#1MORGAN STANLEY BANK ASIA LIMITED Reports and financial statements 31 December 2020#2MORGAN STANLEY BANK ASIA LIMITED REPORTS AND FINANCIAL STATEMENTS Year ended 31 December 2020 CONTENTS Directors' report Independent auditor's report Income statement Statement of comprehensive income Statement of changes in equity Statement of financial position Statement of cash flows Notes to the financial statements Unaudited supplementary financial information PAGES 10 11 63 63 8 9 1 3 6 7#3MORGAN STANLEY BANK ASIA LIMITED DIRECTORS' REPORT The Directors present the annual report and audited financial statements (which comprise the income statement, statement of comprehensive income, statement of changes in equity, statement of financial position, statement of cash flows and related notes 1 to 33) for Morgan Stanley Bank Asia Limited (the "Company" or "MSBAL") for the year ended 31 December 2020. PRINCIPAL ACTIVITIES The Company is a private limited company incorporated in Hong Kong, with a head office in Hong Kong and a branch in Singapore ("Branch"). The Company is a full licensed bank under the Banking Ordinance in Hong Kong, regulated by the Hong Kong Monetary Authority ("HKMA"). The Branch is licensed as a wholesale bank in Singapore, regulated by the Monetary Authority of Singapore ("MAS"). The Company is also a registered institution under the Hong Kong Securities and Futures Ordinance. The principal activities of the Company are to engage in the business of banking including deposit taking and lending. It also acts (a) as agent on behalf of its customers in connection with the provision of general investment, securities and futures dealing, as well as discretionary management and (b) as introducing broker to Morgan Stanley & Co. International plc for the provision of clearance, settlement and custody services in relation to the aforementioned transactions. 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 (the "Morgan Stanley Group"). RESULTS AND APPROPRIATIONS The results of the Company for the year ended 31 December 2020 are set out in the income statement on page 6. No interim dividends were paid to the sole shareholder during the year. The Directors do not recommend the payment of a final dividend and propose that the profits be retained. SHARE CAPITAL Details of the Company's shares issued are set out in note 21 to the financial statements. DIRECTORS The following Directors held office throughout the year and up to the date of approval of this report: Almeida, Niall (Appointed on 10 March 2021) Chui, Yik Chiu Vincent Clatworthy, David Peter (Resigned on 5 May 2020) Fung, Choi Cheung Gazzi, Robert Kwan, Yin Ping Laroia, Gokul Ong, Whatt Soon Ronald Rajaram, Harish Taylor, George Alexander (Appointed on 5 May 2020) Wraight, David John (Resigned on 10 March 2021) DIRECTORS' MATERIAL INTERESTS IN TRANSACTIONS, ARRANGEMENTS AND CONTRACTS THAT ARE SIGNIFICANT IN RELATION TO THE COMPANY'S BUSINESS No transactions, arrangements and contracts of significance to which the Company, its holding companies or any subsidiaries of its holding companies were a party and in which a Director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. 1#4MORGAN STANLEY BANK ASIA LIMITED DIRECTORS' REPORT (CONTINUED) DIRECTORS' RIGHTS TO ACQUIRE SHARES AND DEBENTURES Morgan Stanley, the Company's ultimate holding company, has several senior executive incentive compensation programs under which senior executives receive, as part of their total compensation, incentive awards of restricted stock units. All Directors of the Company except independent non- executive directors, are eligible to participate in such incentive compensation programs and receive awards of restricted stock units thereunder. Details of the deferred stock awards of the ultimate holding company, in which the Directors of the Company are entitled to participate, are set out in note 31 to the financial statements. Other than as disclosed above, at no time during the year was the Company, its holding companies or any subsidiaries of its holding companies a party to any arrangements to enable the Directors of the Company to acquire benefits by means of acquisition of shares in, or debentures of, the Company or any other body corporate. PERMITTED INDEMNITY PROVISION The Articles of Association of the Company provide that a Director or former Director of the Company may be indemnified out of the Company's assets against any liability incurred by the Director to a person other than the Company or an associated company of the Company in connection with any negligence, default, breach of duty or breach of trust in relation to the Company or associated company (as the case may be). AUDITOR A resolution will be submitted to the annual general meeting to re-appoint Messrs. Deloitte Touche Tohmatsu as auditor of the Company. On behalf of the Board of Directors CHUI, VINCENT YIK CHIU DIRECTOR 22 April 2021 2#5INDEPENDENT AUDITOR'S REPORT TO THE SOLE MEMBER OF MORGAN STANLEY BANK ASIA LIMITED (incorporated in Hong Kong with limited liability) Opinion We have audited the financial statements of Morgan Stanley Bank Asia Limited (the "Company") set out on pages 6 to 62, which comprise the statement of financial position as at 31 December 2020, and the income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the financial statements give a true and fair view of the financial position of the Company as at 31 December 2020, and of its financial performance and its cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards ("HKFRSS") issued by the Hong Kong Institute of Certified Public Accountants (the "HKICPA") and have been properly prepared in compliance with the Hong Kong Companies Ordinance. Basis for Opinion We conducted our audit in accordance with Hong Kong Standards on Auditing ("HKSAS") issued by the HKICPA. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the HKICPA's Code of Ethics for Professional Accountants (the "Code"), and we have fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other Information The Directors are responsible for the other information. The other information comprises the information included in the annual report, but does not include the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. 3#6INDEPENDENT AUDITOR'S REPORT (CONTINUED) TO THE SOLE MEMBER OF MORGAN STANLEY BANK ASIA LIMITED (incorporated in Hong Kong with limited liability) Responsibilities of Directors and Those Charged with Governance for the Financial Statements The Directors are responsible for the preparation of the financial statements that give a true and fair view in accordance with HKFRSS issued by the HKICPA and the Hong Kong Companies Ordinance, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company's financial reporting process. Auditor's Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion solely to you in accordance with section 405 of the Hong Kong Companies Ordinance, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with HKSAS will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with HKSAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • . Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors.#7INDEPENDENT AUDITOR'S REPORT (CONTINUED) TO THE SOLE MEMBER OF MORGAN STANLEY BANK ASIA LIMITED (incorporated in Hong Kong with limited liability) Auditor's Responsibilities for the Audit of the Financial Statements . . continued Conclude on the appropriateness of the Directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong 22 April 2021 5#8MORGAN STANLEY BANK ASIA LIMITED INCOME STATEMENT Year ended 31 December 2020 Interest income Interest expense Net interest income Fee and commission income 2020 Notes US$'000 2019 US$'000 59,647 (16,949) 105,120 (20,241) 4 42,698 84,879 415,506 272,666 (1,090) (1,950) 5 414,416 270,716 (9,076) (1,461) Fee and commission expense Net fee and commission income Net trading expense Net gains on derecognition of financial assets measured at fair value through other comprehensive income ("FVOCI") 6 Other revenue Total non-interest revenues Net revenues Non-interest expense: Other expense Net impairment loss on financial instruments PROFIT BEFORE INCOME TAX Income tax PROFIT FOR THE YEAR 6 7 18,467 9,568 423,807 278,829 466,505 363,708 69 8 (310,418) (37) (263,682) 156,050 100,026 10 (24,403) (15,568) 131,647 84,458 All results were derived from continuing operations. The notes on pages 11 to 62 form an integral part of the financial statements. 6#9MORGAN STANLEY BANK ASIA LIMITED STATEMENT OF COMPREHENSIVE INCOME Year ended 31 December 2020 2020 Note US$'000 2019 US$'000 131,647 84,458 PROFIT FOR THE YEAR Items that may be reclassified subsequently to profit or loss: FVOCI reserve: 10 Net change in fair value (1,295) 367 Net amount reclassified to income statement (5) OTHER COMPREHENSIVE INCOME AFTER INCOME TAX (1,295) 362 TOTAL COMPREHENSIVE INCOME FOR THE YEAR ATTRIBUTABLE TO OWNER OF THE COMPANY 130,352 84,820 The notes on pages 11 to 62 form an integral part of the financial statements. 7#10MORGAN STANLEY BANK ASIA LIMITED STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2020 Balance at 1 January 2019 Profit for the year Other comprehensive income for the year: FVOCI reserve: Net change in fair value Net amount reclassified to income statement Total comprehensive income for the year Share FVOCI Retained Total capital reserve earnings equity Note US$'000 US$'000 US$'000 US$'000 170,000 968 137,937 308,905 84,458 84,458 10 655 367 367 (5) 362 84,458 84,820 Transaction with owner: Issue of share capital 500,000 500,000 Balance at 31 December 2019 and 1 January 2020 670,000 1,330 222,395 893,725 Profit for the year 131,647 131,647 Other comprehensive income for the year: FVOCI reserve: Net change in fair value Net amount reclassified to income statement Total comprehensive income for 10 (1,295) (1,295) the year (1,295) 131,647 130,352 Balance at 31 December 2020 670,000 35 354,042 1,024,077 The notes on pages 11 to 62 form an integral part of the financial statements. 8#11MORGAN STANLEY BANK ASIA LIMITED STATEMENT OF FINANCIAL POSITION As at 31 December 2020 ASSETS Notes 2020 US$'000 2019 US$'000 Cash and short-term deposits 22(a) Trading financial assets 12 1,256,705 1,709 633,898 Secured financing 13 582,265 Loans and advances 14 3,438,202 441 362,047 2,770,325 Investment securities 15 2,616,724 Trade and other receivables 16 88,733 854,769 62,570 Deferred tax assets 19 7,801 5,002 Prepayments 1,086 835 TOTAL ASSETS 7,993,225 4,689,887 LIABILITIES AND EQUITY Deposits 17 Trading financial liabilities 12 Trade and other payables 18 728 6,808,011 3,665,736 11,272 130,616 3,552 104,689 Current tax liabilities Accruals TOTAL LIABILITIES EQUITY Share capital 16,889 21,251 2,360 934 6,969,148 3,796,162 FVOCI reserve Retained earnings Equity attributable to owner of the Company TOTAL EQUITY TOTAL LIABILITIES AND EQUITY 22 21 670,000 670,000 21 35 1,330 354,042 222,395 1,024,077 893,725 1,024,077 893,725 7,993,225 4,689,887 These financial statements were approved by the Board of Directors and authorised for issue on 22 April 2021: Signed on behalf of the Board of Directors Chui, Vincent Yik Chiu Director Rajaram, Harish Director The notes on pages 11 to 62 form an integral part of the financial statements. 9#12MORGAN STANLEY BANK ASIA LIMITED STATEMENT OF CASH FLOWS Year ended 31 December 2020 Note 2020 US$'000 2019 US$'000 NET CASH FLOWS FROM/(USED IN) OPERATING ACTIVITIES 22(b) 2,364,912 (892,967) INVESTING ACTIVITIES Purchase of investment securities Proceeds from maturity/sale of investment securities Interest received from investment securities (7,017,094) 5,270,360 4,629 (2,750,300) 3,229,426 9,254 NET CASH FLOWS (USED IN)/FROM INVESTING ACTIVITIES (1,742,105) 488,380 FINANCING ACTIVITIES Issue of ordinary share capital NET CASH FLOWS FROM FINANCING ACTIVITIES 500,000 500,000 NET INCREASE IN CASH AND CASH EQUIVALENTS 622,807 95,413 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 633,898 538,485 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 22(a) 1,256,705 633,898 The notes on pages 11 to 62 form an integral part of the financial statements. 10 10#13MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 1. CORPORATE INFORMATION The Company is a private limited company with a head office in Hong Kong and a branch in Singapore ("Branch"). The Company was incorporated and is domiciled in Hong Kong, at the following principal place of business: Level 31, International Commerce Centre, 1 Austin Road West, Kowloon, Hong Kong. The Company is a full licensed bank under the Banking Ordinance in Hong Kong, regulated by the HKMA. The Branch is licensed as a wholesale bank in Singapore, regulated by the MAS. The Company is also a registered institution under the Hong Kong Securities and Futures Ordinance. The principal activities of the Company are to engage in the business of banking including deposit taking and lending. It also acts (a) as agent on behalf of its customers in connection with the provision of general investment, securities and futures dealing, as well as discretionary management and (b) as introducing broker to Morgan Stanley & Co. International plc for the provision of clearance, settlement and custody services in relation to the aforementioned transactions. The Company's immediate parent undertaking is Morgan Stanley Hong Kong 1238 Limited, which was incorporated in Hong Kong. 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. Morgan Stanley is incorporated in the State of Delaware, the United States of America. Copies of its financial statements can be obtained from http://www.morganstanley.com/investorrelations. 2. BASIS OF PREPARATION Statement of compliance The Company has prepared its annual financial statements in accordance with Hong Kong Financial Reporting Standards ("HKFRS") and interpretations issued by the Hong Kong Institute of Certified Public Accountants ("HKICPA") and the Hong Kong Companies Ordinance. New standards and interpretations adopted during the year The following amendments to standards and interpretations relevant to the Company's operations were adopted during the year. Except where otherwise stated, these standards, amendments to standards and interpretations did not have a material impact on the Company's financial statements. Amendments to HKAS 1 ‘Presentation of Financial Statements' and HKAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors' were issued by the HKICPA in January 2019, for application in accounting periods beginning on or after 1 January 2020. There were no other standards, amendments to standards or interpretations relevant to the Company's operations which were adopted during the year. 11#14MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 2. BASIS OF PREPARATION (CONTINUED) New standards and interpretations not yet adopted At the date of authorisation of these financial statements, the following amendments to standards relevant to the Company's operations were issued by the HKICPA but not mandatory for accounting periods beginning 1 January 2020. The Company does not expect that the adoption of the following standards, amendments to standards and interpretations will have a material impact on the Company's financial statements. Amendments to HKAS 1 'Presentation of Financial Statements': Classification of Liabilities as Current or Non-current were issued by the HKICPA in August 2020, for retrospective application in accounting periods beginning on or after 1 January 2023. Amendments to HKAS 37 'Provisions, Contingent Liabilities and Contingent Assets': Onerous Contracts - Cost of Fulfilling a Contract were issued by the HKICPA in June 2020, for modified retrospective application in accounting periods beginning on or after 1 January 2022. Early application is permitted. As part of the 2018-2020 Annual Improvements Cycle published in June 2020, the HKICPA made an amendment to HKFRS 9 ‘Financial Instruments', relating to the treatment of fees in the assessment of whether financial liabilities are modified or exchanged, where such transactions occur on or after 1 January 2022. Early application is permitted. Basis of measurement The financial statements of the Company are prepared under the historical cost basis, except for certain financial instruments that have been measured at fair value as explained in the accounting policies below. Critical accounting judgements and key sources of estimation uncertainty In preparing the financial statements, the Company makes judgements and estimates that affect the application of accounting policies and reported amounts. Critical accounting judgements are key decisions made by management in the application of the Company's accounting policies, other than those involving estimations, which have the most significant effects on the amounts recognised in the financial statements. Key sources of estimation uncertainty represent assumptions and estimations made by management that have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next financial year. The critical judgements in applying the Company's accounting policies are existences of impairment of financial assets, see note 3(f). The key sources of estimation uncertainty are the valuation of certain financial instruments. For further details on the assumptions and estimation uncertainties in determining the fair value of certain assets and liabilities, see notes 3(d) and 28. The Company evaluates the critical accounting judgements and key sources of estimation uncertainty on an ongoing basis and believes that these are reasonable. 12#15MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 2. BASIS OF PREPARATION (CONTINUED) COVID-19 The COVID-19 pandemic and related voluntary and government-imposed social and business restrictions has impacted global economic conditions, resulting in volatility in the global financial markets, increased unemployment, and operational challenges such as the temporary and permanent closures 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 around the world have reacted to the economic crisis caused by the pandemic by implementing stimulus and liquidity programs and cutting interest rates, though it is unclear whether these or future actions will be successful in countering the economic disruption. If the pandemic continues to be prolonged or the actions of governments and central banks are unsuccessful, including actions to facilitate the comprehensive 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. Should global market conditions worsen, or the pandemic lead to additional market disruptions, Morgan Stanley and the Company could experience reduced client activity and demand for products and services, impairments of other financial assets and other negative impacts on its financial position, including possible constraints on capital and liquidity, as well as a higher cost of capital, and possible changes or downgrades to credit ratings. In addition, continued low interest rates will limit interest margins in the lending businesses. A slowdown of commercial activity could cause a decline in client balances which could also reduce fee and financing revenues. Operationally, Morgan Stanley and the Company have initiated a work remotely protocol and restricted business travel of the workforce, with a return-to-workplace program, which is phased based on role, location and employee willingness and ability to return. While Morgan Stanley and the Company have not experienced a decrease in productivity as a result of the remote work environment, there can be no assurance that the transition will not have an adverse effect in the long term. If significant portions of the workforce, including key personnel, are unable to work effectively because of illness, government actions, or other restrictions in connection with the pandemic, the business impact of the pandemic could be exacerbated. In response to the significant economic impact of the COVID-19 pandemic, global regulators have released a suite of regulatory updates and programs to facilitate market continuation and to provide incentives for banks to continue lending to business and consumers. The impact of these regulatory measures is included in the Company's Pillar 3 disclosures under section H of the unaudited supplementary financial information. 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. The going concern assumption The notes to the financial statements include the Company's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments; and its exposures to credit risk and liquidity risk. Retaining sufficient liquidity and capital to withstand market pressures remains central to the Morgan Stanley Group's and the Company's strategy. Taking the above factors into consideration, the Directors believe it is reasonable to assume that the Company will have access to adequate resources to continue in operational existence for the foreseeable future and continue to adopt the going concern basis in preparing the annual report and financial statements. The existing and potential effects of COVID-19 on the business of the Company, as described in the 'COVID-19' note above, have been considered as part of the going concern analysis. 13#16MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Functional currency Items included in the financial statements are measured and presented in US dollars, the currency of the primary economic environment in which the Company operates. All currency amounts in the financial statements are rounded to the nearest thousand US dollars. b. Foreign currencies All monetary assets and liabilities denominated in currencies other than US dollars are translated into US dollars at the rates ruling at the reporting date. Transactions and non-monetary assets and liabilities denominated in currencies other than US dollars are recorded at the rates prevailing at the dates of the transactions. Foreign exchange differences arising from remeasurement of the amortised cost of fair value through other comprehensive income ("FVOCI") assets are recognised in the income statement. All other gains and losses from movements in foreign exchange rates on FVOCI assets are recorded in other comprehensive income. All other translation differences are taken through the income statement. Exchange differences recognised in the income statement are presented in ‘Other revenue' or 'Other expense', except where noted in 3(c) below. C. i) Financial instruments Financial instruments mandatorily at fair value through profit and loss Trading financial instruments Trading financial instruments include all derivatives contracts. Trading financial instruments are initially recorded on trade date at fair value (see note 3(d) below). All subsequent changes in fair value and foreign exchange differences are reflected in the income statement in 'Net trading income/(expense)'. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. For all trading financial instruments, transaction costs are excluded from the initial fair value measurement of the financial instrument. These costs are recognised in the income statement in 'Other expense'. Non-trading financial assets at fair value through profit or loss Non-trading financial assets at fair value through profit or loss ("FVPL") include secured financing transactions such as securities purchased under agreements to resell. Non-trading financial assets at FVPL are principally financial assets where the Company makes decisions based upon the assets' fair values and are generally recognised on settlement date at fair value (see note 3(d) below), since they are neither regular way nor are they derivatives. From the date the terms are agreed (trade date), until the financial asset is funded (settlement date), the Company recognises any unrealised fair value changes in the financial asset as non-trading financial assets at FVPL. On settlement date, the fair value of consideration given is recognised as a non-trading financial asset at FVPL. Realised interest is included within ‘Interest income' or 'Interest expense'. For all non-trading financial assets at FVPL, transaction costs are excluded from the initial fair value measurement of the financial assets. These costs are recognised in the income statement in ‘Other expense' (note 8). 14#17MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. ii) Financial instruments (continued) Financial assets measured at FVOCI Financial assets measured at FVOCI include government debt securities. Financial assets measured at FVOCI are financial instruments which are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets and the contractual terms of which give rise on specified dates to cash flows that are solely payments of principal and interest ("SPPI") on the principal amount outstanding. Financial assets measured at FVOCI are recorded on trade date and are initially recognised and subsequently measured at fair value (see note 3(d) below). Transaction costs that are directly attributable to the acquisition of a financial asset measured at FVOCI are added to the fair value on initial recognition. Interest calculated using the effective interest rate ("EIR") method (see note 3(c)(iii) below) is recognised in the income statement in 'Interest income'. Foreign exchange differences on the amortised cost of the asset are recognised in the income statement in ‘Other revenue' or 'Other expense'. Movement in expected credit loss ("ECL") allowance is recognised in both the income statement in 'Net impairment loss on financial instruments' and in the statement of comprehensive income in the 'FVOCI reserve'. All other gains and losses on financial assets measured at FVOCI are recognised in the 'FVOCI reserve' within equity. On derecognition of a financial asset measured at FVOCI, the cumulative gain or loss in the 'FVOCI reserve' is reclassified to the income statement and reported in 'Net gains on derecognition of financial assets measured at FVOCI'. iii) Financial assets and financial liabilities at amortised cost Financial assets at amortised cost include cash and short-term deposits, loans and advances and trade and other receivables. Financial assets are recognised at amortised cost when the Company's business model objective is to collect the contractual cash flows of the assets and where these cash flows are SPPI on the principal amount outstanding until maturity. Such assets are recognised when the Company becomes a party to the contractual provisions of the instrument. The instruments are initially measured at fair value (see note 3(d) below) and subsequently measured at amortised cost less ECL allowance. Interest is recognised in the income statement in 'Interest income', using the EIR method as described below. Transaction costs that are directly attributable to the acquisition of the financial asset are added to the fair value on initial recognition. ECL and reversals thereof are recognised in the income statement in 'Net impairment loss on financial instruments'. Financial liabilities classified at amortised cost include deposits and trade and other payables. Financial liabilities are classified as being subsequently measured at amortised cost, except where they are held for trading or are designated as measured at FVPL. They are recognised when the Company becomes a party to the contractual provisions of the instrument and are initially measured at fair value (see note 3(d) below) and subsequently measured at amortised cost. Interest is recognised in the income statement in 'Interest expense' using the EIR method as described below. Transaction costs that are directly attributable to the issue of a financial liability are deducted from the fair value on initial recognition. The EIR method is a method of calculating the amortised cost of a financial instrument (or a group of financial instruments) and of allocating the interest income or interest expense over the expected life of the financial instrument. The EIR is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial instrument (or, where appropriate, a shorter period) to the carrying amount of the financial instrument. The EIR is established on initial recognition of the financial instrument. The calculation of the EIR includes all fees and commissions paid or received, transaction costs, and discounts or premiums that are an integral part of the EIR. 15#18MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. C. d. iv) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Financial instruments (continued) Secured financing In the course of financing its business, the Company enters into arrangements which involve the purchase of securities with resale agreements. Securities received by the Company under resale arrangements are generally not recognised on the statement of financial position. Where cash collateralised, the resulting cash collateral receivable and accrued interest arising under resale agreements are classified as 'Non-trading at FVPL' as they are managed on a fair value basis. Fair value Fair value measurement Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the "exit price") in an orderly transaction between market participants at the measurement date. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, assumptions are set to reflect those that the Company believes market participants would use in pricing the asset or liability at the measurement date. Where the Company manages a group of financial assets and financial liabilities on the basis of its net exposure to either market risks or credit risk, the Company measures the fair value of that group of financial instruments consistently with how market participants would price the net risk exposure at the measurement date. In determining fair value, the Company uses various valuation approaches and establishes a hierarchy for inputs used in measuring fair value that requires the most observable inputs be used when available Observable inputs are inputs that market participants would use in pricing the asset or liability that were developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect assumptions the Company believes other market participants would use in pricing the asset or liability, that are developed based on the best information available in the circumstances. The fair value hierarchy is broken down into three levels based on the observability of inputs as follows, with Level 1 being the highest and Level 3 being the lowest level: - • Level 1 Quoted prices (unadjusted) in an active market for identical assets or liabilities Valuations based on quoted prices in active markets that the Morgan Stanley Group has the ability to access for identical assets or liabilities. Valuation adjustments, block discounts and discounts for equity-specific restrictions that would not transfer to market participants are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgement. Level 2 - Valuation techniques using observable inputs Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 3 - Valuation techniques with significant unobservable inputs Valuations based on inputs that are unobservable and significant to the overall fair value measurement. 16#19MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. d. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fair value (continued) Fair value measurement (continued) The availability of observable inputs can vary from product to product and is affected by a wide variety of factors, including the type of product, whether the product is new and not yet established in the marketplace, the liquidity of markets and other characteristics particular to the product. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgement. Accordingly, the degree of judgement exercised by the Company in determining fair value is greatest for instruments categorised in Level 3 of the fair value hierarchy. The Company considers prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3 of the fair value hierarchy. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the total fair amount is disclosed in the level appropriate for the lowest level input that is significant to the total fair value of the asset or liability. For assets and liabilities that are transferred between levels in the fair value hierarchy during the period, fair values are ascribed as if the assets or liabilities had been transferred as of the beginning of the period. Valuation techniques Many cash instruments and OTC derivative contracts have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that a party is willing to pay for an asset. Ask prices represent the lowest price that a party is willing to accept for an asset. The Company carries positions at the point within the bid-ask range that meets its best estimate of fair value. For offsetting positions in the same financial instrument, the same price within the bid-ask spread is used to measure both the long and short positions. Fair value for many cash instruments and OTC derivative contracts is derived using pricing models. Pricing models take into account the contract terms, as well as multiple inputs including, where applicable, commodity prices, equity prices, interest rate yield curves, credit curves, correlation, creditworthiness of the counterparty, creditworthiness of the Company, option volatility and currency rates. Where appropriate, valuation adjustments are made to account for various factors such as liquidity risk (bid-ask adjustments), credit quality, model uncertainty and concentration risk and funding. Adjustments for liquidity risk adjust model-derived mid-market amounts of Level 2 and Level 3 financial instruments for the bid-mid or mid-ask spread required to properly reflect the exit price of a risk position. Bid-mid and mid-ask spreads are marked to levels observed in trade activity, broker quotes or other external third-party data. Where these spreads are unobservable for the particular position in question, spreads are derived from observable levels of similar positions. 17#20MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. d. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fair value (continued) Valuation process Valuation Control ("VC") within Finance is responsible for the Company's fair value valuation policies, processes and procedures. VC is independent of the business units and reports to the Chief Financial Officer of the Morgan Stanley Group ("CFO"), who has final authority over the valuation of the Company's financial instruments. VC implements valuation control processes designed to validate the fair value of the Company's financial instruments measured at fair value including those derived from pricing models. Model Review. VC, in conjunction with the Model Risk Management Department ("MRM"), which reports to the Chief Risk Officer of the Morgan Stanley Group ("CRO"), independently reviews valuation models' theoretical soundness, the appropriateness of the valuation methodology and calibration techniques developed by the business units using observable inputs. Where inputs are not observable, VC reviews the appropriateness of the proposed valuation methodology to determine that it is consistent with how a market participant would arrive at the unobservable input. The valuation methodologies utilised in the absence of observable inputs may include extrapolation techniques and the use of comparable observable inputs. As part of the review, VC develops a methodology to independently verify the fair value generated by the business unit's valuation models. The Company generally subjects valuations and models to a review process initially and on a periodic basis thereafter. Independent Price Verification. The business units are responsible for determining the fair value of financial instruments using approved valuation models and valuation methodologies. Generally on a monthly basis, VC independently validates the fair values of financial instruments determined using valuation models by determining the appropriateness of the inputs used by the business units and by testing compliance with the documented valuation methodologies approved in the model review process described above. The results of this independent price verification and any adjustments made by VC to the fair value generated by the business units are presented to management of the Morgan Stanley Group's three business segments (i.e. Institutional Securities, Wealth Management and Investment Management), the CFO and the CRO on a regular basis. VC uses recently executed transactions, other observable market data such as exchange data, broker/dealer quotes, third-party pricing vendors and aggregation services for validating the fair values of financial instruments generated using valuation models. VC assesses the external sources and their valuation methodologies to determine if the external providers meet the minimum standards expected of a third-party pricing source. Pricing data provided by approved external sources are evaluated using a number of approaches; for example, by corroborating the external sources' prices to executed trades, by analysing the methodology and assumptions used by the external source to generate a price and/ or by evaluating how active the third-party pricing source (or originating sources used by the third-party pricing source) is in the market. Based on this analysis, VC generates a ranking of the observable market data designed to ensure that the highest-ranked market data source is used to validate the business unit's fair value of financial instruments. VC reviews the models and valuation methodology used to price new material Level 2 and Level 3 transactions and both Finance and MRM must approve the fair value of the trade that is initially recognised. Level 3 Transactions. VC reviews the business unit's valuation techniques to assess whether these are consistent with market participant assumptions. 18#21MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. d. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fair value (continued) Gains and losses on inception In the normal course of business, the fair value of a financial instrument on initial recognition is the transaction price (i.e. the fair value of the consideration given or received). In certain circumstances, however, the fair value will be based on other observable current market transactions in the same instrument, without modification or repackaging, or on a valuation technique whose variables include only data from observable markets. When such evidence exists, the Company recognises a gain or loss on inception of the transaction. When the use of unobservable market data has a significant impact on determining fair value at the inception of the transaction, the entire initial gain or loss indicated by the valuation technique as at the transaction date is not recognised immediately in the income statement, but is deferred and recognised over the life of the instrument or at the earlier of when the unobservable market data become observable, maturity or disposal of the instrument. e. Derecognition of financial assets and liabilities The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risk and rewards of ownership of the asset. If the asset has been transferred, and the Company neither transfers nor retains substantially all of the risks and rewards of the asset, then the Company determines whether it has retained control of the asset. If the Company has retained control of the asset, it shall continue to recognise the financial asset to the extent of its continuing involvement in the financial asset. If the Company has not retained control of the asset, it derecognises the asset and separately recognises any rights or obligation created or retained in the transfer. The renegotiation or modification of the contractual cash flows of a financial instrument can lead to derecognition where the modification is "substantial", determined by qualitative assessment of whether the revised contractual terms of a financial instrument, such as a loan, are significantly different from those of the original financial instrument. In the event that the qualitative assessment is unclear, a quantitative 10% cash flow test is performed. Where modifications do not result in derecognition of the financial instrument, the gross carrying amount of the financial instrument is recalculated and a modification gain/ (loss) is recognised in the income statement. Upon derecognition of a financial asset, the difference between the previous carrying amount and the sum of any consideration received, together with the transfer of any cumulative gain/loss previously recognised in equity, are recognised in the income statement within 'Net gains/(losses) on derecognition of financial assets measured at FVOCI'. The Company derecognises financial liabilities when the Company's obligations are discharged or cancelled or when they expire. 19#22MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) f. Impairment of financial instruments The Company recognises loss allowances for ECL for the following financial instruments that are not measured at FVPL: financial assets measured at amortised cost; and • financial assets measured at FVOCI. Measurement of ECL For financial assets, ECL are the present value of cash shortfalls (i.e. the difference between contractual and expected cash flows) over the expected life of the financial instrument, discounted at the asset's EIR. Where a financial asset is credit-impaired at the reporting date, the ECL is measured as the difference between the asset's gross carrying amount and the present value of future cash flows, discounted at the original EIR. The Company applies a three stage approach to measuring ECL based on the change in credit risk since initial recognition: Stage 1: if the credit risk of the financial instrument at the reporting date has not increased significantly since initial recognition then the loss allowance is calculated as the lifetime cash shortfalls that will result if a default occurs in the next 12 months, weighted by the probability of that default occurring. Stage 2: if there has been a significant increase in credit risk ("SICR") since initial recognition, the loss allowance is calculated as the ECL over the remaining life of the financial instrument. If it is subsequently determined that there has no longer been a SICR since initial recognition, then the loss allowance reverts to reflecting 12-month expected losses. Stage 3: if there has been a SICR since initial recognition and the financial instrument is deemed credit-impaired (see below for definition of credit-impaired), the loss allowance is calculated as the ECL over the remaining life of the financial instrument. If it is subsequently determined that there has no longer been a SICR since initial recognition, then the loss allowance reverts to reflecting 12-month expected losses. Assessment of significant increase in credit risk When assessing SICR, the Company considers both quantitative and qualitative information and analysis based on the Company's historical experience and expert credit risk assessment, including forward- looking information. The probability of default ("PD") is derived from internal credit rating grades (based on available information about the borrower) and multiple forward-looking macroeconomic scenarios which are probability weighted. Credit risk is considered to have increased significantly if the PD has significantly increased at the reporting date relative to the PD of the facility, at the date of initial recognition. The assessment of whether a change in PD is "significant" is based both on a consideration of the relative change in PD and on qualitative indicators of the credit risk of the facility, which indicate whether a loan is performing or in difficulty. In addition, as a backstop, the Company considers that SICR has occurred in all cases when an asset is more than 30 days past due. The Company's accounting policy is to not use the 'low' credit risk practical expedient. As a result, the Company monitors all financial instruments which are subject to impairment for SICR, with the exception of loans and advances and the corresponding interest receivable, for which a lifetime ECL is always calculated. In general, ECL are measured so that they reflect: • A probability-weighted range of possible outcomes; • The time value of money; and • Relevant information relating to past, current and future economic conditions 20 20#23MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. f. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Impairment of financial instruments (continued) Calculation of ECL ECL are calculated using three main components: • • • Probability of default ("PD"): for accounting purposes, the 12-month and lifetime PD represent the expected point-in-time probability of a default over the next 12 months and over the remaining lifetime of the financial instrument respectively, based on conditions existing at the balance sheet date and future economic conditions. Expected loss given default ("LGD"): the LGD represents expected loss conditional on default, taking into account the mitigating effect of collateral, including the expected value of the collateral when realised and the time value of money. Estimated exposure at default ("EAD"): this represents the expected EAD, taking into account the expected repayment of principal and interest from the balance sheet date to the default event together with any expected drawdowns of the facility over that period. These parameters are generally derived from internally developed statistical models, incorporating historical, current and forward-looking macro-economic data and country risk expert judgement. The macro-economic scenarios are reviewed quarterly. The 12-month ECL are equal to the sum over the next 12 months of quarterly PD multiplied by LGD and EAD, with such expected losses being discounted at the EIR. Lifetime ECL are calculated using the discounted present value of total quarterly PDs multiplied by LGD and EAD, over the full remaining life of the facility. When measuring ECL, the Company considers multiple scenarios, except where practical expedients are used to determine ECL. Practical expedients are used where they are consistent with the principles described above. The Company measures ECL on an individual asset basis and has no purchased or originated credit- impaired ("POCI") financial assets. More information on measurement of ECL is provided in note 24. Presentation of ECL ECL is recognised in the income statement within 'Net impairment loss on financial instruments'. ECL on financial assets measured at amortised cost are presented as an ECL allowance. The allowance reduces the net carrying amount on the face of the statement of financial position. Where the financial asset is measured at FVOCI, the loss allowance is recognised as an accumulated impairment amount in other comprehensive income and does not reduce the carrying amount of the financial asset on the statement of financial position. Credit-impaired financial instruments In assessing the impairment of financial instruments under the ECL model, the Company defines credit- impaired financial instruments in accordance with the Credit Risk Management Department's policies and procedures. A financial instrument is credit-impaired when, based on current information and events, it is probable that the Company will be unable to collect all scheduled payments of principal or interest when due according to the contractual terms of the agreement. 21 121#24MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. f. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Impairment of financial instruments (continued) Definition of Default In assessing the impairment of financial instruments under the ECL model, the Company defines default in accordance with Credit Risk Management Department's policies and procedures. This considers whether the borrower is unlikely to pay its credit obligations to the Company in full and takes into account qualitative indicators, such as breaches of covenants. The definition of default also includes a presumption that a financial asset which is more than 90 days past due ("DPD") has defaulted. Write-offs Loans and government debt securities are written off (either partially or in full) when they are deemed uncollectible which generally occurs when all commercially reasonable means of recovering the balance have been exhausted. Such determination is based on an indication that the borrower can no longer pay the obligation, or that the proceeds from collateral will not be sufficient to pay the balance. Partial write-offs are made when a portion of the balance is uncollectable. However, financial assets that are written off could still be subject to enforcement activities for recoveries of amounts due. If the amount to be written off is greater than the accumulated loss allowance, the difference is reflected directly in the income statement within 'Net impairment loss on financial instruments' and is not recognised in the loss allowance account. Any subsequent recoveries are credited to ‘Net impairment loss on financial instruments' within the income statement. g. Revenue recognition Revenues are recognised when the promised services are delivered to the Company's customers, in an amount that is based on the consideration the Company expects to receive in exchange for those services when such amounts are not probable of significant reversal. Fee and commission income Fee and commission income results from transaction-based arrangements in which the client is charged a fee for the execution of transactions. Such revenues primarily arise from the Company providing services in connection with the provision of general investment, securities and futures dealing, as well as discretionary management to its customers and as introducing broker to Morgan Stanley & Co. International plc for the provision of clearance, settlement and custody services in relation to the aforementioned transactions. Fee and commission income is recognised on trade date when the performance obligation is satisfied. h. Fees and commission expense Fees and commission expense in the income statement include service fees. Amounts are recognised as the related services are received. i. Cash and cash equivalents comprise cash and demand deposits with banks along with highly liquid investments, with original maturities of three months or less, that are readily convertible to known amounts of cash and subject to insignificant risk of change in value. Cash and cash equivalents 22 22#25MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. j. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income tax The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is calculated based on taxable profit for the year. Taxable profit may differ from profit/(loss) before income tax as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. Taxable profit is also adjusted if it is considered that it is not probable that a taxation authority will accept an uncertain tax treatment. The Company's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date. Current tax is charged or credited in the income statement, except when it relates to items charged or credited directly to other comprehensive income or equity, in which case the current tax is also recorded within other comprehensive income or equity respectively. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and limited to the extent that it is probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to other comprehensive income or equity, in which case the deferred tax is reflected within other comprehensive income or equity, respectively. Current tax assets are offset against current tax liabilities when there is a legally enforceable right to set off current tax assets against current tax liabilities and the Company intends to settle its current tax assets and current tax liabilities on a net basis or to realise the asset and settle the liability simultaneously. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and current tax liabilities on a net basis. Provisions and commitments k. Provisions are recognised when the Company has an identified present obligation as a result of a past event, when it is probable that an outflow of resources embodying economic benefits will be required to settle that obligation and when a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the year end date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount reflects the present value of those cash flows, where the effect of discounting is material. A commitment is any legal obligation to potentially make or receive cash payments or transfer cash. Commitments are not recognised in the financial statements. Disclosure is made unless the probability of settlement is remote. 23#26MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 1. Offsetting of financial assets and financial liabilities Where there is a currently legally enforceable right to set off the recognised amounts and an intention to either settle on a net basis or to realise the asset and the liability simultaneously, financial assets and financial liabilities are offset and the net amount is presented on the statement of financial position. In the absence of such conditions, financial assets and financial liabilities are presented on a gross basis. m. n. Employee compensation plans i) Equity-settled share-based compensation plans Morgan Stanley issues awards in the form of restricted stock units ("RSUS") to employees of the Morgan Stanley Group for services rendered to the Company. Awards are equity-settled and the cost of the equity-based transactions with employees is measured based on the fair value of the equity instruments at grant date. The fair value of RSUs is based on the market price of Morgan Stanley common stock on the date the award is granted, measured as the volume-weighted average price on the date of grant ("VWAP"). The fair value of RSUs not entitled to dividends until conversion is measured at VWAP reduced by the present value of dividends expected to be paid on the underlying shares prior to the scheduled conversion date. Awards generally contain clawback and cancellation provisions. Certain awards provide Morgan Stanley the discretion to clawback or cancel all or a portion of the award under specified circumstances. Compensation expense for these awards is adjusted for changes in the fair value of the Morgan Stanley's common stock until conversion. The Company recognises compensation cost over the relevant vesting period for each separately vesting portion of the award. An estimation of awards that will be forfeited prior to vesting due to the failure to satisfy service conditions is considered in calculating the total compensation cost to be amortised over the relevant vesting period. Under Morgan Stanley Group chargeback agreements, the Company pays Morgan Stanley for the procurement of shares. The Company pays Morgan Stanley the grant date fair value and any subsequent movement in fair value up to the time of conversion of the award and delivery of shares to the employees. Share-based compensation expense is recorded within ‘Other expense' in the income statement. ii) Deferred cash-based compensation plans Morgan Stanley awards deferred cash-based compensation on behalf of the Company for the benefit of employees, providing a return to the participating employees based upon the performance of various referenced investments. Compensation expense for deferred cash-based compensation awards is calculated based on the notional value of the award granted, adjusted for changes in the fair value of the referenced investments that employees select. The Company recognises compensation cost over the relevant vesting period for each separately vesting portion of the award. Forfeitures due to failure to satisfy service conditions are accounted for as they occur. Deferred cash-based compensation expense is recorded within in ‘Other expense' in the income statement. The liability for the awards is measured at fair value and is included within ‘Other liabilities' in the statement of financial position. Post-employment benefits The Company operates defined contribution post-employment plans. Additionally, the Branch of the Company participates in a defined contribution plan, the Singapore Central Provident Fund. Contributions due in relation to the Company's defined contribution post-employment benefit plan are recognised in ‘Other expense' in the income statement when payable. Details of the plans are given in note 32 to these financial statements. 24#27MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 4. INTEREST INCOME AND INTEREST EXPENSE The table below presents interest income and expense by accounting classification. Interest income and expense is calculated using the EIR method for financial assets and financial liabilities measured at amortised cost and financial assets measured at FVOCI. Interest income includes realised interest on certain financial assets measured at FVPL. 2020 US$'000 2019 US$'000 Financial assets measured at amortised cost 49,366 68,903 Financial assets measured at FVOCI 8,126 23,747 Financial assets not measured at FVPL 57,492 92,650 Non-trading financial assets measured at FVPL 2,155 12,470 Financial assets measured at FVPL 2,155 12,470 Total interest income 59,647 105,120 Financial liabilities measured at amortised cost (16,949) (20,241) Total interest expense (16,949) (20,241) Net interest income 42,698 84,879 No other gains or losses have been recognised in respect of financial assets measured at amortised cost other than as disclosed as 'Interest income' and foreign exchange differences disclosed in ‘Other revenue' (note 7). No other gains or losses have been recognised in respect of financial liabilities measured at amortised cost other than as disclosed as 'Interest expense', and foreign exchange differences disclosed in 'Other revenue' (note 7). 5. FEE AND COMMISSIONS 2020 US$'000 2019 US$'000 Fee and commission income: Sales commissions and fees 415,484 Other fees 22 Total fee and commission income 415,506 272,656 10 272,666 Of which, revenue from contracts with customers 14,678 14,077 Fee and commission expense: Sales commissions and fees (1,090) (1,950) Total fee and commission expense (1,090) (1,950) Net fee and commission income 414,416 270,716 25 25#28MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 6. NET GAINS ON DERECOGNITION OF FINANCIAL ASSETS MEASURED AT FVOCI The table below summarises the carrying amount of the derecognised financial assets measured at FVOCI and the gain on derecognition. Investment securities 7. OTHER REVENUE 2020 2019 Carrying amount of Gains arising Carrying amount of Gains arising financial assets sold from US$'000 derecognition US$'000 financial assets sold from US$'000 derecognition US$'000 100 Net foreign exchange gains Management charges to other Morgan Stanley Group undertakings Others 99,976 2020 US$'000 2019 US$'000 11,641 3,023 6,719 6,465 107 80 18,467 9,568 Of which, revenue from contracts with customers 6,719 6,465 26 46#29MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 8. OTHER EXPENSE 2020 US$'000 2019 US$'000 Staff costs Directors' remuneration Fees 203,884 165,609 169 167 Contribution to defined contribution plan 71 Others 13,277 70 9,796 Auditors' remuneration: Fees payable to the Company's auditor for the audit of the Company's annual financial statements 614 580 Fees payable to the Company's auditor for other services to the Company 27 Non-audit professional services 7,084 1 6,890 Management charges from other Morgan Stanley Group undertakings relating to staff costs 496 298 Management charges from other Morgan Stanley Group undertakings relating to other services 80,655 75,926 Others 4,141 4,345 310,418 263,682 Included within 'Staff costs', 'Directors' remuneration' and 'Management charges from other Morgan Stanley Group undertakings' are amounts totalling US$20,670,000 (2019: US$18,678,000) in relation to equity-settled share-based compensation plans granted to employees of the Company. These costs reflect the amortisation of equity-based awards in relation to current and previous years' awards and are therefore not directly aligned with other staff costs in the current year. Similarly, included within 'Staff costs', 'Directors' remuneration' and 'Management charges from other Morgan Stanley Group undertakings' are amounts totalling US$21,319,000 (2019: US$19,471,000) in relation to the amortisation of current and previous years' awards of deferred cash-based compensation, granted to employees of the Company. Further information regarding employee compensation plans is provided in note 31. For the years ended 31 December 2020 and 31 December 2019, the Company has not paid any (a) payments or benefits in respect of the termination of the service of directors whether in the capacity of directors or in any other capacity while being a director of the Company, and (b) consideration provided to or receivable by any third party for making available the services of a person as a director or in any other capacity while being a director of the Company. During the year, the Company has not granted any loans, quasi-loans nor entered into any other dealings in favor of (a) the Directors, (b) entities controlled by the Directors; or (c) entities connected with the Directors (2019: Nil). 27 27#30MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 9. NET IMPAIRMENT LOSS ON FINANCIAL INSTRUMENTS The following table shows the net ECL charge and write-offs for the year. 2020 2019 Net ECL US$'000 Write-offs US$'000 Loans and advances 37 37 Total US$'000 37 Net ECL US$'000 Write-offs Total US$'000 US$'000 37 All of the above impairment losses were calculated on an individual basis. No collective impairment assessments were made during the year or prior year. 10. INCOME TAX Current tax 2020 US$'000 2019 US$'000 Current year Hong Kong 23,170 14,420 Other jurisdiction 3,741 2,033 26,911 16,453 Adjustments in respect of prior years Hong Kong 31 (2) Other jurisdiction (8) 131 23 129 26,934 16,582 Deferred tax Origination and reversal of temporary differences (2,544) (1,030) Adjustments in respect of prior years 13 (2,531) 16 (1,014) Income tax 24,403 15,568 28#31MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 10. INCOME TAX (CONTINUED) Reconciliation of effective tax rate The current year income tax expense is lower (2019: lower) than that resulting from applying the standard rate of profits tax in Hong Kong for the year of 16.5% (2019:16.5%). The main differences are explained below: 2020 US$'000 2019 US$'000 Profit before income tax 156,050 100,026 Income tax using the standard rate of profits tax in Hong Kong of 16.5% 25,748 16,504 Impact on tax of: Expenses not deductible for tax purposes 741 Tax exempt income (956) 1,362 (1,734) Concessionary tax rate (1,268) (712) Effect of tax rates in foreign jurisdiction 138 81 Tax under provided in prior years Withholding tax expensed Other 36 145 5 (36) (83) Total income tax in the income statement 24,403 15,568 In addition to the amount charged to the income statement, the aggregate amount of current and deferred tax relating to each component of other comprehensive income was as follows: FVOCI reserve: Net change in fair value Net amount reclassified to income Statement Other comprehensive income Before tax US$'000 2020 Tax (expense)/ benefit US$'000 2019 Net of tax US$'000 Before tax US$'000 Tax (expense)/ benefit US$'000 Net of tax US$'000 (1,542) 247 (1,295) 427 (60) 367 (6) 1 (5) (1,542) 247 (1,295) 421 (59) 362 29#32MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 11. FINANCIAL ASSETS AND FINANCIAL LIABILITIES BY MEASUREMENT CATEGORY The following table analyses financial assets and financial liabilities as presented in the statement of financial position by HKFRS 9 classifications. 2020 Amortised FVPL US$'000 FVOCI cost US$'000 Cash and short-term deposits US$'000 1,256,705 Total US$'000 1,256,705 Trading financial assets 1,709 1,709 Secured financing 582,265 582,265 Loans and advances 3,438,202 3,438,202 Investment securities 2,616,724 2,616,724 Trade and other receivables 88,733 88,733 Total financial assets 583,974 2,616,724 4,783,640 7,984,338 Deposits Trading financial liabilities 11,272 Trade and other payables Total financial liabilities 11,272 6,808,011 6,808,011 11,272 130,616 6,938,627 130,616 6,949,899 2019 Amortised FVPL US$'000 FVOCI US$'000 cost Total US$'000 US$'000 Cash and short-term deposits 633,898 633,898 Trading financial assets Secured financing 441 362,047 441 362,047 Loans and advances 2,770,325 2,770,325 Investment securities 854,769 854,769 Trade and other receivables Total financial assets 362,488 854,769 62,570 3,466,793 62,570 4,684,050 Deposits Trading financial liabilities 3,552 Trade and other payables Total financial liabilities 3,665,736 3,665,736 3,552 3,552 104,689 3,770,425 104,689 3,773,977 30 30#33MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 12. TRADING FINANCIAL ASSETS AND LIABILITIES Trading assets and trading liabilities are summarised as follows: Derivatives: Foreign exchange contracts 2020 2019 Notional Fair value Notional Fair value amount Assets US$'000 US$'000 Liabilities US$'000 amount Assets Liabilities US$'000 US$'000 US$'000 782,710 1,709 11,272 709,391 441 3,552 The derivatives are entered with other Morgan Stanley Group undertakings (see note 33). 13. SECURED FINANCING 2020 US$'000 2019 US$'000 Securities purchased under agreements to resell 582,265 362,047 14. LOANS AND ADVANCES 2020 US$'000 2019 US$'000 Loans and advances to customers 3,368,801 2,770,325 Loans and advances to other Morgan Stanley Group undertakings Less: ECL 69,438 (37) 3,438,202 2,770,325 15. INVESTMENT SECURITIES 2020 US$'000 2019 US$'000 Government debt securities: US treasury bills and securities 2,224,669 602,491 Singapore government treasury bills 389,476 252,278 Exchange Fund Bills & Notes 2,579 2,616,724 854,769 31#34MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 16. TRADE AND OTHER RECEIVABLES 2020 US$'000 2019 US$'000 Trade receivables 45,465 36,356 Other receivables Amounts due from other Morgan Stanley Group undertakings 39,714 20,283 Interest receivable 3,352 5,591 Other amounts receivable 202 340 88,733 62,570 17. DEPOSITS 2020 US$'000 2019 US$'000 Deposits of banks Current account balances 2,053 2,149 Deposits of non-bank customers Current account balances 5,648,210 2,622,296 Term deposits 1,157,748 1,041,164 Deposits of other Morgan Stanley Group undertakings 127 6,808,011 3,665,736 18. TRADE AND OTHER PAYABLES 2020 US$'000 2019 US$'000 Other payables Amounts due to other Morgan Stanley Group undertakings 9,380 8,873 Staff compensation and benefits accruals 115,297 85,343 Interest payable 1,942 7,024 Other amounts payable 3,997 3,449 130,616 104,689 19. DEFERRED TAX ASSETS Deferred taxes are calculated on all temporary differences under the liability method. The movement in the deferred tax account is as follows: 2020 US$'000 2019 US$'000 At 1 January 5,002 4,023 Amount recognised in the income statement 2,531 1,014 Amount recognised in other comprehensive income: Financial assets measured at FVOCI 247 (59) Foreign exchange revaluation 21 24 At 31 December 7,801 5,002 32#35MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 19. DEFERRED TAX ASSETS (CONTINUED) The deferred tax included in the statement of financial position and changes recorded in 'Income tax'/'Other comprehensive income' are as follows: 2020 2019 Deferred Other Deferred Other Tax Asset Income statement Comprehensive US$'000 US$'000 Income US$'000 tax asset US$'000 Income statement US$'000 Comprehensive Income US$'000 Deferred compensation Financial assets measured at FVOCI 7,811 (2,531) 5,259 (1,014) (10) 7,801 (2,531) 247 247 (257) (59) 5,002 (1,014) (59) The deferred tax assets recognised are based on management assessment that it is probable that the Company will have taxable profits against which the temporary differences can be utilised. 20. COMMITMENTS AND CONTINGENCIES At 31 December, the Company had the following outstanding commitments. Commitments Unsettled securities purchased under agreements to resell(1) 2020 US$'000 2019 US$'000 51,800 (1) At 31 December 2019, unsettled securities purchased under agreements to resell have a trade date at or prior to 31 December 2019 and settle subsequent to year end. 21. EQUITY Ordinary share capital Ordinary shares Number Ordinary shares US$'000 Authorised, issued and fully paid At 1 January 2019 Increases in the year: 22 March 2019 At 31 December 2019 and 31 December 2020 170,000,000 170,000 500,000 500,000,000 670,000,000 670,000 The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at general meetings of the Company. All shares rank equally with regard to the Company's residual assets. Reserve FVOCI reserve The 'FVOCI reserve' of US$35,000 (2019: US$1,330,000) includes the cumulative net change in the fair value of FVOCI financial assets held at the reporting date. The tax effect of these movements is also included in the 'FVOCI reserve'. 33 33#36MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 22. ADDITIONAL CASH FLOW INFORMATION a. Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents comprise the following balances, which have less than three months maturity from the date of acquisition: Cash with central bank Cash at banks Placements with banks b. Reconciliation of cash flows from operating activities 2020 US$'000 2019 US$'000 593,805 8,037 342,900 435,861 320,000 190,000 1,256,705 633,898 2020 US$'000 2019 US$'000 Profit for the year 131,647 84,458 Adjustments for: Net gains on derecognition of financial assets measured at FVOCI (6) Interest income (59,647) (105,120) Interest expense 16,949 20,241 Income tax 24,403 15,568 Operating cash flows before changes in operating assets and liabilities 113,352 15,141 Changes in operating assets Increase in secured financing (220,214) (361,994) Increase in loans and advances (667,877) (1,172,024) Increase in trade and other receivables (28,402) (78,916) (Increase)/decrease in trading financial assets (1,268) Increase in prepayments (251) (918,012) 528 (711) (1,613,117) Changes in operating liabilities Increase in deposits 3,142,275 635,745 Increase/(decrease) in trade and other payables 31,010 (9,664) Increase in trading financial liabilities 7,720 388 Increase in accruals 1,426 201 3,182,431 626,670 Interest received 53,756 103,838 Interest paid (22,032) (18,806) Net income tax paid (31,520) (3,106) Effect of foreign exchange movements (13,063) (3,587) Net cash flows from/(used in) operating activities 2,364,912 (892,967) 34 =4#37MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 23. EXPECTED MATURITY OF ASSETS AND LIABILITIES The table below shows an analysis of assets and liabilities analysed according to when they are expected to be recovered, realised or settled. At 31 December 2020 Less than or equal to twelve More than twelve months US$'000 months Total US$'000 US$'000 ASSETS Cash and short-term deposits Trading financial assets 1,256,705 1,256,705 1,709 1,709 Secured financing 582,265 582,265 Loans and advances 3,368,801 69,401 3,438,202 Investment securities 2,616,724 2,616,724 Trade and other receivables 88,733 88,733 Deferred tax assets 7,801 7,801 Prepayments 1,086 1,086 7,916,023 77,202 7,993,225 LIABILITIES Deposits 6,808,011 6,808,011 Trading financial liabilities 11,272 11,272 Trade and other payables 96,217 34,399 130,616 Current tax liabilities 16,889 16,889 Accruals 2,360 2,360 6,934,749 34,399 6,969,148 At 31 December 2019 Less than or More than equal to twelve months US$'000 twelve months US$'000 Total US$'000 ASSETS Cash and short-term deposits Trading financial assets 633,898 633,898 441 Secured financing 362,047 Loans and advances 2,770,325 441 362,047 2,770,325 Investment securities 854,769 854,769 Trade and other receivables 62,570 62,570 Deferred tax assets 5,002 5,002 Prepayments 835 835 4,684,885 5,002 4,689,887 LIABILITIES Deposits 3,665,609 127 3,665,736 Trading financial liabilities 3,552 3,552 Trade and other payables 78,883 25,806 104,689 Current tax liabilities Accruals 21,251 934 21,251 934 3,770,229 25,933 3,796,162 35#38MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT Risk management procedures Risk is an inherent part of the Morgan Stanley Group's and the Company's business activities. 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 Company has developed its own risk management policy framework, which is consistent with and leverages the risk management policies and procedures of the Morgan Stanley Group and which include escalation to appropriate senior management personnel of the Company as well as oversight through the Company's Board of Directors (the "Board") and through a dedicated Risk Committee that reports to the Board. Significant risks faced by the Company resulting from its private wealth management and financing activities are set out below. Credit risk Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial obligations to the Company. The Company is primarily exposed to credit risk from margin loans to clients of the Wealth Management business segment, and to a lesser extent from Treasury activities related to deposit placement, investment portfolio and interest rate and foreign exchange hedges. Credit risk management Credit risk exposure is managed on a global basis and in consideration of each significant legal entity within the Morgan Stanley Group. The credit risk management policies and procedures establish the framework for identifying, measuring, monitoring and controlling credit risk whilst ensuring transparency of material credit risks, compliance with established limits and escalating risk concentrations to appropriate senior management and the Board of Directors. The Company incurs credit risk primarily in the Wealth Management business through margin loans to its clients. Margin loans are asset-based in nature secured by mostly cash and marketable securities held with the Company as collateral. The Company also incurs credit risk through a variety of treasury activities, including, but not limited to, the following: entering into derivative contracts with other Morgan Stanley Group undertakings under which counterparties may have obligations to make payments to the Company; • posting margin and/or collateral to banks and other financial counterparties; • placing funds on deposit at other financial institutions; and • entering into securities transactions, whereby the value of these assets may fluctuate based on realised or expected defaults on the underlying obligations. Monitoring and Control In order to help protect the Company from losses, the Credit Risk Management Department establishes firm-wide practices to evaluate, monitor and control credit risk at the transaction, obligor and portfolio levels. The Credit Risk Management Department approves extensions of credit, evaluates the creditworthiness of the Company's counterparties and borrowers on a regular basis, and helps ensure that credit exposure is actively monitored and managed. The evaluation of counterparties and borrowers includes an assessment of the probability that an obligor will default on its financial obligations and any subsequent losses that may occur when an obligor defaults. In addition, credit risk exposure is actively managed by credit professionals and committees within the Credit Risk Management Department and through various risk committees, whose membership includes individuals from the Credit Risk Management Department. 36 36#39MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk (continued) Credit risk management (continued) Monitoring and Control (continued) A Credit Limits Framework is utilised to manage credit risk levels across the Company. The Credit Limits Framework is calibrated within the Company's risk appetite and includes stress loss, product, collateral concentration, correlated collateral, single-name, regulatory and connected lending limits. The Credit Risk Management Department helps ensure timely and transparent communication of material credit risks, compliance with established limits and escalation of risk concentrations to appropriate senior management. The Credit Risk Management Department also works closely with the Market Risk Department and applicable business units to monitor risk exposures and to perform stress tests to identify, analyse and control credit risk concentrations arising from the Company's lending and treasury activities. The stress tests shock market factors (e.g. interest rates, security prices, credit spreads) and risk parameters (e.g. probability of default), in order to assess the impact of stresses on exposures, profit and loss, and the Company's capital position. Stress tests are conducted in accordance with established policies and procedures of Morgan Stanley Group and the Company and comply with methodologies outlined in the Basel regulatory framework. Credit Evaluation The evaluation of corporate and institutional counterparties and borrowers includes assigning obligor credit ratings, which reflect an assessment of an obligor's PD and LGD. An obligor credit rating can be categorised into Investment grade, Non-investment grade and Default. Credit evaluations typically involve the assessment of financial statements, leverage, liquidity, capital strength, asset composition and quality, market capitalisation, access to capital markets, the adequacy of collateral, if applicable, and in the case of certain loans, cash flow projections and debt service requirements. The Credit Risk Management Department also evaluates strategy, market position, industry dynamics, management and other factors that could affect the obligor's risk profile. Additionally, the Credit Risk Management Department evaluates the relative position of the Morgan Stanley Group's exposure in the borrower's capital structure and relative recovery prospects, as well as adequacy of collateral (if applicable) and other structural elements of the particular transaction. The Company's Wealth Management business segment generates minimal credit exposure given the collateralised nature of the business, as such the credit evaluation focuses on the counterparties' and borrowers' background and collateral evaluation, to ensure the exposures are well-collateralised and credit risk is mitigated. In addition to assessing and monitoring its credit exposure and risk at the individual obligor level, the Company also reviews its credit exposure and risk to geographic regions. As at 31 December 2020 and 31 December 2019, credit exposure was concentrated in North American and Asian countries. In addition, the Company pays particular attention to smaller exposures in emerging markets given their unique risk profile. Sovereign ceiling ratings i.e. the maximum credit rating that can be assigned to a counterparty with a designated country of risk, are derived using methodologies generally consistent with those employed by external rating agencies. The Company also reviews its credit exposure and risk to certain types of customers. At 31 December 2020 and 31 December 2019, the Company's material credit exposure was to sovereigns, sovereign related entities, corporate entities, financial institutions and individuals. 37#40MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk (continued) Credit risk management (continued) Risk Mitigation The Credit Risk Management Department may seek to mitigate credit risk from its lending and treasury activities in multiple ways, including collateral provisions and hedges. In connection with the Company's Wealth Management business, the Company relies on the use of collateral to manage credit risk. The amount and type of collateral required by the Company depends on an assessment of the credit risk of the obligor. Collateral held is managed in accordance with the Company's guidelines and the relevant underlying agreements. Collateral is primarily publicly traded debt and equity securities, as well as a small amount of other collateral including unlisted securities, notes, mutual funds and insurance policies that fulfill the risk management requirement of being valuable and realisable at short notice. In connection with the Company's derivatives activities with other Morgan Stanley Group undertakings, the Company generally enters into master netting agreements and collateral arrangements with counterparties. These agreements provide the Company with the ability to demand collateral, as well as to liquidate collateral and offset receivables and payables covered under the same master agreement in the event of a counterparty default. In connection with securities purchased under agreements to resell transactions, the Company manages credit exposure arising from such transactions by, in appropriate circumstances, entering into Global Master Repurchase Agreements with counterparties that provide the Company, in the event of a counterparty default, with the right to net a counterparty's rights and obligations under such agreement and liquidate and set off collateral held by the Company against the net amount owed by the counterparty. Under these securities purchased under agreements to resell transactions, the Company receives collateral, including US government securities. The Company also monitors the fair value of the underlying securities as compared with the related receivable or payable, including accrued interest, and, as necessary, requests additional collateral to ensure such transactions are adequately collateralised. Exposure to credit risk The maximum exposure to credit risk ("gross credit exposure") of the Company as at 31 December 2020 and 31 December 2019 is disclosed below, based on the carrying amounts of the financial assets and the maximum amount that the Company could have to pay in relation to unrecognised financial instruments, which the Company believes are subject to credit risk. The table includes financial instruments subject to ECL and not subject to ECL. Those financial instruments that bear credit risk but are not subject to ECL are subsequently measured at fair value. Exposure arising from financial instruments not recognised on the statement of financial position is measured as the maximum amount that the Company could have to pay, which may be significantly greater than the amount that would be recognised as a liability. Where the Company enters into credit enhancements, including receiving cash and security as collateral and master netting agreements, to manage the credit exposure on these financial instruments the financial effect of the credit enhancements is also disclosed below. The net credit exposure represents the credit exposure remaining after the effect of the credit enhancements. Collateral and other credit enhancements The Company employs a range of policies and practices to mitigate credit risk, the most common being acceptance of collateral for funds advanced. The main types of collateral held are cash and marketable securities. The Company has internal policies on the acceptability of specific classes of collateral or credit risk mitigation. The market value of securities received as collateral is monitored on a daily basis and securities received as collateral generally are not recognised on the statement of financial position. The Company monitors the creditworthiness of counterparties on an ongoing basis and requests additional collateral in accordance with collateral arrangements when deemed necessary. 38#41MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk (continued) Collateral and other credit enhancements (continued) At 31 December 2020, the carrying amount of financial assets on which no ECL were recognised because of collateral held was US$3,368,801,000 (2019: US$2,770,325,000). The Company closely monitors collateral held for financial assets considered to be credit-impaired, as in such cases it is considered more likely that the Company will take possession of collateral to mitigate potential credit losses. The Company does not hold financial assets considered to be credit-impaired. Exposure to credit risk by class Class Subject to ECL: 31 December 2020 Gross credit exposure US$'000 Credit (1) enhancements US$'000 Net credit exposure US$'000 Gross credit exposure US$'000 (1) 31 December 2019 Credit enhancements Net credit exposure US$'000 US$'000 Cash and short-term deposits 1,256,705 1,256,705 633,898 633,898 Loans and advances (3) 3,438,202 (3,368,801) Investment securities 2,616,724 69,401 2,616,724 2,770,325 854,769 (2,770,325) 854,769 Trade and other receivables(2) 88,733 88,733 62,570 62,570 Not subject to ECL: Trading financial assets: Derivatives 1,709 Secured financing 582,265 7,984,338 (1,709) (578,129) (3,948,639) 441 4,136 4,035,699 362,047 4,684,050 (441) (359,010) (3,129,776) 3,037 1,554,274 Unrecognised financial instruments Not subject to ECL: Unsettled securities purchased under agreements to resell(4) 51,800 (1) The carrying amount recognised in the statement of financial position best represents the Company's maximum exposure to credit risk. (2) Trade and other receivables include cash collateral pledged against the payable on OTC derivative positions. These derivative liabilities are included within trading financial liabilities in the statement of financial position. (3) The collateral held as security for loans and advances consists of cash of US$811,426,000 (2019: US$529,704,000), securities of US$1,748,866,000 (2019: US$1,019,982,000) and other collateral of US$808,509,000 (2019: US$1,220,639,000). (4) For unsettled securities purchased under agreements to resell, collateral in the form of securities will be received at the point of settlement. Since the value of collateral is determined at a future date, it is currently unquantifiable and not included in the table. 39 51,800#42MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk (continued) Credit quality Exposure to credit risk by internal rating grades Internal credit ratings, as below, are derived using methodologies generally consistent with those used by external agencies: Investment grade: AAA - BBB Non-investment grade: BB - CCC Default: D The table below shows gross carrying amount and, in the case of unrecognised financial instruments, nominal amounts by internal rating grade. All exposures subject to ECL are Stage 1, unless otherwise shown. Investment grade At 31 December 2020 AAA AA A BBB Non- Investment Unrated (¹)/ Total Net of ECL US$'000 Default Grade Subject to ECL: Cash and short term deposits 8,101 115,270 1,114,334 Loans and advances 18,838 214,782 162 1,256,705 3,223,441 16 3,438,239 1,256,705 3,438,202 Investment securities 2,614,145 Trade and other receivables 208 2,622,454 115,270 2,579 85,159 1,202,072 88 3,278 233,708 3,226,881 16 2,616,724 88,733 7,400,401 2,616,724 88,733 7,400,364 Not subject to ECL: Trading financial assets: derivatives Secured financing 1,709 582,265 583,974 Unrecognised financial instruments not subject to ECL: Unsettled securities purchased under agreements 1,709 1,709 582,265 582,265 583,974 583,974 40 40#43MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk (continued) Credit quality (continued) Exposure to credit risk by internal rating grades (continued) Investment grade At 31 December 2019 US$'000 AAA AA A BBB Non- Investment Grade Unrated (¹)/ Default Total Net of ECL Subject to ECL: Cash and short term deposits 158,037 76,224 399,302 Loans and advances 319 182,357 16 2,531,824 56,144 Investment securities 854,769 Trade and other receivables 14 1,012,820 76,224 56,695 455,997 315 182,991 5,455 2,537,295 91 56,235 633,898 2,770,325 854,769 62,570 4,321,562 633,898 2,770,325 854,769 62,570 4,321,562 Not subject to ECL: Trading financial assets: derivatives Secured financing Unrecognised financial instruments not subject to ECL: Unsettled securities purchased under agreements 441 362,047 362,488 51,800 (1) For the unrated loans and receivables and the corresponding interest receivable, a lifetime ECL is always calculated without considering whether SICR has occurred. 441 362,047 362,488 441 362,047 362,488 51,800 51,800 41#44MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk (continued) Expected credit loss allowance Financial instruments subject to the impairment requirements of HKFRS 9 There have been no changes made to estimation techniques or significant assumptions for estimating impairment during the year. There were no modifications to financial assets during the year or since origination and therefore modifications have not impacted ECL staging. ECL on cash and short-term deposits, loans and advances and trade and other receivables is de minimis owing to their short term tenure and the collateralised nature of loans and advances. For investment securities, the gross carrying amount on which no ECL is recognised because they have an investment grade internal credit rating, corresponding to a low risk of default. Liquidity risk Liquidity risk refers to the risk that the Company will be unable to finance its operations due to a loss of access to the capital markets or difficulty in liquidating its assets. Liquidity risk encompasses the Company's ability (or perceived ability) to meet its financial obligations without experiencing significant business disruption or reputational damage that may threaten the Company's viability as a going concern. Liquidity risk also encompasses the associated funding risks triggered by the market or idiosyncratic stress events that may cause unexpected changes in funding needs or an inability to raise new funding. Generally, the Company incurs liquidity risk as a result of its trading, lending, investing and client facilitation activities. The Morgan Stanley Group's Liquidity Risk Management Framework is critical to helping ensure that the Company maintains sufficient liquidity resources and durable funding sources to meet its daily obligations and to withstand unanticipated stress events. The Liquidity Risk Department is a distinct area in Risk Management, which oversees and monitors liquidity risk. The Liquidity Risk Department ensures transparency of material liquidity risks, compliance with established risk limits and escalation of risk concentrations to appropriate senior management. To execute these responsibilities, the Liquidity Risk Department: • • Establishes limits in line with the Morgan Stanley Group's risk appetite; Identifies and analyses emerging liquidity risks to ensure such risks are appropriately mitigated; Monitors and reports risk exposures against metrics and limits; and Reviews the methodologies and assumptions underpinning the Morgan Stanley Group's Liquidity Stress Tests to ensure sufficient liquidity under a range of adverse scenarios. The liquidity risks identified by these processes are summarised in reports produced by the Liquidity Risk Department that are circulated to and discussed with the Company's Asset & Liability Committee ("ALCO") and regional ALCO and risk committees, as appropriate. The Treasury Department and applicable business units have primary responsibility for evaluating, monitoring and controlling the liquidity risks arising from the Morgan Stanley Group's business activities, and for maintaining processes and controls to manage the key risks inherent in their respective areas. The Liquidity Risk Department coordinates with the Treasury Department and these business units to help ensure a consistent and comprehensive framework for managing liquidity risk across the Morgan Stanley Group. The Company's liquidity risk management policies and procedures are consistent with those of the Morgan Stanley Group. The Board of Directors of the Company is ultimately responsible for establishing the liquidity risk tolerance and ensuring the Company's liquidity risk is appropriately managed. In addition to the internal liquidity risk management framework, the Company is locally subject to the liquidity regulations prescribed by the HKMA. The Company has daily monitoring and reporting processes in place to ensure compliance with its regulatory requirements 42#45MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk (continued) The primary goal of the Company's liquidity risk and funding management framework is to ensure that the Company has access to adequate funding across a wide range of market conditions and time horizons. The framework is designed to enable the Company to fulfil its financial obligations and support the execution of its business strategies. The following principles guide the Company's liquidity risk management framework: • • Sufficient liquid assets should be maintained to cover maturing liabilities and other planned and contingent outflows; Maturity profile of assets and liabilities should be aligned, with limited reliance on short-term funding; Source, counterparty, currency, region, and term of funding should be diversified; and Liquidity Stress Tests should anticipate, and account for, periods of limited access to funding. The core components of the Company's liquidity risk management framework that support our target liquidity profile, are the Required Liquidity Framework, Liquidity Stress Tests and Liquidity Resources (as defined below). Required Liquidity Framework The Required Liquidity Framework establishes the amount of liquidity the Company must hold in both normal and stressed environments to ensure that its financial condition and overall soundness is not adversely affected by an inability (or perceived inability) to meet its financial obligations in a timely manner. The Required Liquidity Framework considers the most constraining liquidity requirement to satisfy all regulatory and internal limits at a Morgan Stanley Group and legal entity level. Liquidity Stress Tests The Company uses Liquidity Stress Tests to model external and intercompany liquidity flows across multiple scenarios and a range of time horizons. These scenarios contain various combinations of idiosyncratic and systemic stress events of different severity and duration. The methodology, implementation, production and analysis of the Company's Liquidity Stress Tests are important components of the Required Liquidity Framework. Liquidity Stress Tests are produced for the Company, to capture specific cash requirements and cash availability. The Liquidity Stress Tests assume that a legal entity will use its own liquidity first to fund its obligations before drawing liquidity from its ultimate parent undertaking, Morgan Stanley. Morgan Stanley will support its subsidiaries and will not have access to subsidiaries' liquidity resources that are subject to any regulatory, legal or tax constraints. In addition to the assumptions underpinning the Liquidity Stress Tests, the Company takes into consideration the settlement risk related to intra-day settlement and clearing of securities and financing activities. At 31 December 2020 and 31 December 2019, the Company maintained sufficient liquidity to meet current and contingent funding obligations as modelled in its Liquidity Stress Tests. Liquidity Resources The Company maintains sufficient liquidity resources which consists of unencumbered highly liquid securities and cash deposits with banks (including central banks) ("Liquidity Resources") to meet regulatory requirements, cover daily funding needs and to meet strategic liquidity targets sized by the Required Liquidity Framework and Liquidity Stress Tests. The total amount of Liquidity Resources is actively managed by the Company considering the following components: unsecured debt maturity profile; balance sheet size and composition; funding needs in a stressed environment inclusive of contingent cash outflows; regulatory requirements; and collateral requirements. The amount of liquidity resources the Company holds is based on the Company's risk tolerance and is subject to change depending on market and firm-specific events. Unencumbered highly liquid securities consist netted trading assets, investment securities and securities received as collateral. 43#46MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk (continued) Liquidity Resources (continued) The Company holds its own Liquidity Resources which is composed of diversified cash and cash equivalents and unencumbered highly liquid securities. Eligible unencumbered highly liquid securities include primarily non-US government securities in addition to US government securities. Funding Management The Company manages its funding in a manner that reduces the risk of disruption to the Company's operations. The Company pursues a strategy of diversification of secured and unsecured funding sources (by product, investor and region) and attempts to ensure that the tenor of its liabilities equals or exceeds the expected holding period of the assets being financed. The Company funds itself through diverse sources. These sources include the Company's equity capital, borrowings and deposits. Balance sheet management In managing both the Morgan Stanley Group's and the Company's liquidity risk the composition and size of the entire balance sheet, not just financial liabilities, is monitored and evaluated. The liquid nature of the marketable securities and short-term receivables arising principally from sales and trading activities in the Institutional Securities business provides the Morgan Stanley Group and the Company with flexibility in managing the composition and size of its balance sheet. Maturity analysis In the following maturity analysis of financial liabilities, derivatives not held as part of the Company's trading activities are disclosed according to their earliest contractual maturity; all such amounts are presented at their fair value, consistent with how these financial liabilities are managed. All other amounts represent undiscounted cash flows payable by the Company arising from its financial liabilities to earliest contractual maturities as at 31 December 2020 and 31 December 2019. Repayments of financial liabilities that are subject to immediate notice are treated as if notice were given immediately and are classified as on demand. This presentation is considered by the Company to appropriately reflect the liquidity risk arising from those financial liabilities, presented in a way that is consistent with how the liquidity risk on these financial liabilities is managed by the Company. 31 December 2020 Financial liabilities Deposits of banks Deposits of non-bank customers Deposits of other Morgan Stanley Group undertakings Trading financial liabilities: Derivatives Trade and other payables Total financial liabilities Unrecognised financial instruments Unsettled securities purchased under agreements to resell On demand US$'000 Less than 1 month 3 months - 1 month 3 months 1 year US$'000 US$'000 US$'000 1 year - 5 years US$'000 Total US$'000 2,053 5,648,210 320,201 439,782 399,180 2,053 6,807,373 9,400 5,659,663 6,299 29,323 355,823 2,842 53,878 496,502 2,131 3,616 404,927 34,399 11,272 130,616 34,399 6,951,314 44#47MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk (continued) Maturity analysis (continued) 31 December 2019 Financial liabilities Deposits of banks Deposits of non-bank customers Deposits of other Morgan Stanley Group On Less than 1 month 3 months - 1 year - demand US$'000 1 month US$'000 3 months US$'000 1 year US$'000 5 years US$'000 Total US$'000 2,149 2,623,233 263,247 446,463 338,697 2,149 3,671,640 127 127 undertakings Trading financial liabilities: Derivatives Trade and other payables Total financial liabilities 9,142 2,634,524 1,747 22,315 287,309 1,805 42,867 491,135 3,552 4,559 25,806 343,256 25,933 104,689 3,782,157 Unrecognised financial instruments Unsettled securities purchased under agreements to resell(¹) 51,800 51,800 (1) The Company enters into forward starting reverse repurchase agreements (agreements which have a trade date at or prior to 31 December 2019 and settle subsequent to period end). These agreements primarily settle within three business days and of the total amount at 31 December 2019, US$51.8 million settled within three business days. Market Risk Market risk is defined by HKFRS 7 ‘Financial Instruments: Disclosures' ("HKFRS 7”) as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The Company manages the market risk associated with its assets and liabilities management activities at both division and an individual product level, and includes consideration of market risk at the legal entity level. Sound market risk management is an integral part of the Company's culture. The Company is responsible for ensuring that market risk exposures are well-managed and monitored. The Company also ensures transparency of material market risks, monitors compliance with established limits, and escalates risk concentrations to appropriate senior management. To execute these responsibilities, the Morgan Stanley Group monitors the market risk of the firm against limits on aggregate risk exposures, performs a variety of risk analyses including monitoring Value-at- risk ("VaR") and stress testing analyses, routinely reports risk summaries and maintains the VaR and scenario analysis methodologies. The Company is managed within the Morgan Stanley Group's global framework. The market risk management policies and procedures of the Company include performing risk analyses and reporting material risks identified to appropriate senior management of the Company. The Company is exposed to the following types of market risk under this definition: interest rate risk and currency risk. 45 45#48MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Market Risk (continued) Interest rate risk Interest rate risk is defined by HKFRS 7 as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is primarily exposed to interest rate risk under this definition as a result of changes in the future cash flows of deposits and loans, bank balance, changes in the fair value of fixed rate debt investments categorised as FVOCI, and the interest rate swap hedges. The Company measures and reports Interest rate risk in the banking book (IRRBB) using the new standardised framework through MA(BS)12A - Interest Rate Risk in the Banking Book in accordance with HKMA requirements. The Company measures its IRRBB exposures mainly through the Economic Value of Equity (EVE) and Net Interest Income (NII). These are calculated weekly for internal risk management purposes, as well as monthly as part of the monthly closing process. The Company's interest rate risk is managed by the Treasury Department. The asset and liability structure is actively managed to ensure the Company does not assume excessive interest rate risk relative to its overall development strategy and commensurate with the scale, nature and complexity of its business. The Company may also enter into additional hedges such as interest rate swaps from time to time. The ALCO is responsible for ensuring that these objectives are met on an ongoing basis. Independent market risk management oversight is provided by Market Risk Department (MRD). MRD identifies market risks including IRRBB, and develops and employs risk measures and tools to monitor, control and mitigate those risks. MRD also monitors risk exposures against established limits, and produces and distributes comprehensive reports designed to keep senior management apprised of the Company's market risk and IRRBB exposures. The Company's Market Risk Management Policy sets forth principles and practices for sound management of its market risk. The policy has been established to evidence the Company's standards for independent identification, measurement, monitoring, reporting, challenge, and escalation of market risk arising from the Company's business activities. The Company's interest rate risk is controlled through conservative risk limits approved by the Board or its delegated Risk Committees including the Board Risk Committee, the Bank Risk Committee and the Credit and Market Risk Committee. The Company has clearly defined EVE and NII limits in place, in addition to other sensitivity and notional based risk limits. These limits are set by taking into account the size of the Company's balance sheet, projected business growth and risk appetite as set by the Board. Exposure is monitored at least weekly for EVE and NII limits, and daily for sensitivity and notional based limits. These are reported back to the Risk Committees on a monthly and quarterly basis. The Company applies the model assumptions for IRRBB prescribed by the HKMA with no deviations. The models used are reviewed on an annual basis at a minimum and independently verified by the Morgan Stanley Group's Model Risk Management (MRM) group. The standardised EVE risk measure is calculated according to the six shock scenarios defined in the HKMA SPM IR-1. For the calculation of the change in NII, in addition to the two shock scenarios defined in SPM IR-1 for parallel up and parallel down interest rate moves, the Company also calculates a range of internal shock scenarios covering non-parallel interest rate moves combined with different repricing assumptions for customer deposits. The net gain or loss in the income statement resulted from the application of a parallel shift in market interest rates increase or decrease to these positions is disclosed in the Template IRRBB1: Quantitative information on interest rate risk in banking book as part of the Company's Pillar 3 disclosures under section H of the unaudited supplementary financial information. 46 46#49MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Market Risk (continued) Currency risk The Company has foreign currency exposure arising from its assets and liabilities in currencies other than US dollars, which it actively manages by hedging with other Morgan Stanley Group undertakings. The analysis below details the material foreign currency exposure for the Company, by foreign currency. The analysis calculates the impact on total comprehensive income of a reasonably possible parallel shift of the foreign currency in relation to the US dollar, with all other variables held constant. 2019 Sensitivity to applied percentage change in currency (+/-) 2020 Sensitivity to applied percentage change in currency (+/-) Foreign Percentage Other currency exposure applied change Profit or loss US$'000 % US$'000 comprehensive income US$'000 Foreign Percentage currency change exposure Other Profit comprehensive applied or loss income US$'000 % US$'000 US$'000 Hong Kong Dollar (16,134) 1 161 Singapore Dollar (4,254) 2 85 Yuan Renminbi 19 7 1 (20,369) (9,786) 1 98 (3,115) 2 62 (412) 5 21 (13,313) The reasonably possible percentage change in the currency rate in relation to US dollars has been calculated based on the greatest annual percentage change over the 2-year period from 1 January 2019 to 31 December 2020 (2019: from 1 January 2018 to 31 December 2019). Thus, the percentage change applied may not be the same percentage as the actual change in the currency rate for the year ended 31 December 2020, or for the year ended 31 December 2019. 25. FINANCIAL ASSETS ACCEPTED AS COLLATERAL The Company's policy is generally to take possession of securities purchased under agreements to resell. The Company monitors the fair value of the underlying securities as compared with the related receivable or payable, including accrued interest, and, as necessary, requests additional collateral to ensure such transactions are adequately collateralised. Where deemed appropriate, the Company's agreements with third parties specify its rights to request additional collateral. These transactions are mostly conducted under standard documentation used by financial market participants. The fair value of collateral accepted under these arrangements as at 31 December 2020 was US$578,129,000 (2019: US$359,010,000). None of this amount has been sold or repledged to third parties in connection with financing activities, or to comply with commitments under short sale transactions (2019: US$Nil). 47#50MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 26. OPERATIONAL RISK Operational risk refers to the risk of loss, or of damage to the Company's reputation, resulting from inadequate or failed processes or systems, from human factors or from external events (e.g. fraud, theft, legal and compliance risks, cyber-attacks or damage to physical assets). Operational risk relates to the following risk event categories as defined by Basel Capital Standards: internal fraud; external fraud; employment practices and workplace safety; clients, products and business practices; business disruption and system failure; damage to physical assets; and execution, delivery and process management. The Company may incur operational risk across the full scope of its business activities, including revenue-generating activities (e.g., private wealth management) and support and control groups (e.g., information technology and trade processing). The Company has established an operational risk framework to identify, measure, monitor and control risk across the Company. This framework is consistent with the framework established by the Morgan Stanley Group and includes escalation to the Company's Board of Directors and appropriate senior management personnel. Effective operational risk management is essential to reducing the impact of operational risk incidents and mitigating legal and reputational risks. The framework is continually evolving to reflect changes in the Company and to respond to the changing regulatory and business environment. The Company has implemented operational risk data and assessment systems to monitor and analyse internal and external operational risk events, to assess business environment and internal control factors and to perform scenario analysis. The collected data elements are incorporated in the operational risk capital model. The model encompasses both quantitative and qualitative elements. Internal loss data and scenario analysis results are direct inputs to the capital model, while external operational incidents, business environment and internal control factors are evaluated as part of the scenario analysis process. In addition, the Company employs a variety of risk processes and mitigants to manage its operational risk exposures. These include a governance framework, a comprehensive risk management program and insurance. Operational risks and associated risk exposures are assessed relative to the risk tolerance established by the Board and are prioritised accordingly. The breadth and variety of operational risk are such that the types of mitigating activities are wide- ranging. Examples of such activities include continuous enhancement of defences against cyber-attacks; use of legal agreements and contracts to transfer and/or limit operational risk exposures; due diligence; implementation of enhanced policies and procedures; exception management processing controls; and segregation of duties. Primary responsibility for the management of operational risk is with the business segments, the control groups and the business managers therein. The business managers maintain processes and controls designed to identify, assess, manage, mitigate and report operational risk. Each of the business segments has a designated operational risk coordinator. The operational risk coordinator regularly reviews operational risk issues and reports to the Company's senior management within each business. Each control group o also has a designated operational risk coordinator and a forum for discussing operational risk matters with the Company's senior management. Oversight of operational risk is provided by the Operational Risk Oversight Committee, regional risk committees and senior management. In the event of a merger; joint venture; divestiture; reorganisation; or creation of a new legal entity, a new product or a business activity, operational risks are considered, and any necessary changes in processes or controls are implemented. 48 48#51MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 26. OPERATIONAL RISK (CONTINUED) The Operational Risk Department provides independent oversight of operational risk and assesses measures and monitors operational risk against tolerance. The Operational Risk Department works with the business divisions and control groups to help ensure a transparent, consistent and comprehensive framework for managing operational risk within each area and across the Company. The Operational Risk Department scope includes oversight of technology risk, cybersecurity risk, information security risk and data risk management programme (e.g., cybersecurity), the fraud risk management and prevention programme and third party risk management (supplier and affiliate risk oversight and assessment) programme. Furthermore, the Operational Risk Department supports the collection and reporting of operational risk incidents and the execution of operational risk assessments; provides the infrastructure needed for risk measurement and risk management; and ensures ongoing validation and verification of the Company's advanced measurement approach for operational risk capital. The Fusion Resilience Centre's mission is to understand, prepare for, respond to, recover and learn from operational threats and incidents that impact the Morgan Stanley Group, from cyber and fraud to technology incidents, weather events, terror attacks, geopolitical unrest and pandemics. Programmes for Business Continuity and Disaster recovery are designed to mitigate risk and enable recovery from business continuity incidents impacting the Company's people, technology, suppliers and/or facilities. Business divisions within the Morgan Stanley Group and control groups maintain business continuity plans, including identifying processes and strategies to continue business critical processes during a business continuity incident, the business unit will be able to continue its critical processes and limit the impact of the incident to the Morgan Stanley Group and its clients. Technical recovery plans are maintained for critical technology assets and detail the steps to be implemented to recover from a disruption. Business units also test the documented preparation to provide a reasonable expectation that, during a business continuity events. Disaster recovery testing is performed to validate the recovery capability of these critical technology assets. The Company maintains a programme that oversees its cyber and information security risks. The Company's cybersecurity and information security policies, procedures and technologies are designed to protect the Company's information assets against unauthorised disclosure, modification or misuse and are also designed to address regulatory requirements. These policies and procedures cover a broad range of areas, including: identification of internal and external threats, access control, data security, protective controls, detection of malicious or unauthorised activity, incident response and recovery planning. In connection with its ongoing operations, the Company utilises third-party suppliers, which it anticipates that such usage will continue and may increase in the future. These services include, for example, outsourced processing and support functions and consulting and other professional services. The Company's risk-based approach to managing exposure to these services includes the performance of due diligence, implementation of service level and other contractual agreements, consideration of operational risk and ongoing monitoring of third-party suppliers' performance. The Company maintains a third-party risk programme which is designed to align with our risk tolerance and meet regulatory requirements. The program includes appropriate governance, policies, procedures, and enabling. The third-party risk programme includes the adoption of appropriate risk management controls and practices throughout the third-party management lifecycle to manage risk of service failure, risk of data loss and reputational risk, among others. 49 49#52MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 27. FINANCIAL ASSETS AND FINANCIAL LIABILITIES SUBJECT TO OFFSETTING In order to manage credit exposure arising from its business activities, the Company applies various credit risk management policies and procedures, see note 24 for further details. Primarily in connection with securities purchased under agreements to resell and derivative transactions, the Company enters into master netting arrangements and collateral arrangements with its counterparties. These agreements provide the Company with the right, in the ordinary course of business and/or in the event of a counterparty default (such as bankruptcy or a counterparty's failure to pay or perform), to net a counterparty's rights and obligations under such agreement and, in the event of counterparty default, set off collateral held by the Company against the net amount owed by the counterparty. However, in certain circumstances, the Company may not have such an agreement in place; the relevant insolvency regime (which is based on type of counterparty of the entity and the jurisdiction of organisation of the counterparty) may not support the enforceability of the agreement; or the Company may not have sought legal advice to support the enforceability of the agreement. In the statement of financial position, financial assets and financial liabilities are only offset and presented on a net basis where there is a current legally enforceable right to set off the recognised amounts and an intention to either settle on a net basis or to realise the assets and the liabilities simultaneously. In the absence of such conditions, financial assets and financial liabilities are presented on a gross basis. The following tables present information about the offsetting of financial instruments and related collateral amounts. The tables do not include information about financial instruments that are subject only to a collateral agreement. The effect of master netting arrangements, collateral agreements and other credit enhancements, on the Company's exposure to credit risk is disclosed in note 24. 50#53MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 27. FINANCIAL ASSETS AND FINANCIAL LIABILITIES SUBJECT TO OFFSETTING (CONTINUED) Amounts not offset Not subject to legally enforceable Gross Amount amount US$'000 offset US$'000 Net Financial Cash amount instruments collateral (1) US$'000 US$'000 US$'000 Net exposure US$'000 master netting agreement US$'000 31 December 2020 Assets Secured Financing: Securities purchased under agreements to resell 582,265 582,265 (578,129) 4,136 Trading financial assets: Derivatives 1,709 TOTAL ASSETS 583,974 1,709 583,974 (1,709) (579,838) 4,136 Liabilities Trading financial liabilities: Derivatives TOTAL LIABILITIES 11,272 11,272 (1,709) (9,274) 289 11,272 11,272 (1,709) (9,274) 289 31 December 2019 Assets Secured Financing: Securities purchased under agreements to resell 362,047 Trading financial assets: Derivatives TOTAL ASSETS Liabilities Trading financial liabilities: Derivatives TOTAL LIABILITIES 362,047 (359,010) 3,037 441 362,488 441 362,488 (441) (359,451) 3,037 3,552 3,552 3,552 (441) (3,111) 3,552 (441) (3,111) (1) The cash collateral is recognised in the statement of financial position within 'Trade and other receivables' and 'Trade and other payables' respectively. 51#54MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 28. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE a. Financial assets and liabilities recognised at fair value on a recurring basis The following tables present the carrying value of the Company's financial assets and financial liabilities recognised at fair value on a recurring basis, classified according to the fair value hierarchy. 2020 Trading financial assets: - Derivatives Foreign exchange contracts Secured financing: - - Securities purchased under agreements to resell Investment securities: Quoted prices in Valuation techniques Valuation techniques with using significant active observable unobservable market inputs inputs (Level 1) US$'000 (Level 2) US$'000 (Level 3) US$'000 Total US$'000 1,709 1,709 582,265 582,265 - Government debt securities 2,224,669 392,055 2,616,724 Total financial assets measured at fair value 2,224,669 976,029 3,200,698 Trading financial liabilities: - Derivatives Foreign exchange contracts Total financial liabilities measured at fair value 11,272 11,272 11,272 11,272 52 52#55MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 28. a. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED) Financial assets and liabilities recognised at fair value on a recurring basis (continued) 2019 Trading financial assets: - Derivatives Foreign exchange contracts Secured financing: - Securities purchased under agreements to resell Investment securities: Quoted prices in Valuation techniques Valuation techniques with using significant active observable unobservable market inputs inputs (Level 1) (Level 2) (Level 3) Total US$'000 US$'000 US$'000 US$'000 441 441 362,047 362,047 - Government debt securities 602,491 252,278 854,769 Total financial assets measured at fair value 602,491 614,766 1,217,257 Trading financial liabilities: - Derivatives Foreign exchange contracts Total financial liabilities measured at fair value 3,552 3,552 3,552 3,552 53 53#56MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 28. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED) a. Financial assets and liabilities recognised at fair value on a recurring basis (continued) The Company's valuation approach and fair value hierarchy categorisation for certain significant classes of financial instruments recognised at fair value on a recurring basis is as follows: Asset and Liability / Valuation Technique Government debt securities US treasury securities ⚫ Fair value is determined using quoted market prices. Non US Government Obligations Fair value is determined using quoted prices in active markets when available. When not available, quoted prices in less-active markets are used. In the absence of position- specific quoted prices, fair value may be determined through benchmarking from comparable instruments. Valuation Hierarchy Classification • Level 1 as inputs are observable and in an active market • Level 1 - if actively traded and inputs are observable - • Level 2 if the market is less active or prices are dispersed • Level 3 - in instances where the prices are unobservable Derivatives OTC derivative contracts (include swap contracts related to interest rates and foreign currencies) . Depending on the product and the terms of the transaction, the fair value of OTC derivative products can be modeled using a series of techniques, including closed-form analytic formulas, such as the Black-Scholes option-pricing model, simulation models or a combination thereof. Many pricing models do not entail material subjectivity as the methodologies employed do not necessitate significant judgement, since model inputs may be observed from actively quoted markets, as is the case for generic interest rate swaps. In the case of more established derivative products, the pricing models used by the Company are widely accepted by the financial services industry. Securities purchased under agreements to resell • Fair value is computed using a standard cash flow discounting methodology. • The inputs to the valuation include contractual cash flows and collateral funding spreads, which are the incremental spread over the overnight indexed swap ("OIS") rate for a specific collateral rate (which refers to the rate applicable to a specific type of security pledged as collateral). - when valued using • Level 2 observable inputs, or where the unobservable input is not deemed significant • Level 3 - if an unobservable input is deemed significant • Level 2 when the valuation inputs are observable Level 3 in instances where the unobservable inputs is deemed significant 54#57MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 28. b. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (CONTINUED) Transfers between Level 1 and Level 2 of the fair value hierarchy for financial assets and liabilities recognised at fair value on a recurring basis There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the current year and prior year. C. Changes in Level 3 financial assets and liabilities recognised at fair value on a recurring basis There were no transfers between Level 2 and Level 3 of the fair value hierarchy during the current year and prior year. d. Assets and liabilities measured at fair value on a non-recurring basis Non-recurring fair value measurements of assets or liabilities are those which are required or permitted in the statement of financial position in particular circumstances. There were no assets or liabilities measured at fair value on a non-recurring basis during the current year and prior year. 29. ASSETS AND LIABILITIES NOT MEASURED AT FAIR VALUE For all financial instruments not measured at fair value, the carrying amount is considered to be a reasonable approximation of fair value. 30. CAPITAL MANAGEMENT The Morgan Stanley Group manages its capital on a global basis with consideration for its legal entities. The capital managed by the Morgan Stanley Group broadly includes ordinary share capital, preference share capital, subordinated loans and reserves. The Morgan Stanley Group manages its consolidated 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. In the future, the Morgan Stanley Group may adjust its capital base to in reaction to the changing needs of its businesses. The Company views capital as an important source of financial strength. It manages and monitors its capital in line with established policies and procedures and in compliance with local regulatory requirements. The Morgan Stanley Group also aims to adequately capitalise at a legal entity level whilst safeguarding that entity's ability to continue as a going concern and ensuring that it meets all regulatory capital requirements, so that it can continue to provide returns for the Morgan Stanley Group. In order to maintain or adjust the capital structure as described above, the Company may adjust the amount of dividends paid, return capital to shareholder, issue new shares, issue subordinated debt or sell assets to reduce debt. 55 55#58MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 30. CAPITAL MANAGEMENT (CONTINUED) The Company is regulated by the HKMA and as such is subject to minimum capital requirements. The Company's capital is monitored on an ongoing basis to ensure compliance with these requirements. At a minimum, the Company must ensure that capital is greater than the capital requirement covering credit, market and operational risk. The Company complied with all of its regulatory capital requirements during the current and prior year. The Company manages the following items as capital: Share capital FVOCI reserve Retained earnings 2020 US$'000 2019 US$'000 670,000 670,000 35 1,330 354,042 222,395 1,024,077 893,725 The Company has earmarked part of its retained earnings for maintaining its regulatory reserve for general banking risks to satisfy the provisions of the Banking Ordinance for prudential supervision purposes. At 31 December 2020, US$17,154,000 (2019: US$27,703,000) in the retained earnings was earmarked for this purpose. 56 56#59MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 31. EMPLOYEE COMPENSATION PLANS Morgan Stanley maintains various equity-settled share-based and cash-based deferred compensation plans for the benefit of employees. Equity-settled share-based compensation plans Morgan Stanley has granted RSU awards pursuant to several equity-based compensation plans. The plans provide for the deferral of a portion of certain current and former employees' incentive compensation, with awards made in the form of restricted common stock. Awards under these plans are generally subject to vesting over time, generally one to seven years, and are generally contingent upon continued employment and subject to restrictions on sale, transfer or assignment until conversion to common stock. All, or a portion of, an award may be forfeited if employment is terminated before the end of the relevant vesting period or cancelled after the vesting period in certain situations. Recipients of RSU awards may have voting rights, at Morgan Stanley's discretion, and generally receive dividend equivalents if the awards vest, unless this is prohibited by regulation. During the year, Morgan Stanley granted 380,593 RSUs (2019: 479,074 RSUs) to employees of the Company with a weighted average fair value per unit of US$56.86 (2019: US$43.28), based on the market value of Morgan Stanley common stock at grant date. The equity-based compensation expense recognised in the year is US$20,670,000 (2019: US$18,678,000). The Company has entered into a chargeback agreement with Morgan Stanley under which it is committed to pay to Morgan Stanley the grant date fair value of the awards granted as well as subsequent movements in their fair value. Therefore, the total amount included within 'Staff costs' and 'Management charges from other Morgan Stanley Group undertakings relating to staff costs' within 'Other expense of US$35,343,000 (2019: US$26,012,000) includes the equity-based compensation expense and the movements in the fair value of the awards granted to employees. The related liability due to Morgan Stanley at the end of the year, reported within Trade and other payables' in the statement of financial position, is US$47,257,000 (2019: US$32,148,000). US$25,455,000 (2019: US$17,635,000) is expected to be settled wholly within one year and US$21,802,000 (2019: US$14,513,000) thereafter. Deferred cash-based compensation plans Morgan Stanley has granted deferred cash-based compensation awards to certain employees which defer a portion of the employees' discretionary compensation. The plans generally provide a return to the plan participants based upon the performance of various referenced investments. Awards under these plans are generally subject to a sole vesting condition of service over time, which normally ranges from one to seven years from the date of grant. All or a portion of an award may be forfeited if employment is terminated before the end of the relevant vesting period in certain situations. The awards are settled in cash at the end of the relevant vesting period. Awards with a value of US$21,088,000 (2019: US$20,485,000) have been granted to employees of the Company during the year. The liability to employees at the end of the year, reported within 'Trade and other payables' in the statement of financial position, is US$31,431,000 (2019: US$26,721,000). US$18,834,000 (2019: US$15,783,000) is expected to be settled wholly within one year, and US$12,597,000 (2019: US$10,938,000) thereafter. Plans operated by fellow Morgan Stanley undertakings As explained in note 8, the Company utilises the services of staff who are employed by other Morgan Stanley Group entities. Management charges are incurred in respect of these employee services which include the cost of equity-settled share-based compensation plans and deferred cash-based compensation plans. 57#60MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 32. POST-EMPLOYMENT BENEFITS Defined contribution plans The Morgan Stanley Group operates the Morgan Stanley Defined Contribution Plan (the "Plan"), which requires contributions to be made to funds held in trust, separate from the assets of the Company. The Plan is a defined contribution plan. Additionally, the employees of the Branch are members of a state-managed retirement benefit plan, the Central Provident Fund, operated by the Government of Singapore. The Branch is required to contribute a specified percentage of payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of the Branch with respect to the retirement plan is to make the specified contributions. The defined contribution pension charge recognised within 'Staff costs' and 'Directors' remuneration' in 'Other expense' in the income statement was US$6,005,000 for the year (2019: US$5,644,000) of which US$302,000 was accrued at 31 December 2020 (2019: US$243,000). 33. RELATED PARTY DISCLOSURES Parent and subsidiary relationships Parent and ultimate controlling entity The Company's immediate parent undertaking is Morgan Stanley Hong Kong 1238 Limited, which was incorporated in Hong Kong. The ultimate parent undertaking and controlling entity and the largest group of which the Company is a member and for which group financial statements are prepared is Morgan Stanley. Morgan Stanley is incorporated in the State of Delaware, the United States of America. Copies of its financial statements can be obtained from www.morganstanley.com/investorrelations. 58 58#61MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 33. RELATED PARTY DISCLOSURES (CONTINUED) Key management compensation Key management personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of the Company. Key management personnel include the Board of Directors of the Company. Key management personnel compensation, in respect of their services rendered, comprised the following: Short-term employee benefits Post-employment benefits Share-based payments Other long-term employee benefits 2020 US$'000 2019 US$'000 7,336 4,674 84 77 7,104 5,305 3,322 3,344 17,846 13,400 The share-based payment costs disclosed above reflect the amortisation of equity-based awards granted to key management personnel over the last three years and are therefore not directly aligned with other staff costs in the current year. Key management personnel compensation is borne by Morgan Stanley Group undertakings in both the current and prior years. Management recharges (if any) in respect of key management personnel compensation borne by other Morgan Stanley Group undertakings are included in 'Management charges from other Morgan Stanley Group undertakings relating to staff costs' within ‘Other expense', as disclosed in note 8. In addition to the above, directors not in the Morgan Stanley Group provided key management personnel services to the Company for which a fee of US$169,000 was charged for the year (2019: US$168,000) and of which nil was accrued at 31 December 2020 (2019: US$Nil). Transactions with related parties The Morgan Stanley Group conducts business for clients globally through a combination of both functional and legal entity organisational structures. Accordingly, the Company is closely integrated with the operations of the Morgan Stanley Group and enters into transactions with other Morgan Stanley Group undertakings on an arm's length basis for the purposes of utilising financing, trading and risk management, and infrastructure services. The nature of these relationships along with information about the transactions and outstanding balances is given below. Settlement of the outstanding balances will be made in cash. 59 59#62MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 33. RELATED PARTY DISCLOSURES (CONTINUED) Transactions with related parties (continued) Cash The Company receives deposits from other Morgan Stanley Group undertakings. All such transactions are entered into on an arm's length basis. 2020 2019 Interest US$'000 Balance US$'000 Interest US$'000 Balance US$'000 Amounts due to other Morgan Stanley Group undertakings 434 527 127 Funding The Company provides funding to other Morgan Stanley Group undertakings in the following form: General funding General funding is undated, unsecured, floating rate lending, other than certain funding which is dated on a rolling 395 day term. Funding may be received or provided for specific transaction related funding requirements, or for general operational purposes. The interest rates are established by the Morgan Stanley Group Treasury function for all entities within the Morgan Stanley Group and approximate the market rate of interest that the Morgan Stanley Group incurs in funding its business. Details of the outstanding balances on these funding arrangements and the related interest income or expense recognised in the income statement during the year are shown in the table below: Rolling 395 day term Amounts due from other Morgan Stanley Group undertakings 2020 2019 Interest US$'000 Balance US$'000 Interest US$'000 Balance US$'000 1,901 69,401 The Company has recognised US$37,000 (2019: US$Nil) of expense, and US$37,000 of provision for impairment relating to ECL (2019: US$Nil, relating to incurred loss impairment) on the above outstanding balance from a related party. 60 60#63MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 33. RELATED PARTY DISCLOSURES (CONTINUED) Transactions with related parties (continued) Trading and risk management The Company enters into purchases and sales of securities and derivative transactions with other Morgan Stanley Group undertakings primarily to meet local regulatory requirements and to manage the market risks associated with such transactions. The Company also has a cash sweep service with other Morgan Stanley Group undertakings to facilitate provision of financial services to clients on a global basis. All such transactions are entered into on an arm's length basis. The total amounts receivable and payable on such securities transactions not yet settled and the fair value of such derivatives contracts outstanding at the year end were as follows: 2020 US$'000 2019 US$'000 Amounts due from other Morgan Stanley Group undertakings on unsettled securities and derivative transactions 37,900 33,636 Amounts due to other Morgan Stanley Group undertakings on unsettled securities and derivative transactions 11,272 3,552 At 31 December 2020, the Company has pledged collateral of US$9,274,000 (2019: US$3,160,000) to other Morgan Stanley Group undertakings to mitigate credit risk on exposures arising under derivatives contracts between the Company and other Morgan Stanley Group undertakings. This is reported in the statement of financial position in 'Trade and other receivables'. For the year ended 31 December 2020, the Company received interest of US$3,000 (2019: US$13,000) from and incurred interest charges of US$6,000 (2019: US$14,000) to other Morgan Stanley Group undertakings arising from collateral pledged and received respectively during the year. Infrastructure services and fees and commissions The Company receives and incurs management charges from and to other Morgan Stanley Group undertakings for infrastructure services, including the provision of staff, administrative support and office facilities. Management recharges received and incurred during the year are as follows: Amounts recharged from other Morgan Stanley Group undertakings Amounts recharged to other Morgan Stanley Group undertakings 2020 US$'000 2019 US$'000 81,151 76,224 6,719 6,465 The management and execution of business strategies on a global basis results in many Morgan Stanley transactions impacting a number of Morgan Stanley Group undertakings. The Morgan Stanley Group operates a number of intra-group policies to ensure that, where possible, revenues and related costs are matched. 61#64MORGAN STANLEY BANK ASIA LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2020 33. RELATED PARTY DISCLOSURES (CONTINUED) Transactions with related parties (continued) Infrastructure services and fees and commissions (continued) The Company earns fee and commission income from other Morgan Stanley Group undertakings for value added services which include sales commissions and fees arising from such policies. It also incurs fee and commission expense in respect of such services performed by other Morgan Stanley Group undertakings. Fees and commissions received during the year are as follows: 2020 US$'000 2019 US$'000 Fees and commissions received from other Morgan Stanley Group undertakings 400,828 258,589 Fees and commissions paid to other Morgan Stanley Group undertakings 1,090 1,950 Amounts arising from infrastructure services and fee and commission income outstanding at the reporting date are as follows: 2020 US$'000 2019 US$'000 Amounts due from other Morgan Stanley Group undertakings 39,714 20,283 Amounts due to the Company's direct and indirect parent undertakings Amounts due to other Morgan Stanley Group undertakings These balances are undated, unsecured and non-interest bearing. 2020 US$'000 2019 US$'000 474 9,380 9,380 8,399 8,873 62 62#65MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 The following information is disclosed as part of the accompanying information to the financial statements to comply with the Banking (Disclosure) Rules and does not form part of the audited financial statements. A. CORPORATE GOVERNANCE Corporate Governance Practices The Company and Morgan Stanley are committed to upholding high standards in its corporate governance practices. The HKMA has issued statutory guidelines on Corporate Governance of Locally Incorporated Authorised Institutions ("CG-1") under section 7(3) of the Banking Ordinance applicable to all locally incorporated Authorised Institutions ("AIS"). The Company has in place an effective framework which is consistent with the principles and best practices in corporate governance as set forth in the guidelines on CG-1. Board of Directors The Board of the Company comprises of nine members as of 31 December 2020, including three Independent Non-Executive Directors. All Directors have the appropriate experience, competence, personal and professional integrity to discharge their responsibilities effectively. The Directors have sufficient independence, expertise and experience to oversee the Company's operations and manage risks appropriately. Board Practices Board meetings are held at least four times a year, with one in each quarter. Notice of each Board meeting is given to all Directors in advance and the agenda is sent to the Directors before the date of each Board meeting. Minutes of each Board meeting are circulated to all Directors for their comments prior to confirmation of the minutes at the following Board meeting. Minutes of Board meetings are kept by the Company Secretary and are available for inspection by the Directors. There are four Board committees: (a) Board Audit Committee, (b) Board Remuneration and Culture, Values and Conduct Committee, (c) Board Risk Committee; and (d) Board Nomination Committee. In addition, there are two Management committees: (a) Management Committee; and (b) Bank Risk Committee, which are in turn supported by a number of management sub-committees. Key Board Committees (a) Board Audit Committee Three Board members sit on the Board Audit committee including two Independent Non-Executive Directors and one Non-Executive Director. The Board Audit Committee is chaired by an Independent Non-Executive Director and expects to meet at least 4 times a year. The Board Audit Committee's mandate is to ensure that there is effective supervision of the Company's financial reporting processes, systems of internal controls and internal audit function. The Board Audit Committee also will review and endorse the recommendation on the appointment or re-appointment of external auditors and reviews the financial statements before recommending them to the Board for approval. 63#66MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 A. CORPORATE GOVERNANCE (CONTINUED) Key Board Committees (continued) (b) Board Remuneration and Culture, Values and Conduct Committee Three Board members sit on the Board Remuneration and Culture, Values and Conduct Committee including two Independent Non-Executive Directors and one Non-Executive Director. The Board Remuneration and Culture, Values and Conduct Committee is chaired by an Independent Non- Executive Director and meets at least twice a year. The Board Remuneration and Culture, Values and Conduct Committee's responsibility is to assist the Board in discharging its responsibility for the design and operation of the Company's remuneration system, and the oversight of the Company's culture, values and conduct programme. The Board has delegated to the Board Remuneration and Culture, Values and Conduct Committee the authority to approve the remuneration packages for the Company's senior management and key personnel with a view to creating a remuneration system that incentivises proper employee behavior, and to oversee the implementation of the Company's culture, values and conduct programme. (c) Board Risk Committee The Board Risk Committee comprises three Board members, including two Independent Non- Executive Directors and one Non-Executive Director. The Board Risk Committee meets at a minimum of 4 times a year and is chaired by an Independent Non-Executive Director. The Board Risk Committee oversees key financial and non-financial risk related matters and risk governance and recommends to the Board the Company's risk appetite statements. It also reviews annually the Company's risk management strategy and policy, and reviews and ensures that the Company has appropriate manpower resources, infrastructure and other resources and systems to identify, assess, monitor, and manage risks. (d) Board Nomination Committee Three Board members sit on the Board Nomination Committee including two Independent Non- Executive Directors and one Non-Executive Director. The Board Nomination Committee is chaired by an Independent Non-Executive Director and meets as frequently as is properly required to carry out its functions and at least once a year. The Board Nomination Committee is responsible for assisting and providing guidance to the Board in relation to the appointment of board members, and the assessment of board performance for the Company. Key Management Committees (a) Management Committee The Management Committee is chaired by the Chief Executive of the Company and meets monthly. The Management Committee oversees the operations of the Company and provides a regular forum for business leaders across the Company to identify and discuss key issues and actions that need to be taken to fulfill the Company's strategy. (b) Bank Risk Committee The Bank Risk Committee is chaired by the Chief Executive of the Company and meets monthly. The Bank Risk Committee provides a regular forum for senior representatives of the Company to oversee the risk management practices within the Company. 64#67MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 A. CORPORATE GOVERNANCE (CONTINUED) Internal Audit The Internal Audit Department ("IAD") reports to the Board Audit Committee and is independent of the Business Units and Support and Control Functions and Risk Management. IAD provides an independent assessment of the design, implementation and operating effectiveness of the Company's control environment and risk management processes using a risk-based audit coverage model and audit execution methodology developed from professional auditing standards. Internal Audit also reviews and tests the Company's compliance with internal guidelines set for risk management and risk monitoring, as well as external rules and regulations governing the industry. It effects these responsibilities through risk-based periodic reviews of the Company's processes, activities, products or information systems; targeted reviews of specific controls and activities; pre-implementation or initiative reviews of new or significantly changed processes, activities, products or information systems; and special investigations required as a result of internal factors or regulatory requests. Internal Audit conducts independent closure verification of significant Internal Audit and regulatory issues. Compliance The Company is committed to maintaining and upholding high standards of corporate governance. The Company has been in material compliance with the HKMA Module on "Corporate Governance of Locally Incorporated Authorised institutions" ("CG-1") issued under the HKMA's Supervisory Policy Manual ("SPM"). Financial disclosure policy The Company has in place the financial disclosure policy which is reviewed and approved by the Board of the Company. It sets out (a) the process and approach in determining the content, appropriateness, frequency, relevance and adequacy of the information disclosed, and (b) governance and oversight of the Company's disclosures for verifying or reviewing the accuracy of the information disclosed. 95 65#68MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 B. SEGMENTAL INFORMATION (a) By geographical area The geographical segmental analysis for the year ended 31 December 2020 is as follows: 2020 Hong Kong (1) US$'000 Singapore (1) US$'000 Total US$'000 Total operating income (net of interest expense) 386,940 79,565 466,505 Profit before ECL 122,798 33,289 156,087 Profit before income tax 122,761 33,289 156,050 Total assets 5,505,687 2,487,538 7,993,225 Total liabilities 4,674,066 2,295,082 6,969,148 (1) The amounts disclosed above are after elimination of interoffice balances or transactions between the head office in Hong Kong and the Branch. (b) By class of business The main business segments of the Company are as follows: (i) Wealth Management: the Company engages in the business of banking including deposit taking and lending. It also acts (a) as agent on behalf of its customers in connection with the provision of general investment, securities dealing, as well as discretionary management and (b) as introducing broker to Morgan Stanley & Co. International plc for the provision of clearance, settlement and custody services in relation to the aforementioned transactions. (ii) Treasury and others: includes treasury operations and back office activities. 66 66#69MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 B. SEGMENTAL INFORMATION (CONTINUED) (b) By class of business (continued) The Company's business segment results for the year ended 31 December 2020 are as follows: Wealth Management (1) US$'000 Treasury and others (1) US$'000 Total US$'000 2020 Total operating income (net of interest expense) 451,611 14,894 466,505 Profit before ECL 141,834 14,253 156,087 Profit before income tax 141,834 14,216 156,050 Total assets 3,373,387 4,619,838 7,993,225 (1) The amounts disclosed above are after elimination of interoffice balances or transactions between the head office in Hong Kong and the Branch. C. LOAN AND ADVANCES - SECTOR INFORMATION As at 31 December Sector classification Loans and advances for use in Hong Kong Industrial, commercial and financial: Financial concerns Others Individuals Others Loans and advances for use outside Hong Kong Total 2020 US$'000 34,320 1,351,011 386,733 1,666,138 3,438,202 For the extent to which loans and advances are covered by collaterals, please refer to "collateral and other credit enhancement" under note 24 to the audited financial statements. 67 10#70MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 C. LOAN AND ADVANCES - SECTOR INFORMATION (CONTINUED) Geographical Areas Hong Kong Singapore Mainland China As at 31 December 2020 US$'000 1,772,082 405,225 342,017 918,878 3,438,202 Others Total At 31 December 2020, the Company has recognised US$37,000 of provision for impairment relating to ECL on loans and advances to other Morgan Stanley Group undertaking located in Luxembourg. Loans and Advances are exposures of counterparties based on the location of the counterparties after taking into account any risk transfer. The risk transfers have been made if the claims are guaranteed by a party in a geographical area which is different from that of the counterparty or if the claims are on an overseas branch of a bank whose head office is located in another geographical area. D. INTERNATIONAL CLAIMS International claims are on-balance sheet exposures of counterparties based on the location of the counterparties after taking into account any risk transfer. The risk transfers have been made if the claims are guaranteed by a party in a geographical area which is different from that of the counterparty or if the claims are on an overseas branch of a bank whose head office is located in another geographical area. Non-bank private sector Non-bank Non-financial 31 December 2020 Bank US$'000 Official sector US$'000 financial institutions US$'000 private sector US$'000 Total US$'000 Developed countries 586,771 2,224,826 151,232 2,667 of which: United States 105,966 2,224,826 5,987 Offshore centres 602,946 363,877 of which: Hong Kong 602,932 of which: West Indies UK 197,642 65,142 2,965,496 2,336,779 2,298,254 3,265,077 937,853 1,738,427 893,158 958,300 68#71MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 E. OVERDUE AND RESCHEDULED ASSETS There were no overdue or rescheduled assets as at 31 December 2020. F. MAINLAND ACTIVITIES Below is a breakdown of the Company's Mainland exposures to non-bank counterparties on the Hong Kong office into the specified categories, in accordance with the numbers reported in the Return of Mainland Activities submitted to the HKMA. As at 31 December 2020 Type of counterparties The People's Republic of China ("PRC") nationals residing in Mainland China or other entities On-balance sheet Off-balance exposures US$'000 sheet exposures US$'000 Total US$'000 incorporated in Mainland China and their subsidiaries and JVs 148,192 148,192 Of which, PRC nationals residing in Mainland China or entities beneficially-owned by Mainland interest 147,708 147,708 Other counterparties where the exposures are considered by the reporting institution to be non- bank Mainland China exposures 380,097 Total 528,289 380,097 528,289 G. CURRENCY RISK The currency risk arising from the Company's operation for those individual currencies which each constitutes more than 10% of the total net positions in all foreign currencies are as follows: As at 31 December 2020 Spot assets Spot liabilities Forward purchases Forward sales Net (short)/ long position SGD (1) US$'000 USD (1) US$'000 525,751 5,706,388 (208,210) (5,993,813) (321,641) (4,100) 551,662 (244,029) 20,208 (1) Net (short)/long positions in individual currencies of the Company are reported in gross, i.e. interoffice balances and transactions between the head office in Hong Kong and the Branch are not eliminated. The Company had no option and structural positions in any particular foreign currency as at 31 December 2020. 69 60#72MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE The capital adequacy ratios of the Company were calculated in accordance with Banking (Capital) Rules of the Banking Ordinance. The Company uses the following approaches to calculate its capital charge for: (a) credit risk: Standardised (Credit Risk) Approach ("STC approach"); and (b) operational risk: Basic Indicator Approach ("BIA approach"). There was no risk-weighted amount ("RWA") for market risk for the Company because the Company was exempted by the HKMA from the calculation of market risk. The following templates and tables show the standard disclosure templates and tables specified by the HKMA in relation to the Pillar 3 disclosures required under the Banking (Disclosure) Rules. Other Pillar 3 templates or tables not disclosed below either are not applicable to the Company or have no reportable amount for the period. Table OVA: Overview of risk management Risk Management Framework The Company has established a risk governance framework ("RGF"), which is vital to the success of the Company's business activities. The RGF integrates the diverse roles of the Business Units, Support and Control Functions, Firm Risk Management, and Compliance into a holistic enterprise structure and facilitates the incorporation of risk assessment into decision-making processes across the Company. The Company's RGF affirms to Morgan Stanley's firm-wide risk governance framework. RGF recognises that risks are often interrelated and therefore should be managed firm-wide on an aggregate and individual basis. RGF encompasses the Company's risk management culture, principles and practices that support risk identification, measurement, monitoring, escalation and decision-making processes. RGF views risk in a broad context and considers the risk to earnings and capital adequacy in a stressed market environment, as well as the risks to future earnings due to reputational damage. The principal risks involved in the Company's business activities include market, interest rate, credit, operational, liquidity, compliance, conduct and reputational risk. Strategic risk is integrated into the Company's business planning, embedded in the evaluation of all principal risks and overseen by the Company's Board of Directors (or a committee thereof). The Company's articulation of the aggregate level and types of risk that it is willing to accept in order to achieve its business objectives is established, communicated and monitored in accordance with the Company's Risk Appetite Statement. The combination of Risk Tolerance Statements, quantitative risk limits, and Key Risk Indicators ("KRIS") aims to ensure the Company's businesses are carried out in line with the risk appetite established by the Company's Board, and to protect the Company's capital and reputation in both normal and stressed environments. There are regular reporting, including reporting on breaches, to the both management and Board committees. Risk Management Culture The Company's risk management culture requires the Company to seek acceptable risk-adjusted returns through prudent risk- taking that protects the Company's capital base and franchise, and is faithful to the Company's risk appetite and core values. The Company's three lines of defense, its Business Units, Independent Risk Management and Compliance functions, and the Internal Audit Department, shall play an integral role in enabling the Company's to achieve the objectives of the RGF. The Company's risk management culture is based on the following five key principles: Integrity: critical to Morgan Stanley Group's approach to Enterprise Risk Management ("ERM") is strong risk culture and risk governance. Developing the Morgan Stanley Group's risk culture is a continuous process and builds upon the Morgan Stanley Group's commitment to "doing the right thing" and its values that make managing risk each employee's responsibility; 70 70#73MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Table OVA: Overview of risk management (continued) Risk Management Culture (continued) • Comprehensiveness: a well-defined, comprehensive risk governance structure maintained by employees with appropriate risk management expertise that provides for periodic assessment of the efficacy of the Morgan Stanley Group's risk management framework; Independence: independent lines of reporting for risk managers in regard to identification, measurement, monitoring, escalation and mitigation of risk; Accountability: well-defined roles and responsibilities that establish clear accountability for risk management and are aligned with the Morgan Stanley Group's disciplinary and compensation structure; Transparency: strong risk culture that encourages open dialogue, effective challenge, escalation and appropriate reporting of risk to senior management, the Board (or a committee thereof) and the Company's regulators as well as external disclosures of risk matters. The Company executes risk oversight through multiple lines of defense. • The first line of defense is provided by the business units where risks are taken. In the course of conducting business activities, staff in the business units hold frontline positions in the proper identification, assessment, management and reporting of risk exposures on an ongoing basis, having regard to the Company's risk appetite, policies, procedures and controls. • The second line of defense is provided by independent and effective risk management and compliance functions. The risk management function is primarily responsible for overseeing the Company's risk- taking activities, undertaking risk assessments and reporting independently from the business line, while the compliance function monitors compliance with laws, corporate governance rules, regulations and internal policies; and The third line of defense is provided by an independent and effective internal audit function, which is responsible for providing assurance on the effectiveness of the Company's risk management governance and controls over key risks within the Company's businesses and functions (including the first and second lines of defense described above). Risk Governance Structure Risk management requires independent bank-level oversight, accountability of the Company's business segments, and effective communication of risk matters to senior management and the Board. The nature of the Company's risks, coupled with this risk management philosophy, forms the Company's risk governance structure. The Company's risk governance structure includes: Board and Board Committees Board Remuneration and Culture, Values and Conduct Committee Management Committees Management Committee Board of Directors Board Audit Committee Board Risk Committee Board Nomination Committee Bank Risk Committee Above committees are further detailed in Section A of the Unaudited Supplementary Financial Information. 71#74MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Table OVA: Overview of risk management (continued) Risk Appetite Monitoring and Reporting The Company's Risk Appetite Framework requires a comprehensive approach to monitor, assess and report on the risk profiles of the Company, Business Units on an ongoing basis, with regular reporting to the Bank Risk Committee and Board Risk Committee. The reporting must include quantitative measurements and qualitative assessments that enable a comparison of the Company's current risk profile against risk limits, KRIS and Risk Tolerance Statements. Reporting must identify matters for escalation and decisions, as well as highlight emerging risks, mitigating actions and matters that are significant to the Company's strategy. Monitoring is an ongoing review of major risks and/or controls at a set frequency. The scope and frequency of monitoring depends on the types of risk, as well as on the specific business risk operations and activities. Adequate monitoring enables the Company to understand its risk profile across risk types, groups, and lines of business. It also helps the Company to ascertain how particular risks may be evolving or changing in reaction to controls and the impact of emerging risks. Risk data and analysis are reported at and across multiple levels of the Company, and to various audiences, through an extensive suite of periodic and ad hoc reports. Reports include backward-looking, current, and forward-looking risk management information. The goal of effective risk reporting is to provide actionable information that informs daily business decisions, prompts responses to key current and emerging issues, and ensures that senior management and the Board maintain a comprehensive view of key risk profiles. Firm Risk Management Functions Market Risk The Market Risk Department ("MRD") oversees the market risk arising from the Company's trading and non-trading business activities. This includes identifying and defining market risks; developing and employing risk measures and tools to monitor, control and mitigate those risks; establishing limits; monitoring usage against these limits; and producing and distributing comprehensive reports designed to keep senior management apprised of the Company's market risk exposures. MRD helps ensure transparency of material market risks, which includes, but is not limited to, the escalation of risk concentrations to senior management, as well as the disclosure and reporting of market risks to the Board and the Company's regulatory authorities. Credit Risk The Credit Risk Management Department ("CRM”) oversees, assesses, monitors, measures, controls and reports on credit risk exposure to institutions and individuals primarily through the Wealth Management businesses ("PWM Asia"). CRM helps ensure transparency of material credit risks, which includes the escalation of risk concentrations to senior management, as well as the disclosure and reporting of credit risks to the Board and the Company's regulatory authorities. CRM also works closely with MRD and applicable Business Units to monitor risk exposures and to perform stress tests to identify, analyse and control credit risk concentrations arising in PWM Asia's lending and trading activities. 72#75MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Table OVA: Overview of risk management (continued) Firm Risk Management Functions (continued) Liquidity Risk The Liquidity Risk Department ("LRD") oversees the liquidity risk arising from the Company's business activities. LRD independently ensures transparency of material liquidity risks, compliance with established risk limits, escalation of risk concentrations to senior management, adherence to sound business practices, and compliance with applicable regulations and supervisory guidance. Operational Risk The Operational Risk Department ("ORD") provides independent oversight and challenge of Operational Risk management within the Company by identifying, measuring, monitoring and controlling Operational Risks and independently validating the effectiveness and consistency of risk management processes via its Operational Risk framework. Legal and Compliance Department The Company has established procedures based on legal and regulatory requirements that are designed to facilitate compliance with applicable statutory and regulatory requirements as well as Morgan Stanley's global standard relating to business conduct, ethics and practices. • · Compliance Department The Compliance Department helps to ensure the Company's compliance and adherence to the relevant laws, regulations, and standards that govern its business activities as well as adherence to the internal policies and procedures. Moreover, Compliance Department is also responsible for identifying, measuring, mitigating and reporting on compliance related risks. Legal Department The Legal Department reports to the International General Counsel and provides legal and regulatory advice that protects the Company's financial well-being and reputation and assists the Business Units to understand legal risk and to comply with relevant financial services related laws, regulations, guidance, policies and standards. Global Financial Crimes The Company has adopted an AML policy which outlines the Company's anti-money laundering compliance program. This AML policy sets forth the guiding principles and consistent standards for best practices reasonably designed to protect the Company's business from being used to facilitate money laundering, terrorist financing, or other illicit activities. The Company is subject to risk of major regulatory sanctions and reputation damage if the Company significantly fails to comply with applicable AML, sanction screening laws, or Anti- Bribery and Corruption rules. Financial crimes related issues are reported as required to the Franchise Risk Officer, the Company's Global Financial Crimes Committee, Management Committee and the Board of Directors. 73#76MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Table OVA: Overview of risk management (continued) Internal Audit Department IAD provides perspectives to both senior management and the Board Audit Committee for their consideration in discharging their legal, fiduciary, and oversight responsibilities. It is further detailed in Section A of the Unaudited Supplementary Financial Information. Stress testing Stress testing is one of the Company's principal risk management tools, which is used to identify and assess the impact of scenarios on its portfolios and capital, covering all products offered by the Company. Stress testing complements other company-wide risk metrics by providing a flexible approach to understanding risk and assessing the Company's resilience to different scenarios over a range of severities, relevant to current market conditions and forward looking macroeconomic views. Most notably, stress testing is used for: . • Risk Management: Identifying areas of potential weakness in Company's portfolio as a basis for senior management to take portfolio-level decisions, determining risk mitigation actions and set risk limits, and improving risk and control environment. Capital and Liquidity planning: Informing the proposed stressed capital and liquidity forecasts through severe but plausible stress tests. Others including business planning, new product evaluation and strategic business decision. The MSBAL Stress Testing Framework utilises stress testing methodologies, including sensitivity tests and scenario analyses, to identify and assess Company's resilience to different stress conductions. Risk Mitigation Risk Mitigation is further detailed in the note 24 to the audited financial statements. Adequacy of Risk Management Arrangements The Company is satisfied that the risk management arrangements and systems, as described, are appropriate given the strategy and risk profile of the Company. These elements are reviewed at least annually and, where applicable, updated to reflect best practice, evolving market conditions and changing regulatory requirements. 74 74#77MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template KM1: Key Prudential Ratios As at As at As at As at As at 31 December 2020 30 30 31 September June March 2020 2020 2020 USD'000 USD'000 USD'000 USD'000 31 December 2019 USD'000 Regulatory capital (amount) 1 Common Equity Tier 1 ("CET1") 999,061 975,975 945,537 905,692 860,933 2 Tier 1 999,061 975,975 945,537 905,692 860,933 3 Total capital 1,014,779 992,788 961,002 923,513 879,176 RWA (amount) 4 Total RWA 1,973,727 2,117,187 1,979,754 2,033,105 2,022,152 Risk-based regulatory capital ratios (as a percentage of RWA) 5 CET1 ratio (%) 51% 46% 48% 45% 43% 6 Tier 1 ratio (%) 51% 46% 48% 45% 43% 7 Total capital ratio (%) 51% 47% 49% 45% 43% Additional CET1 buffer requirements (as a percentage of RWA) Capital conservation buffer 8 2.500% 2.500% 2.500% 2.500% 2.500% requirement (%) Countercyclical capital buffer 9 0.575% 0.511% 0.463% 0.444% 0.877% requirement (%) Higher loss absorbency requirements 10 (%) (applicable only to G-SIBS or D-SIBS) 0% 0% 0% 0% 0% Total Authorised Institution ("AI")- 11 specific CET1 buffer requirements 3.075% 3.011% 2.963% 2.944% 3.377% (%) CET1 available after meeting the 12 Al's minimum capital requirements 43% 39% 40% 37% 35% (%) Basel III leverage ratio Total leverage ratio ("LR") exposure 13 7,973,729 6,662,895 6,488,947 5,767,055 4,715,015 measure 14 LR (%) 13% 15% 15% 16% 18% Liquidity Maintenance Ratio ("LMR") 17a LMR (%) (¹) 64% 59% 57% 54% 63% Core Funding Ratio ("CFR") 20a CFR (%) (¹) 255% 224% 225% 208% 231% Note 1: The LMR and CFR disclosed above represent the arithmetic mean of the average LMR and average CFR of the 3 calendar months within each quarter respectively. The Company is not required, under the Banking (Liquidity) Rules, to calculate Liquidity Coverage Ratio or Net Stable Funding Ratio for its liquidity risk. 75#78MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template OV1: Overview of RWA RWA As at As at 31 December 2020 USD'000 30 September Minimum capital requirements As at 31 December 2020 USD'000 2020 USD'000 1,253,630 1,253,630 1,436,165 1,436,165 100,290 100,290 1 Credit risk for non-securitization exposures 2 Of which Standardised (Credit Risk) Approach ("STC approach") 2a Of which Basic Approach ("BSC approach") 3 Of which foundation Internal Ratings-Based ("IRB") Approach 4 Of which supervisory slotting criteria approach 5 Of which advanced IRB approach 6 Counterparty default risk and default fund contributions 3,814 2,043 305 7 Of which Standardised Approach for measuring Counterparty Credit Risk ("SA-CCR") Not applicable 7a Of which Current Exposure Method ("CEM") 1,565 2,043 125 Of which Internal Models (Counterparty Credit Risk) 8 Approach ("IMM(CCR) approach") 9 Of which others 2,249 180 10 Credit Valuation Adjustment ("CVA") risk 711 929 57 11 Equity positions in banking book under the simple risk-weight method and internal models method 12 Collective investment scheme ("CIS") exposures - Look-Through Approach ("LTA") 13 CIS exposures - Mandate-Based Approach ("MBA") 14 CIS exposures-Fall-Back Approach ("FBA") 14a CIS exposures - combination of approaches Not applicable Not applicable Not applicable Not applicable 15 16 67 Settlement risk Securitization exposures in banking book Of which Securitization Internal Ratings-Based Approach ("SEC-IRBA") Of which Securitization External Ratings-Based Approach ("SEC-ERBA") (including Internal Assessment Approach ("IAA")) Of which Securitization Fall-Back Approach ("SEC-FBA") 17 18 19 Of which Securitization Standardised Approach ("SEC-SA") 19a 20 Market risk 21 Of which Standardised (Market Risk) Approach ("STM approach") 22 Of which Internal Models Approach ("IMM approach") 23 24 Capital charge for switch between exposures in trading book and banking book (not applicable before the revised market risk framework takes effect) Operational risk Not applicable 717,045 678,050 57,364 24a Sovereign concentration risk 25 Amounts below the thresholds for deduction (subject to 250% Risk-Weight ("RW")) 26 Capital floor adjustment 26a Deduction to RWA 26b Of which portion of regulatory reserve for general banking risks and collective provisions which is not included in Tier 2 Capital 1,473 1,473 118 118 26c 27 Total Of which portion of cumulative fair value gains arising from the revaluation of land and buildings which is not included in Tier 2 Capital 1,973,727 2,117,187 157,898 The disclosure on minimum capital requirement is made by multiplying the Company's RWA derived from the relevant calculation approach by 8%, not the Company's actual "regulatory capital". 76#79MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template LI1: Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories with regulatory risk categories Carrying values Carrying values of items: as reported in not subject published financial statements/ under scope of regulatory consolidation subject to credit risk framework subject to counterparty credit risk framework subject to the securitization framework subject to market risk framework to capital requirements or subject to deduction from capital As at 31 December 2020 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Assets Cash and short-term 1,256,705 1,256,705 deposits Trading financial assets 1,709 Secured Financing 582,265 1,709 582,265 Loans and advances 3,438,202 Investment securities 2,616,724 3,438,202 2,616,724 Trade and other 88,733 88,733 receivables Deferred tax assets Prepayments 7,801 1,086 7,801 1,086 Total assets 7,993,225 7,401,450 583,974 7,801 Liabilities Deposits 6,808,011 Trading financial 11,272 liabilities Trade and other payables 130,616 Current tax liabilities 16,889 Accruals 2,360 Total liabilities 6,969,148 11,272 11,272 6,808,011 130,616 16,889 2,360 6,957,876 The Company's scope of accounting consolidation and its scope of regulatory consolidation are the same. 77 17#80MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template PV1: Prudent valuation adjustments The following table shows the detailed breakdown of the constituent elements of prudent valuation adjustments, for assets measured at fair value. Foreign Equity Interest rates Exchange Credit Commodities Total ("FX") Of which: In the trading book Of which: In the banking book As at US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 31 December 2020 1 Close-out uncertainty, 134 15 149 149 of which: 2 Mid-market value 113 113 113 3 Close-out costs 21 15 36 36 4 Concentration 5 Early termination 6 Model risk - 7 Operational risks 9 1 10 10 8 Investing and funding costs 9 Unearned credit spreads 10 Future administrative costs 11 Other adjustments (¹) 12 Total adjustments (88) 55 (10) 6 (98) 61 (98) 61 Note 1: For other adjustments, it refers to the diversification benefits from mid-market value and close-out costs, resulting in reduction in valuation adjustment required. The highest amount of valuation adjustments are attributable to the interest rate products measured at fair value, mainly government debt securities. For rows that are not applicable, there are immaterial risks and financial impacts from those elements of valuation adjustments regarding to the Company's financial assets. 78#81MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template CC1: Composition of regulatory capital As at 31 December 2020 Amount USD'000 Source based on reference numbers/letters of the balance sheet under the regulatory scope of consolidation (Template CC2) CET1 capital: instruments and reserves 1 Directly issued qualifying CET1 capital instruments plus any related share premium 670,000 (1) 2 Retained earnings 354,042 (2) 3 Disclosed reserves 35 (3) 4 Directly issued capital subject to phase-out arrangements from CETI (only applicable to non-joint stock companies) Not applicable Not applicable 5 Minority interests arising from CET1 capital instruments issued by consolidated bank subsidiaries and held by third parties (amount allowed in CET1 capital of the consolidation group) 6 CET1 capital before regulatory deductions 1,024,077 CET1 capital: regulatory deductions 7 Valuation adjustments 61 8 Goodwill (net of associated deferred tax liabilities) 9 Other intangible assets (net of associated deferred tax liabilities) 10 Deferred tax assets (net of associated deferred tax liabilities) 7,801 (4) 11 Cash flow hedge reserve 12 Excess of total EL amount over total eligible provisions under the IRB approach 13 Credit-enhancing interest-only strip, and any gain-on-sale and other increase in the CET1 capital arising from securitization transactions 14 15 16 Gains and losses due to changes in own credit risk on fair valued liabilities Defined benefit pension fund net assets (net of associated deferred tax liabilities) Investments in own CET1 capital instruments (if not already netted off paid-in capital on reported balance sheet) 17 Reciprocal cross-holdings in CET1 capital instruments 18 Insignificant LAC investments in CET1 capital instruments issued by financial sector entities that are outside the scope of regulatory consolidation (amount above 10% threshold) 19 Significant LAC investments in CET1 capital instruments issued by financial sector entities that are outside the scope of regulatory consolidation (amount above 10% threshold) 20 Mortgage servicing rights (net of associated deferred tax liabilities) Not applicable Not applicable 21 Deferred tax assets arising from temporary differences (net of associated deferred tax liabilities) Not applicable Not applicable 22 Amount exceeding the 15% threshold Not applicable Not applicable 23 of which: significant investments in the ordinary share of financial sector entities Not applicable Not applicable 24 of which: mortgage servicing rights Not applicable Not applicable 25 of which: deferred tax assets arising from temporary differences Not applicable Not applicable 26 National specific regulatory adjustments applied to CET1 capital 26a Cumulative fair value gains arising from the revaluation of land and buildings (own-use and investment properties) 26b Regulatory reserve for general banking risks 17,154 12 79#8226c 26d MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template CC1: Composition of regulatory capital (continued) As at 31 December 2020 Securitization exposures specified in a notice given by the MA Cumulative losses below depreciated cost arising from the institution's holdings of land and buildings 26e Capital shortfall of regulated non-bank subsidiaries 26f Capital investment in a connected company which is a commercial entity (amount above 15% of the reporting institution's capital base) 27 Regulatory deductions applied to CET1 capital due to insufficient AT1 capital and Tier 2 capital to cover deductions 28 Total regulatory deductions to CET1 capital 29 CET1 capital AT1 capital: instruments 30 Qualifying AT1 capital instruments plus any related share premium 31 32 33 34 35 36 of which: classified as equity under applicable accounting standards of which: classified as liabilities under applicable accounting standards Capital instruments subject to phase-out arrangements from ATI capital AT1 capital instruments issued by consolidated bank subsidiaries and held by third parties (amount allowed in AT1 capital of the consolidation group) of which: ATI capital instruments issued by subsidiaries subject to phase-out arrangements AT1 capital before regulatory deductions AT1 capital: regulatory deductions 37 Investments in own AT1 capital instruments 38 Reciprocal cross-holdings in AT1 capital instruments 39 40 Insignificant LAC investments in AT1 capital instruments issued by financial sector entities that are outside the scope of regulatory consolidation (amount above 10% threshold) Significant LAC investments in AT1 capital instruments issued by financial sector entities that are outside the scope of regulatory consolidation 41 National specific regulatory adjustments applied to AT1 capital 42 Regulatory deductions applied to AT1 capital due to insufficient Tier 2 capital to cover deductions 43 Total regulatory deductions to AT1 capital 44 AT1 capital 45 Tier 1 capital (T1 = CET1 + AT1) Tier 2 capital: instruments and provisions 46 Qualifying Tier 2 capital instruments plus any related share premium 47 Capital instruments subject to phase-out arrangements from Tier 2 capital 48 49 Tier 2 capital instruments issued by consolidated bank subsidiaries and held by third parties (amount allowed in Tier 2 capital of the consolidation group) of which: capital instruments issued by subsidiaries subject to phase-out arrangements Amount USD'000 25,016 999,061 999,061 Source based on reference numbers/letters of the balance sheet under the regulatory scope of consolidation (Template CC2) 88 80#83MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template CC1: Composition of regulatory capital (continued) Amount As at 31 December 2020 USD'000 50 Collective provisions and regulatory reserve for general banking risks eligible for inclusion in Tier 2 capital 15,718 51 Tier 2 capital before regulatory deductions 15,718 Tier 2 capital: regulatory deductions 52 Investments in own Tier 2 capital instruments 53 54 54a 55 55 55a Reciprocal cross-holdings in Tier 2 capital instruments and non-capital LAC liabilities Insignificant LAC investments in Tier 2 capital instruments issued by, and non-capital LAC liabilities of, financial sector entities that are outside the scope of regulatory consolidation (amount above 10% threshold and, where applicable, 5% threshold) Insignificant LAC investments in non-capital LAC liabilities of financial sector entities that are outside the scope of regulatory consolidation (amount formerly designated for the 5% threshold but no longer meets the conditions) (for institutions defined as "section 2 institution" under §2(1) of Schedule 4F to BCR only) Significant LAC investments in Tier 2 capital instruments issued by financial sector entities that are outside the scope of regulatory consolidation (net of eligible short positions) Significant LAC investments in non-capital LAC liabilities of financial sector entities that are outside the scope of regulatory consolidation (net of eligible short positions) National specific regulatory adjustments applied to Tier 2 capital 56 56a Add back of cumulative fair value gains arising from the revaluation of land and buildings (own-use and investment properties) eligible for inclusion in Tier 2 capital 56b Regulatory deductions applied to Tier 2 capital to cover the required deductions falling within §48(1)(g) of BCR 57 Total regulatory adjustments to Tier 2 capital 58 Tier 2 capital (T2) 59 Total regulatory capital (TC = T1 + T2) 60 Total RWA 15,718 1,014,779 1,973,727 Capital ratios (as a percentage of RWA) 61 CET1 capital ratio 62 Tier 1 capital ratio 63 Total capital ratio 51% 51% 51% 64 Institution-specific buffer requirement (capital conservation buffer plus countercyclical capital buffer plus higher loss absorbency requirements) 3.075% 65 of which: capital conservation buffer requirement 2.500% 66 of which: bank specific countercyclical capital buffer requirement 0.575% 67 of which: higher loss absorbency requirement 68 CET1 (as a percentage of RWA) available after meeting minimum capital requirements 43% Source based on reference numbers/letters of the balance sheet under the regulatory scope of consolidation (Template CC2) 81#84MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template CC1: Composition of regulatory capital (continued) As at 31 December 2020 National minima (if different from Basel 3 minimum) Amount USD'000 Source based on reference numbers/letters of the balance sheet under the regulatory scope of consolidation (Template CC2) 69 National CET1 minimum ratio 70 National Tier 1 minimum ratio 71 National Total capital minimum ratio Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Amounts below the thresholds for deduction (before risk weighting) 72 Insignificant LAC investments in CET1, AT1 and Tier 2 capital instruments issued by, and non-capital LAC liabilities of, financial sector entities that are outside the scope of regulatory consolidation 73 Significant LAC investments in CET1 capital instruments issued by financial sector entities that are outside the scope of regulatory consolidation 74 Mortgage servicing rights (net of associated deferred tax liabilities) Not applicable 75 Deferred tax assets arising from temporary differences (net of associated deferred tax liabilities) Not applicable Not applicable Not applicable Applicable caps on the inclusion of provisions in Tier 2 capital 76 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to the BSC approach, or the STC approach and SEC-ERBA, SEC-SA and SEC-FBA (prior to application of cap) 17,191 77 Cap on inclusion of provisions in Tier 2 under the BSC approach, or the STC approach, and SEC-ERBA, SEC-SA and SEC-FBA 15,718 78 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to the IRB approach and SEC-IRBA (prior to application of cap) 79 Cap for inclusion of provisions in Tier 2 under the IRB approach and SEC-IRBA Capital instruments subject to phase-out arrangements (only applicable between 1 Jan 2018 and 1 Jan 2022) 80 81 Current cap on CET1 capital instruments subject to phase-out arrangements Amount excluded from CETI due to cap (excess over cap after redemptions and maturities) Not applicable Not applicable Not applicable Not applicable 82 Current cap on AT1 capital instruments subject to phase-out arrangements 83 Amount excluded from AT1 capital due to cap (excess over cap after redemptions and maturities) 84 Current cap on Tier 2 capital instruments subject to phase-out arrangements 85 Amount excluded from Tier 2 capital due to cap (excess over cap after redemptions and maturities) Elements where a more conservative definition has been applied in the BCR relative to that set out in Basel III capital standards are disclosed below in Notes to the Template. 82 62#85MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template CC1: Composition of regulatory capital (continued) Notes to the Template Description 10 Deferred tax assets ("DTAS") (net of associated deferred tax liabilities) Explanation Hong Kong basis Basel III basis USD'000 USD'000 7,801 7,801 As set out in paragraphs 69 and 87 of the Basel III text issued by the Basel Committee (December 2010), DTAs of the bank to be realised are to be deducted, whereas DTAs which relate to temporary differences may be given limited recognition in CET1 capital (and hence be excluded from deduction from CET1 capital up to the specified threshold). In Hong Kong, an AI is required to deduct all DTAs in full, irrespective of their origin, from CET1 capital. Therefore, the amount to be deducted as reported in row 10 may be greater than that required under Basel III. The amount reported under the column "Basel III basis" in this box represents the amount reported in row 10 (i.e. the amount reported under the "Hong Kong basis") adjusted by reducing the amount of DTAs to be deducted which relate to temporary differences to the extent not in excess of the 10% threshold set for DTAs arising from temporary differences and the aggregate 15% threshold set for MSRS, DTAs arising from temporary differences and significant investments in CET1 capital instruments issued by financial sector entities (excluding those that are loans, facilities or other credit exposures to connected companies) under Basel III. Abbreviations: CET1: Common Equity Tier 1 AT1: Additional Tier 1 83 83#86MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template CC2: Reconciliation of regulatory capital to balance sheet Balance sheet as in published financial Reference disclosure statements to template (Note) USD'000 CC1 As at 31 December 2020 Assets Cash and short-term deposits Trading financial assets Secured Financing 1,256,705 1,709 582,265 Loans and advances 3,438,202 Investment securities 2,616,724 Trade and other receivables 88,733 Deferred tax assets 7,801 (4) Prepayments 1,086 7,993,225 Total assets Liabilities Deposits 6,808,011 Trading financial liabilities 11,272 Trade and other payables 130,616 Current tax liabilities 16,889 Accruals 2,360 6,969,148 Total liabilities Shareholders' equity Share capital Of which: amount eligible for CET1 FVOCI reserve Retained earnings Total shareholders' equity 670,000 670,000 (1) 35 (3) 354,042 (2) 1,024,077 Note: The Company's scope of accounting consolidation and its scope of regulatory consolidation are the same. 84#87MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Table CCA: Main features of regulatory capital instruments The following table shows the main features of outstanding capital instruments issued. 1 Issuer 2 Unique identifier (e.g. CUSIP, ISIN or Bloomberg identifier for private placement) 3 Governing law(s) of the instrument Regulatory treatment 4 Transitional Basel III rules¹ 5 Post-transitional Basel III rules² 6 7 8 Quantitative qualitative information Morgan Stanley Bank Asia Limited Not applicable Hong Kong Law Not applicable Common Equity Tier 1 Eligible at solo/group/ solo and group Instrument type (types to be specified by each jurisdiction) Amount recognised in regulatory capital (currency in millions, as of most recent reporting date) 9 Par value of instrument 10 Accounting classification 11 Original date of issuance Solo Ordinary shares US$670 million Not applicable Shareholders' equity 1 share issued on 19 May 2014 13,000,000 shares issued on 11 July 2014 156,999,998 shares issued on 13 January 2015 1 share issued on 9 February 2015 500,000,000 shares issued on 22 March 2019 Perpetual 12 Perpetual or dated 13 Original maturity date 14 Issuer call subject to prior supervisory approval 15 16 Optional call date, contingent call dates and redemption amount Subsequent call dates, if applicable No maturity No Not applicable Not applicable Coupons/dividends 17 Fixed or floating dividend/coupon 18 Coupon rate and any related index Floating Not applicable 19 Existence of a dividend stopper No 20 Fully discretionary, partially discretionary or mandatory Fully discretionary 21 Existence of step-up or other incentive to redeem No 22 Non-cumulative or cumulative 23 Convertible or non-convertible 24 If convertible, conversion trigger(s) Non-cumulative Non-convertible Not applicable 25 If convertible, fully or partially Not applicable 26 If convertible, conversion rate Not applicable 27 If convertible, mandatory or optional conversion Not applicable 28 If convertible, specify instrument type convertible into Not applicable 29 If convertible, specify issuer of instrument it converts into Not applicable 30 Write-down feature No 31 If write-down, write-down trigger(s) Not applicable 32 If write-down, full or partial Not applicable 33 If write-down, permanent or temporary 34 If temporary write-down, description of write-up mechanism Not applicable Not applicable 55 85#88MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Table CCA: Main features of regulatory capital instruments (continued) 35 Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument in the insolvency creditor hierarchy of the legal entity concerned). Quantitative qualitative information Not applicable 36 Non-compliant transitioned features 37 If yes, specify non-compliant features Footnote: No Not applicable 1. Regulatory treatment of capital instruments subject to transitional arrangements provided for in Schedule 4H to the BCR. 2. Regulatory treatment of capital instruments not subject to transitional arrangements provided for in Schedule 4H to the BCR. Information relating to the disclosure of the full terms and conditions of the Company's capital instruments can be viewed on the website: http://www.morganstanley.com/about-us/global-offices/hong-kong. Template CCyB1: Geographical distribution of credit exposures used in countercyclical capital buffer ("CCyB") Applicable JCCyB ratio in effect Geographical breakdown by Jurisdiction (J) As at 31 December 2020 RWA used in computation of CCyB ratio % US$'000 AI-specific CCyB ratio % CCyB amount US$'000 Hong Kong SAR 1.000% 608,851 2 Luxembourg 0.500% 69,442 3 Sum 678,293 4 Total (Note) 1,119,146 0.575% 11,349 Note: The geographical allocation of private sector credit exposures to the various jurisdictions is based on "ultimate risk basis". "Ultimate risk basis" means the allocation of exposures to the jurisdictions where the risk ultimately lies, as defined as the location where the "ultimate obligor" resides. Total RWA on Row 4 represents total sum of the RWA for private sector credit exposures across all jurisdictions to which the Company is exposed, including jurisdictions with no applicable JCCyB ratio or with applicable JCCyB ratio set at zero. The CCyB amount as at 31 December 2020 represents the Company's specific CCyB ratio multiplied by the Company's total RWA, as specified by the standard disclosure templates issued by the HKMA, instead of the Company's RWA relating to private sector credit exposures. 98 86#89MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template LR1: Summary comparison of accounting assets against leverage ratio exposure measure As at 31 December 2020 Item 1 Total consolidated assets as per published financial disclosure statements Value under the LR framework USD'000 7,993,225 2 3 Adjustment for investments in banking, financial, insurance or commercial entities that are consolidated for accounting purposes but outside the scope of regulatory consolidation Adjustment for fiduciary assets recognised on the balance sheet pursuant to the applicable accounting standard but excluded from the LR exposure measure 4 Adjustments for derivative contracts 5 Adjustment for securities financing transactions ("SFTs") (i.e. repos and similar secured lending) 6 Adjustment for off-balance sheet ("OBS") items (i.e. conversion to credit equivalent amounts of OBS exposures) 6a Adjustment for specific and collective provisions that are allowed to be excluded from exposure measure 7 Other adjustments 8 Leverage ratio exposure measure 1,421 4,136 (37) (25,016) 7,973,729 87 88#90MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template LR2: Leverage Ratio As at 31 December 2020 As at 30 September 2020 USD'000 USD'000 On-balance sheet exposures 1 On-balance sheet exposures (excluding those arising from derivative contracts and SFTs, but including collateral) 7,409,251 6,680,477 2 Less: Asset amounts deducted in determining Tier 1 capital (25,016) (21,658) 3 Total on-balance sheet exposures (excluding derivative contracts and SFTs) Exposures arising from derivative contracts 7,384,235 6,658,819 4 Replacement cost associated with all derivative contracts (where applicable net of eligible cash variation margin and/or with bilateral netting) 5 Add-on amounts for potential future exposure ("PFE") associated with all derivative 3,130 4,085 contracts 6 Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to the applicable accounting framework 7 Less: Deductions of receivables assets for cash variation margin provided under derivative contracts 8 Less: Exempted Central Counterparty ("CCP") leg of client-cleared trade exposures 9 Adjusted effective notional amount of written credit derivative contracts 10 Less: Adjusted effective notional offsets and add-on deductions for written credit derivative contracts 11 Total exposures arising from derivative contracts 3,130 4,085 Exposures arising from SFTs 12 Gross SFT assets (with no recognition of netting), after adjusting for sale accounting transactions 582,265 13 Less: Netted amounts of cash payables and cash receivables of gross SFT assets 14 Counterparty Credit Risk ("CCR") exposure for SFT assets 4,136 15 Agent transaction exposures 16 Total exposures arising from SFTs Other off-balance sheet exposures 586,401 17 Off-balance sheet exposure at gross notional amount 18 Less: Adjustments for conversion to credit equivalent amounts 19 Off-balance sheet items Capital and total exposures 20 Tier 1 capital 999,061 20a Total exposures before adjustments for specific and collective provisions 20b Adjustments for specific and collective provisions 7,973,766 (37) 975,975 6,662,904 (9) 21 Total exposures after adjustments for specific and collective provisions Leverage ratio 7,973,729 6,662,895 22 Leverage ratio 13% 15% 888#91MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Table LIQA: Liquidity risk management (a) Governance of liquidity risk management (i) Risk tolerance Liquidity risk refers to the risk that the Company will be unable to finance its operations due to a loss of access to the capital markets or difficulty in liquidating its assets. The Company's Liquidity Risk Management Framework is critical to helping ensure that the Company maintains sufficient liquidity reserves and durable funding sources to meet its daily obligations and to withstand unanticipated stress events. The Required Liquidity Framework reflects the amount of liquidity the Company must hold in both normal and stressed environments to ensure that the Company's financial condition and overall soundness are not adversely affected by an inability (or perceived inability) to meet financial obligations in a timely manner. The Required Liquidity Framework considers the most constraining liquidity requirement to satisfy all regulatory and internal limits at a consolidated and legal entity level. (ii) Risk management function Senior management establishes and maintains liquidity policies. Through various risk and control committees, senior management reviews business performance relative to these policies, monitors the availability of alternative sources of financing, and oversees the liquidity, interest rate and currency sensitivity of asset and liability positions. Corporate Treasury, Liquidity Risk Department, ALCO and other committees and control groups assist in evaluating, monitoring and controlling the impact that business activities have on the balance sheet, liquidity and capital structure. Liquidity matters are reported regularly to the Board and the Risk Committees of the Company. (b) Funding strategy The primary goal of the Liquidity Risk Management Framework is to ensure that the Company has access to sufficient liquidity and assets across a wide range of market conditions and time horizons. The framework is designed to allow the Company to fulfil financial obligations and support the execution of its business strategies. The funding management of the Company is centralised in Corporate Treasury. The following principles guide the Liquidity Risk Management Framework: • • Sufficient liquid assets should be maintained to cover maturing liabilities and other planned and contingent outflows; Maturity profile of assets and liabilities should be aligned, with limited reliance on short-term funding; • Source, counterparty, currency, region and term of funding should be diversified; • Liquidity Stress Tests should anticipate, and account for, periods of limited access to funding. 89#92MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Table LIQA: Liquidity risk management (continued) (c) Liquidity Stress Tests The Company uses Liquidity Stress Tests to model external and intercompany liquidity flows across multiple scenarios and a range of time horizons. These scenarios contain various combinations of idiosyncratic and systemic stress events of different severity and duration. The methodology, implementation, production and analysis of the Company's Liquidity Stress Tests are important components of the Required Liquidity Framework. Liquidity Stress Tests are produced for the Company, to capture specific cash requirements and cash availability. The Liquidity Stress Tests assume that a legal entity will use its own liquidity first to fund its obligations before drawing liquidity from its ultimate parent undertaking, Morgan Stanley. Morgan Stanley will support its subsidiaries and will not have access to subsidiaries' liquidity resources that are subject to any regulatory, legal or tax constraints. In addition to the assumptions underpinning the Liquidity Stress Tests, the Company takes into consideration the settlement risk related to intra-day settlement and clearing of securities and financing activities. (d) Liquidity risk mitigation techniques Liquidity Resources The Company maintains sufficient liquidity resources which consists of unencumbered highly liquid securities and cash deposits with banks (including central banks) (“Liquidity Resources") to cover daily funding needs and to meet strategic liquidity targets sized by the Required Liquidity Framework and Liquidity Stress Tests. The total amount of Liquidity Resources is actively managed by the Company considering the following components: unsecured debt maturity profile; balance sheet size and composition; funding needs in a stressed environment inclusive of contingent cash outflows; and collateral requirements. The amount of liquidity resources the Company holds is based on the Company's risk tolerance and is subject to change depending on market and firm-specific events. Unencumbered highly liquid securities consist netted trading assets, investment securities and securities received as collateral. The Company holds its own Liquidity Resources which is composed of diversified cash and cash equivalents and unencumbered highly liquid securities. Eligible unencumbered highly liquid securities include primarily non-US government securities in addition to US government securities. 90 90#93MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Table LIQA: Liquidity risk management (continued) (d) Liquidity risk mitigation techniques (continued) Funding Management The Company manages its funding in a manner that reduces the risk of disruption to the Company's operations. The Company pursues a strategy of diversification of secured and unsecured funding sources (by product, investor and region) and attempts to ensure that the tenor of its liabilities equals or exceeds the expected holding period of the assets being financed. The Company funds itself through diverse sources. These sources may include the Company's equity capital, borrowings and deposits. The table below shows the Company's significant funding sources as at 31 December 2020: As at Significant funding sources (as a percentage of the total liabilities and equity) 31 December 2020 85% 8% Funding from deposits Funding from share capital Balance sheet management In managing both the Morgan Stanley Group's and the Company's liquidity risk the composition and size of the entire balance sheet, not just financial liabilities, is monitored and evaluated. A substantial portion of the Morgan Stanley Group's total assets consists of liquid marketable securities and short-term receivables arising principally from sales and trading activities in the Institutional Securities business. The liquid nature of these assets provides the Morgan Stanley Group and the Company with flexibility in managing the composition and size of its balance sheet. The table below shows the Company's future cash flows, taking into account off-balance sheet risks, as at 31 December 2020, which is disclosed in accordance with the numbers reported in the Return of Liquidity Position for the month of 31 December 2020 submitted to the HKMA. Liquefiable assets (weighted amount) Qualifying liabilities (weighted amount) As at 31 December 2020 USD'000 3,945,510 6,134,155 91 14#94MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Table LIQA: Liquidity risk management (continued) (d) Liquidity risk mitigation techniques (continued) Maturity analysis The table below shows the analysis of on- and off- balance sheet items by remaining maturity and the resultant liquidity gaps. This presentation is considered by the Company to appropriately reflect the liquidity risk arising from those assets and liabilities, presented in a way that is consistent with how the liquidity risk is managed by the Company. The below information is prepared in accordance with the numbers reported in the Return of Liquidity Monitoring Tools as at 31 December 2020, based on the completion instruction from the HKMA. Accordingly, the classification of on-balance sheet assets, on- balance sheet liabilities, off-balance sheet claims and off-balance sheet obligations are not the same as that disclosed under the audited financial statements. Breakdown of cash flows by remaining maturity As at 31 December 2020 More than 1 month but not more than 3 months Not more than 1 month USD'000 USD'000 More than 3 months but not more than 6 months USD'000 More than 6 months but not more than 1 More than 1 year but not more than 5 year years Over 5 years Balancing amount USD'000 USD'000 USD'000 USD'000 On-balance sheet items Amount receivable arising from securities financing transactions 582,265 Amount receivable arising 591,959 84,205 96,289 from derivative contracts Due from banks and central banks 1,265,954 29 Debt securities 2,386,173 Loans and advances to non- bank customers 2,988,062 86,981 364,993 143,570 11,868 7,228 69,457 Other assets 81,768 Total on-balance sheet assets 7,896,181 108 536,287 157 8,888 251,727 7,385 69,457 8,917 Total off-balance sheet claims On-balance sheet items Deposits from non-bank 5,968,910 440,016 356,248 42,727 56 customers Amount payable arising from 595,921 87,032 98,384 derivative contracts Due to banks 2,053 Other liabilities 47,857 54,282 3,544 13,770 34,399 Capital and reserves 1,024,077 Total on-balance sheet liabilities 6,614,741 581,330 458,176 56,497 34,455 1,024,077 Total off-balance sheet obligations 791,390 Contractual Maturity Mismatch 490,050 (45,043) (206,449) (49,112) 35,002 NA Cumulative Contractual Maturity Mismatch 490,050 445,007 238,558 189,446 224,448 224,448 ΝΑ Footnote: 1. "Due from banks and central banks" includes due from banks, due from HKMA for accounts of exchange fund, and due from overseas central banks 22 92#9593 93 MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Table LIQA: Liquidity risk management (continued) (e) Contingency funding plan The Company has developed a Contingency Funding Plan ("CFP") that captures the governance, liquidity management tools for event identification, and processes for CFP activation and de-activation during liquidity stress events for the Company. The CFP documents the Company's systematic approach to accessing available liquidity sources, in addition to those used for day to day operations, to meet its obligations and maintain operational services during a liquidity stress event. The CFP supports the existing liquidity risk management framework and defines processes for: • • • Identification through quantitative measures of a potential or actual liquidity stress event; Definition of roles and responsibilities for CFP activation and execution; Coordination and communication in response to liquidity shortfalls; Identification of available contingent liquidity sources; and Return to standard operating liquidity management status, and post-event analysis.#96MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Table CRA: General information about credit risk Overview Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial obligations to the Company. The Company incurs credit risk primarily from the Company's lending activities, in the form of securities margin loans issued to mainly clients of the Wealth Management business, and to a lesser extent by Treasury activities related to deposit placement, reverse repo transactions, investment portfolio and derivatives for hedging purpose. Credit Risk Management The Company's credit risk management policies and procedures establish the framework for identifying, measuring, monitoring and controlling credit risk while ensuring transparency of material credit risks, compliance with established limits and escalating risk concentrations to appropriate senior management and the Board of Directors. A Credit Limits Framework is utilised to manage credit risk levels across the Company. The Credit Limits Framework is calibrated within the Company's risk appetite and includes stress loss, single name, product, industry, collateral concentration, correlated collateral, as well as regulatory and internal limits on large exposures (to single counterparty or SCG) and connected parties exposures per regulatory definitions. The Company executes oversight of credit risk management through three lines of defense. The Company believes this structure creates clear delineation of responsibilities and facilitates effective implementation of the control framework. The three lines of defense is further detailed in Table OVA: Overview of risk management. Credit risk exposure is actively managed by business unit, CRM and senior management. A variety of credit risk reports are distributed daily to business unit and CRM, monthly to Credit and Market Risk Committee and Bank Risk Committee where membership includes senior management, and quarterly to Board Risk Committee and the Board of Directors. Details of the Financial Risk Managements are further detailed in note 24 to the audited financial statements, and Table OVA of the Unaudited Supplementary Financial Information. 24 94#97MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template CR1: Credit quality of exposures Gross carrying amounts of Allowances / impairments Defaulted exposures Non- defaulted exposures Of which expected credit loss ("ECL") accounting provisions for credit losses on STC approach exposures Allocated in regulatory category of specific provisions Allocated in regulatory category of collective provisions Of which ECL accounting provisions for credit losses on IRB approach exposures Net values As at 31 December 2020 USD'000 1 Loans USD'000 3,441,644 USD'000 USD'000 USD'000 USD'000 USD'000 37 37 3,441,607 Debt 2 2,616,724 2,616,724 securities Off-balance 3 sheet exposures 4 Total 6,058,368 37 37 6,058,331 Loans included loans and advances and related accrued interest receivables. 95 95#98MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Table CRB: Additional disclosure related to credit quality of exposures A financial asset is considered past due when a counterparty has failed to make a payment when contractually due. A financial instrument is credit-impaired when, based on current information and events, it is probable that the Company will be unable to collect all scheduled payments of principal or interest when due according to the contractual terms of the agreement. For details of methods adopted for determining impairments, please refer to the note 3(f) and 24 to the audited financial statements. As at 31 December 2020, the Company had no exposure which is past due for more than 90 days but is not impaired. Restructured exposures refer to assets that have been restructured and renegotiated between the Company and the counterparties because of a deterioration in the financial position of the counterparties or of the inability of the counterparties to meet the original repayment schedule and for which the revised repayment terms, either of interest or of repayment period, are non-commercial to the Company. As at 31 December 2020, the Company had no restructured exposures. The following tables show the breakdown of the Company's exposures by geographical areas, industry and residual maturity as at 31 December 2020. These amounts do not include the effects of recognised credit risk mitigation. Exposures by geographical areas Hong Kong Mainland China Others (1) Total Exposures by industry Industrial, commercial and financial Individuals Others (1) Total Exposures by residual maturity Less than 1 year Between 1 and 5 years Total 2020 US$'000 2,578,557 421,091 4,407,824 7,407,472 2020 US$'000 2,789,568 652,012 3,965,892 7,407,472 2020 US$'000 7,338,071 69,401 7,407,472 Note (1): Any segment which constitutes less than 10% of the Company's total RWA for credit risk (after taking into account of any recognised credit risk mitigation) is not separately disclosed and grouped on an aggregated basis under the category "others". 96 96#99MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Table CRC: Qualitative disclosures related to credit risk mitigation In order to manage credit exposure arising from its business activities, the Company applies various credit risk management policies and procedures, see note 24 to the audited financial statements for further details. The Company's primary method of mitigating credit risk is the use of eligible collateral for the margin loan portfolio. Eligible collaterals include cash, marketable securities and other investment products. Majority of the Company's collaterals are cash and marketable securities, including equity securities, bonds and mutual funds, where collateral values are being revaluated daily. The Company maintains policies and procedures related to collateral management. It applies a conservative margin policy to ensure with a high degree of confidence that claims can be repaid in full through the liquidation of assets in the client portfolio securing the exposure. The Company enters into valid bilateral netting agreements with Morgan Stanley affiliates which satisfied the conditions set out under section 2 of the Banking (Capital) Rules for recognised netting. As at 31 December 2020, minimal recognised netting is applied for both on- and off-balance sheet exposures. Template CR3: Overview of recognised credit risk mitigation Exposures secured by Exposures unsecured: Exposures Exposures recognised carrying amount(1) As at US$'000 Exposures to be secured US$'000 secured by secured by recognised recognised credit derivative collateral guarantees contracts US$'000 US$'000 US$'000 31 December 2020 1 Loans 2 Debt securities 1,079,869 2,361,738 2,361,738 2,616,724 3 Total 3,696,593 2,361,738 2,361,738 4 Of which defaulted Loans included loans and advances and related accrued interest receivables. Note (1): For the extent to which loans and advances are covered by collaterals, please refer to "collateral and other credit enhancement" under note 24 to the audited financial statements. Unsecured exposures disclosed in the above table are either because the relevant collateral is not considered as recognised collateral, or the carrying amount of such recognised collateral is subject to standard supervisory haircut in accordance with the Banking (Capital) Rules. Table CRD: Qualitative disclosures on use of ECAI ratings under STC approach The Company uses the STC approach to calculate its credit risk. Standard & Poor's Rating Services, Moody's Investors Service and Fitch Ratings are the external credit assessment institutions (the "ECAIS") that the Company used to determine the risk weight of the exposure classes, including sovereign, bank, securities firm, corporate and other exposures which are not past due exposures. The Company follows the process as prescribed in Part 4 of the Banking (Capital) Rules to map ECAI issuer ratings to exposures booked in its banking book. 97 97#100MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template CR4: Credit risk exposures and effects of recognised credit risk mitigation for STC approach Exposures pre-CCF and pre-CRM Exposures post-CCF RWA and RWA and post-CRM density On- balance As at sheet 31 December 2020 amount Off- balance sheet amount On- balance sheet amount Off- balance sheet amount RWA RWA density Exposure classes USD'000 USD'000 USD'000 USD'000 USD'000 % 1 Sovereign exposures 3,210,795 - 3,210,795 2 Public Sector Entity ("PSE") exposures 2a Of which: domestic I ' PSES 2b 26 Of which: foreign PSES Multilateral development 1 1 I . I 3 bank exposures 4 Bank exposures 672,178 672,178 5 Securities firm 81,838 76,318 exposures 6 Corporate exposures 2,789,568 907,065 7 CIS exposures 8 Cash items 9 Exposures in respect of failed delivery on transactions entered into on a basis other than a delivery-versus- payment basis 10 Regulatory retail . exposures 11 Residential mortgage loans 12 Other exposures which are not past due 653,093 exposures 13 Past due exposures 14 Significant exposures to commercial entities 15 Total י I 173,923 . I I 1 I 134,483 20% 38,159 50% 907,065 100% . I . 173,923 I 100% 7,407,472 5,040,279 1,253,630 25% 86 98#101MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template CR5: Credit risk exposures by asset classes and by risk weights - for STC approach As at 31 December 2020 Total credit risk exposures amount (post CCF and post CRM) USD'000 Risk Weight 0% 10% 20% 35% 50% 75% 100% 150% 250% Others Exposure class USD'000 USD'000 USD'000 USD'000 USD'000 USD'000 USD'000 USD'000 USD'000 USD'000 1 Sovereign exposures 3,210,795 2 PSE exposures 2a Of which: domestic PSES 2b Of which: foreign PSES . I 3 Multilateral development bank exposures 4 Bank exposures 672,016 162 5 6 Securities firm exposures Corporate exposures T 76,318 I די 7 CIS exposures 8 9 10 11 Residential mortgage loans 12 Other exposures which are not past due exposures Cash items Exposures in respect of failed delivery on transactions entered into on a basis other than a delivery-versus-payment basis Regulatory retail exposures . . י . 1 907,065 . 1 . . . 13 Past due exposures 14 Significant exposures to commercial entities . . 15 Total 3,210,795 . . . . . . . 173,923 . 672,016 76,480 1,080,988 3,210,795 672,178 76,318 907,065 173,923 5,040,279 99 99#102MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Table CCRA: Qualitative disclosures related to counterparty credit risk (including those arising from clearing through CCPs) Counterparty credit risk refers to the risk of loss associated with the failure by one or more sales and trading counterparties to perform against its contractual obligations. The Company's counterparty credit risk arises from securities purchased under agreements to resell with external counterparties and derivative transactions with Morgan Stanley affiliates in relation to treasury activities. Counterparty credit exposure is managed by eligible collateral with daily margining between the Company and counterparties and the collateral requirement is not linked to credit rating. Given the nature of such transactions, there is no general wrong-way-risk and specific wrong-way risk. Operating limits in relation to exposures arising from the derivative transactions with Morgan Stanley affiliates are set as a percentage of the Company's capital based on historical usage of such activities. Details of such transactions are further detailed in note 24 and note 27 to the audited financial statements. Template CCR1: Analysis of counterparty default risk exposures (other than those to CCPs) by approaches Alpha (a) used for Default Replacement cost (RC) PFE Effective EPE computing default risk risk exposure after RWA exposure CRM As at 31 December 2020 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 1 SA-CCR (for derivative Not applicable contracts) la CEM 3,130 1 3,130 1,565 2 IMM (CCR) approach 3 Simple Approach (for SFTs) 4 Comprehensive Approach 11,242 2,249 (for SFTs) 5 Value-at-risk ("VaR") (for SFTs) 6 Total 3,814 100#103MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template CCR2: CVA capital charge As at 31 December 2020 Netting sets for which CVA capital charge is calculated by the advanced CVA method Exposure at default ("EAD") post CRM US$'000 RWA US$'000 1 (i) VaR (after application of multiplication factor if applicable) 2 (ii) Stressed VaR (after application of multiplication factor if applicable) 3 Netting sets for which CVA capital charge is calculated by the standardised CVA method 4 Total 3,130 3,130 711 711 101#104MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template CCR3: Counterparty default risk exposures (other than those to CCPs) by asset classes and by risk weights - for STC approach As at 31 December 2020 Total default risk 0% 10% 20% 35% 50% 75% 100% 150% 250% Others exposure Risk Weight after CRM Exposure class US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ '000 '000 '000 '000 '000 '000 '000 '000 '000 '000 '000 1 Sovereign exposures 2 PSE exposures 2a Of which: domestic PSES 2b Of which: foreign PSEs 3 Multilateral development bank exposures 4 Bank exposures 5 6 Corporate exposures 7 8 9 10 11 Securities firm exposures CIS exposures Regulatory retail exposures Residential mortgage loans Other exposures which are not past due exposures Significant exposures to commercial entities 12 Total . ידידי . I I . I 11,242 . I 11,242 3,130 . 3,130 I I . I I I I . . 1 . . . . I . 1 1 . . . I יי - . . . . יי יי ייי - - 14,372 102 I 14,372 . 1 . 1 1#105MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template CCR5: Composition of collateral for counterparty default risk exposures (including those for contracts or transactions cleared through CCPs) As at 31 December 2020 Cash domestic currency Other sovereign debt Total Derivative contracts SFTs Fair value of recognised collateral received Segregated Unsegregated Segregated Unsegregated of recognised collateral Fair value of posted collateral Fair value Fair value of posted collateral received US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 8,532 571,023 8,532 571,023 Domestic currency refers to the reporting currency of the Company, i.e. USD. 103#106MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Table IRRBBA: Interest rate risk in banking book - risk management objectives and policies Interest rate risk in the banking book (IRRBB) arises due to maturity mismatches from the Company's balance sheet positions such as customer deposits, loans, investment securities, debt issued, and other interest rate sensitive financial assets and liabilities designated at fair value. The Company measures and reports IRRBB using the new standardised framework through MA(BS)12A - Interest Rate Risk in the Banking Book in accordance with HKMA requirements. The Company measures its IRRBB exposures mainly through the Economic Value of Equity (EVE) and Net Interest Income (NII). These are calculated weekly for internal risk management purposes, as well as monthly as part of the monthly closing process. The Company's interest rate risk is managed by the Treasury Department. The asset and liability structure is actively managed to ensure the Company does not assume excessive interest rate risk relative to its overall development strategy and commensurate with the scale, nature and complexity of its business. The Company may also enter into additional hedges such as interest rate swaps from time to time. The ALCO is responsible for ensuring that these objectives are met on an ongoing basis. Independent market risk management oversight is provided by MRD. MRD identifies market risks including IRRBB, and develops and employs risk measures and tools to monitor, control and mitigate those risks. MRD also monitors risk exposures against established limits, and produces and distributes comprehensive reports designed to keep senior management apprised of the Company's market risk and IRRBB exposures. The Company's Market Risk Management Policy sets forth principles and practices for sound management of its market risk. The policy has been established to evidence the Company's standards for independent identification, measurement, monitoring, reporting, challenge, and escalation of market risk arising from the Company's business activities. The Company's interest rate risk is controlled through conservative risk limits approved by the Board of Directors or its delegated Risk Committees including the Board Risk Committee, the Bank Risk Committee and the Credit and Market Risk Committee. The Company has clearly defined EVE and NII limits in place, in addition to other sensitivity and notional based risk limits. These limits are set by taking into account the size of the Company's balance sheet, projected business growth and risk appetite as set by the Board of Directors. Exposure is monitored at least weekly for EVE and NII limits, and daily for sensitivity and notional based limits. These are reported back to the Risk Committees on a monthly and quarterly basis. The IAD independently assesses the Company's control environment and risk management processes through conducting regular audit reviews. IAD reports to the Audit Committee and is independent of the business units and risk management functions. The Company applies the model assumptions for IRRBB prescribed by the HKMA with no deviations. The models used are reviewed on an annual basis at a minimum and independently verified by the Morgan Stanley Group's Model Risk Management (MRM) group. The standardised EVE risk measure is calculated according to the six shock scenarios defined in the HKMA SPM IR-1. For non-maturity deposits (NMDs), behavioral maturities have been modelled using the Company's own observed data covering the past 8 years. The Company's average and longest behavioral maturity of NMDs are 0.28 years and 4 years respectively. For the calculation of the change in NII, in addition to the two shock scenarios defined in SPM IR-1 for parallel up and parallel down interest rate moves, the Company also calculates a range of internal shock scenarios covering non-parallel interest rate moves combined with different repricing assumptions for customer deposits. 104#107MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template IRRBB1: Quantitative information on interest rate risk in banking book AEVE ANII As at As at Period 31 December 2020 USD'000 31 December 2019 USD'000 As at 31 December 2020 USD'000 As at 31 December 2019 USD'000 1 Parallel up 2 Parallel down 3 Steepener 4 Flattener 5 Short rate up 6 Short rate down 7 Maximum Period 8 Tier 1 capital (10,030) (17,998) 22,764 13,572 10,030 17,998 1,129 1,306 2,868 318 126 12,060 7,024 22,764 13,572 10,030 17,998 As at 31 December 2020 As at 31 December 2019 USD'000 999,061 USD'000 860,933 As at 31 December 2020 and 31 December 2019, the maximum change in EVE under the standardised framework in SPM IR-1 on the Company's interest rate sensitive positions in the banking book is below the threshold of 15% of the Company's Tier 1 Capital as set by HKMA. Overall movement in EVE and NII due to an increase in NMDs for the year end 31 December 2020, which are allocated to different behavioral maturity classes up to 4 years. 105#108MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Table REMA: Remuneration policy Governance structure The Board Remuneration and Culture, Values and Conduct Committee appointed by the Board of Directors of the Company assists the Board of Directors in discharging its responsibility for the design and operation of the Company's remuneration system, and makes recommendation in respect of remuneration policy and practices to the Board of Directors. The Board Remuneration and Culture, Values and Conduct Committee comprises of three Board members, two of whom are independent non- executive directors of the Company. No external consultants have been engaged by the Company since the set up of the Board Remuneration and Culture, Values and Conduct Committee. The Board of Directors endorses and issues the remuneration policy for the Company and its branch. The remuneration policy takes into consideration the global practices of the Morgan Stanley Group on remuneration. In addition, local market and competitor practices are also taken into consideration in determining the Company's remuneration policy. Senior management is defined as those persons who are responsible for oversight of the Company's strategy or activities and/or those of the Company's material business lines. Key personnel are defined as individual employees whose duties or activities in the course of their employment involve the assumption of material risk or taking on of material exposures on behalf of the Company. For the year ended 31 December 2020, the Company has 24 senior management and no key personnel. Quantitative information on the remuneration for senior management and key personnel is set out in Templates REM1, REM2 and REM3 below. Four meetings were held by the Board Remuneration and Culture, Values and Conduct Committee during the year ended 31 December 2020. In 2020, the Committee and the Board have approved changes to the Company's Remuneration Policy which only include Bank name change from Morgan Stanley Asia International Limited to Morgan Stanley Bank Asia Limited. For the year ended 31 December 2020, the remuneration paid to the Board Remuneration and Culture, Values and Conduct Committee members in the Morgan Stanley Group was borne by other Morgan Stanley Group undertakings; the remuneration paid to the Board Remuneration and Culture, Values and Conduct Committee members not in the Morgan Stanley Group by the Company was approximately US$113,000. Remuneration structure The Company's remuneration policies and procedures are consistent with those of the Morgan Stanley Group. The Morgan Stanley Group is committed to responsible and effective compensation program, which is continually evaluated with a view towards balancing the following objectives, all of which support shareholders' interests: Deliver Pay for Sustainable Performance The Morgan Stanley Group applies "pay-for-performance" philosophy that pervades its culture and motivates the employees. The Morgan Stanley Group rewards employees by directly linking compensation to performance based on their annual objective setting and annual performance evaluation, taking account of the overall performance of the Company as a whole over the longer term; performance of the relevant business units; contribution of individual employees to the above performance; and outlook of the overall Morgan Stanley Group. Compensation programs for the majority of employees comprised two key elements, including base salary and discretionary compensation which may be payable in cash or partially in cash and partially in deferred compensation awards depending on the level of total compensation, seniority and the role of the employees. 106#109MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Table REMA: Remuneration policy (continued) Remuneration structure (continued) Deliver Pay for Sustainable Performance (continued) In addition, for employees in the most senior roles, a significant portion of compensation is delivered in the form of long-term incentive awards, which closely tie such employees' compensation to the Morgan Stanley Group's long-term performance. Investment Representatives ("IRs") are also eligible to receive commissions, which are formulaically calculated based on predetermined production goals and also payable in cash or partially in cash and partially in deferred compensation awards. Align Employees' Compensation with Shareholders' Interests The Morgan Stanley Group links a significant portion of employees' incentive compensation to performance and delivers annual deferred compensation awards which helps motivate employees to achieve the Morgan Stanley Group's financial and strategic goals. Compensation decisions for employees in risk control functions (including risk management, financial control, compliance, legal and internal audit functions) are determined by senior management of these divisions, wholly independent of the performance of the business units, and not by the management of the business units. Attract and Retain Top Talent The Morgan Stanley Group competes for talent globally with other banks and financial institutions. The Morgan Stanley Group continually monitors competitive pay levels and structures its incentive awards to attract and retain the most qualified employees. Mitigate Excessive Risk-Taking The Compensation, Management Development and Succession Committee (the "CMDS Committee”) of the Morgan Stanley Group is advised by the Morgan Stanley Group's CRO and the CMDS Committee's independent compensation consultant to help ensure that the structure and design of compensation arrangements disincentivise unnecessary or excessive risk-taking that threatens the Morgan Stanley Group's interests or give rise to risks that could have a material adverse effect on the Morgan Stanley Group. Remuneration process In the first quarter of each year, senior management of the Morgan Stanley Group proposes and works with the members of the Morgan Stanley Group's Operating Committee (including the CRO of the Morgan Stanley Group) and the Board of Directors of the Morgan Stanley Group to establish financial and non-financial performance priorities that are aligned with the Morgan Stanley Group's business strategy and to incorporate risk-adjusted measures and objectives. The CRO of the Morgan Stanley Group evaluates the Morgan Stanley Group's current compensation programs on annual basis and has determined that such programs do not encourage excessive risk-taking behavior, due in part to (i) the balance of fixed compensation and variable compensation; (ii) the balance between short-term and long-term incentives; (iii) mandatory deferrals into both equity-based and cash- based incentives programs; (iv) the governance procedures followed in making compensation decisions; and (v) the risk-mitigating features of the deferred incentive compensation awards, such as cancellation and clawback provisions. Details of the deferred compensation plans are set out in note 31 to the financial statements. 107#110MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Table REMA: Remuneration policy (continued) Remuneration process (continued) The overall discretionary bonus pool is established in consultation with the CMDS Committee. Risk- Adjusted Return on Equity is the primary quantitative metric reviewed with the CMDS Committee to determine the size of the bonus pool. Employee eligibility for bonus compensation is discretionary and bonus decisions are subject to a multi-dimensional process, which considers financial and non-financial individual, business unit and Morgan Stanley Group's performance measures. Non-financial performance criteria that may be taken into account in deciding whether to award, and the amount of any bonus compensation, include (but are not limited to): • • Individual conduct, including but not limited to, adherence to the Morgan Stanley Group's Code of Conduct and policies and the Morgan Stanley Group's cultural values; Contribution to the performance and profitability of both the business unit and the Morgan Stanley Group and the strategic objectives of the Morgan Stanley Group, business unit and the team and the associated value attributed to the role; Commercial impact, including business/functional knowledge and judgment, client relationships, innovation and execution; • Leadership skills, including teamwork, communication and management; • Professional skills, including recruiting, diversity and inclusion; and ● Adherence to compliance and risk policies, including ethics, control and risk management. Senior management of the Morgan Stanley Group and the CMDS Committee oversee the Morgan Stanley Group's controls regarding the year-end compensation process to help eliminate incentives for excessive risk-taking, including: • • • • Sizing the incentive compensation pool to more fully consider risk-adjusted returns, compliance with risk limits and the market and competitive environment; Allocating the incentive compensation pool among businesses after consideration of the business' returns on certain financial and return on capital metrics; Delivering a substantial portion of compensation in multi-year deferrals subject to malus/cancellation; Directing compensation managers to consider malus/cancellation events and an employee's risk management activities and outcomes in making compensation decisions; and Undertaking a rigorous review process by risk control functions to identify potential malus/cancellation situations. In addition, on an annual basis, business heads and Operating Committee members representing the Morgan Stanley Group's revenue-generating divisions will prepare a Pay and Performance Analysis report that is presented to the CMDS Committee. This report sets the stage for the CMDS Committee to understand the outcomes of pay from the prior year relative to the market, and the linkage of prior year pay and performance. In turn, this enables the CMDS Committee to consider where the starting baseline of pay either trails or leads the market and whether such a position is warranted or should be rectified in light of current year known performance. Compensation outcomes are symmetric with risk outcomes at the Morgan Stanley Group level. The Company's remuneration policy provides the Company ability to adjust commission payments, discretionary bonus, and cancel unvested deferrals where the employee's conduct fall below the Company's standard and expectation. 108#111MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template REM1: Remuneration awarded during financial year Below table shows the quantitative information on remuneration for the year ended 31 December 2020. Remuneration amount and quantitative information 1 2 3 4 Fixed 5 remuneration 7 8 Number of employees Total fixed remuneration Of which: cash-based Of which: deferred Of which: shares or other share-linked instruments Of which: deferred Of which: other forms Of which: deferred Number of employees Total variable remuneration Senior management USD'000 2020 Key personnel USD'000 24 7,997 7,997 24 10 17,790 11 Of which: cash-based 14,361 12 Of which: deferred 3,429 Variable 13 remuneration Of which: shares or other share-linked 3,429 instruments 14 Of which: deferred 3,429 15 Of which: other forms 16 69 Of which: deferred 17 Total remuneration 25,787 Note: Fixed remuneration includes base salary, pension contribution, extra payments, sign-on bonus, termination payments and other allowances where applicable. Cash based variable remuneration includes bonus and deferred cash. Share based variable remuneration includes deferred stock units. 109#112MORGAN STANLEY BANK ASIA LIMITED UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION Year ended 31 December 2020 H. PILLAR 3 DISCLOSURE (CONTINUED) Template REM2: Special payments Below table shows the quantitative information on special payment for the year ended 31 December 2020. Guaranteed bonuses Special Number of payments employees Total amount US$'000 Number of employees 2020 Sign-on awards Total amount US$'000 Severance payments Number of employees Total amount US$'000 Senior 163 1 management Key 2 personnel Template REM3: Deferred remuneration Below table shows the quantitative information on deferred and retained remuneration. 2020 Total amount of outstanding deferred remuneration Of which: Total amount of outstanding deferred and retained remuneration exposed to ex post explicit and/or implicit adjustment US$'000 Total amount of amendment during the year due to ex post explicit adjustments US$'000 Total amount of amendment during the year due to ex post implicit adjustments US$'000 Total amount of deferred remuneration paid out in the financial year US$'000 Deferred and retained remuneration US$'000 1 Senior management 2 Cash 7,206 7,206 3 Shares 10,966 10,966 4 Cash-linked instruments 5 Other 6 Key personnel 7 Cash 8 Shares 9 Cash-linked instruments 10 Other 11 Total 18,172 18,172 Note: י י י 74 3,744 3,419 4,228 3,818 Total amount of amendment during the year due to ex post explicit adjustments was US$Nil (2019: US$Nil) as none of the senior management and key personnel had any forfeitures during the year. Total amount of amendment during the year due to ex post implicit adjustments was US$3,818,000 (2019: US$2,773,000) mainly due to increase in market price of Morgan Stanley common stock during the year in relation to deferred share-based compensation. 110 7,647