ‘Management charges from other Morgan Stanley Group undertakings’ are amounts totalling US$20,670,000 (2019: US$18,678,000) in relation to equity-settled share-based compensation plans granted to employees of the Company. These costs reflect the amortisation of equity-based awards in relation to current and previous years’ awards and are therefore not directly aligned with other staff costs in the current year. Similarly, included within ‘Staff costs’, ‘Directors’ remuneration’ and ‘Management charges from other Morgan Stanley Group undertakings’ are amounts totalling US$21,319,000 (2019: US$19,471,000) in relation to the amortisation of current and previous years’ awards of deferred cash-based compensation, granted to employees of the Company. Further information regarding employee compensation plans is provided in note 31. For the years ended 31 December 2020 and 31 December 2019, 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 (2019: Nil). 27


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    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 9. NET IMPAIRMENT LOSS ON FINANCIAL INSTRUMENTS The following table shows the net ECL charge and write-offs for the year. 2020 2019 Net ECL Write-offs Total Net ECL Write-offs Total US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 Loans and advances 37 - 37 - - - 37 - 37 - - - All of the above impairment losses were calculated on an individual basis. No collective impairment assessments were made during the year or prior year. 10. INCOME TAX 2020 2019 US$’000 US$’000 Current tax Current year Hong Kong 23,170 14,420 Other jurisdiction 3,741 2,033 26,911 16,453 Adjustments in respect of prior years Hong Kong 31 (2) Other jurisdiction (8) 131 23 129 26,934 16,582 Deferred tax Origination and reversal of temporary differences (2,544) (1,030) Adjustments in respect of prior years 13 16 (2,531) (1,014) Income tax 24,403 15,568 28


  • Page 31

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 10. INCOME TAX (CONTINUED) Reconciliation of effective tax rate The current year income tax expense is lower (2019: lower) than that resulting from applying the standard rate of profits tax in Hong Kong for the year of 16.5% (2019:16.5%). The main differences are explained below: 2020 2019 US$’000 US$’000 Profit before income tax 156,050 100,026 Income tax using the standard rate of profits tax in Hong Kong of 16.5% 25,748 16,504 Impact on tax of: Expenses not deductible for tax purposes 741 1,362 Tax exempt income (956) (1,734) Concessionary tax rate (1,268) (712) Effect of tax rates in foreign jurisdiction 138 81 Tax under provided in prior years 36 145 Withholding tax expensed - 5 Other (36) (83) Total income tax in the income statement 24,403 15,568 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: 2020 2019 Tax Tax Before (expense)/ Net of Before (expense)/ Net of tax benefit tax tax benefit tax US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 FVOCI reserve: Net change in fair value (1,542) 247 (1,295) 427 (60) 367 Net amount reclassified to income Statement - - - (6) 1 (5) Other comprehensive income (1,542) 247 (1,295) 421 (59) 362 29


  • Page 32

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 11. FINANCIAL ASSETS AND FINANCIAL LIABILITIES BY MEASUREMENT CATEGORY The following table analyses financial assets and financial liabilities as presented in the statement of financial position by HKFRS 9 classifications. 2020 Amortised FVPL FVOCI cost Total US$’000 US$’000 US$’000 US$’000 Cash and short-term deposits - - 1,256,705 1,256,705 Trading financial assets 1,709 - - 1,709 Secured financing 582,265 - - 582,265 Loans and advances - - 3,438,202 3,438,202 Investment securities - 2,616,724 - 2,616,724 Trade and other receivables - - 88,733 88,733 Total financial assets 583,974 2,616,724 4,783,640 7,984,338 Deposits - - 6,808,011 6,808,011 Trading financial liabilities 11,272 - - 11,272 Trade and other payables - - 130,616 130,616 Total financial liabilities 11,272 - 6,938,627 6,949,899 2019 Amortised FVPL FVOCI cost Total US$’000 US$’000 US$’000 US$’000 Cash and short-term deposits - - 633,898 633,898 Trading financial assets 441 - - 441 Secured financing 362,047 - - 362,047 Loans and advances - - 2,770,325 2,770,325 Investment securities - 854,769 - 854,769 Trade and other receivables - - 62,570 62,570 Total financial assets 362,488 854,769 3,466,793 4,684,050 Deposits - - 3,665,736 3,665,736 Trading financial liabilities 3,552 - - 3,552 Trade and other payables - - 104,689 104,689 Total financial liabilities 3,552 - 3,770,425 3,773,977 30


  • Page 33

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 12. TRADING FINANCIAL ASSETS AND LIABILITIES Trading assets and trading liabilities are summarised as follows: 2020 2019 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 782,710 1,709 11,272 709,391 441 3,552 The derivatives are entered with other Morgan Stanley Group undertakings (see note 33). 13. SECURED FINANCING 2020 2019 US$’000 US$’000 Securities purchased under agreements to resell 582,265 362,047 14. LOANS AND ADVANCES 2020 2019 US$’000 US$’000 Loans and advances to customers 3,368,801 2,770,325 Loans and advances to other Morgan Stanley Group undertakings 69,438 - Less: ECL (37) - 3,438,202 2,770,325 15. INVESTMENT SECURITIES 2020 2019 US$’000 US$’000 Government debt securities: US treasury bills and securities 2,224,669 602,491 Singapore government treasury bills 389,476 252,278 Exchange Fund Bills & Notes 2,579 - 2,616,724 854,769 31


  • Page 34

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 16. TRADE AND OTHER RECEIVABLES 2020 2019 US$’000 US$’000 Trade receivables 45,465 36,356 Other receivables Amounts due from other Morgan Stanley Group undertakings 39,714 20,283 Interest receivable 3,352 5,591 Other amounts receivable 202 340 88,733 62,570 17. DEPOSITS 2020 2019 US$’000 US$’000 Deposits of banks Current account balances 2,053 2,149 Deposits of non-bank customers Current account balances 5,648,210 2,622,296 Term deposits 1,157,748 1,041,164 Deposits of other Morgan Stanley Group undertakings - 127 6,808,011 3,665,736 18. TRADE AND OTHER PAYABLES 2020 2019 US$’000 US$’000 Other payables Amounts due to other Morgan Stanley Group undertakings 9,380 8,873 Staff compensation and benefits accruals 115,297 85,343 Interest payable 1,942 7,024 Other amounts payable 3,997 3,449 130,616 104,689 19. 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: 2020 2019 US$’000 US$’000 At 1 January 5,002 4,023 Amount recognised in the income statement 2,531 1,014 Amount recognised in other comprehensive income: Financial assets measured at FVOCI 247 (59) Foreign exchange revaluation 21 24 At 31 December 7,801 5,002 32


  • Page 35

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 19. DEFERRED TAX ASSETS (CONTINUED) The deferred tax included in the statement of financial position and changes recorded in ‘Income tax’/‘Other comprehensive income’ are as follows: 2020 2019 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 7,811 (2,531) - 5,259 (1,014) - Financial assets measured at FVOCI (10) - 247 (257) - (59) 7,801 (2,531) 247 5,002 (1,014) (59) 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. 20. COMMITMENTS AND CONTINGENCIES At 31 December, the Company had the following outstanding commitments. 2020 2019 US$’000 US$’000 Commitments Unsettled securities purchased under agreements to resell(1) - 51,800 (1) At 31 December 2019, unsettled securities purchased under agreements to resell have a trade date at or prior to 31 December 2019 and settle subsequent to year end. 21. EQUITY Ordinary share capital Ordinary Ordinary shares shares Number US$’000 Authorised, issued and fully paid At 1 January 2019 170,000,000 170,000 Increases in the year: 22 March 2019 500,000,000 500,000 At 31 December 2019 and 31 December 2020 670,000,000 670,000 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. Reserve FVOCI reserve The ‘FVOCI reserve’ of US$35,000 (2019: US$1,330,000) includes the cumulative net change in the fair value of FVOCI financial assets held at the reporting date. The tax effect of these movements is also included in the ‘FVOCI reserve’. 33


  • Page 36

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 22. 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: 2020 2019 US$’000 US$’000 Cash with central bank 593,805 8,037 Cash at banks 342,900 435,861 Placements with banks 320,000 190,000 1,256,705 633,898 b. Reconciliation of cash flows from operating activities 2020 2019 US$’000 US$’000 Profit for the year 131,647 84,458 Adjustments for: Net gains on derecognition of financial assets measured at FVOCI - (6) Interest income (59,647) (105,120) Interest expense 16,949 20,241 Income tax 24,403 15,568 Operating cash flows before changes in operating assets and liabilities 113,352 15,141 Changes in operating assets Increase in secured financing (220,214) (361,994) Increase in loans and advances (667,877) (1,172,024) Increase in trade and other receivables (28,402) (78,916) (Increase)/decrease in trading financial assets (1,268) 528 Increase in prepayments (251) (711) (918,012) (1,613,117) Changes in operating liabilities Increase in deposits 3,142,275 635,745 Increase/(decrease) in trade and other payables 31,010 (9,664) Increase in trading financial liabilities 7,720 388 Increase in accruals 1,426 201 3,182,431 626,670 Interest received 53,756 103,838 Interest paid (22,032) (18,806) Net income tax paid (31,520) (3,106) Effect of foreign exchange movements (13,063) (3,587) Net cash flows from/(used in) operating activities 2,364,912 (892,967) 34


  • Page 37

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 23. 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 2020 Less than or More than equal to twelve twelve months months Total US$’000 US$’000 US$’000 ASSETS Cash and short-term deposits 1,256,705 - 1,256,705 Trading financial assets 1,709 - 1,709 Secured financing 582,265 - 582,265 Loans and advances 3,368,801 69,401 3,438,202 Investment securities 2,616,724 - 2,616,724 Trade and other receivables 88,733 - 88,733 Deferred tax assets - 7,801 7,801 Prepayments 1,086 - 1,086 7,916,023 77,202 7,993,225 LIABILITIES Deposits 6,808,011 - 6,808,011 Trading financial liabilities 11,272 - 11,272 Trade and other payables 96,217 34,399 130,616 Current tax liabilities 16,889 - 16,889 Accruals 2,360 - 2,360 6,934,749 34,399 6,969,148 At 31 December 2019 Less than or More than equal to twelve twelve months months Total US$’000 US$’000 US$’000 ASSETS Cash and short-term deposits 633,898 - 633,898 Trading financial assets 441 - 441 Secured financing 362,047 - 362,047 Loans and advances 2,770,325 - 2,770,325 Investment securities 854,769 - 854,769 Trade and other receivables 62,570 - 62,570 Deferred tax assets - 5,002 5,002 Prepayments 835 - 835 4,684,885 5,002 4,689,887 LIABILITIES Deposits 3,665,609 127 3,665,736 Trading financial liabilities 3,552 - 3,552 Trade and other payables 78,883 25,806 104,689 Current tax liabilities 21,251 - 21,251 Accruals 934 - 934 3,770,229 25,933 3,796,162 35


  • Page 38

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. 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, assess, monitor, and manage each of the various types of risk involved in its business activities in accordance with defined policies and procedures. The Company has developed its own risk management policy framework, which is consistent with and leverages the risk management policies and procedures of the Morgan Stanley Group and which include escalation to 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. The Company is primarily exposed to credit risk from margin loans to clients of the Wealth Management business segment, and to a lesser extent from Treasury activities related to deposit placement, investment portfolio and interest rate and foreign exchange hedges. Credit risk management Credit risk exposure is managed on a global basis and in consideration of each significant legal entity within the Morgan Stanley Group. The credit risk management policies and procedures establish the framework for identifying, measuring, monitoring and controlling credit risk whilst ensuring transparency of material credit risks, compliance with established limits and escalating risk concentrations to appropriate senior management and the Board of Directors. The Company incurs credit risk primarily in the Wealth Management business through margin loans to its clients. Margin loans are asset-based in nature secured by mostly cash and marketable securities held with the Company as collateral. The Company also incurs credit risk through a variety of treasury activities, including, but not limited to, the following:  entering into derivative contracts with other Morgan Stanley Group undertakings under which counterparties may 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 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 helps ensure 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 subsequent 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. 36


  • Page 39

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk (continued) Credit risk management (continued) Monitoring and Control (continued) A Credit Limits Framework is utilised to manage credit risk levels across the Company. The Credit Limits Framework is calibrated within the Company’s risk appetite and includes stress loss, product, collateral concentration, correlated collateral, single-name, regulatory and connected lending limits. The Credit Risk Management Department helps ensure timely and transparent communication 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 from the Company’s lending and treasury activities. The stress tests shock market factors (e.g. interest rates, security prices, credit spreads) and risk parameters (e.g. probability of default), in order to assess the impact of stresses on exposures, profit and loss, and the Company’s capital position. Stress tests are conducted in accordance with established policies and procedures of Morgan Stanley Group and the Company and comply with methodologies outlined in the Basel regulatory framework. Credit Evaluation The evaluation of corporate and institutional counterparties and borrowers includes assigning obligor credit ratings, which reflect an assessment of an obligor’s PD and LGD. An obligor credit rating can be categorised into Investment grade, Non-investment grade and Default. Credit evaluations typically involve the assessment of financial statements, leverage, liquidity, capital strength, asset composition and quality, market capitalisation, access to capital markets, the 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 and collateral evaluation, to ensure the exposures are well-collateralised and credit risk is mitigated. 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 2020 and 31 December 2019, 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 ceiling ratings i.e. the maximum credit rating that can be assigned to a counterparty with a designated country of risk, are derived using methodologies generally consistent with those employed by external rating agencies. The Company also reviews its credit exposure and risk to certain types of customers. At 31 December 2020 and 31 December 2019, the Company’s material credit exposure was to sovereigns, sovereign related entities, corporate entities, financial institutions and individuals. 37


  • Page 40

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk (continued) Credit risk management (continued) Risk Mitigation The Credit Risk Management Department may seek to mitigate credit risk from its lending and treasury activities in multiple ways, including collateral provisions and hedges. 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. In connection with the Company’s derivatives activities 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. In connection with securities purchased under agreements to resell transactions, the Company manages credit exposure arising from such transactions by, in appropriate circumstances, entering into Global Master Repurchase Agreements with counterparties that provide the Company, in the event of a counterparty default, with the right to net a counterparty’s rights and obligations under such agreement and liquidate and set off collateral held by the Company against the net amount owed by the counterparty. Under these securities purchased under agreements to resell transactions, the Company receives collateral, including US government securities. The Company also monitors the fair value of the underlying securities as compared with the related receivable or payable, including accrued interest, and, as necessary, requests additional collateral to ensure such transactions are adequately collateralised. Exposure to credit risk The maximum exposure to credit risk (“gross credit exposure”) of the Company as at 31 December 2020 and 31 December 2019 is disclosed below, based on the carrying amounts of the financial assets and the maximum amount that the Company could have to pay in relation to unrecognised financial instruments, which the Company believes are subject to credit risk. The table includes financial instruments subject to ECL and not subject to ECL. Those financial instruments that bear credit risk but are not subject to ECL are subsequently measured at fair value. Exposure arising from financial instruments not recognised on the statement of financial position is measured as the maximum amount that the Company could have to pay, which may be significantly greater than the amount that would be recognised as a liability. 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. Collateral and other credit enhancements The Company employs a range of policies and practices to mitigate credit risk, the most common being acceptance of collateral for funds advanced. The main types of collateral held are cash and marketable securities. The Company has internal policies on the acceptability of specific classes of collateral or credit risk mitigation. 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 on an ongoing basis and requests additional collateral in accordance with collateral arrangements when deemed necessary. 38


  • Page 41

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk (continued) Collateral and other credit enhancements (continued) At 31 December 2020, the carrying amount of financial assets on which no ECL were recognised because of collateral held was US$3,368,801,000 (2019: US$2,770,325,000). The Company closely monitors collateral held for financial assets considered to be credit-impaired, as in such cases it is considered more likely that the Company will take possession of collateral to mitigate potential credit losses. The Company does not hold financial assets considered to be credit-impaired. Exposure to credit risk by class 31 December 2020 31 December 2019 Gross credit Credit Net credit Gross credit Credit Net credit Class exposure (1) enhancements exposure exposure (1) enhancements exposure US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 Subject to ECL: Cash and short-term deposits 1,256,705 - 1,256,705 633,898 - 633,898 Loans and advances(3) 3,438,202 (3,368,801) 69,401 2,770,325 (2,770,325) - Investment securities 2,616,724 - 2,616,724 854,769 - 854,769 Trade and other receivables(2) 88,733 - 88,733 62,570 - 62,570 Not subject to ECL: Trading financial assets: Derivatives 1,709 (1,709) - 441 (441) - Secured financing 582,265 (578,129) 4,136 362,047 (359,010) 3,037 7,984,338 (3,948,639) 4,035,699 4,684,050 (3,129,776) 1,554,274 Unrecognised financial instruments Not subject to ECL: Unsettled securities purchased under agreements to resell(4) - - - 51,800 - 51,800 (1) The carrying amount recognised in the statement of financial position best represents the Company's maximum exposure to credit risk. (2) Trade and other receivables include cash collateral pledged against the payable on OTC derivative positions. These derivative liabilities are included within trading financial liabilities in the statement of financial position. (3) The collateral held as security for loans and advances consists of cash of US$811,426,000 (2019: US$529,704,000), securities of US$1,748,866,000 (2019: US$1,019,982,000) and other collateral of US$808,509,000 (2019: US$1,220,639,000). (4) For unsettled securities purchased under agreements to resell, collateral in the form of securities will be received at the point of settlement. Since the value of collateral is determined at a future date, it is currently unquantifiable and not included in the table. 39


  • Page 42

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk (continued) Credit quality Exposure to credit risk by internal rating grades Internal credit ratings, as below, are derived using methodologies generally consistent with those used by external agencies: Investment grade: AAA - BBB Non-investment grade: BB - CCC Default: D The table below shows gross carrying amount and, in the case of unrecognised financial instruments, nominal amounts by internal rating grade. All exposures subject to ECL are Stage 1, unless otherwise shown. Investment grade Non- At 31 December 2020 Unrated(1)/ AAA AA A BBB Investment Total Net of ECL US$’000 Default Grade Subject to ECL: Cash and short term deposits 8,101 115,270 1,114,334 18,838 162 - 1,256,705 1,256,705 Loans and advances - - - 214,782 3,223,441 16 3,438,239 3,438,202 Investment securities 2,614,145 - 2,579 - - - 2,616,724 2,616,724 Trade and other receivables 208 - 85,159 88 3,278 - 88,733 88,733 2,622,454 115,270 1,202,072 233,708 3,226,881 16 7,400,401 7,400,364 Not subject to ECL: Trading financial assets: derivatives - - 1,709 - - - 1,709 1,709 Secured financing - - 582,265 - - - 582,265 582,265 - - 583,974 - - - 583,974 583,974 Unrecognised financial instruments not subject to ECL: Unsettled securities purchased under agreements - - - - - - - - 40


  • Page 43

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk (continued) Credit quality (continued) Exposure to credit risk by internal rating grades (continued) Investment grade Non- At 31 December 2019 Unrated(1)/ AAA AA A BBB Investment Total Net of ECL US$’000 Default Grade Subject to ECL: Cash and short term deposits 158,037 76,224 399,302 319 16 - 633,898 633,898 Loans and advances - - - 182,357 2,531,824 56,144 2,770,325 2,770,325 Investment securities 854,769 - - - - - 854,769 854,769 Trade and other receivables 14 - 56,695 315 5,455 91 62,570 62,570 1,012,820 76,224 455,997 182,991 2,537,295 56,235 4,321,562 4,321,562 Not subject to ECL: Trading financial assets: derivatives - - 441 - - - 441 441 Secured financing - - 362,047 - - - 362,047 362,047 - - 362,488 - - - 362,488 362,488 Unrecognised financial instruments not subject to ECL: Unsettled securities purchased under agreements - - 51,800 - - - 51,800 51,800 (1) For the unrated loans and receivables and the corresponding interest receivable, a lifetime ECL is always calculated without considering whether SICR has occurred. 41


  • Page 44

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk (continued) Expected credit loss allowance Financial instruments subject to the impairment requirements of HKFRS 9 There have been no changes made to estimation techniques or significant assumptions for estimating impairment during the year. There were no modifications to financial assets during the year or since origination and therefore modifications have not impacted ECL staging. ECL on cash and short-term deposits, loans and advances and trade and other receivables is de minimis owing to their short term tenure and the collateralised nature of loans and advances. For investment securities, the gross carrying amount on which no ECL is recognised because they have an investment grade internal credit rating, corresponding to a low risk of default. 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 the market or idiosyncratic stress events that may cause unexpected changes in funding needs or an inability to raise new funding. Generally, the Company incurs liquidity risk as a result of its trading, lending, investing and client facilitation activities. The Morgan Stanley Group’s Liquidity Risk Management Framework is critical to helping ensure that the Company maintains sufficient liquidity resources and durable funding sources to meet its daily obligations and to withstand unanticipated stress events. The Liquidity Risk Department is a distinct area in Risk Management, which oversees and monitors liquidity risk. 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 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 the Company’s Asset & Liability Committee (“ALCO”) and regional ALCO and risk committees, 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 for maintaining 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 42


  • Page 45

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk (continued) The primary goal of the Company’s liquidity risk and funding management framework is to ensure that the Company has access to adequate funding across a wide range of market conditions and time horizons. The framework is designed to enable the Company to fulfil its financial obligations and support the execution of its 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 Tests should anticipate, and account for, periods of limited access to funding. The core components of the Company’s liquidity risk management framework that support our target liquidity profile, are the Required Liquidity Framework, Liquidity Stress Tests and Liquidity Resources (as defined below). Required Liquidity Framework The Required Liquidity Framework establishes the amount of liquidity the Company must hold in both normal and stressed environments to ensure that its financial condition and overall soundness is not adversely affected by an inability (or perceived inability) to meet its financial obligations in a timely manner. The Required Liquidity Framework considers the most constraining liquidity requirement to satisfy all regulatory and internal limits at a Morgan Stanley Group and legal entity level. Liquidity Stress Tests The Company uses Liquidity Stress Tests to model external and intercompany liquidity flows 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 methodology, implementation, production and analysis of the Company’s Liquidity Stress Tests are important components of the Required Liquidity Framework. 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 resources 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 2020 and 31 December 2019, the Company maintained sufficient liquidity to meet current and contingent funding obligations as modelled in its Liquidity Stress Tests. Liquidity Resources The Company maintains sufficient liquidity resources which consists of unencumbered highly liquid securities and cash deposits with banks (including central banks) (“Liquidity Resources”) to meet regulatory requirements, cover daily funding needs and to meet strategic liquidity targets sized by the Required Liquidity Framework and Liquidity Stress Tests. The total amount of Liquidity Resources is actively managed by the Company considering the following components: 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. The amount of liquidity resources the Company holds is based on the Company’s risk tolerance and is subject to change depending on market and firm-specific events. Unencumbered highly liquid securities consist netted trading assets, investment securities and securities received as collateral. 43


  • Page 46

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk (continued) Liquidity Resources (continued) The Company holds its own Liquidity Resources 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. 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, investor and region) and attempts to ensure that the tenor of its liabilities equals or exceeds the expected holding period of the assets being financed. The Company funds itself through diverse sources. These sources include the Company’s equity capital, borrowings and deposits. 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. The liquid nature of the marketable securities and short-term receivables arising principally from sales and trading activities in the Institutional Securities business provides the Morgan Stanley Group and the Company with flexibility in managing the composition and size of its balance sheet. Maturity analysis In the following maturity analysis of 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 liabilities are managed. All other amounts represent undiscounted cash flows payable by the Company arising from its financial liabilities to earliest contractual maturities as at 31 December 2020 and 31 December 2019. 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 liabilities, presented in a way that is consistent with how the liquidity risk on these financial liabilities is managed by the Company. On Less than 1 month - 3 months - 1 year - demand 1 month 3 months 1 year 5 years Total 31 December 2020 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 Financial liabilities Deposits of banks 2,053 - - - - 2,053 Deposits of non-bank customers 5,648,210 320,201 439,782 399,180 - 6,807,373 Deposits of other Morgan Stanley Group undertakings - - - - - - Trading financial liabilities: Derivatives - 6,299 2,842 2,131 - 11,272 Trade and other payables 9,400 29,323 53,878 3,616 34,399 130,616 Total financial liabilities 5,659,663 355,823 496,502 404,927 34,399 6,951,314 Unrecognised financial instruments Unsettled securities purchased under agreements to resell - - - - - - 44


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    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk (continued) Maturity analysis (continued) On Less than 1 month - 3 months - 1 year - demand 1 month 3 months 1 year 5 years Total 31 December 2019 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 Financial liabilities Deposits of banks 2,149 - - - - 2,149 Deposits of non-bank customers 2,623,233 263,247 446,463 338,697 - 3,671,640 Deposits of other Morgan Stanley Group undertakings - - - - 127 127 Trading financial liabilities: Derivatives - 1,747 1,805 - - 3,552 Trade and other payables 9,142 22,315 42,867 4,559 25,806 104,689 Total financial liabilities 2,634,524 287,309 491,135 343,256 25,933 3,782,157 Unrecognised financial instruments Unsettled securities purchased under agreements to resell(1) - 51,800 - - - 51,800 (1) The Company enters into forward starting reverse repurchase agreements (agreements which have a trade date at or prior to 31 December 2019 and settle subsequent to period end). These agreements primarily settle within three business days and of the total amount at 31 December 2019, US$51.8 million settled within three business days. Market Risk Market risk is defined by HKFRS 7 ‘Financial Instruments: Disclosures’ (“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. The Company manages the market risk associated with its assets and liabilities management activities at both division and an individual product level, and includes consideration of market risk at the legal entity level. 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 including monitoring Value-at- risk (“VaR”) and stress testing analyses, routinely reports risk summaries and maintains the VaR and scenario analysis methodologies. 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 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. 45


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    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. 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 deposits and loans, bank balance, changes in the fair value of fixed rate debt investments categorised as FVOCI, and the interest rate swap hedges. The Company measures and reports Interest rate risk in the banking book (IRRBB) using the new standardised framework through MA(BS)12A - Interest Rate Risk in the Banking Book in accordance with HKMA requirements. The Company measures its IRRBB exposures mainly through the Economic Value of Equity (EVE) and Net Interest Income (NII). These are calculated weekly for internal risk management purposes, as well as monthly as part of the monthly closing process. The Company’s interest rate risk is managed by the Treasury Department. The asset and liability structure is actively managed to ensure the Company does not assume excessive interest rate risk relative to its overall development strategy and commensurate with the scale, nature and complexity of its business. The Company may also enter into additional hedges such as interest rate swaps from time to time. The ALCO is responsible for ensuring that these objectives are met on an ongoing basis. Independent market risk management oversight is provided by Market Risk Department (MRD). MRD identifies market risks including IRRBB, and develops and employs risk measures and tools to monitor, control and mitigate those risks. MRD also monitors risk exposures against established limits, and produces and distributes comprehensive reports designed to keep senior management apprised of the Company’s market risk and IRRBB exposures. The Company’s Market Risk Management Policy sets forth principles and practices for sound management of its market risk. The policy has been established to evidence the Company’s standards for independent identification, measurement, monitoring, reporting, challenge, and escalation of market risk arising from the Company’s business activities. The Company’s interest rate risk is controlled through conservative risk limits approved by the Board or its delegated Risk Committees including the Board Risk Committee, the Bank Risk Committee and the Credit and Market Risk Committee. The Company has clearly defined EVE and NII limits in place, in addition to other sensitivity and notional based risk limits. These limits are set by taking into account the size of the Company’s balance sheet, projected business growth and risk appetite as set by the Board. Exposure is monitored at least weekly for EVE and NII limits, and daily for sensitivity and notional based limits. These are reported back to the Risk Committees on a monthly and quarterly basis. The Company applies the model assumptions for IRRBB prescribed by the HKMA with no deviations. The models used are reviewed on an annual basis at a minimum and independently verified by the Morgan Stanley Group’s Model Risk Management (MRM) group. The standardised EVE risk measure is calculated according to the six shock scenarios defined in the HKMA SPM IR-1. For the calculation of the change in NII, in addition to the two shock scenarios defined in SPM IR-1 for parallel up and parallel down interest rate moves, the Company also calculates a range of internal shock scenarios covering non-parallel interest rate moves combined with different repricing assumptions for customer deposits. The net gain or loss in the income statement resulted from the application of a parallel shift in market interest rates increase or decrease to these positions is disclosed in the Template IRRBB1: Quantitative information on interest rate risk in banking book as part of the Company’s Pillar 3 disclosures under section H of the unaudited supplementary financial information. 46


  • Page 49

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Market Risk (continued) 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 material 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. 2020 2019 Sensitivity to applied Sensitivity to applied percentage change in percentage change in currency (+/-) currency (+/-) Foreign Percentage Other Foreign Percentage Other currency change Profit or comprehensive currency change Profit comprehensive exposure applied loss income exposure applied or loss income US$’000 % US$’000 US$’000 US$’000 % US$’000 US$’000 Hong Kong Dollar (16,134) 1 161 - (9,786) 1 98 - Singapore Dollar (4,254) 2 85 - (3,115) 2 62 - Yuan Renminbi 19 7 1 - (412) 5 21 - (20,369) (13,313) 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 2019 to 31 December 2020 (2019: from 1 January 2018 to 31 December 2019). Thus, the percentage change applied may not be the same percentage as the actual change in the currency rate for the year ended 31 December 2020, or for the year ended 31 December 2019. 25. FINANCIAL ASSETS ACCEPTED AS COLLATERAL The Company’s policy is generally to take possession of securities purchased under agreements to resell. The Company monitors the fair value of the underlying securities as compared with the related receivable or payable, including accrued interest, and, as necessary, requests additional collateral to ensure such transactions are adequately collateralised. Where deemed appropriate, the Company’s agreements with third parties specify its rights to request additional collateral. These transactions are mostly conducted under standard documentation used by financial market participants. The fair value of collateral accepted under these arrangements as at 31 December 2020 was US$578,129,000 (2019: US$359,010,000). None of this amount has been sold or repledged to third parties in connection with financing activities, or to comply with commitments under short sale transactions (2019: US$Nil). 47


  • Page 50

    MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 26. OPERATIONAL RISK Operational risk refers to the risk of loss, or of damage to the Company’s reputation, resulting from inadequate or failed processes or systems, from human factors or from external events (e.g. fraud, theft, legal and compliance risks, cyber-attacks 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. 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 reflect 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 governance framework, a comprehensive risk management program and insurance. Operational risks and associated risk exposures are assessed relative to the risk tolerance established by the Board and are prioritised accordingly. The breadth and variety of operational risk are such that the types of mitigating activities are wide- ranging. Examples of such activities include continuous enhancement of defences against cyber-attacks; use of legal agreements and contracts to transfer and/or limit operational risk exposures; due diligence; implementation of enhanced policies and procedures; exception management processing controls; and segregation of duties. Primary responsibility for the management of operational risk is with the business segments, the control groups and the business managers therein. The business managers maintain processes and controls designed to identify, assess, manage, mitigate and report operational risk. Each of the business segments has a designated operational risk coordinator. The operational risk coordinator regularly reviews operational risk issues and reports to the Company’s senior management within each business. Each control group also has a designated operational risk coordinator and a forum for discussing operational risk matters with the Company’s senior management. Oversight of operational risk is provided by the Operational Risk Oversight Committee, regional risk committees and senior management. In the event of a merger; joint venture; divestiture; reorganisation; or creation of a new legal entity, a new product or a business activity, operational risks are considered, and any necessary changes in processes or controls are implemented. 48

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