Morgan Stanley : Europe SE - Annual Report - 31 December 2023

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Morgan Stanley Europe SE

Annual Report 2023

Registered number: HRB 109880

Registered office: Grosse Gallusstrasse 18 60312 Frankfurt am Main

TABLE OF CONTENTS (1)
MANAGEMENT REPORT	4
Company Overview	5
Corporate Structure	5
Supervision and Authorisations	5
Economic Report	6
Business Environment	6
Net Assets, Financial Position and Results of Operations	6
Capital Management	9
Liquidity and Funding Management	9
Financial andNon-financialKey Performance Indicators	10
Risk Report	13
Risk Management Framework	13
Internal Capital Adequacy Assessment Process	17
Credit Risk	19
Market Risk	21
Liquidity Risk	23
Operational Risk	25
Model Risk	26
Conduct Risk	27
Compliance Risk	27
Climate and Environmental Risk Management	28
Other Material Risks	31
Risk Summary	32
Opportunities and Outlook	33
Regulatory Developments	33
Disclosures in accordance with section 340a (1a) HGB in conjunction with section 289b
(2) HGB	35

1. Please note that the English version of the Annual Financial Statements and Management Report as at 31 December 2023 is a convenience translation. Deloitte GmbH Wirtschaftprüfungsgesellschaft, Frankfurt am Main, issued the Independent Auditors' Report only for the German version of the Financial Statements and the Management Report as at 31 December 2023. Therefore, the German version prevails.

BALANCE SHEET AS AT 31 DECEMBER 2023	37
INCOME STATEMENT FOR THE PERIOD FROM 1 JANUARY TO 31 DECEMBER 2023	38
CASH FLOW STATEMENT FOR THE PERIOD FROM 1 JANUARY TO 31 DECEMBER 2023..	39
NOTES	............................................................................................................................................................	40
General Information	40
1.	Corporate Information	40
2.	Basis of Accounting	40
3.	Accounting Policies	41
Notes to the Balance Sheet	44
4.	Residual Maturity of Receivables and Liabilities	44
5.	Receivables and Liabilities with Affiliated Companies	45
6.	Repurchase Agreements	45
7.	Trading Assets and Liabilities	45
8.	Non-currentAssets	46
9.	Other Assets and Liabilities	46
10.	Foreign Currencies	46
11.	Debt Issuances	46
12.	Provisions	46
13.	Subordinated Debt	47
14.	Instruments for Additional Tier 1 Regulatory Capital	47
15.	Equity Capital	47
Notes to the Income Statement	47
16.	Income Breakdown by Geographical Markets	47
17.	Income from Profit Sharing, Profit Transfer or Partial Profit Transfer Agreement-related Profits..	48
18.	Other Operating Income and Expenses	48
Additional Information	48
19.	Valuation Units	48
20.	Contingent Liabilities	48
21.	Auditor's Fee	48
22.	Employees	48
23.	Statement of Cash Flows	48
24.	Management Board and Supervisory Board	49
INDEPENDENT AUDITOR'S REPORT	51
Report of the Supervisory Board in accordance with Section 171 (2) of the German Stock
Corporation Act (AktG)	57

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MORGAN STANLEY EUROPE SE

ANNUAL REPORT 2023

Management Report

MANAGEMENT

REPORT

Company Overview

Economic Report

Risk Report

Opportunities and Outlook

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ANNUAL REPORT 2023

Management Report

Company Overview

Morgan Stanley Europe SE, Frankfurt am Main (the "Company" or "MSESE") is part of the Morgan Stanley Europe Holding SE Group (the "Group" or the "MSEHSE Group").

The Company is Morgan Stanley's primary hub to facilitate European Union clients' ("EU27 clients") business. The Company's business strategy is closely integrated into the global strategy of Morgan Stanley's Institutional Securities Group ("ISG"). The Company's principal business units within ISG are the Institutional Equities Division ("IED"), the Fixed Income Division ("FID"), the Investment Banking Division ("IBD") and Global Capital Markets ("GCM").

In executing Morgan Stanley's ISG strategy, the Company is a key contributor in the following areas:

• sales, trading, financing and market-making activities in equity and fixed income products, including foreign exchange and commodities;
• financial advisory services, including advice on mergers, acquisitions and restructurings;
• investment activities; and
• capital raising.

The Company makes global products available to EU27 clients, and also provides EU27 products to global clients via other Morgan Stanley entities. Market making activities such as Euro interest rate swaps, European Union ("EU") government bonds, Euro inflation swaps, Covered Bonds, automated market-making of European equity stocks (for EU exchanges) are market risk managed by the Company. In alignment with its business strategy and regulatory expectations, in 2023, the Company increased its market risk management capabilities in certain EU products and plans to further expand its capabilities in 2024.

Corporate Structure

Morgan Stanley Europe Holding SE, Frankfurt am Main ("MSEHSE") is the parent company of the Company and authorised by the European Central Bank ("ECB") as a financial holding company in accordance with Section 2f (1) and

(3) of the German Banking Act (Kreditwesengesetz or "KWG"). MSEHSE is a superordinated undertaking in accordance with Section 10a (2) of the KWG.

MSEHSE directly holds 100% of the shares in MSESE, which in turn directly holds 100% of the shares in Morgan Stanley Bank AG, Frankfurt am Main ("MSBAG"). MSESE operates branches in France, Italy, the Netherlands, Poland, Spain, Sweden and Denmark.

There are control agreements (Beherrschungs- verträge) in place between MSEHSE and MSESE and between MSESE and MSBAG which include loss compensations in accordance with Section 302 of the German Stock Corporation Act (Aktiengesetz or "AktG"). Letters of Comfort are provided by MSEHSE to benefit MSESE and MSBAG as well as by MSESE to benefit MSBAG. A Profit and Loss Transfer Agreement exists between MSESE and MSBAG. As a result, MSESE and MSBAG form an income tax group (Ertragsteuerliche Organschaft) in accordance with the Corporation Tax Act (Körperschaftsteuergesetz).

The Company's ultimate parent undertaking and controlling entity is Morgan Stanley, Delaware, United States of America ("US"). Morgan Stanley is a global financial services firm authorised as a Financial Holding Company and regulated by the Board of Governors of the Federal Reserve System in the US. All companies of the MSEHSE Group are fully integrated into the global Morgan Stanley Group (the "Morgan Stanley Group").

Supervision and Authorisations

The Company is subject to joint supervision by the ECB, the Federal Financial Supervisory Authority ("BaFin") and the Deutsche Bundesbank.

MSESE is conditionally registered with the Securities and Exchange Commission ("SEC") as a Securities Based Swap Dealer ("SBSD"). MSESE is complying with home country capital requirements in lieu of SEC capital requirements pursuant to applicable substituted compliance rules.

MSESE is also registered with the Commodity Futures Trading Commission ("CFTC") as a Swap Dealer.

MSESE is a Capital Requirements Regulation ("CRR") credit institution (Class 1 Investment Firm). MSESE is not authorised to provide either deposit taking services or lending.

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Management Report

Economic Report

Business Environment

The Management Report contains certain forward-looking statements. These statements are made by the Management Board in good faith, based on the information available at the time of the approval of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

The market environment in aggregate for much of 2023 remained mixed, characterised by inflationary pressures and uncertainty regarding the future path of interest rates, which have remained high. Towards the end of the year, the market environment has improved somewhat with the expectation of lower interest rates into 2024. However, there remains uncertainty regarding the timing and pace of the rate reductions along with concerns regarding heightened geopolitical risks that could impact capital markets in 2024. This environment has impacted the performance of the Group and the Company. Despite the challenging market

conditions, the Company's performance remained solid in 2023 although reported profitability was below forecast expectations. To the extent that the business environment continues to remain uncertain it could further adversely impact client confidence and related activity.

Global Markets and Economic Conditions

Growth in global Gross Domestic Product ("GDP") has weakened in 2023. Throughout the year, the main macroeconomic factors that have weighed on growth globally have been the restrictive monetary policy introduced by central banks to curb the record-high inflation and a reversal of the manufacturing cycle after its strong rebound post-pandemic. The euro area economy saw subdued growth, with considerable heterogeneity across countries. Weak global trade, consequences of energy supply shocks, and restrictive monetary policy have all been a drag on growth in the euro area.

The policy mix in 2023 has been a continuation of the one of late 2022. Fiscal policy measures

in the euro area remained accommodative as governments spent generously on energy- related measures. The monetary policy tightening accelerated in 2023, with the ECB entering into restrictive territory. Further tightening was seen across other regions as well, as central banks tried to bring inflation back to target and avoid inflation expectations getting entrenched at elevated levels.

In the euro area, the ECB ended reinvestments under its Asset Purchase Programme in June 2023. The ECB kept raising rates until September 2023, reaching a deposit facility rate of 4.0%. Fiscal deficits in 2023 are expected to remain above 3%, reaching (an estimated) 3.3% of euro area GDP. Euro area inflation reached 5.5% in 2023, driven by increasing core inflation. After a peak at 10.6% in October 2022 headline inflation declined rapidly throughout the year to 2.9% in December 2023.

War in the Middle East

The Company continues to monitor the war and increased tensions in the Middle East and its impact on the regional economy, as well as on other world economies and the financial markets.

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Net Assets, Financial Position and Results of Operations

The MSEHSE Group`s regulatory reporting and internal management reporting are both based upon International Financial Reporting Standards ("IFRS"). The Company is also principally managed using IFRS.

A reconciliation of profit after tax and balance sheet of MSEHSE Group under IFRS to profit after tax and balance sheet of MSESE under the German Commercial Code (Handelsgesetzbuch or "HGB") is shown below. Subsequently, the income statement and balance sheet of MSESE according to HGB is shown along with supporting commentary.

Reconciliation from IFRS to HGB

The following table summarises profit after tax and balance sheet size under IFRS for the MSEHSE Group and also for MSESE.

		Profit after	Balance
€ in millions		tax	Sheet
MSEHSE Group	2023	187	106,711
2022	142	118,977
Thereof:
MSESE	2023	186	105,778
2022	133	117,588

The following table provides a reconciliation from IFRS to HGB of the profit after tax of the Company for the years 2023 and 2022:

€ in millions	2023	2022
PROFIT AFTER TAX (IFRS)	186	133
Risk valuation adjustment	(51)	(37)
according to section 340e (3) and
(4) HGB
Adjustments for AT1 capital	(48)	(43)
instruments within equity capital
Decrease of deferred tax assets	11	-
Valuation adjustments for pensions	(1)	3
and similar obligations
Goodwill depreciation	(5)	(8)
Write downs of goodwill from	-	(20)
transfer of Real Assets business
Others	(8)	14
PROFIT AFTER TAX (HGB)	84	42

The following table provides a reconciliation of the Company's balance sheet from IFRS to HGB for the years 2023 and 2022:

€ in millions	2023	2022
BALANCE SHEET (IFRS)	105,778	117,588
Derivatives and related cash	(42,683)	(44,709)
collateral netting
Secured financing netting	(2,438)	(4,578)
Others	(147)	613
BALANCE SHEET (HGB)	60,510	68,914

Income Statement

Set out below is an overview of the financial results according to HGB for the years 2023 and 2022.

	2023	2022	Increase/	Variance
€ in millions	(decrease)	%
Sales and trading	643	495	148	30%
Investment banking	96	125	(29)	(23%)
Other	68	31	37	119 %
Net revenues	807	651	156	24%
Staff related
expenses	293	251	42	17%
Non-staff related
expenses	370	335	35	10%
Operating
expenses	663	586	77	13%
Profit before tax	144	65	79	122%
Extraordinary
income	-	37	(37)	(100)%
Income taxes	60	60	-	-%
Profit after tax	84	42	42	100%

Net Revenues

Sales and trading

Sales and trading income is comprised of commission and trading income. Commission income arises from arrangements in which the client is charged commission for executing and clearing transactions related to securities and other listed products. Trading income is largely derived from client activity and was affected by a variety of interrelated factors, including market volumes, bid-offer spreads and the impact of market conditions on inventory held to facilitate client activity.

Although sales and trading revenues in 2023 increased compared to 2022 as the business benefited from higher interest rates and increased market risk management, the performance remained below forecast expectations.

Investment banking

Investment banking fee income is derived from client engagements in which the Company acts as an advisor in relation to mergers and acquisitions, divestitures and corporate

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restructurings, underwriter of equity and fixed income securities or distributor of capital.

Investment banking revenues in 2023 decreased compared to 2022, reflecting lower advisory revenues driven by fewer completed M&A transactions in the Morgan Stanley Group on lower market volumes.

Other

Other revenues include €121 million of revenues recognised from the Profit and Loss Transfer agreement with MSBAG. The result of the ordinary operating activities of MSBAG for the financial year ending 31 December 2023 was transferred to the Company in full. Refer to the section "Corporate Structure" for further details.

Operating Expenses

Staff related expenses

Staff related expenses include: base salaries and fixed allowances, discretionary incentive compensation, amortisation of deferred cash and equity awards and other items including health and welfare benefits.

Staff related expenses increased in 2023 compared to 2022. This was driven by higher salary expenses and severance costs primarily associated with the employee action recorded in the second quarter of 2023.

Non-staff related expenses

Non-staff related expenses include brokerage fees, administration and corporate services, professional services, transaction taxes and management charges from other Morgan Stanley Group undertakings relating to other services. Non-staff related expenses increased in 2023 compared to 2022, reflecting an increase in transaction-related expenses, including brokerage and transaction taxes, and increased management charges from other Morgan Stanley Group undertakings.

Extraordinary income

Extraordinary income of €37 million in 2022 reflected gains recognised from the sale of the Real Assets business unit.

Income Taxes

The Company's income taxes for the period are €60 million. The main driver for the lower effective tax rate in 2023 is the geographic mix of profits and tax rates in jurisdictions outside Germany.

Balance Sheet

			Increase/	Variance
€ in millions	2023	2022	(decrease)	%
ASSETS
Cash	327	-	327	>100%
Receivables from
credit institutions	17,630	32,320	(14,690)	(45%)
and customers
Trading assets	41,462	35,486	5,976	17%
Investments in
affiliated	603	603	-	-%
companies
Other assets	488	505	(17)	(3%)
TOTAL ASSETS	60,510	68,914	(8,404)	(12%)
LIABILITIES
Liabilities to credit
institutions and	14,990	28,063	(13,073)	(47%)
customers
Trading liabilities	34,582	33,448	1,134	3%
Subordinated debt	3,511	1,006	2,505	249%
Instruments for
Additional Tier 1	1,000	1,000	-	-%
Regulatory Capital
Debt securities	92	0	92	>100%
Provisions	155	157	(2)	(1%)
Other liabilities	121	316	(195)	(62%)
Fund for general	77	26	51	196%
banking risks
TOTAL	54,528	64,016	(9,488)	(15%)
LIABILITIES
EQUITY
TOTAL EQUITY	5,982	4,898	1,084	22%
TOTAL
LIABILITIES AND	60,510	68,914	(8,404)	(12%)
EQUITY

Cash

The increase compared with the prior year is driven by cash placed on demand with the Deutsche Bundesbank.

Receivables from and liabilities to credit institutions and customers

Receivables from and liabilities to credit institutions and customers decreased compared to the prior year. This was primarily driven by a decrease in cash collateral pledged and received in relation to derivative transactions and a reduction in overnight cash deposits received from MSBAG and placed at the Deutsche Bundesbank.

Trading portfolio

Trading assets and trading liabilities increased compared with the prior year. These increases were driven by an increase in European government bond inventory as well as increases in the value of securities financing transactions.

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Investments in affiliated companies Investments in affiliated companies all relate to shares held in MSBAG.

Other assets

Other assets mainly consist of variation margin posted to central counterparties and the receivable in relation to revenues recognised from the Profit and Loss Transfer agreement with MSBAG.

Subordinated debt

The increase compared to the prior year is driven by the issuance of senior subordinated debt to MSEHSE.

Debt securities

The increase in the year is driven by the Company issuing structured notes to non- affiliated companies.

Provisions

Provisions primarily consist of variable, deferred and share-based compensation, pension obligations and tax provisions.

Other liabilities

The decrease compared to the prior year is mainly driven by a reduction in the balance of variation margin received in relation to listed derivative transactions.

Fund for general banking risks

The fund for general banking risks, as prescribed within section 340e (4) HGB, increased from €26 million in 2022 to €77 million in 2023 in line with the increase in net trading income in 2023.

Capital Structure

The equity presented in the balance sheet consists of share capital, capital and earnings reserves and retained earnings. The increase in equity in the year from €4,898 million to €5,982 million is mainly due to a capital contribution in cash of €1,000 million from MSEHSE to

MSESE.

In 2023, the return on investment pursuant to Section 26a (1) Sentence 4 KWG is positive 0.14% (2022: positive 0.06%).

Capital Management

The Group actively manages and monitors its capital in line with established policies and procedures and in compliance with local regulatory requirements.

Effective 1 January 2023, MSESE has been granted a Capital waiver in accordance with Article 9 of the CRR, allowing its capital

requirements to be met on an individual consolidated basis (MSESE incorporating its subsidiary MSBAG, "MSESE Consol"). MSBAG has been granted a Capital waiver in accordance with Article 7 of the CRR and therefore its capital requirements are met at the MSESE Consol level. Capital requirements are managed at both the MSEHSE Group level and at the MSESE Consol level.

Consistent with the Morgan Stanley Group's capital management policies, the Group manages its capital position based upon, among other things, business opportunities, risks, capital availability and rates of return together with internal capital policies, regulatory requirements and rating agency guidelines.

Regulatory Capital

The Group is subject to minimum capital requirements as calculated in accordance with the CRR and the Capital Requirements Directive (Directive 2013/36/EU or "CRD") as transposed into German Law.

The Group conducts an Internal Capital Adequacy Assessment Process ("ICAAP") at least quarterly in order to meet its obligations under CRD and the requirements of the ECB. The ICAAP is a key information tool for the Group Management Boards to approve capital adequacy targets and limits, establish ongoing monitoring processes and internal thresholds, and review identified risks in line with the business strategy. Refer to the section "Risk Report" for further information on the ICAAP.

Liquidity and Funding

Management

The primary goal of the Group's liquidity and funding management framework is to ensure that the Group has sufficient liquidity to cover its

business operations and regulatory requirements, as well as access to adequate funding across a wide range of market conditions and time horizons. It manages resources mainly based on business opportunities, risks, availability and rates of return, which are driven by internal policies, regulatory requirements and rating agency guidelines.

MSESE and MSBAG have been granted a waiver in accordance with Article 8 of the CRR which permits liquidity requirements to be managed at the MSESE Consol level for MSESE and its subsidiary MSBAG as a sub- group. In addition to the MSESE Consol level,

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capital and liquidity requirements must also be managed at the MSEHSE Group level.

Liquidity Resources, Funding and Balance Sheet Management

The Group maintains sufficient liquidity resources to comply with internal liquidity stress testing and regulatory requirements. The total amount of Liquidity Resources is actively managed by the Group considering the following components:

• balance sheet size and composition;
• funding needs in a stressed environment inclusive of contingent cash outflows;
• collateral requirements; and
• regulatory requirements.

The amount of Liquidity Resources held is based on the Group's risk tolerance and is subject to change dependent on market and Group-specific events.

The Liquidity Resources consist of cash at central banks and high-quality unencumbered assets. Eligible unencumbered highly liquid securities include primarily Level 1 (as defined in the Commission Delegated Regulation (EU) 2015/61) government bonds and German sub- sovereign obligations.

Refer to the section "Risk Report" for further information on the Liquidity Risk framework, Liquidity framework and Liquidity Stress Tests.

Credit Ratings

The cost and availability of financing and cash collateral are impacted by the credit ratings of the Company, among other variables. In addition, credit ratings can impact trading revenues, particularly in those businesses where longer-term counterparty performance is a key consideration, such as certain over the counter ("OTC") derivative transactions. When determining credit ratings, rating agencies consider both company-specific and industry- wide factors. The Company's senior unsecured ratings are provided in the section "Non-financial key performance indicators".

Recovery and Resolution Planning ("RRP")

The Group prepares a recovery plan which identifies mitigation tools available to the Group in times of severe stress. The recovery plan is

updated on an annual basis and submitted to the ECB.

In terms of resolution planning, the Single Resolution Board ("SRB") as well as the BaFin as the national resolution authority are the responsible authorities for the Group. The Group produces information for the aforementioned authorities in the form of resolution reporting templates and ad-hoc regulatory submissions, in accordance with the EU statutory and regulatory requirements.

The Morgan Stanley Group has developed a resolution plan in accordance with the requirements of Section 165(d) of Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act and its implementing regulations adopted by the Federal Reserve Board and the Federal Deposit Insurance Corporation. The resolution plan presents the Morgan Stanley Group's strategy for resolution of the Morgan Stanley Group upon material financial distress or failure. Both MSESE and MSBAG are considered Material Operating Entities of the Morgan Stanley Group and are within the scope of the resolution strategy adopted by the Morgan Stanley Group.

Minimum Requirement for own funds and Eligible Liabilities ("MREL") and Total Loss Absorbing Capacity ("TLAC")

MREL serves to ensure that the Group has sufficient eligible liabilities in a resolution scenario to absorb losses and safeguard existing capital requirements. The BaFin, as the Group's national supervisor, shares the responsibility to determine MREL requirements with the SRB. The Group is subject to internal MREL requirements. MSESE Consol is also subject to MREL requirements from 1 January 2024.

With a similar objective, TLAC requirements serve to ensure that the Group has sufficient resources to absorb losses. TLAC is applied only at the Group level.

In 2023, the Company issued senior subordinated debt funding to MSEHSE in the amount of €2,500 million in order to meet its MREL requirements.

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