September 29, 2023 

Luigi L. De Ghenghi, Esq. 

Davis Polk & Wardwell LLP

450 Lexington Avenue 

New York, New York 10017 

Dear Mr. De Ghenghi: 

This is in response to your letter dated August 15, 2023, to the Board on 

behalf of Morgan Stanley, New York, New York, requesting relief under the Board’s 

Regulation Q (the “capital rule”).1 Specifically, Morgan Stanley requests authorization to 

treat the transaction by Morgan Stanley Finance LLC, New York, New York

(“MS Finance”), named “Series 2023-1 Portfolio Tranched Credit-Linked Notes due 

September 7, 2030” (the “CLN transaction”), as a synthetic securitization for purposes of 

calculating Morgan Stanley’s risk-weighted assets under the capital rule. 

In the CLN transaction, MS Finance has issued debt obligations, the 

principal and interest payments on which are calculated based on the performance of a 

pool of loans held by Morgan Stanley Bank, N.A., New York, New York. Specifically, 

payments on the obligations are calculated as if a credit default swap were in place.

2

 

MS Finance has received cash from purchasers in consideration for the issuance of these 

debt obligations. 

To be a securitization exposure under the capital rule, an exposure must 

arise from or reference a “traditional securitization” or a “synthetic securitization,” as

defined in the capital rule.3

 If the transaction meets certain operational criteria, a Boardregulated institution may, in the case of a traditional securitization, exclude the 

underlying exposures from the calculation of its risk-weighted assets or, in the case of a 

synthetic securitization, recognize for risk-based capital purposes the use of a credit risk 

1

 12 CFR part 217. 

2

 The transaction has been documented as if a credit default swap were in place under a 

2002 Master Agreement and Schedule, as published by the International Swaps and 

Derivatives Association, Inc., between MS Finance and a hypothetical counterparty. 

3

 12 CFR 217.2 s.vv. securitization exposure, synthetic securitization, traditional 

securitization. 
- 2 - 

mitigant to hedge the underlying exposures.4 A Board-regulated institution that meets 

these conditions must hold risk-based capital against any credit risk of the exposures it 

retains in connection with the securitization.

5

 Morgan Stanley requests that the Board 

permit it to compute its risk-weighted asset amount under the capital rule as if the CLN 

transaction were a synthetic securitization that met the operational criteria for synthetic 

securitizations.

For a transaction to be a synthetic securitization under the capital rule, at 

least a portion of the credit risk of one or more underlying exposures must be transferred 

to one or more third parties through the use of one or more “credit derivatives” or 

“guarantees,” as defined in the capital rule.6

 Moreover, to meet the operational criteria 

for a synthetic securitization, a Board-regulated institution must use a qualifying credit 

risk mitigant in the form of “financial collateral,” a guarantee that meets certain 

requirements, or a credit derivative that meets certain requirements.7

 Morgan Stanley has 

not demonstrated that the CLN transaction satisfies each of these elements of the capital 

rule. 

Under the CLN transaction, as represented by Morgan Stanley, a portion 

of the credit risk of the underlying exposures is transferred to the obligation holders by 

use of contractual provisions that incorporate standard industry credit derivative 

documentation. In addition, MS Finance receives the value of the purchased credit 

protection at issuance in the form of cash proceeds; the proceeds serve to mitigate credit 

risk of the protection providers. The amount of cash that MS Finance owes to the 

obligation holders depends on the credit performance of the pool of reference assets. 

Thus, the credit protection is pre-funded rather than backed by collateral.8

 Morgan 

Stanley contends that the CLN transaction meets all other definitional requirements and 

operational criteria for synthetic securitizations under the capital rule. It is expected that 

the risk weight produced under the securitization framework under the capital rule would 

be commensurate with the risk of the exposures that arise from the transaction if the CLN 

transaction as represented by Morgan Stanley were treated as a synthetic securitization 

that meets the operational criteria for a synthetic securitization.

4

 12 CFR 217.41(a) and (b); .141(a) and (b).

5

 Id. 

6

 12 CFR 217.2 s.vv. credit derivative, guarantee, synthetic securitization.

7

 12 CFR 217.41(b)(1); .141(b)(1); see also 12 CFR 217.2 s.vv. eligible credit derivative, 

eligible guarantee, financial collateral.

8

 Morgan Stanley has represented that, for the CLN transaction, the principal amount of 

the CLN transaction, the cash proceeds of the CLN transaction, the notional amount of 

protection under related interaffiliate credit derivatives, and the cash collateralizing the 

credit derivatives would all be denominated in the same currency as the reference 

portfolios and thus would not present any currency mismatch. 
- 3 -

Based on all the facts of record, the Director of the Division of 

Supervision and Regulation, acting pursuant to section 217.1(d)(3) of the capital rule

under authority delegated by the Board,

9 and after consultation with the General Counsel,

has determined that Morgan Stanley may calculate its risk-weighted asset amount under 

the capital rule as if the CLN transaction were a synthetic securitization that met all of the 

operational criteria for a synthetic securitization. This action also permits Morgan

Stanley to treat other credit-linked-note transactions as synthetic securitizations for 

purposes of calculating risk-weighted assets under the capital rule, so long as any such 

other credit-linked-note transactions are structured and documented in a substantially 

identical manner to the CLN transaction and do not deviate from the definitional 

requirements and operational criteria for synthetic securitizations in the capital rule other 

than with respect to the use of a “credit derivative” and the presence of a qualifying credit 

risk mitigant. In addition, this action applies only to the CLN transaction and other 

substantially identical CLN transactions up to an aggregate outstanding reference 

portfolio principal amount of the lower of 100 percent of Morgan Stanley’s total capital 

or $20 billion. Morgan Stanley may not apply this treatment to less than the entirety of 

all the exposures arising out of any given CLN transaction. 

This action is based on the specific facts and representations in the request 

and in communications with Board staff, as well as any commitments provided by 

Morgan Stanley. Any change in these facts or representations should be communicated 

immediately to Board staff and could result in a different conclusion. This action also is 

limited to this transaction and like transactions as described above and does not apply to 

any other transaction. 

Very truly yours,

(Signed) Ann E. Misback

Ann E. Misback

Secretary of the Board

9

 12 CFR 265.7(k)(1)(ii)(C).