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Secured amount account for foreign futures and options on futures trades by U.S.customers. MS&Co. is required to separately hold customer funds for its customers tomargin or guarantee their futures and options on futures trades on foreign boards of trade.Collectively these funds are called the “secured amount” and are held in a customersegregated account separate from the funds held in the futures and cleared swap origins.Secured amount customer funds may be maintained in one commingled account for all ofMS&Co.’s foreign futures and options on futures customers. Secured amount customerfunds may be held with: (i) a bank or trust company located in the United States; (ii) theclearing organization of any foreign board of trade; (iii) a foreign broker; (iv) such aclearing organization’s or foreign broker’s designated depositories; (vi) a bank or trustcompany located outside the United States that has in excess of 1 billion of regulatorycapital; or (vii) an FCM registered with the CFTC. However, MS&Co. may not maintaincustomer funds in the foreign futures and options on futures account outside the UnitedStates except as necessary to meet margin requirements (including pre-fundingrequirements) established by rule, regulation or order of a foreign boards of trade orforeign clearing organization, or to meet margin calls issued by a foreign broker carryingthe secured amount account. Customer segregated account for cleared swap trades. MS&Co. must maintain customerfunds that margin cleared swap transactions in a customer segregated account that isseparate from the customer segregated account for U.S. futures and from the securedamount account. Funds for all cleared swaps customers may be commingled in a singleaccount and must be held at a bank or trust company, a clearing organization, or anotherFCM. Customer funds attributable to one cleared swap customer may not be used to meetthe obligations of MS&Co. or of any other person, including another customer.Acknowledgment Letters. Customer funds must be held in an account with a name that clearlyidentifies the funds as customer funds and shows that the funds are segregated as required underapplicable law. An FCM is required to obtain written acknowledgements from each depositorywith which it custodies customer funds that the depository was informed that such customer fundsbelong to customers and are being held in accordance with applicable law. (An FCM is not requiredto obtain a written acknowledgment from a registered derivatives clearing organization that hasadopted rules providing for the segregation of customer funds in accordance with the provisionsof applicable law.) Among other representations, the depository must acknowledge that it cannotuse any portion of customer funds to satisfy any obligations that the FCM may owe the depository.A copy of the letter must be filed with the CFTC and the FCM’s DSRO. Among other provisions,the depository must agree that that it will reply promptly and directly to any request forconfirmation of account balances or any other information regarding or related to the customersegregated account from authorized members of the CFTC staff or an appropriate representativeof the FCM’s DSRO. In addition, the depository must undertake to provide the CFTC with thetechnological capability to obtain direct, read-only access to account and transaction information.Separately, DSRO rules require each FCM to instruct each depository, whether located in theUnited States or outside the United States, that holds customer funds (in any or all of the customeraccount origins) to confirm to the DSRO all account balances daily. DSRO programs compare thedaily balances reported by the depositories with the balances reported by the FCMs in their dailysegregation reports. Any material discrepancies would generate an immediate alert to regulators.6

Reporting. MS&Co. is required, on each business day, to calculate its segregation requirementfor each segregated customer account and to submit (on the next following business day) to theCFTC and to CME (as its DSRO) a report that sets out (i) the total amount of customer fundsrequired to be held in each segregated customer account origin, (ii) the amount of such customerfunds actually held in each segregated customer account origin, and (iii) its residual interest ineach segregated customer account origin. In the event that the total amount of funds in a customersegregated account origin is less than the required amounts, MS&Co. would be required to giveimmediate notice of that fact to the CFTC, NFA, CME (as its DSRO) and other exchanges andclearing houses on which MS&Co. transacts as a ta.html) the following financial information relating to MS&Co.’s operations as anFCM: (i) the daily segregation statement, secured amount statement and cleared swap customerstatement for each business day of the last calendar year; (ii) a schedule of the currently availablemonth-end figures for MS&Co.’s tentative net capital, net capital and excess net capital for eachmonth of the last calendar year; (iii) the year-end certified statement of financial condition,segregation statement, secured amount statement and cleared swap statement and all relatedfootnotes thereto as set forth in MS&Co.’s most current and currently available certified annualreport; and (iv) the month-end segregation statement, secured amount statement and cleared swapcustomer statement as set forth on MS&Co.’s month-end and currently available FOCUS reportsfor each month of the preceding calendar year.Residual Interest. To ensure that it is continuously in compliance with its segregationrequirements, MS&Co. deposits a portion of its own funds in each customer segregated accountas a buffer to ensure that account levels do not fall below those required to margin customerpositions. These excess funds represent MS&Co.’s “residual interest” in each customer segregatedaccount. Residual interest funds are held for the exclusive benefit of MS&Co.’s customers whileheld in a customer segregated account. MS&Co. is required to have written policies andprocedures regarding the establishment and maintenance of a targeted residual interest in each ofthe three customer segregated account origins. In establishing the residual interest target amount,MS&Co. senior management have taken into consideration a number factors, including: (i) thenature of MS&Co.’s customers, their general creditworthiness, and their trading activity; (ii) thetype of markets and products traded by those customers, as well as MS&Co.’s proprietary trading;(iii) the general volatility and liquidity of those markets and products; (iv) MS&Co.’s own liquidityand capital needs; and (v) historical trends in balances and customer debits in each customersegregated account.All FCMs are required to notify the CFTC and its DSRO (the CME, for MS&Co.) immediatelywhenever the amount of residual interest in any segregated customer account falls below theFCM’s targeted residual interest for such customer segregated account. In addition, certainrestrictions and conditions apply to an FCM’s ability to withdraw funds comprising its residualinterest from any customer segregated account. Specifically, an FCM must file a regulatory reportof any withdrawal of funds from a customer segregated account that exceeds 25 percent of theFCM’s residual interest in that account, and any such withdrawal must be pre-approved in writingby a senior financial officer of the FCM.7

Periodic Regulatory Audits. MS&Co. is subject to an annual financial and operational auditconducted by its DSRO, which tests for MS&Co.’s compliance with its obligations underapplicable law relating to the handling of and accounting for customer segregated funds. Inaddition, MS&Co. is subject to periodic audits by the CFTC, NFA and other self-regulatoryorganizations.Bankruptcy Protections. The Federal Bankruptcy Code (the “Code”) includes provisionsrelating to the insolvency of an FCM that define customer property to mean cash, securities, orother property held by the FCM for the account of a customer. The Code also sets forth specialpriority rules for distribution of property to futures customers and exceptions to the automatic stayand voidability provisions of the Code. The Code affords claims of public customers of the FCM(that is, customers of the FCM that are not affiliates of the FCM) the highest priority, subject onlyto the payment of claims relating to the administration of customer property. In the event of theinsolvency of an FCM, where there also was a shortfall in customer funds, customers participatingin the relevant account class would be entitled to a pro-rata distribution of customer property, inaccordance with the requirements of section 766 of the Code.MS&Co.’s choice of bank depositories, custodians, and counterparties for customer funds.MS&Co. has adopted policies and procedures for the evaluation of depositories of customer funds,which include criteria that must be met by a depository to be selected to hold customer funds. Inevaluating a depository’s suitability as a custodian of customer funds, MS&Co. examines, amongother factors, the depository’s capitalization, creditworthiness, operational reliability, and accessto liquidity. MS&Co. also takes into account the extent to which customer funds are concentratedwith any depository or group of depositories. The criteria also include the availability of depositinsurance and the extent of the regulation and supervision of the depository.Upon the approval of a depository as a custodian of customer funds, account opening proceduresensure that, prior to the deposit of customer funds, the depository’s authorization requirements arefully documented, and acknowledgment letters required from the depository are executed and filedwith the appropriate regulator in accordance with applicable law.MS&Co. also has policies and procedures for monitoring any approved depository of customerfunds on an ongoing basis to assess its continued satisfaction of its established criteria, includingannual due diligence review of each depository.Collateral management. MS&Co. seeks to enable its customers to make efficient use of fundsdeposited with MS&Co. CFTC regulations and MS&Co. policies and procedures govern howcustomer funds provided to MS&Co. may be maintained and invested. Joint futures and securitiescustomers of MS&Co. (and its broker-dealer affiliates) may transfer excess margin from theirfutures, secured amount or cleared swap customer accounts to their securities accounts, and mayin turn meet their margin calls to MS&Co. as FCM by a transfer of available cash or collateralfrom their MS&Co. securities account. Customers should be aware that the funds transferred bya customer from a futures or cleared swaps account to a securities account would no longer receivethe regulatory treatment afforded to funds held in a customer futures or cleared swaps account.Instead, the funds would be subject to applicable securities customer protection rules and statutes8

such as Rule 15c3-3 under the Securities Exchange Act of 1934, as well as the Securities InvestorProtection Act of 1970 (“SIPA”).Permitted Investment of customer funds. CFTC Regulation 1.25 (“Regulation 1.25”) sets forthrequirements on how FCMs may invest customer funds. Pursuant to Regulation 1.25, an FCM ispermitted to use customer funds to purchase permitted investments. Permitted investments mustbe separately accounted for by the FCM under CFTC Regulation 1.26 and segregated from theFCM’s own assets in accounts that designate the funds as belonging to customers of the FCM andheld in segregation as required by the Commodity Exchange Act and CFTC regulations.MS&Co. submits a Segregated Investment Detail Report (“SIDR”) to the CFTC, the NFA andCME as its DSRO on the fifteenth and last business days of each month listing the names of allbanks, trust companies, FCMs, DCOs, or any other depository or custodian holding customer fundsfor MS&Co., for each customer segregated account. This report includes: (1) the name andlocation of each entity holding such customer funds; (2) the total amount of customer funds heldby each entity; and (3) the total amount of customer funds, cash and investments that each entityholds. A summary of the information set forth in the current MS&Co. SIDR may be viewed cialsIndex.aspx?entityId UpygXzt3Ct4%3dNon-recognition of Initial Margin. MS&Co. has implemented changes to the treatment of initialmargin that is received from its futures and cleared swaps customers in the form of cash. Inaccordance with generally accepted accounting principles in the United States, these changes haveresulted in the non-recognition of those cash initial margin balances on Morgan Stanley’s balancesheet.Separate Margining of Certain Accounts. In accordance with and at all times subject to theconditions set forth in CFTC Staff Advisory No. 19-17, dated July 10, 2019, issued by the Divisionof Clearing and Risk and the Division of Swap Dealer and Intermediary Oversight (“StaffAdvisory 19-17”), MS&Co. permits the treatment of certain accounts of the same beneficial owneras accounts of separate entities for purposes of CFTC Regulation 39.13(g)(8)(iii).Treatment of Separately Margined Accounts in the Event of an FCM Bankruptcy. In theevent of an FCM bankruptcy under 17 C.F.R. §§ 190.01 through 190.10 (the “Part 190 Rules”),all accounts of a customer that are separately margined in accordance with the terms and conditionsof Staff Advisory 19-17 will be combined, and any such customer’s rights and obligations withrespect to such separate accounts will be determined in accordance with the U.S. Bankruptcy Codeand the Part 190 Rules.Investment of MS&Co. own funds. MS&Co. invests its own funds separately from itsinvestments of customer funds. These investments include direct investments in: U.S. governmentand agency securities and other sovereign government obligations; state and municipal securitiesand other corporate debt; residential mortgage-backed securities, commercial mortgage-backedsecurities and other asset-backed securities; collateralized debt obligations that typically referencea tranche of an underlying synthetic portfolio of single name credit default swaps collateralized bycorporate bonds or cash portfolio of asset-backed securities; exchange-traded and unlisted equitysecurities and listed fund units; and listed and over-the-counter derivative contracts, includingforward, swap and option contracts related to interest rates, foreign currencies, credit standing of9

reference entities, or equity prices. MS&Co.’s investments also include direct investments inprivate equity funds, real estate funds and hedge funds.Material RisksAs discussed above, customer funds entrusted to MS&Co. are protected by significant regulatoryprotections and MS&Co.’s internal risk management and investment policies. Nonetheless,customer funds held by MS&Co. are subject to certain risks. As described below, these includethe risk of loss of all or part of the customer’s funds due to investments made by MS&Co., risksassociated with the operations of MS&Co. or its affiliates, and risks related to the financialcondition of MS&Co. or its affiliates.Potential risks from investments of customer funds. As of the date hereof, MS&Co. does notengage in permitted investments under Regulation 1.25. Were MS&Co. at any time to resumesuch permitted investments, such activity would entail risks arising from the particularinvestments, including market risk (the risk of loss arising from changes in price or value of aninvestment), credit risk (the risk of loss from a counterparty or issuer failing to meet its financialobligations), interest rate risk (the risk of loss due to changes to the level of one or more interestrates), and foreign exchange risk (the risk of loss due to changes to the value of a foreign currencyor exchange rate between currencies). Under normal circumstances, and in accordance with CFTCregulations, an FCM bears sole responsibility for any losses resulting from the investment ofcustomer funds in permitted investments under Regulation 1.25. However, in the extraordinarycircumstance of an FCM’s insolvency involving losses on permitted investments that the FCMwas unable to cover, customers could end up bearing a pro rata share of such losses.Potential risks from operations of MS&Co., its affiliates, and third-party service providers.Customers may be exposed to risks associated with the operations of MS&Co. or its affiliates.These risks include the risk of financial or other loss arising from inadequate or failed internalprocesses, employees, resources and systems or from fraudulent or other improper conduct.MS&Co.’s business is highly dependent on its ability to process, on a daily basis, a large numberof transactions across numerous and diverse markets and in many currencies. MS&Co. performsthe functions required to operate its different businesses either by itself or through third-partyservice providers. MS&Co. relies on the ability of its employees, its internal systems and systemsat technology centers operated by unaffiliated third parties to process a high volume oftransactions. These third parties may fail to perform their obligations, which could, in turn, disruptMS&Co.’s operations. MS&Co. also faces the risk of default, operational failure or cessation ofoperations of any of the clearing firms, exchanges, clearing houses, custodians, depositories orother financial intermediaries it uses to facilitate customer transactions. In the event of such adefault, breakdown or improper operation of MS&Co.’s, an affiliate’s, or a third party’s systems,or improper or unauthorized action by third parties or MS&Co.’s employees, MS&Co. could sufferfinancial loss, an impairment of liquidity, a disruption of business, regulatory sanctions or damageto its reputation, any of which could adv

4 1 MS&Co. facilitates access to B3 by introduction of certain customers to its Brazil affiliate, Morgan Stanley CTVM. 2 MS&Co. and its affiliate Morgan Stanley & Co. International plc ("MSIP") and Morgan Stanley Europe SE ("MSESE") are clearing members of ICE Clear Europe. MS&Co. maintains clearing accounts at ICE Clear Europe in its own name, as well as indirectly through its affiliate .