Please contact Homer C. Hill, III, of the Federal Reserve Bank of New York
at (212) 720-2164 if you have any questions.

Sincerely yours,

NlatdeV, Pre

Robert deV. Frierson
Deputy Secretary of the Board

cc: Homer C. Hill, II
Federal Reserve Bank of New York


BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D. C. 20551

ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD

April 10, 2009

Mr. Fred Gonfiantini
Managing Director
Morgan Stanley

1585 Broadway

New York, NY 10036

Dear Mr. Gonfiantini:

This is in response to your letter dated March 31, 2009, regarding the
regulatory capital treatment of the Board’s Regulation T margin debits (“Reg. T
margin loans”)' of Morgan Stanley’s registered U.S. broker-dealer, Morgan
Stanley & Co., Incorporated (“MS & Co.”), both of New York, New York. You
request that Morgan Stanley be granted an exception to the Board's risk-based
capital adequacy guidelines for bank holding companies (“Capital Guidelines”),?
which require a 100 percent risk weight for Reg. T margin loans. Specifically, you
have requested that Morgan Stanley be permitted to assign a 10 percent risk weight
to its Reg. T margin loans, consistent with the treatment that the Board has
approved for other bank holding companies.’

In the request, you contend that the risk-based capital requirement for such
loans is excessive and represent that Morgan Stanley has a de minimis internal
economic capital charge for credit risk on its Reg. T margin loans.

A margin account at a broker-dealer registered with the Securities and
Exchange Commission (“SEC”) is a leveraged account through which securities
can be purchased, sold short, carried, or traded using a loan from the broker-dealer
and a deposit of cash or securities by the customer. The amount of leverage

' 12 CER part 220.
> 12 CER part 225, Appendix A.

> See Board letters to John C. Gerspach (Citigroup Inc.), June 15, 2007; Jeffrey D.
Landau (The Bank of New York Mellon), December 17, 2007; and Alton E.
Yother (Regions Financial Corporation), December 18, 2007.


available to a customer is limited by the Board's Regulation T, the
margin-maintenance rules of the Financial Industry Regulatory Authority
(NYSE Rule 431), and the lender's internal margin-maintenance requirements.
Your request notes that Morgan Stanley generally applies internal
margin-maintenance requirements that exceed those of the SEC or the NYSE.
(MS & Co. is a member of the exchange).

As noted above, Reg. T margin loans held by U.S. bank holding companies
currently are assigned to the 100 percent risk weight category under the Capital
Guidelines, which results in a risk-based capital requirement of 8 percent. In
contrast, foreign firms, including foreign banking organizations that own U.S.
broker-dealers, as well as bank holding companies that own U.S. broker-dealers
and that have already received the requested relief, are currently required to hold
significantly less regulatory capital against Reg. T margin loans. The Board has
broad authority to grant exemptions from the Capital Guidelines on a case-by-case
basis.

Based on all the facts of record, including the information provided in your
request and other supervisory information, and subject to the conditions listed
below, the director of the Division of Banking Supervision and Regulation, acting
under delegated authority, has approved an exception to the Capital Guidelines that
permits Morgan Stanley to apply a 10 percent risk weight to its Reg. T margin
loans.

To qualify for the capital treatment outlined above, Morgan Stanley’s Reg. T
margin loans must meet the following conditions:

1. The securities collateral for the Reg. T margin loans is liquid and readily
marketable;

2. The Reg. T margin loans and associated collateral are marked to market each
business day;

3. The Reg. T margin loans are subject to initial margin requirements under
Regulation T and daily margin-maintenance requirements under NYSE
Rule 431 or NASD rule 2520; and

* 12 CER part 225, Appendix A, § ILA.


4. Morgan Stanley has a reasonable basis for concluding that it would be able
to liquidate the collateral for the Reg. T margin loans without undue delay,
even in the case of bankruptcy or insolvency of the borrower.

The capital treatment approved above for Morgan Stanley’s Reg. T margin
loans provides a more appropriate risk-based capital treatment for these
transactions than their current treatment under the Capital Guidelines. The
combination of initial margin requirements under Regulation T, ongoing
margin-maintenance requirements under NYSE Rule 431, generally higher
ongoing internal margin-maintenance requirements, Morgan Stanley’s daily
mark-to-market and margin-call policies, the presence of liquid and readily
marketable collateral even in the case of insolvency or bankruptcy of the borrower,
and the typical right to terminate such loans at any time makes them a low
credit-risk product warranting a 10 percent risk weight.

This exception accommodates Morgan Stanley’s broker-dealer activities in a
risk-sensitive manner, helps remove a constraint on certain of Morgan Stanley’s
securities-based lending operations, and brings Morgan Stanley’s risk-based capital
requirement for Reg. T margin loans in accord with bank holding companies that
are already permitted through Board exceptions to risk weighting these exposures
at 10 percent. Morgan Stanley should be aware that the Board may in the future
impose a regulatory capital treatment for Reg. T margin loans that differs from the
treatment described in your request.

This determination is conditioned on Morgan Stanley’s compliance with all
the commitments and representations made to the Board in connection with the
request. These commitments and representations are deemed to be conditions
imposed in writing in connection with granting the request and, as such, may be
enforced in proceedings under applicable law. Further, this determination is based
on the specific facts and circumstances described in the request and in your
discussions with Federal Reserve staff. Any material change in those facts and
circumstances or any failure by Morgan Stanley to observe any of its commitments
or representations may result in a different view or in a revocation of the regulatory
capital treatment permitted under this determination.