Morgan Stanley : B.V. - Annual Report - 31 December 2020

Registered number: 34161590

Registered office: Luna Arena Herikerbergweg 238 1101 CM Amsterdam

The Netherlands

MORGAN STANLEY B.V.

Report and financial statements

31 December 2020

MORGAN STANLEY B.V.

CONTENTS	PAGE
ANNUAL REPORT
Directors' report	1
Directors' responsibilities statement	12
ANNUAL ACCOUNTS
Statement of comprehensive income	13
Statement of changes in equity	14
Statement of financial position	15
Statement of cash flows	16
Notes to the financial statements	17
OTHER INFORMATION
Additional information	69
Independent auditors' report	70

MORGAN STANLEY B.V.

DIRECTORS' REPORT

The Directors present their report and financial statements (which comprise the statement of comprehensive income, the statement of changes in equity, the statement of financial position, the statement of cash flows, and the related notes, 1 to 26) for Morgan Stanley B.V. (the "Company") for the year ended 31 December 2020.

RESULTS AND DIVIDENDS

The profit for the year, after tax, was €3,023,000 (2019: €765,000).

During the year, dividends of €15,000,000 were paid (2019: €nil).

PRINCIPAL ACTIVITY

The principal activity of the Company is the issuance of financial instruments including notes, certificates and warrants ("Structured Notes") and the hedging of the obligations arising pursuant to such issuances.

The Company was incorporated under Dutch law on 6 September 2001 and has its statutory seat in Amsterdam, The Netherlands. The business office of the Company is at Luna Arena, Herikerbergweg 238, 1101 CM, Amsterdam, The Netherlands.

The Company's ultimate parent undertaking and controlling entity is Morgan Stanley, which, together with the Company and Morgan Stanley's other subsidiary undertakings, form the "Morgan Stanley Group".

FUTURE OUTLOOK

There have not been any significant changes in the Company's principal activity in the year under review and no significant change in the Company's principal activity is expected.

BUSINESS REVIEW

Exposure to risk factors and the current business environment in which it operates may impact business results of the Company's operations.

Risk factors

Risk is an inherent part of the Company's business activity. The Company seeks to identify, assess, monitor and manage each of the various types of risk involved in its business activities, in accordance with defined policies and procedures.

The Morgan Stanley Group Risk Appetite Statement articulates the aggregate level and type of risk that the Group is willing to accept in order to execute its business strategy.

The Morgan Stanley Group has an established Risk Management Framework, to support the identification, monitoring and management of risk.

The primary risk areas for the Company include Market, Credit, Liquidity and Operational Risks which are discussed in the Risk Management section.

Emergence of COVID-19

The coronavirus disease ("COVID-19") pandemic and related voluntary and government-imposed social and business restrictions has adversely impacted global economic conditions, resulting in volatility in the global financial markets, increased unemployment, and operational challenges such as the temporary closure 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 have reacted to the economic crisis caused by the pandemic by implementing stimulus and liquidity programs and cutting interest rates. If the pandemic is prolonged or the actions of governments and central banks are unsuccessful, including adequate 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.

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MORGAN STANLEY B.V.

DIRECTORS' REPORT

BUSINESS REVIEW (CONTINUED)

Emergence of COVID-19 (continued)

During 2020 the Company has seen significant market volatility, however the resulting impact has been offset by the Company's hedging strategy.

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.

United Kingdom ("UK") withdrawal from the European Union ("EU")

On 31 January 2020, the UK withdrew from the EU under the terms of a withdrawal agreement between the UK and the EU. The withdrawal agreement provided for a transition period to the end of December 2020, during which time the UK would continue to apply EU law as if it were a member state, and UK firms' passporting rights to provide financial services in EU jurisdictions continued.

On 24 December 2020 the UK and the EU announced they had reached agreement on the terms of a trade and cooperation agreement to govern the future relationship between the parties. The agreement consists of three main pillars including: trade, citizens' security, and governance, covering a variety of arrangements in several areas. The agreement is provisionally applicable with effect from 1 January 2021 pending formal ratification by the EU. The Company's results of operations have not been negatively affected.

Planned Replacement of London Interbank Offered Rate ("LIBOR") and Replacement or Reform of Other Interest Rates

Central banks around the world, including the Federal Reserve, the Bank of England and the European Central Bank, have commissioned committees and working groups of market participants and official sector representatives to replace LIBOR and replace or reform other interest rate benchmarks (collectively, the "IBORs"). The Company are a party to a number of LIBOR-linked contracts, some of which extend beyond 2021 and, in the case of U.S. dollar LIBOR, 30 June 2023, comprising structured notes and derivatives.

In 2020, there have been several steps taken by the industry to encourage the transition to alternative reference rates. Certain central bank-sponsored committees have issued recommended best practices to assist market participants in transitioning away from the IBORs in various jurisdictions. These documents include recommended timelines and intermediate steps market participants can take in order to achieve a successful transition.

On 5 March 2021, Intercontinental Exchange ("ICE") Benchmark Administration, which administers LIBOR publication, announced that it will cease the publication of most LIBOR rates as of the end of December 2021, except for the publication until 30 June 2023 of the most widely used US dollar LIBOR tenors, and the UK Financial Conduct Authority ("FCA"), which regulates LIBOR publication, announced that it would not compel panel banks to submit to LIBOR beyond those dates. The United States of America ("US") banking agencies and the UK FCA have encouraged banks to cease entering into new contracts referencing LIBOR as soon as practicable and no later than 31 December 2021. The UK FCA has also announced that is consulting on whether to continue publication on a "synthetic" basis for a limited set of LIBOR settings beyond such cessation dates.

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MORGAN STANLEY B.V.

DIRECTORS' REPORT

BUSINESS REVIEW (CONTINUED)

Planned Replacement of London Interbank Offered Rate ("LIBOR") and Replacement or Reform of Other Interest Rates (continued)

Morgan Stanley has established and are undertaking a Morgan Stanley wide and regional IBOR transition plan to promote the transition to alternative reference rates, which is overseen by a global steering committee, with senior management oversight. The transition plan is designed to identify, assess and monitor risks associated with the expected discontinuation or unavailability of one or more of the IBORs, and includes continued engagement with central bank and industry working groups and regulators (including participation and leadership on key committees), active client engagement, internal operational readiness, and risk management, among other things. The review of the contracts which the Company are a party to includes assessing the impact of applicable fallbacks and any amendments that may be warranted or appropriate. Steps are also being taken to update operational processes (including to support alternative reference rates), models, and associated infrastructure through bilaterally negotiated voluntary conversions of outstanding LIBOR products where practicable. The impact on the Company's statement of comprehensive income for the year ended 31 December 2020 of transition steps already taken is not material.

Overview of 2020

The issued Structured Notes expose the Company to the risk of changes in market prices of the underlying securities, interest rate risk and, where denominated in currencies other than Euros, the risk of changes in rates of exchange between the Euro and the other relevant currencies. The Company uses the contracts that it purchases from other Morgan Stanley Group undertakings to hedge the market price, interest rate and foreign currency risks associated with the issuance of the Structured Notes.

The statement of comprehensive income for the year is set out on page 13. The Company reported a profit before income tax of €4,031,000 for the year ended 31 December 2020, compared to a profit before income tax of €1,013,000 for the prior year.

The profit before income tax for the year ended 31 December 2020 primarily comprises management charges recognised in 'Other revenue' of €5,109,000 compared to €1,013,000 received in the prior year. The increase in profit before income tax is driven by an increase in the Company's share of Europe, Middle East and Africa ("EMEA") derivatives revenues.

The Company has recognised a net expense of €57,448,000 in 'Net trading (expense)/ income' compared to a net income of €882,658,000 for the prior year, with a corresponding net income of €57,448,000 recognised in 'Net income/ (expense) on other financial instruments held at fair value' (2019: net expense of €882,658,000). This is due to fair value changes attributable to market movements on the securities underlying Structured Notes hedged by derivatives classified as trading financial instruments.

The statement of financial position for the Company is set out on page 15. The Company's total assets at 31 December 2020 are €8,428,162,000, a decrease of €628,704,000 or 7% when compared to 31 December 2019. Total liabilities of €8,398,699,000 represent a decrease of €616,727,000 or 7% when compared to total liabilities at 31 December 2019. These movements are primarily attributable to the value of issued Structured Notes and the related hedging instruments held at 31 December 2020. Structured Notes reflected in 'Debt and other borrowings' decreased by 7% compared to 31 December 2019. This is a result of maturities and fair value movements in the year partially being offset by new issuances. The net decrease in the value of the related hedging instruments is primarily the result of market movements.

The performance of the Company is included in the results of the Morgan Stanley Group. The Company's Directors believe that providing further performance indicators for the Company itself would not enhance an understanding of the development, performance or position of the business of the Company.

The risk management section below sets out the Company's and the Morgan Stanley Group's policies for the management of liquidity and cash flow risk and other significant business risks.

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