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September 2016
Preliminary Terms No.
1,081
Registration Statement
No. 333-200365
Dated September 27,
2016
Filed pursuant to Rule
433
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INTEREST RATE STRUCTURED
PRODUCTS
Contingent Income Auto-Callable Securities due
2018, With 1-year Initial Non-Call Period
Based on the Performance of the 10-Year U.S.
Dollar ICE Swap Rate
Principal at Risk Securities
As further described below, the securities
do not guarantee the repayment of principal and do not provide for the regular payment of interest. Instead, the securities will
pay a contingent quarterly coupon
but only if
the level of the 10-Year U.S. Dollar ICE Swap Rate, which we refer to as the
reference rate, is
greater than or equal to
the reference rate strike, which is 80% of the initial reference level, on the
related observation date. If, however, the level of the reference rate is
less than
the reference rate strike on any observation
date, we will pay no interest for the related quarterly period. In addition, starting on approximately the one-year anniversary
of the original issue date, the securities will be automatically redeemed if the level of the reference rate is greater than or
equal to the initial reference level on any quarterly redemption determination date for the early redemption payment equal to the
sum of the stated principal amount plus the related contingent quarterly coupon. At maturity, if the securities have not previously
been redeemed and the final reference level is greater than or equal to the reference rate strike, the payment at maturity will
also be the sum of the stated principal amount and the related contingent quarterly coupon. If, however, the final reference level
is less than the reference rate strike, investors will be fully exposed to the decline in the reference rate on a 1-to-1 basis
and will receive a payment at maturity that is less than 80% of the stated principal amount of the securities and could be zero.
A very small absolute change in the reference rate can result in few or no quarterly coupons and a significant loss on the securities.
For example, assuming an initial reference rate of 2.000%, if the final reference rate were to decline by only one percentage point
to 1.000%, while the absolute change in the rate is only 1.00%, that move actually represents a 50% decline from the initial reference
rate, and investors would lose 50% of the stated principal amount.
Accordingly,
i
nvestors in the securities must be willing
to accept the risk of losing their entire initial investment and also the risk of not receiving any contingent quarterly coupons
throughout the entire 2-year term of the securities.
The securities are for investors who are willing to risk their principal
and seek an opportunity to earn interest at a potentially above-market rate in exchange for the risk of receiving no quarterly
interest over the entire 2-year term and in exchange for the possibility of an automatic early redemption prior to maturity. Investors
will not participate in any appreciation of the reference rate.
All payments are subject to the credit
risk of Morgan Stanley. If Morgan Stanley defaults on its obligations, you could lose some or all of your investment. These securities
are not secured obligations and you will not have any security interest in, or otherwise have any access to, any underlying reference
asset or assets.
SUMMARY TERMS
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Issuer:
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Morgan Stanley
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Reference rate:
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The 10-Year U.S. Dollar ICE Swap Rate. Please see “Additional Provisions—Reference Rate” below.
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Aggregate principal amount:
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$ . May be increased prior to the original issue date but we are not required to do so.
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Issue price:
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$1,000 per security
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Stated principal amount:
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$1,000 per security
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Pricing date:
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September 28, 2016
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Original issue date:
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September 30, 2016 (2 business days after the pricing date)
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Maturity date:
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September 30, 2018
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Interest accrual date:
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September 30, 2016
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Payment at maturity:
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·
If
the final reference level is
greater than or equal to
the reference rate strike: (i) the stated principal amount
plus
(ii) the contingent quarterly coupon with respect to the final observation date.
·
If
the final reference level is
less than
the reference rate strike: (i) the stated principal amount
times
(ii) the
reference rate performance factor.
This amount will be less than 80% of the stated
principal amount of the securities and could be zero.
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Contingent quarterly coupon:
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A
contingent
coupon will be paid on the securities on each contingent coupon payment date
but only if
the level
of the reference rate is at or above the reference rate strike on the related observation date. If payable, the contingent quarterly
coupon will be an amount in cash per stated principal amount corresponding to a return of 12.25%
per annum
for each interest
payment period for each observation date.
If,
on any observation date, the level of the reference rate is less than the reference rate strike, we will pay no coupon for the
applicable quarterly period. It is possible that the reference rate will remain below the reference rate strike for extended periods
of time or even throughout the entire 2-year term of the securities so that you will receive few or no quarterly coupons.
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Automatic early redemption:
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If,
on any redemption determination date, beginning on the third U.S. government securities business day preceding September 30, 2017,
the level of the reference rate is greater than or equal to the initial reference level, the securities will be automatically
redeemed for an early redemption payment on the related early redemption date. No further payments will be made on the securities
once they have been redeemed.
The
securities will not be redeemed early on any early redemption date if the level of the reference rate is below the initial reference
level on the related redemption determination date.
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Early redemption payment:
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The early redemption payment will be an amount equal to (i) the stated principal amount for each security you hold
plus
(ii) the contingent quarterly coupon with respect to the related observation date.
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Agent:
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Morgan Stanley & Co. LLC (“MS & Co.”), a wholly owned subsidiary of Morgan Stanley. See “Supplemental Information Concerning Plan of Distribution; Conflicts of Interest.”
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Contingent coupon payment dates:
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Each March 30, June 30, September 30 and December 30, beginning December 30, 2016;
provided
that if any such day is not a business day, that interest payment will be made on the next succeeding business day and no adjustment will be made to any interest payment made on that succeeding business day.
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Initial reference level:
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, which is the level of the reference rate on the pricing date
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Final reference level:
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The level of the reference rate on the final observation date.
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Reference rate strike:
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, which is 80% of the initial reference level (rounded to three decimal places)
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Reference rate performance factor:
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The final reference level
divided by
the initial reference level.
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Terms continued on the following page
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Estimated value on the pricing date:
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Approximately $950.30 per security, or within $10.30 of that estimate. See “The Securities” on page 3.
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Commissions and issue price:
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Price to public
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Agent’s commissions
(1)
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Proceeds to issuer
(2)
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Per security
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$1,000
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$
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$
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Total
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$
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$
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$
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(1)
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Morgan Stanley or one of our affiliates will pay varying
discounts and commissions to dealers, including Morgan Stanley Wealth Management (an affiliate of the agent) and their financial
advisors, of up to $ per security depending on market conditions. See “Supplemental Information Concerning Plan of Distribution;
Conflicts of Interest.” For additional information, see “Plan of Distribution (Conflicts of Interest)” in the
accompanying prospectus supplement.
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(2)
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See “Use of Proceeds and Hedging” on page
15.
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You should read
this document together with the related prospectus supplement and prospectus, each of which can be
accessed via the hyperlinks below, before you decide to invest.
Prospectus
Supplement dated November 19, 2014
Prospectus
dated February 16, 2016
The securities are not deposits or savings accounts and are
not insured by the Federal Deposit Insurance Corporation or any other governmental agency or instrumentality, nor are they obligations
of, or guaranteed by, a bank.
The issuer has filed a registration statement (including a prospectus)
with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus in that registration
statement and other documents the issuer has filed with the SEC for more complete information about the issuer and this offering.
You may get these documents for free by visiting EDGAR on the SEC Web site at
.
www.sec.gov. Alternatively,
the issuer, any underwriter or any dealer participating in this offering will arrange to send you the prospectus if you request
it by calling toll-free 1-800-584-6837.
Terms continued from previous page:
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Observation dates:
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The third U.S. government securities business day prior to the related contingent coupon payment date. We refer to the third U.S. government securities business day prior to the maturity date as the final observation date.
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Redemption determination dates:
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The third U.S. government securities business day prior to the related early redemption date.
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Early redemption dates:
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Each March 30, June 30, September 30 and December 30, beginning September 30, 2017.
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Day-count convention:
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30/360
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Specified currency:
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U.S. dollars
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CUSIP / ISIN:
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61760QKC7 / US61760QKC77
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Book-entry or certificated security:
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Book-entry
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Business day:
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New York
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Calculation agent:
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Morgan
Stanley Capital Services LLC.
All
determinations made by the calculation agent will be at the sole discretion of the calculation agent and will, in the absence
of manifest error, be conclusive for all purposes and binding on you, the trustee and us.
All
values used in the interest rate formula for the securities and all percentages resulting from any calculation of interest will
be rounded to the nearest one hundred-thousandth of a percentage point, with .000005% rounded up to .00001%. All dollar amounts
used in or resulting from such calculation on the securities will be rounded to the nearest cent, with one-half cent rounded upward.
Because
the calculation agent is our affiliate, the economic interests of the calculation agent and its affiliates may be adverse to your
interests as an investor in the securities, including with respect to certain determinations and judgments that the calculation
agent must make in determining the payment that you will receive, if any, on each contingent coupon payment date and at maturity
or upon automatic early redemption, as applicable. The calculation agent is obligated to carry out its duties and functions as
calculation agent in good faith and using its reasonable judgment.
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Trustee:
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The Bank of New York Mellon
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Contact information:
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Morgan Stanley Wealth Management clients may contact their local Morgan Stanley branch office or our principal executive offices at 1585 Broadway, New York, New York 10036 (telephone number (866) 477-4776). All other clients may contact their local brokerage representative. Third-party distributors may contact Morgan Stanley Structured Investment Sales at (800) 233-1087.
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Contingent Income Auto-Callable Securities due 2018, With 1-year Initial Non-Call Period
Based on the Performance of the 10-Year U.S. Dollar ICE Swap Rate
Principal at Risk Securities
The Securities
Principal at Risk Securities
The securities do not guarantee the repayment of principal and
do not provide for the regular payment of interest. Instead, the securities will pay a contingent quarterly coupon
but only
if
the level of the 10-Year U.S. Dollar ICE Swap Rate, which we refer to as the reference rate, is
greater than or equal
to
the reference rate strike, which is 80% of the initial reference level, on the related observation date. If, however, the
level of the reference rate is less than the reference rate strike on any observation date, we will pay no interest for the related
quarterly period. In addition, starting on approximately the one-year anniversary of the original issue date, the securities will
be automatically redeemed if the level of the reference rate is greater than or equal to the initial reference level on any quarterly
redemption determination date for the early redemption payment equal to the sum of the stated principal amount plus the related
contingent quarterly coupon. At maturity, if the securities have not previously been redeemed and the final reference level is
greater than or equal to the reference rate strike, the payment at maturity will also be the sum of the stated principal amount
and the related contingent quarterly coupon. If, however, the final reference level is less than the reference rate strike, investors
will be fully exposed to the decline in the reference rate on a 1-to-1 basis and will receive a payment at maturity that is less
than 80% of the stated principal amount of the securities and could be zero.
A very small absolute change in the reference rate
can result in few or no quarterly coupons and a signifcant loss on the securities.
For example, assuming an initial reference
rate of 2.000%, if the final reference rate were to decline by only one percentage point to 1.000%, while the absolute change in
the rate is only 1.00%, that move actually represents a 50% decline from the initial reference rate, and investors would lose 50%
of the stated principal amount.
Accordingly,
i
nvestors in the securities must be willing to accept the risk of losing
their entire initial investment and also the risk of not receiving any contingent quarterly coupons throughout the entire 2-year
term of the securities.
Maturity:
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2 years
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|
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Contingent quarterly coupon:
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A
contingent
coupon at an annual rate of 12.25% (corresponding
to approximately $30.625 per quarter per security) will be paid on the securities on each contingent coupon payment date
but
only if
the level of the reference rate is at or above the reference rate strike on the related observation date.
If, on any observation date, the level of the reference rate
is less than the reference rate strike, we will pay no coupon for the applicable quarterly period.
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Automatic early redemption (quarterly on or after September 30, 2017):
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Starting on September 30, 2017, if the level of the reference rate is greater than or equal to the initial reference level on any quarterly redemption determination date, the securities will be automatically redeemed for an early redemption payment equal to the stated principal amount plus the contingent quarterly coupon with respect to the related observation date.
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|
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Payment at maturity:
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If the securities have not previously been redeemed and the final
reference level is greater than or equal to the reference rate strike, the payment at maturity will be the sum of the stated principal
amount and the related contingent quarterly coupon.
However, if the final reference level is less than the reference
rate strike, investors will be fully exposed to the negative performance of the reference rate and will receive a payment at maturity
that is less than 80% of the stated principal amount of the securities and could be zero.
Accordingly,
i
nvestors in the
securities must be willing to accept the risk of losing their entire initial investment.
|
We describe the basic features of these securities in the sections
of the accompanying prospectus called “Description of Debt Securities—Floating Rate Debt Securities” and prospectus
supplement called “Description of Notes,” subject to and as modified by the provisions described below. All payments
on the securities are subject to the credit risk of Morgan Stanley.
The stated principal amount and issue price of each security is
$1,000. This price includes costs associated with issuing, selling, structuring and hedging the securities, which are borne by
you, and, consequently, the estimated value of the securities on the pricing date will be less than the issue price. We estimate
that the value of each security on the pricing date will be approximately $950.30, or within $10.30 of that estimate. Our estimate
of the value of the securities as determined on the pricing date will be set forth in the final pricing supplement.
What goes into the estimated value on the pricing date?
In valuing the securities on the pricing date, we take into account
that the securities comprise both a debt component and a performance-based component linked to the reference rate. The estimated
value of the securities is determined using our own pricing and valuation models, market inputs and assumptions relating to the
reference rate, instruments based on the reference rate, volatility and other factors including current and
Contingent Income Auto-Callable Securities due 2018, With 1-year Initial Non-Call Period
Based on the Performance of the 10-Year U.S. Dollar ICE Swap Rate
Principal at Risk Securities
expected interest rates, as well as an interest rate related to
our secondary market credit spread, which is the implied interest rate at which our conventional fixed rate debt trades in the
secondary market.
What determines the economic terms of the securities?
In determining the economic terms of the securities, including
the contingent quarterly coupon rate and the reference rate strike, we use an internal funding rate, which is likely to be lower
than our secondary market credit spreads and therefore advantageous to us. If the issuing, selling, structuring and hedging costs
borne by you were lower or if the internal funding rate were higher, one or more of the economic terms of the securities would
be more favorable to you.
What is the relationship between the estimated value on the
pricing date and the secondary market price of the securities?
The price at which MS & Co. purchases the securities in the
secondary market, absent changes in market conditions, including those related to interest rates and the reference rate, may vary
from, and be lower than, the estimated value on the pricing date, because the secondary market price takes into account our secondary
market credit spread as well as the bid-offer spread that MS & Co. would charge in a secondary market transaction of this type,
the costs of unwinding the related hedging transactions and other factors.
MS & Co. may, but is not obligated to, make a market in the
securities and, if it once chooses to make a market, may cease doing so at any time.
Contingent Income Auto-Callable Securities due 2018, With 1-year Initial Non-Call Period
Based on the Performance of the 10-Year U.S. Dollar ICE Swap Rate
Principal at Risk Securities
Additional Provisions
Reference Rate
What is the 10-Year U.S. Dollar ICE Swap Rate?
The 10-Year U.S. Dollar ICE Swap Rate (which we refer to as the
reference rate) is on any U.S. government securities business day, the fixed rate of interest payable on an interest rate swap
with a 10-year maturity as reported on Reuters Page ICESWAP1 or any successor page thereto at approximately 11:00 a.m. New York
City time for such day. This rate is one of the market-accepted indicators of medium to longer-term interest rates.
The rate reported on Reuters Page ICESWAP1 (or any successor
page thereto) is calculated by ICE Benchmark Administration Limited based on tradeable quotes for the related interest rate swaps
of the relevant tenor that are sourced from electronic trading venues.
An interest rate swap rate, at any given time, generally indicates
the fixed rate of interest (paid semi-annually) that a counterparty in the swaps market would have to pay for a given maturity,
in order to receive a floating rate (paid quarterly) equal to 3-month LIBOR for that same maturity.
U.S. Government Securities Business Day
U.S. government securities business day means any day except
for a Saturday, Sunday or a day on which The Securities Industry and Financial Markets Association recommends that the fixed income
departments of its members be closed for the entire day for purposes of trading in U.S. government securities.
CMS Rate Fallback Provisions
If the reference rate is not displayed by approximately 11:00
a.m. New York City time on the Reuters Page ICESWAP1 on any day on which the level of the reference rate must be determined, the
rate for such day will be determined on the basis of the mid-market semi-annual swap rate quotations to the calculation agent provided
by five leading swap dealers in the New York City interbank market (the “Reference Banks”) at approximately 11:00 a.m.,
New York City time, on such day, and, for this purpose, the mid-market semi-annual swap rate means the mean of the bid and offered
rates for the semi-annual fixed leg, calculated on a 30/360 day count basis, of a fixed-for-floating U.S. Dollar interest rate
swap transaction with a 10 year maturity commencing on such day and in a representative amount with an acknowledged dealer of good
credit in the swap market, where the floating leg, calculated on an actual/360 day count basis, is equivalent to USD LIBOR with
a designated maturity of three months. The calculation agent will request the principal New York City office of each of the Reference
Banks to provide a quotation of its rate. If at least three quotations are provided, the rate for that day will be the arithmetic
mean of the quotations, eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation
(or, in the event of equality, one of the lowest). If fewer than three quotations are provided as requested, the reference rate
will be determined by the calculation agent in good faith and in a commercially reasonable manner.
Contingent Income Auto-Callable Securities due 2018, With 1-year Initial Non-Call Period
Based on the Performance of the 10-Year U.S. Dollar ICE Swap Rate
Principal at Risk Securities
How the Securities Work
The following diagrams illustrate the potential outcomes for
the securities depending on (1) the level of the reference rate on each quarterly observation date, (2) the level of the reference
rate on each quarterly redemption determination date (starting in September 2017) and (3) the final reference level. Please see
“Hypothetical Examples” beginning on page 8 for an illustration of hypothetical payouts on the securities.
Diagram #1: Contingent Quarterly Coupons
(Beginning on the First Contingent Coupon Payment Date until Early Redemption or Maturity)
Diagram #2: Automatic Early Redemption (Starting
in September 2017)
Contingent Income Auto-Callable Securities due 2018, With 1-year Initial Non-Call Period
Based on the Performance of the 10-Year U.S. Dollar ICE Swap Rate
Principal at Risk Securities
Diagram #3: Payment at Maturity if No Automatic
Early Redemption Occurs
A very small absolute change in the reference rate can result
in few or no quarterly coupons and a significant loss on the securities.
For example, assuming an initial reference rate of
2.000%, if the final reference rate were to decline by only one percentage point to 1.000%, while the absolute change in the rate
is only 1.00%, that move actually represents a 50% decline from the initial reference rate, and investors would lose 50% of the
stated principal amount.
There is no minimum payment at maturity on the securities. Accordingly, you could lose your entire
initial investment in the securities.
For more information about the payout upon an early redemption
or at maturity in different hypothetical scenarios, see “Hypothetical Examples” below.
Contingent Income Auto-Callable Securities due 2018, With 1-year Initial Non-Call Period
Based on the Performance of the 10-Year U.S. Dollar ICE Swap Rate
Principal at Risk Securities
Hypothetical Examples
How to calculate the payment at maturity (if
the securities have not been automatically redeemed):
The following hypothetical examples are for illustrative purposes
only. Whether you receive a contingent quarterly coupon will be determined on each quarterly observation date, whether the securities
are redeemed prior to maturity will be determined on each quarterly redemption determination date and the payment at maturity,
if any, will be determined by reference to the level of the reference rate on the final observation date. The actual initial reference
level and reference rate strike will be determined on September 28, 2016. Some numbers appearing in the examples below have been
rounded for ease of analysis. All payments on the securities, if any, are subject to the credit risk of Morgan Stanley. The below
examples are based on the following terms:
Hypothetical Initial Reference Level:
|
1.400%
|
Hypothetical Reference Rate Strike:
|
1.120, which is 80% of the hypothetical initial reference level
|
Contingent Quarterly Coupon:
|
A contingent coupon at an annual rate of 12.25% (corresponding to approximately $30.625 per quarter)
1
will be paid on each contingent coupon payment date
but only if the level of the reference rate is at or above the reference rate strike on the related observation date.
|
Stated Principal Amount:
|
$1,000
|
1
The actual contingent
quarterly coupon will be an amount determined by the calculation agent based on the number of days in the applicable payment period,
calculated on a 30/360 day count basis. The hypothetical contingent quarterly coupon of $30.625 is used in these examples for
ease of analysis.
In Example 1, the level of the reference rate
is greater than or equal to the initial reference level on one of the quarterly redemption determination dates (beginning on September
30, 2017). Because the level of the reference rate is greater than or equal to the initial reference level on such a date, the
securities are automatically redeemed on the related early redemption date. In Examples 2, 3, and 4, the level of the reference
rate is less than the initial reference level on all of the redemption determination dates, and, consequently, the securities are
not automatically redeemed prior to, and remain outstanding until, maturity.
Example 1
—The securities are automatically
redeemed following the quarterly redemption determination date in December 2017, as the level of the reference rate is equal to
the initial reference level on such redemption determination date. The reference rate declines substantially and the level of the
reference rate is at or above the reference rate strike on only 2 of the 4 quarterly observation dates prior to (and excluding)
the observation date immediately preceding the early redemption. Therefore, you would receive the contingent quarterly coupons
with respect to those 2 observation dates, totaling $30.625 × 2 = $61.25, but not for the other 2 observation dates. The
reference rate in this example, however, recovers and the level of the reference rate is equal to the initial reference level on
the redemption determination date in December 2017. Upon early redemption, investors receive the early redemption payment calculated
as $1,000 + $30.625 = $1,030.625.
The total payment over the 1-year term of the
securities is $61.25 + $1,030.625 = $1,091.875.
Example 2
—The securities are not redeemed prior
to maturity, as the level of the reference rate is less than the initial reference level on all quarterly redemption determination
dates. The level of the reference rate is at or above the reference rate strike on all 8 quarterly observation dates including
the final observation date. Therefore, you would receive (i) the contingent quarterly coupons with respect to the 7 observation
dates prior to (and excluding) the final observation date, totaling $30.625 × 7 = $214.375 and (ii) the payment at maturity
calculated as $1,000 + $30.625 = $1,030.625.
The total payment over the 2-year term of the
securities is $214.375 + $1,030.625 = $1,245.00.
This example illustrates the scenario where
you receive a contingent quarterly coupon on every contingent coupon payment date throughout the term of the securities and receive
your principal back at maturity, resulting in a 12.25% per annum interest rate over the 2-year term of the securities. This example
therefore represents the maximum amount payable over the 2-year term of the securities. To the extent that coupons are not paid
on every contingent coupon payment date, the effective interest rate on the securities will be less than the contingent quarterly
coupon rate and could be zero.
Contingent Income Auto-Callable Securities due 2018, With 1-year Initial Non-Call Period
Based on the Performance of the 10-Year U.S. Dollar ICE Swap Rate
Principal at Risk Securities
Example 3
—The securities are not
redeemed prior to maturity, as the level of the reference rate is less than the initial reference level on all quarterly redemption
determination dates. The level of the reference rate is at or above the reference rate strike on 1 out of the 7 quarterly observation
dates prior to (and excluding) the final observation date and is at or above the reference rate strike on the final observation
date. Therefore, you would receive (i) the contingent quarterly coupons with respect to that 1 observation dates prior to (and
excluding) the final observation date, totaling $30.625 × 1 = $30.625 and (ii) the payment at maturity calculated as $1,000
+ $30.625 = $1,030.625.
The total payment over the 2-year term of the
securities is $30.625 + $1,030.625 = $1,061.25.
Example 4
—The securities are not
redeemed prior to maturity, as the level of the reference rate is less than the initial reference level on all quarterly redemption
determination dates. The level of the reference rate is below the reference rate strike on all of the quarterly observation dates
including the final observation date on which the level of the reference rate is 0.700%. Therefore, you would receive (i) no contingent
quarterly coupons and (ii) the payment at maturity calculated as $1,000 × (0.700% / 1.400%) = $500.
The total payment over the 2-year term of the securities is $0
+ $500 = $500.
If the securities are not automatically redeemed prior to
maturity and the final reference level is less than the reference rate strike, you will lose a significant portion or all of your
investment in the securities.
Contingent Income Auto-Callable Securities due 2018, With 1-year Initial Non-Call Period
Based on the Performance of the 10-Year U.S. Dollar ICE Swap Rate
Principal at Risk Securities
Historical Information
The Reference Rate
The following graph sets forth the historical percentage levels
of the reference rate for the period from January 1, 2006 to September 23, 2016. The historical levels of the reference rate should
not be taken as an indication of its future performance. We cannot give you any assurance that the reference rate will be greater
than or equal to the reference rate strike on any day during the term of the securities, including the final observation date.
We obtained the information in the graph below from Bloomberg Financial Markets, without independent verification. The reference
rate has at times experienced periods of high volatility, and you should not take the historical values of the reference rate as
an indication of its future performance.
When reviewing the historical performance of the reference rate
in the below graph, it is important to understand that
a very small absolute percentage-point change in the reference rate can
result in a few or no quarterly coupons and a significant loss on the securities.
For example, assuming a hypothetical initial
reference rate of 1.400%, the reference rate strike would be equal to 1.120% (80% of the hypothetical initial reference rate),
which represents a decrease of only 0.28 percentage points.
If, on any observation date, the level of the reference rate is
less than the reference rate strike, we will pay no coupon for the applicable quarterly period. In addition, if the final reference
rate is less than the reference rate strike, the payment at maturity will be less than 80% of the stated principal amount of the
securities and could be zero. There is no minimum payment at maturity on the securities. Accordingly, you could lose your entire
initial investment in the securities.
* The red solid line indicates the hypothetical reference
rate strike, assuming the level of the reference rate on September 23, 2016 were the initial reference level.
Contingent Income Auto-Callable Securities due 2018, With 1-year Initial Non-Call Period
Based on the Performance of the 10-Year U.S. Dollar ICE Swap Rate
Principal at Risk Securities
Risk Factors
The securities involve risks not associated with an investment
in ordinary debt securities. An investment in the securities entails significant risks not associated with similar investments
in a conventional debt security, including, but not limited to, fluctuations in the reference rate and other events that are difficult
to predict and beyond the issuer’s control. This section describes the most significant risks relating to the securities.
For a complete list of risk factors, please see the accompanying prospectus supplement and prospectus. You should carefully consider
whether the securities are suited to your particular circumstances before you decide to purchase them. Accordingly, prospective
investors should consult their financial and legal advisers as to the risks entailed by an investment in the securities and the
suitability of the securities in light of their particular circumstances.
|
§
|
The Securities Do Not Guarantee The Return Of Any Principal.
The terms of the securities differ from those of ordinary
debt securities in that the securities do not guarantee the return of any of the principal amount at maturity. Instead, if the
final reference level is less than the reference rate strike, you will be fully exposed to the decline in the reference rate, as
compared to the initial reference level, on a 1-to-1 basis, and you will receive for each security that you hold at maturity an
amount of cash that is significantly less than the stated principal amount, in proportion to the decline in the reference rate.
Under this scenario, the value of any such payment will be less than 80% of the stated principal amount and could be zero.
A
very small absolute change in the reference rate can result in a significant loss on the securities.
For example, assuming
an initial reference rate of 2.000%, if the final reference rate were to decline by only one percentage point to 1.000%, while
the absolute change in the rate is only 1.00%, that move actually represents a 50% decline from the initial reference rate, and
investors would lose 50% of the stated principal amount. You may lose up to your entire initial investment in the securities.
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The Securities Are Subject To Automatic Early Redemption Risk.
Beginning September 30, 2017, the securities will be
automatically redeemed if the level of the reference rate is
greater than or equal to
the initial reference level on any
quarterly determination date. The reference rate is one of the market-accepted indicators of longer-term interest rates. Consequently,
if the securities are redeemed prior to their stated maturity date,
you will receive no further interest payments
on the
securities redeemed and may have to re-invest the proceeds in a lower rate environment and may not be able to reinvest at comparable
terms or returns.
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The Securities Do Not Provide For The Regular Payment Of Interest.
The terms of the securities differ from those of
ordinary debt securities in that they do not provide for the regular payment of interest. Instead, the securities will pay a contingent
quarterly coupon
but only if
the level of the reference rate is
at or above
80% of the initial reference level, which
we refer to as the reference rate strike, on the related observation date. If, on the other hand, the level of the reference rate
is lower than the reference rate strike on the relevant observation date for any interest period, we will pay no coupon on the
applicable contingent coupon payment date.
A very small absolute change in the reference rate can result in few or no quarterly
coupons.
It is possible that the reference rate could remain below the reference rate strike for extended periods of time
or even throughout the entire 2-year term of the securities so that you will receive few or no contingent quarterly coupons. If
you do not earn sufficient contingent coupons over the term of the securities, the overall return on the securities may be less
than the amount that would be paid on a conventional debt security of the issuer of comparable maturity.
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The Contingent Coupon, If Any, Is Based Only On The Level Of The Reference Rate On The Related Quarterly Observation Date
At The End Of The Related Interest Period.
Whether the contingent coupon will be paid on any contingent coupon payment date
will be determined at the end of the relevant interest period based on the level of the reference rate on the relevant quarterly
observation date. As a result, you will not know whether you will receive the contingent coupon on any contingent coupon payment
date until near the end of the relevant interest period. Moreover, because the contingent coupon is based solely on the level of
the reference rate on quarterly observation dates, if the level of the reference rate on any observation date is below the reference
rate strike, you will receive no coupon for the related interest period even if the level of the reference rate was higher on other
days during that interest period.
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The Historical Performance Of The Reference Rate Is Not An Indication Of Its Future Performance.
The historical performance
of the reference rate should not be taken as an indication of future performance during the term of the securities. Changes in
the levels of the reference rate will affect the trading price of the securities, but it is
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Contingent Income Auto-Callable Securities due 2018, With 1-year Initial Non-Call Period
Based on the Performance of the 10-Year U.S. Dollar ICE Swap Rate
Principal at Risk Securities
impossible to predict whether such
levels will rise or fall. There can be no assurance that the level of the reference rate will be greater than or equal to the reference
rate strike.
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Investors Are Subject To Our Credit Risk, And Any Actual Or Anticipated Changes To Our Credit Ratings And Credit Spreads
May Adversely Affect The Market Value Of The Securities.
Investors are dependent on our ability to pay all amounts due on the
securities on contingent coupon payment dates, early redemption dates and at maturity and therefore investors are subject to our
credit risk and to changes in the market’s view of our creditworthiness. The securities are not guaranteed by any other entity.
If we default on our obligations under the securities, your investment would be at risk and you could lose some or all of your
investment. As a result, the market value of the securities prior to maturity will be affected by changes in the market's view
of our creditworthiness. Any actual or anticipated decline in our credit ratings or increase in the credit spreads charged by the
market for taking our credit risk is likely to adversely affect the value of the securities.
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The Price At Which The Securities May Be Resold Prior To Maturity Will Depend On A Number Of Factors And May Be Substantially
Less Than The Amount For Which They Were Originally Purchased.
Some of these factors include, but are not limited to: (i)
actual or anticipated changes in the level of the reference rate, (ii) volatility of the level of the reference rate, (iii) changes
in interest and yield rates, (iv) any actual or anticipated changes in our credit ratings or credit spreads and (v) time remaining
to maturity. Generally, the longer the time remaining to maturity and the more tailored the exposure, the more the market price
of the securities will be affected by the other factors described in the preceding sentence. This can lead to significant adverse
changes in the market price of securities like the securities. Primarily, if the level of the reference rate is near or below the
reference rate strike, the market value of the securities is expected to decrease and you may receive substantially less than 100%
of the issue price if you are able to sell your securities at such time.
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The Rate We Are Willing To Pay For Securities Of This Type, Maturity And Issuance Size Is Likely To Be Lower Than The Rate
Implied By Our Secondary Market Credit Spreads And Advantageous To Us. Both The Lower Rate And The Inclusion Of Costs Associated
With Issuing, Selling, Structuring And Hedging The Securities In The Original Issue Price Reduce The Economic Terms Of The Securities,
Cause The Estimated Value Of The Securities To Be Less Than The Original Issue Price And Will Adversely Affect Secondary Market
Prices.
Assuming no change in market conditions or any other relevant factors, the prices, if any, at which dealers, including
MS & Co., are willing to purchase the securities in secondary market transactions will likely be significantly lower than the
original issue price, because secondary market prices will exclude the issuing, selling, structuring and hedging-related costs
that are included in the original issue price and borne by you and because the secondary market prices will reflect our secondary
market credit spreads and the bid-offer spread that any dealer would charge in a secondary market transaction of this type, the
costs of unwinding the related hedging transactions as well as other factors.
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The inclusion of the costs of issuing,
selling, structuring and hedging the securities in the original issue price and the lower rate we are willing to pay as issuer
make the economic terms of the securities less favorable to you than they otherwise would be.
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The Estimated Value Of The Securities Is Determined By Reference To Our Pricing And Valuation Models, Which May Differ From
Those Of Other Dealers And Is Not A Maximum Or Minimum Secondary Market Price.
These pricing and valuation models are proprietary
and rely in part on subjective views of certain market inputs and certain assumptions about future events, which may prove to be
incorrect. As a result, because there is no market-standard way to value these types of securities, our models may yield a higher
estimated value of the securities than those generated by others, including other dealers in the market, if they attempted to value
the securities. In addition, the estimated value on the pricing date does not represent a minimum or maximum price at which dealers,
including MS & Co., would be willing to purchase your securities in the secondary market (if any exists) at any time. The value
of your securities at any time after the date of this pricing supplement will vary based on many factors that cannot be predicted
with accuracy, including our creditworthiness and changes in market conditions.
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The Securities Will Not Be Listed On Any Securities Exchange And Secondary Trading May Be Limited.
The securities will
not be listed on any securities exchange. Therefore, there may be little or no secondary market for the securities. MS & Co.
may, but is not obligated to, make a market in the securities and, if it once chooses to make a market, may cease doing so at any
time. When it does make a market, it will generally do so for transactions of
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Contingent Income Auto-Callable Securities due 2018, With 1-year Initial Non-Call Period
Based on the Performance of the 10-Year U.S. Dollar ICE Swap Rate
Principal at Risk Securities
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routine
secondary market size at prices based on its estimate of the current value of the securities,
taking into account its bid/offer spread, our credit spreads, market volatility, the
notional size of the proposed sale, the cost of unwinding any related hedging positions,
the time remaining to maturity and the likelihood that it will be able to resell the
securities. Even if there is a secondary market, it may not provide enough liquidity
to allow you to trade or sell the securities easily. Since other broker-dealers may not
participate significantly in the secondary market for the securities, the price at which
you may be able to trade your securities is likely to depend on the price, if any, at
which MS & Co. is willing to transact. If, at any time, MS & Co. were to cease
making a market in the securities, it is likely that there would be no secondary market
for the securities. Accordingly, you should be willing to hold your securities to maturity.
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Morgan Stanley & Co. LLC, Which Is A Subsidiary Of The Issuer, Has Determined The Estimated Value On The Pricing Date.
MS & Co. has determined the estimated value of the securities on the pricing date.
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The Issuer, Its Subsidiaries Or Affiliates May Publish Research That Could Affect The Market Value Of The Securities. They
Also Expect To Hedge The Issuer’s Obligations Under The Securities.
The issuer or one or more of its affiliates may,
at present or in the future, publish research reports with respect to movements in interest rates generally or the reference rate
specifically. This research is modified from time to time without notice and may express opinions or provide recommendations that
are inconsistent with purchasing or holding the securities. Any of these activities may affect the market value of the securities.
In addition, the issuer’s subsidiaries expect to hedge the issuer’s obligations under the securities and they may realize
a profit from that expected hedging activity even if investors do not receive a favorable investment return under the terms of
the securities or in any secondary market transaction.
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The Calculation Agent, Which Is A Subsidiary Of The Issuer, Will Make Determinations With Respect To The Securities.
As calculation agent, Morgan Stanley Capital Services LLC will determine the initial reference rate, the reference rate strike,
the final reference rate, the reference rate performance factor, the contingent quarterly coupon, if any, due to you with respect
to each observation date, whether the securities will be redeemed following any redemption determination date and, if the securities
are not redeemed prior to maturity, the amount of cash, if any, you will receive at maturity. Moreover, certain determinations
made by the calculation agent may require it to exercise discretion and make subjective judgments, such as with respect to the
reference rate. These potentially subjective determinations may adversely affect the payout to you on the securities. For further
information regarding these types of determinations, see “Additional Provisions―Reference Rate” and related definitions
above.
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The U.S. Federal Income Tax Consequences Of An Investment In The Securities Are Uncertain.
There is no direct legal
authority as to the proper treatment of the securities for U.S. federal income tax purposes, and, therefore, significant aspects
of the tax treatment of the securities are uncertain.
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Please read the discussion under
“Tax Considerations” in this pricing supplement concerning the U.S. federal income tax consequences of an investment
in the securities. We intend to treat a security for U.S. federal income tax purposes as a single financial contract that provides
for a coupon that will be treated as gross income to you at the time received or accrued in accordance with your regular method
of tax accounting. Under this treatment, the ordinary income treatment of the coupon payments, in conjunction with the capital
loss treatment of any loss recognized upon the sale, exchange or settlement of the securities, could result in adverse tax consequences
to holders of the securities because the deductibility of capital losses is subject to limitations. We do not plan to request a
ruling from the Internal Revenue Service (the “IRS”) regarding the tax treatment of the securities, and the IRS or
a court may not agree with the tax treatment described herein. If the IRS were successful in asserting an alternative treatment
for the securities, the timing and character of income or loss on the securities might differ significantly from the tax treatment
described herein. For example, under one possible treatment, the IRS could seek to recharacterize the securities as debt instruments.
In that event, U.S. Holders would be required to accrue into income original issue discount on the securities every year at a “comparable
yield” determined at the time of issuance (as adjusted based on the difference, if any, between the actual and the projected
amount of any contingent payments on the securities) and recognize all income and gain in respect of the securities as ordinary
income. The risk that financial instruments providing for buffers, triggers
or similar downside protection features, such as the securities, would be recharacterized as debt is greater than the risk of recharacterization
for comparable financial instruments that do not have such features.
Non-U.S. Holders should note that we currently intend to
withhold on any coupon paid to Non-U.S. Holders generally at a rate of 30%, or at a reduced rate specified by an applicable income
tax treaty under an
Contingent Income Auto-Callable Securities due 2018, With 1-year Initial Non-Call Period
Based on the Performance of the 10-Year U.S. Dollar ICE Swap Rate
Principal at Risk Securities
“other income” or
similar provision, and will not be required to pay any additional amounts with respect to amounts withheld.
Even if a security is properly treated
as a single financial contract that provides for a coupon, there is uncertainty regarding whether loss recognized upon settlement
at maturity, if any, should be treated as short-term or long-term capital loss or as ordinary loss (which, in the case of certain
non-corporate U.S. Holders, might be subject to the 2% floor on “miscellaneous itemized deductions”).
In 2007, the U.S. Treasury Department
and the IRS released a notice requesting comments on the U.S. federal income tax treatment of “prepaid forward contracts”
and similar instruments. While it is not clear whether the securities would be viewed as similar to the prepaid forward contracts
described in the notice, it is possible that any Treasury regulations or other guidance issued after consideration of these issues
could materially and adversely affect the tax consequences of an investment in the securities, possibly with retroactive effect.
The notice focuses on a number of issues, the most relevant of which for holders of the securities are the character and timing
of income or loss and the degree, if any, to which income realized by non-U.S. investors should be subject to withholding tax.
Both U.S. and Non-U.S. Holders (as defined below) should consult their tax advisers regarding the U.S. federal income tax consequences
of an investment in the securities, including possible alternative treatments, the issues presented by this notice and any tax
consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction.
Contingent Income Auto-Callable Securities due 2018, With 1-year Initial Non-Call Period
Based on the Performance of the 10-Year U.S. Dollar ICE Swap Rate
Principal at Risk Securities
Use of Proceeds and Hedging
The proceeds we receive from the sale of the securities will
be used for general corporate purposes. We will receive, in aggregate, $1,000 per security issued, because, when we enter into
hedging transactions in order to meet our obligations under the securities, our hedging counterparty will reimburse the cost of
the Agent’s commissions. The costs of the securities borne by you and described on page 3 above comprise the Agent’s
commissions and the cost of issuing, structuring and hedging the securities.
Supplemental Information Concerning Plan of Distribution;
Conflicts of Interest
We expect to deliver the securities against payment
therefor in New York, New York on September 30, 2016, which will be the second scheduled business day following the date of
the pricing of the securities.
Morgan Stanley or one of our affiliates will
pay varying discounts and commissions to dealers, including Morgan Stanley Smith Barney LLC (“Morgan Stanley Wealth Management”)
and their financial advisors, of up to $ per security depending on market conditions. The agent may distribute the securities through
Morgan Stanley Wealth Management, as selected dealer, or other dealers, which may include Morgan Stanley & Co. International
plc (“MSIP”) and Bank Morgan Stanley AG. Morgan Stanley Wealth Management, MSIP and Bank Morgan Stanley AG are affiliates
of Morgan Stanley.
MS & Co. is our wholly-owned subsidiary and it and other
subsidiaries of ours expect to make a profit by selling, structuring and, when applicable, hedging the securities. When MS &
Co. prices this offering of securities, it will determine the economic terms of the securities such that for each security the
estimated value on the pricing date will be no lower than the minimum level described in “The Securities” on page 3.
MS & Co. will conduct this offering in compliance with the
requirements of FINRA Rule 5121 of the Financial Industry Regulatory Authority, Inc., which is commonly referred to as FINRA, regarding
a FINRA member firm’s distribution of the securities of an affiliate and related conflicts of interest. MS & Co. or any
of our other affiliates may not make sales in this offering to any discretionary account.
Contingent Income Auto-Callable Securities due 2018, With 1-year Initial Non-Call Period
Based on the Performance of the 10-Year U.S. Dollar ICE Swap Rate
Principal at Risk Securities
Acceleration Amount in Case of an Event of Default
In case an event of default with respect to the securities shall
have occurred and be continuing, the amount declared due and payable per security upon any acceleration of the securities shall
be an amount in cash equal to the value of such security on the day that is two business days prior to the date of such acceleration,
as determined by the calculation agent (acting in good faith and in a commercially reasonable manner) by reference to factors that
the calculation agent considers relevant, including, without limitation: (i) then-current market interest rates; (ii) our credit
spreads as of the pricing date, without adjusting for any subsequent changes to our creditworthiness; and (iii) the then-current
value of the performance-based component of such security. Because the calculation agent will take into account movements in market
interest rates, any increase in market interest rates since the pricing date will lower the value of your claim in comparison to
if such movements were not taken into account.
Notwithstanding the foregoing, if a voluntary or involuntary
liquidation, bankruptcy or insolvency of, or any analogous proceeding is filed with respect to the issuer, then depending on applicable
bankruptcy law, your claim may be limited to an amount that could be less than the default amount.
Contingent Income Auto-Callable Securities due 2018, With 1-year Initial Non-Call Period
Based on the Performance of the 10-Year U.S. Dollar ICE Swap Rate
Principal at Risk Securities
Tax Considerations
Prospective investors should note that the discussion under
the section called “United States Federal Taxation” in the accompanying prospectus supplement does not apply to the
securities issued under this pricing supplement and is superseded by the following discussion.
The following is a general discussion of the material U.S. federal
income tax consequences and certain estate tax consequences of the ownership and disposition of the securities. This discussion
applies only to investors in the securities who:
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purchase the securities in the original offering; and
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hold the securities as capital assets within the meaning of Section
1221 of the Internal Revenue Code of 1986, as amended (the “Code”).
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This discussion does not describe all of the
tax consequences that may be relevant to a holder in light of the holder’s particular circumstances or to holders subject
to special rules, such as:
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certain financial institutions;
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certain dealers and traders in securities or commodities;
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investors holding the securities as part of a “straddle,”
wash sale, conversion transaction, integrated transaction or constructive sale transaction;
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U.S. Holders (as defined below) whose functional currency is not the
U.S. dollar;
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partnerships or other entities classified as partnerships for U.S.
federal income tax purposes;
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regulated investment companies;
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real estate investment trusts; or
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tax-exempt entities, including “individual retirement accounts”
or “Roth IRAs” as defined in Section 408 or 408A of the Code, respectively.
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If an entity that is classified as a partnership
for U.S. federal income tax purposes holds the securities, the U.S. federal income tax treatment of a partner will generally depend
on the status of the partner and the activities of the partnership. If you are a partnership holding the securities or a partner
in such a partnership, you should consult your tax adviser as to the particular U.S. federal tax consequences of holding and disposing
of the securities to you.
As the law applicable to the U.S. federal income
taxation of instruments such as the securities is technical and complex, the discussion below necessarily represents only a general
summary. Moreover, the effect of any applicable state, local or non-U.S. tax laws is not discussed, nor are any alternative minimum
tax consequences or consequences resulting from the Medicare tax on investment income.
This discussion is based on the Code, administrative
pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof, changes to
any of which subsequent to the date hereof may affect the tax consequences described herein. Persons considering the purchase of
the securities should consult their tax advisers with regard to the application of the U.S. federal income tax laws to their particular
situations as well as any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction.
General
Due to the absence of statutory, judicial or
administrative authorities that directly address the treatment of the securities or instruments that are similar to the securities
for U.S. federal income tax purposes, no assurance can be given that the IRS or a court will agree with the tax treatment described
herein. We intend to treat a security for U.S. federal income tax purposes as a single financial contract that provides for a coupon
that will be treated as gross income to you at the time received or accrued in accordance with your regular method of tax accounting.
In the opinion of our counsel, Davis Polk & Wardwell LLP, this treatment of the securities is reasonable under current law;
however, our counsel has advised us that it is unable to conclude affirmatively that this treatment is more likely than not to
be upheld, and that alternative treatments are possible.
You should consult your tax adviser regarding
all aspects of the U.S. federal tax consequences of an investment in the securities (including possible alternative treatments
of the securities). Unless otherwise stated, the following discussion is based on the treatment of each security as described in
the previous paragraph.
Tax Consequences to U.S. Holders
Contingent Income Auto-Callable Securities due 2018, With 1-year Initial Non-Call Period
Based on the Performance of the 10-Year U.S. Dollar ICE Swap Rate
Principal at Risk Securities
This section applies to you only if you are
a U.S. Holder. As used herein, the term “U.S. Holder” means a beneficial owner of a security that is, for U.S. federal
income tax purposes:
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a citizen or individual resident of the United States;
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a corporation, or other entity taxable as a corporation, created or
organized in or under the laws of the United States, any state thereof or the District of Columbia; or
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an estate or trust the income of which is subject to U.S. federal income
taxation regardless of its source.
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Tax Treatment of the Securities
Assuming the treatment of the securities as
set forth above is respected, the following U.S. federal income tax consequences should result.
Tax Basis
. A U.S. Holder’s tax basis in the securities
should equal the amount paid by the U.S. Holder to acquire the securities.
Tax Treatment of Coupon Payments
. Any coupon payment on
the securities should be taxable as ordinary income to a U.S. Holder at the time received or accrued, in accordance with the U.S.
Holder’s regular method of accounting for U.S. federal income tax purposes.
Sale, Exchange or Settlement of the Securities.
Upon a
sale, exchange or settlement of the securities, a U.S. Holder should recognize gain or loss equal to the difference between the
amount realized on the sale, exchange or settlement and the U.S. Holder’s tax basis in the securities sold, exchanged or
settled. For this purpose, the amount realized does not include any coupon paid at settlement and may not include sale proceeds
attributable to an accrued coupon, which may be treated as a coupon payment. Although not free from doubt in light of the lack
of clear authority addressing the treatment of the settlement of instruments such as the securities, any such gain or loss recognized
should be long-term capital gain or loss if the U.S. Holder has held the securities for more than one year at the time of the sale,
exchange or settlement, and should be short-term capital gain or loss otherwise. However, there is a substantial risk that the
IRS may assert that any loss recognized by a U.S. Holder upon settlement of the securities at maturity should be treated as ordinary
loss. In the event of an ordinary loss to certain non-corporate U.S. Holders, any deduction arising from the loss may be subject
to the 2% floor on “miscellaneous itemized deductions.”
You should consult your tax adviser regarding the character
of gain or loss recognized upon the sale, exchange or settlement of the securities.
The ordinary income treatment of the coupon
payments, in conjunction with the capital loss treatment of any loss recognized upon the sale, exchange or settlement of the securities,
could result in adverse tax consequences to holders of the securities because the deductibility of capital losses is subject to
limitations.
Possible Alternative Tax Treatments of an Investment in
the Securities
Due to the absence of authorities that directly address the proper
tax treatment of the securities, no assurance can be given that the IRS will accept, or that a court will uphold, the treatment
described above. In particular, the IRS could seek to analyze the U.S. federal income tax consequences of owning the securities
under Treasury regulations governing contingent payment debt instruments (the “Contingent Debt Regulations”). If the
IRS were successful in asserting that the Contingent Debt Regulations applied to the securities, the timing and character of income
thereon would be significantly affected. Among other things, a U.S. Holder would be required to accrue into income original
issue discount on the securities every year at a “comparable yield” determined at the time of their issuance, adjusted
upward or downward to reflect the difference, if any, between the actual and the projected amount of any contingent payments on
the securities. Furthermore, any gain realized by a U.S. Holder at maturity or upon a sale, exchange or other disposition of the
securities would be treated as ordinary income, and any loss realized would be treated as ordinary loss to the extent of the U.S.
Holder’s prior accruals of original issue discount and as capital loss thereafter. The risk that financial instruments providing
for buffers, triggers or similar downside protection features, such as the securities, would be recharacterized as debt is greater
than the risk of recharacterization for comparable financial instruments that do not have such features.
Other alternative federal income tax treatments of the securities
are possible, which, if applied, could significantly affect the timing and character of the income or loss with respect to the
securities. In 2007, the U.S. Treasury Department and the IRS released a notice requesting comments on the U.S. federal income
tax treatment of “prepaid forward contracts” and similar instruments. The notice focuses on whether to require holders
of “prepaid forward contracts” and similar instruments to accrue income over the term of their investment. It also
asks for comments on a number of related topics, including the character of income or loss with respect to these instruments; whether
short-term instruments should be subject to any such accrual regime; the relevance of factors such as the exchange–traded
status of the instruments and the nature of the underlying property to which the instruments are linked; whether these instruments
are or should be subject to the “constructive ownership” rule, which very generally can operate to recharacterize certain
long-term capital gain as ordinary income and impose an interest charge; and appropriate transition rules and effective dates.
While it is not clear whether instruments such as the securities would be
Contingent Income Auto-Callable Securities due 2018, With 1-year Initial Non-Call Period
Based on the Performance of the 10-Year U.S. Dollar ICE Swap Rate
Principal at Risk Securities
viewed as similar to the prepaid forward contracts described
in the notice, any Treasury regulations or other guidance promulgated after consideration of these issues could materially and
adversely affect the tax consequences of an investment in the securities, possibly with retroactive effect. U.S. Holders should
consult their tax advisers regarding the U.S. federal income tax consequences of an investment in the securities, including possible
alternative treatments and the issues presented by this notice.
Backup Withholding and Information Reporting
Backup withholding may apply in respect of payments on the securities
and the payment of proceeds from a sale, exchange or other disposition of the securities, unless a U.S. Holder provides proof of
an applicable exemption or a correct taxpayer identification number and otherwise complies with applicable requirements of the
backup withholding rules. The amounts withheld under the backup withholding rules are not an additional tax and may be refunded,
or credited against the U.S. Holder’s U.S. federal income tax liability, provided that the required information is timely
furnished to the IRS. In addition, information returns will be filed with the IRS in connection with payments on the
securities and the payment of proceeds from a sale, exchange or other disposition of the securities, unless the U.S. Holder provides
proof of an applicable exemption from the information reporting rules.
Tax Consequences to Non-U.S. Holders
This section applies to you only if you are a Non-U.S. Holder.
As used herein, the term “Non-U.S. Holder” means a beneficial owner of a security that is for U.S. federal income tax
purposes:
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an individual who is classified as a nonresident alien;
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a foreign corporation; or
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a foreign estate or trust.
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The term “Non-U.S. Holder” does
not include any of the following holders:
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a holder who is an individual present in the United States for 183
days or more in the taxable year of disposition and who is not otherwise a resident of the United States for U.S. federal income
tax purposes;
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certain former citizens or residents of the United States; or
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a holder for whom income or gain in respect of the securities is effectively
connected with the conduct of a trade or business in the United States.
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Such holders should consult their tax advisers regarding the
U.S. federal income tax consequences of an investment in the securities.
Although significant aspects of the tax treatment of each security
are uncertain, we intend to withhold on any coupon paid to a Non-U.S. Holder generally at a rate of 30% or at a reduced rate specified
by an applicable income tax treaty under an “other income” or similar provision. We will not be required to pay any
additional amounts with respect to amounts withheld. In order to claim an exemption from, or a reduction in, the 30% withholding
tax, a Non-U.S. Holder of the securities must comply with certification requirements to establish that it is not a U.S. person
and is eligible for such an exemption or reduction under an applicable tax treaty. If you are a Non-U.S. Holder, you should consult
your tax adviser regarding the tax treatment of the securities, including the possibility of obtaining a refund of any withholding
tax and the certification requirement described above.
U.S. Federal Estate Tax
Individual Non-U.S. Holders and entities the property of which
is potentially includible in such an individual’s gross estate for U.S. federal estate tax purposes (for example, a trust
funded by such an individual and with respect to which the individual has retained certain interests or powers) should note that,
absent an applicable treaty exemption, the securities may be treated as U.S.-situs property subject to U.S. federal estate tax.
Prospective investors that are non-U.S. individuals, or are entities of the type described above, should consult their tax advisers
regarding the U.S. federal estate tax consequences of an investment in the securities.
Backup Withholding and Information Reporting
Information returns will be filed with the IRS in connection
with any coupon payment and may be filed with the IRS in connection with the payment at maturity on the securities and the payment
of proceeds from a sale, exchange or other disposition. A Non-U.S. Holder may be subject to backup withholding in respect of amounts
paid to the Non-U.S. Holder, unless such Non-U.S. Holder complies with certification procedures to establish that it is not a U.S.
person for U.S. federal income tax purposes or
Contingent Income Auto-Callable Securities due 2018, With 1-year Initial Non-Call Period
Based on the Performance of the 10-Year U.S. Dollar ICE Swap Rate
Principal at Risk Securities
otherwise establishes an exemption. The amount of any backup
withholding from a payment to a Non-U.S. Holder will be allowed as a credit against the Non-U.S. Holder’s U.S. federal income
tax liability and may entitle the Non-U.S. Holder to a refund, provided that the required information is timely furnished to the
IRS.
FATCA Legislation
Legislation commonly referred to as “FATCA” generally
imposes a withholding tax of 30% on payments to certain non-U.S. entities (including financial intermediaries) with respect to
certain financial instruments, unless various U.S. information reporting and due diligence requirements have been satisfied. An
intergovernmental agreement between the United States and the non-U.S. entity’s jurisdiction may modify these requirements.
This legislation generally applies to certain financial instruments that are treated as paying U.S.-source interest or other U.S.-source
“fixed or determinable annual or periodical” income (“FDAP income”). Withholding (if applicable) applies
to payments of U.S.-source FDAP income and, for dispositions after December 31, 2018, to payments of gross proceeds of the disposition
(including upon retirement) of certain financial instruments treated as providing for U.S.-source interest or dividends. While
the treatment of the securities is unclear, you should assume that any coupon payment with respect to the securities will be subject
to the FATCA rules. If withholding applies to the securities, we will not be required to pay any additional amounts with respect
to amounts withheld. Both U.S. and Non-U.S. Holders should consult their tax advisers regarding the potential application of FATCA
to the securities.
The discussion in the preceding paragraphs, insofar as it
purports to describe provisions of U.S. federal income tax laws or legal conclusions with respect thereto, constitutes the full
opinion of Davis Polk & Wardwell LLP regarding the material U.S. federal tax consequences of an investment in the securities.
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