December 2016
Preliminary Terms No. 1,208
Registration Statement Nos.
333-200365; 333-200365-12
Dated Devember 2, 2016
Filed pursuant to Rule 433
Morgan Stanley Finance LLC
INTEREST RATE STRUCTURED PRODUCTS
Fixed
to Floating Rate Securities due 2036
Fully and Unconditionally
Guaranteed by Morgan Stanley
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst
Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
As further described below, interest will
accrue on the securities (i) in
years 1 to 2
: at a rate of 10.00% per annum and (ii) in
years 3 to maturity
: for
each day that the closing value of
each of
the S&P 500
®
Index
and
the Russell 2000
®
Index is
greater than or equal to
70% of its respective initial index value (which we refer to as the index reference level),
at a variable rate per annum equal to 20
times
the difference, if any, between the 30-Year ICE Swap Rate (“30CMS”)
and the 2-Year ICE Swap Rate (“2CMS”), as determined on the CMS reference determination date at the start of the related
monthly interest payment period; subject to the maximum interest rate of 10.00% per annum for each interest payment period during
the floating interest rate period and the minimum interest rate of 0.00% per annum. The securities provide an above-market
interest rate in years 1 to 2; however, for each interest payment period in years 3 to maturity, the securities will not pay any
interest with respect to an interest payment period if the CMS reference index level is equal to or less than 0.00% on the related
monthly CMS reference determination date. In addition, if, on any calendar day, the index closing value of
either
index is less than the index reference level for such index, interest will accrue at a rate of 0.00% per annum for that day. At
maturity, if the final index value of
each
index is greater than or equal to its barrier level of 50% of its respective
initial index value, investors will receive the stated principal amount of the securities
plus
any accrued but unpaid interest. However,
if the final index value of
either
index is less than its respective barrier level, investors will be fully exposed to the
decline in the worst performing index over the term of the securities, and the payment at maturity will be less than 50% of the
stated principal amount of the securities and could be zero.
There is no minimum payment at maturity on the securities. Accordingly,
investors may lose up to their entire initial investment in the securities.
Because payments on the securities are
based on the worst performing of the indices, a decline beyond the respective index reference level and/or respective barrier level,
as applicable, of
either
index will result in few or no interest payments during the floating interest rate period and/or
a significant loss of your investment, as applicable, even if the other index has appreciated or has not declined as much. Investors
will not participate in any appreciation of either index. These long-dated securities are for investors who seek an
opportunity to earn interest at a potentially above-market rate in exchange for the risk of losing their principal and the risk
of receiving little or no interest on the securities during the floating interest rate period.
All payments are subject to our credit risk. If
we default on our 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
|
Issuer:
|
Morgan Stanley Finance LLC (“MSFL”)
|
Guarantor:
|
Morgan Stanley
|
Indices:
|
S&P 500
®
Index (the “SPX Index”) and Russell 2000
®
Index (the “RTY Index”)
|
CMS reference index:
|
30-Year ICE Swap Rate minus 2-Year ICE Swap Rate,
expressed as a percentage.
Please see “Additional Provisions—CMS
Reference Index” below.
|
Aggregate principal amount:
|
$ . May be increased prior to the original issue date but we are not required to do so.
|
Issue price:
|
At variable prices
|
Stated principal amount:
|
$1,000 per security
|
Pricing date:
|
December , 2016
|
Original issue date:
|
December 30, 2016 ( business days after the pricing date)
|
Maturity date:
|
December 30, 2036
|
Interest accrual date:
|
December 30, 2016
|
Payment at maturity:
|
·
If the final index value of
each
index is
greater than or equal to
its respective barrier level
:
the
stated principal amount
plus
any accrued and unpaid interest
·
If the final index value of
either
index is
less than
its respective barrier level
:
(a) the stated
principal amount
times
the index performance factor of the worst performing index
plus
(b) any accrued and unpaid
interest.
This amount will be less than 50% of the stated principal amount of the securities and could be zero.
|
Interest:
|
From and including the original issue date to but
excluding December 30, 2018 (the “fixed interest rate period”)
: 10.00% per annum
From and including December 30, 2018 to
but excluding the maturity date (the “floating interest rate period”)
:
For each interest payment period, a variable rate
per annum equal to the product of:
(a)
leverage factor
times
the CMS reference index;
subject to the minimum interest rate and the maximum interest rate
;
and
(b)
N/ACT;
where,
“N” = the total number of calendar days
in the applicable interest payment period on which the index closing value of each index is greater than or equal to its respective
index reference level (each such day, an “accrual day”); and
“ACT” = the total number of calendar
days in the applicable interest payment period.
The CMS reference index level applicable to an interest
payment period will be determined on the related CMS reference determination date.
Interest for each interest payment
period during the floating interest rate period is subject to the minimum interest rate of 0.00% per annum and the maximum interest
rate of 10.00% per annum for such interest payment period. Beginning December 30, 2018, it is possible that you could
receive little or no interest on the securities. If, on the related CMS reference determination date, the CMS reference
index level is equal to or less than the CMS reference index strike, interest will accrue at a rate of 0.00% for that interest
payment period. In addition, if, on any day, the index closing value of either index is determined to be less than
the index reference level for such index, interest will accrue at a rate of 0.00% per annum for that day. The determination
of the index closing value for each index will be subject to certain market disruption events. Please see Annex A—Market
Disruption Event” below.
|
Agent:
|
Morgan Stanley & Co. LLC (“MS & Co.”), an affiliate of MSFL and a wholly owned subsidiary of Morgan Stanley. See “Supplemental Information Concerning Plan of Distribution; Conflicts of Interest.”
|
Terms continued on the following page
|
Estimated value on the pricing date:
|
Approximately $
861.00
per security, or within $11.00 of that estimate. See “The Securities” on page 3.
|
Commissions and issue price:
|
Price to public
(1)(2)
|
Agent’s commissions
(2)
|
Proceeds to us
(3)
|
Per security
|
At variable prices
|
$
|
$
|
Total
|
At variable prices
|
$
|
$
|
|
(1)
|
The securities
will be offered from time to time in one or more negotiated transactions at varying prices
to be determined at the time of each sale, which may be at market prices prevailing,
at prices related to such prevailing prices or at negotiated prices; provided, however,
that such price will not be less than $970 per security and will not be more than $1,000
per security. See “Risk Factors—The Price You Pay For The Securities
May Be Higher Than The Prices Paid By Other Investors.”
|
|
(2)
|
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.
|
|
(3)
|
See “Use
of Proceeds and Hedging” on page 21.
|
You should read
this document together with the related prospectus supplement, index supplement and prospectus, each of which can be
accessed via the hyperlinks below, before you decide to invest.
Prospectus Supplement dated February 16, 2016
Index
Supplement dated February 29, 2016
Prospectus
dated February 16, 2016
References
to “we,” “us” and “our” refer to Morgan Stanley or MSFL, or Morgan Stanley and MSFL collectively,
as the context requires.
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.
MSFL and Morgan Stanley have 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 MSFL and Morgan Stanley have filed with the SEC for more complete
information about MSFL, Morgan Stanley 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.
Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
Terms continued from previous page:
|
Leverage factor:
|
20
|
Interest payment period:
|
Monthly
|
Interest payment period end dates:
|
Unadjusted
|
Interest payment dates:
|
The 30
th
calendar day of each month (or, in the case of February, the last calendar day of such month), beginning January 30, 2017;
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.
|
Interest reset dates:
|
The 30
th
calendar day of each month (or, in the case of February, the last calendar day of such month), beginning December 30, 2018
|
Maximum interest rate:
|
10.00% per annum for each interest payment period during the floating interest rate period
|
Minimum interest rate:
|
0.00% per annum
|
|
Underlying index publisher:
|
With respect to the SPX Index: S&P Dow Jones Indices
LLC
With respect to the RTY Index: Russell Investments
|
|
CMS reference determination dates:
|
Two (2) U.S. government securities business days prior to the related interest reset date at the start of the applicable interest payment period.
|
|
CMS reference index strike:
|
0.00%
|
|
Index reference level:
|
With respect to the SPX Index:
, which is 70% of its initial index value
With respect to the RTY Index:
, which is 70% of its initial index value
|
|
Initial index value:
|
With respect to the SPX Index:
, which is its index closing value on December 27, 2016, subject to adjustment due to non-index business days or certain market
disruption events.
With respect to the RTY Index:
, which is its index closing value on December 27, 2016, subject to adjustment due to non-index business days or certain market
disruption events.
|
|
Barrier level:
|
With respect to the SPX Index:
, which is 50% of its initial index value
With respect to the RTY Index:
, which is 50% of its initial index value
|
|
Final index value:
|
With respect to each index, the index closing value of such index on the final determination date
|
|
Index closing value:
|
With respect to each index, the closing value of such index.
Please see “Additional Provisions—Indices” below.
|
|
Final determination date:
|
The third scheduled business day prior to the maturity date, subject to adjustment due to non-index business days or certain market disruption events.
|
|
Index cutoff:
|
With respect to each index, the index closing value of such index for any day from and including the third index business day prior to the related interest payment date for any interest payment period shall be the index closing value of such index on such third index business day prior to such interest payment date.
|
|
Index performance factor:
|
The final index value
divided by
the initial index value
|
|
Worst performing index:
|
The index with the larger percentage decrease from the respective initial index value to the respective final index value
|
|
Redemption:
|
None
|
|
Day-count convention:
|
Actual/Actual
|
|
Specified currency:
|
U.S. dollars
|
|
CUSIP / ISIN:
|
61766YAY7 / US61766YAY77
|
|
Book-entry or certificated security:
|
Book-entry
|
|
Business day:
|
New York
|
|
Calculation agent:
|
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 on each interest payment date and at maturity or whether a market disruption event has occurred. Please
see Annex A—Market Disruption Event” and “—Discontinuance of an Index; Alteration of Method of Calculation”
below. The calculation agent is obligated to carry out its duties and functions as calculation agent in good faith and
using its reasonable judgment.
|
|
Trustee:
|
The Bank of New York Mellon
|
|
Contact information:
|
Morgan Stanley Wealth Management clients may contact their local Morgan Stanley branch office or Morgan Stanley’s 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.
|
|
Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
The Securities
Principal at Risk Securities
The securities offered are debt securities of Morgan Stanley
Finance LLC (“MSFL”) and are fully and unconditionally guaranteed by Morgan Stanley. In years 1 to 2, the
securities pay interest at a rate of 10.00% per annum. Beginning December 30, 2018, interest will accrue on the securities
for each day that the closing value of
each of
the S&P 500
®
Index
and
the Russell 2000
®
Index is
greater than or equal to
70% of its respective initial index value (which we refer to as the index reference level),
at a variable rate per annum equal to
20
times
the difference, if any, between the 30-Year ICE Swap Rate (“30CMS”)
and the 2-Year ICE Swap Rate (“2CMS”), as determined on the CMS reference determination date at the start of the related
monthly interest payment period; subject to the maximum interest rate of 10.00% per annum for each interest payment period during
the floating interest rate period and the minimum interest rate of 0.00% per annum. The securities provide an above-market
interest rate in years 1 to 2; however, for each interest payment period in years 3 to maturity, the securities will not pay any
interest with respect to an interest payment period if the CMS reference index level is equal to or less than 0.00% on the related
monthly CMS reference determination date. In addition, if, on any calendar day, the index closing value of
either
index is less than the index reference level for such index, interest will accrue at a rate of 0.00% per annum for that day.
At maturity, if the final index value of
each
index is greater than or equal to its barrier level of 50% of its respective initial index value, investors will receive
the stated principal amount of the securities
plus
any accrued but unpaid interest. However, if the final index
value of
either
index is less than its respective barrier level, investors will be fully exposed to the decline in the worst
performing index over the term of the securities, and the payment at maturity will be less than 50% of the stated principal amount
of the securities and could be zero.
There is no minimum payment at maturity on the securities. Accordingly,
investors may lose up to their entire initial investment in the securities.
Because payments on the securities are
based on the worst performing of the indices, a decline beyond the respective index reference level and/or respective barrier level,
as applicable, of
either
index will result in few or no interest payments during the floating interest rate period and/or
a significant loss of your investment, as applicable, even if the other index has appreciated or has not declined as much. Investors
will not participate in any appreciation of either index.
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 Securities,” subject to and as modified by the provisions described below. All
payments on the securities are subject to our credit risk.
The stated principal amount of each security is $1,000, and the
issue price is variable. 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 $861.00, or within $11.00
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 CMS reference index and the
indices. The estimated value of the securities is determined using our own pricing and valuation models, market inputs
and assumptions relating to the CMS reference index and the indices, instruments based on the CMS reference index and the indices,
volatility and other factors including current and 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 interest rate, the leverage factor, the maximum interest rate applicable to each interest payment period during the floating
interest rate period, the CMS reference index strike, the index reference levels and the barrier levels, 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.
Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
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 CMS reference index and
the indices, 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.
Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
Additional Provisions
CMS Reference Index
What are the 30-Year and 2-Year ICE Swap Rates?
The 30-Year ICE Swap Rate (which we refer to as “30CMS”)
is, on any U.S. government securities business day, the fixed rate of interest payable on an interest rate swap with a 30-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 longer-term interest rates.
The 2-Year ICE Swap Rate (which we refer to as “2CMS”)
is, on any U.S. government securities business day, the fixed rate of interest payable on an interest rate swap with a 2-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 shorter-term interest rates.
The rates reported on Reuters Page “ICESWAP1” (or
any successor page thereto) are 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 30CMS or 2CMS is not displayed by approximately 11:00 a.m.
New York City time on the Reuters Screen ICESWAP1 Page on any day on which the level of the CMS reference index must be determined,
any such affected 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 term equal to the applicable 30 year or 2 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 rate will be determined by the calculation agent in good faith and in
a commercially reasonable manner.
Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
Indices
The S&P 500
®
Index
The SPX Index, which is calculated, maintained and published
by S&P Dow Jones Indices LLC (“S&P”), consists of stocks of 500 component companies selected to provide a performance
benchmark for the U.S. equity markets. The calculation of the SPX Index is based on the relative value of the float
adjusted aggregate market capitalization of the 500 component companies as of a particular time as compared to the aggregate average
market capitalization of 500 similar companies during the base period of the years 1941 through 1943. For additional
information about the SPX Index, see the information set forth under “Annex A—The S&P 500
®
Index” in this document and “S&P 500
®
Index” in the accompanying index supplement.
The Russell 2000
®
Index
The RTY Index is an index calculated, published and disseminated
by Russell Investments, and measures the composite price performance of stocks of 2,000 companies incorporated in the U.S. and
its territories. All 2,000 stocks are traded on a major U.S. exchange and are the 2,000 smallest securities that form
the Russell 3000
®
Index. The Russell 3000
®
Index is composed of the 3,000 largest U.S.
companies as determined by market capitalization and represents approximately 98% of the U.S. equity market. The RTY
Index consists of the smallest 2,000 companies included in the Russell 3000
®
Index and represents a small portion
of the total market capitalization of the Russell 3000
®
Index. The RTY Index is designed to track the
performance of the small capitalization segment of the U.S. equity market. For additional information about the RTY
Index, see the information set forth under “Annex A—The Russell 2000
®
Index” in this document
and “Russell 2000
®
Index” in the accompanying index supplement.
Index Closing Value Fallback Provisions
The index closing value on any calendar day during the term of
the securities on which the index level of an index is to be determined (each, an “index determination date”) will
equal:
|
·
|
with respect to the SPX Index, the official closing value of such index
as published by the underlying index publisher for the SPX Index or its successor, or in the case of any successor index, the official
closing value for such successor index as published by the publisher of such successor index or its successor, at the regular weekday
close of trading on that calendar day, as determined by the calculation agent; and
|
|
·
|
with respect to the RTY Index, the closing value of such index or any
successor index reported by Bloomberg Financial Services, or any successor reporting service the calculation agent may select,
on such index determination date. The closing value of the RTY Index reported by Bloomberg Financial Services may be
lower or higher than the official closing value of the RTY Index published by the underlying index publisher for such index,
|
provided
that the index closing value
for each index for any day from and including the third index business day prior to the related interest payment date for any interest
payment period shall be the index closing value for such index in effect on such third index business day prior to such interest
payment date;
provided further
that if a market disruption event with respect to an index occurs on any index determination
date (other than the day on which the initial index value of an index is determined or the final determination date) or if any
such index determination date is not an index business day with respect to an index, the closing value of such index for such index
determination date will be the closing value of such index on the immediately preceding index business day for such index on which
no market disruption event has occurred with respect to such index.
If a market disruption event with respect to
an index occurs on the day on which the initial index value of an index is determined or the final determination date, or if any
such date is not an index business day with respect to an index, the relevant date solely with respect to that affected index shall
be the next succeeding index business day with respect to that index on which there is no market disruption event with respect
to that index;
provided
that if a market disruption event with respect to that index has occurred on each of the five index
business days with respect to that index immediately succeeding any such scheduled date, then (i) such fifth succeeding index business
day shall be deemed to be the relevant date with respect to that affected index, notwithstanding the occurrence of a market disruption
event with respect to that index on such day, and (ii) with respect to any such fifth succeeding index business day on which a
market disruption event occurs with respect to that index, the calculation agent shall determine the index closing value on such
fifth succeeding index business day in accordance with the formula for and method of calculating that index last in effect prior
to the commencement of the market disruption event, using the closing price (or, if trading in the relevant securities has been
materially suspended or materially limited, its good faith estimate of the closing price that would have prevailed but for such
suspension or
Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
limitation) at the close of the principal trading
session of the relevant exchange on such index business day of each security most recently constituting that affected index without
any rebalancing or substitution of such securities following the commencement of the market disruption event.
In certain circumstances, the index closing
value of an index shall be based on the alternate calculation of such index described under “Annex A—Discontinuance
of an Index; Alteration of Method of Calculation.”
“Index business day” means, with respect to each
index, a day, as determined by the calculation agent, on which trading is generally conducted on each of the relevant exchange(s)
for such index, other than a day on which trading on such exchange(s) is scheduled to close prior to the time of the posting of
its regular final weekday closing price.
“Relevant exchange” means, with respect to each index,
the primary exchange(s) or market(s) of trading for (i) any security then included in such index, or any successor index, and (ii)
any futures or options contracts related to such index or to any security then included in such index.
For more information regarding market disruption events with
respect to an index, discontinuance of an index and alteration of the method of calculation, see “Annex A—Market Disruption
Event” and “—Discontinuance of an Index; Alteration of Method of Calculation” herein.
Postponement of Maturity Date
If the scheduled final determination date is not an index business
day with respect to an index or if a market disruption event occurs on that day with respect to an index so that the final determination
date is postponed and falls less than two business days prior to the scheduled maturity date, the maturity date of the securities
will be postponed to the second business day following that final determination date, as postponed with respect to an index.
Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
How the Securities Work
How to calculate the interest payments during
the floating interest rate period:
The table below presents examples of hypothetical interest that
would accrue on the securities during any month in the floating interest rate period. The examples below are for purposes
of illustration only. The examples of the hypothetical floating interest rate that would accrue on the securities are
based on both the level of the CMS reference index level on the applicable CMS reference determination date and the total number
of calendar days in a monthly interest payment period on which the index closing value of each index is greater than or equal to
its respective index reference level.
The actual interest payment amounts during the floating interest
rate period will depend on the actual level of the CMS reference index on each CMS reference determination date and the index closing
value of each index on each day during the floating interest payment period. The applicable interest rate for each monthly
interest payment period will be determined on a per-annum basis but will apply only to that interest payment period. The
table assumes that the interest payment period contains 30 calendar days. The examples below are for purposes of illustration
only and would provide different results if different assumptions were made.
CMS
Reference Index
|
20
times
CMS Reference Index*
|
Annualized rate of interest paid
|
Number of days on which the index closing value of
each index
is greater than or equal
to its respective index reference level
|
0
|
5
|
10
|
15
|
20
|
25
|
30
|
-1.300%
|
0.00%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
-1.200%
|
0.00%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
-1.100%
|
0.00%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
-1.000%
|
0.00%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
-0.900%
|
0.00%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
-0.800%
|
0.00%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
-0.700%
|
0.00%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
-0.600%
|
0.00%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
-0.500%
|
0.00%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
-0.400%
|
0.00%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
-0.300%
|
0.00%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
-0.200%
|
0.00%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
-0.100%
|
0.00%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.00%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.000%
|
0.050%
|
1.00%
|
0.000%
|
0.167%
|
0.333%
|
0.500%
|
0.667%
|
0.833%
|
1.000%
|
0.100%
|
2.00%
|
0.000%
|
0.333%
|
0.667%
|
1.000%
|
1.333%
|
1.667%
|
2.000%
|
0.150%
|
3.00%
|
0.000%
|
0.500%
|
1.000%
|
1.500%
|
2.000%
|
2.500%
|
3.000%
|
0.200%
|
4.00%
|
0.000%
|
0.667%
|
1.333%
|
2.000%
|
2.667%
|
3.333%
|
4.000%
|
0.250%
|
5.00%
|
0.000%
|
0.833%
|
1.667%
|
2.500%
|
3.333%
|
4.167%
|
5.000%
|
0.300%
|
6.00%
|
0.000%
|
1.000%
|
2.000%
|
3.000%
|
4.000%
|
5.000%
|
6.000%
|
0.350%
|
7.00%
|
0.000%
|
1.167%
|
2.333%
|
3.500%
|
4.667%
|
5.833%
|
7.000%
|
0.400%
|
8.00%
|
0.000%
|
1.333%
|
2.667%
|
4.000%
|
5.333%
|
6.667%
|
8.000%
|
0.500%
|
10.00%
|
0.000%
|
1.667%
|
3.333%
|
5.000%
|
6.667%
|
8.333%
|
10.000%
|
0.600%
|
10.00%
|
0.000%
|
1.667%
|
3.333%
|
5.000%
|
6.667%
|
8.333%
|
10.000%
|
0.700%
|
10.00%
|
0.000%
|
1.667%
|
3.333%
|
5.000%
|
6.667%
|
8.333%
|
10.000%
|
0.800%
|
10.00%
|
0.000%
|
1.667%
|
3.333%
|
5.000%
|
6.667%
|
8.333%
|
10.000%
|
0.900%
|
10.00%
|
0.000%
|
1.667%
|
3.333%
|
5.000%
|
6.667%
|
8.333%
|
10.000%
|
1.000%
|
10.00%
|
0.000%
|
1.667%
|
3.333%
|
5.000%
|
6.667%
|
8.333%
|
10.000%
|
1.100%
|
10.00%
|
0.000%
|
1.667%
|
3.333%
|
5.000%
|
6.667%
|
8.333%
|
10.000%
|
1.200%
|
10.00%
|
0.000%
|
1.667%
|
3.333%
|
5.000%
|
6.667%
|
8.333%
|
10.000%
|
* Subject to the minimum interest
rate of 0.00% and the maximum interest rate of 10.00%
Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
If 30CMS is less than or equal to 2CMS on the applicable CMS
reference determination date, the floating interest rate will be the minimum interest rate of 0.00% and no interest will accrue
on the securities for such interest period regardless of the total number of calendar days in the interest payment period on which
the index closing value of each index is greater than or equal to its respective index reference level.
If on any day, the index closing value of
either
index
is determined to be less than the index reference level for such index, interest will accrue at a rate of 0.00% per annum for that
day.
Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
How to calculate the payment at maturity:
The following hypothetical examples illustrate how to calculate
the payment at maturity. The following examples are for illustrative purposes only. The amount you will receive
at maturity, if any, will be determined by reference to the index closing value of each index on the final determination date. The
actual initial index value and barrier level for each index will be determined on December 27, 2016. All payments on
the securities, if any, are subject to our credit risk. The below examples are based on the following terms:
Payment at maturity:
|
·
If the final index value of
each
index is
greater than or equal to
its respective barrier level: the stated
principal amount
plus
any accrued and unpaid interest
·
If the final index value of
either
index is
less than
its respective barrier level: (a) the stated principal
amount
times
the index performance factor of the worst performing index
plus
(b) any accrued and unpaid interest.
This
amount will be less than 50% of the stated principal amount of the securities and could be zero.
|
Stated principal amount:
|
$1,000 per security
|
Hypothetical initial index value:
|
With respect to the SPX Index: 2,000
With respect to the RTY Index: 1,200
|
Hypothetical barrier level:
|
With respect to the SPX Index: 1,000, which is 50% of the hypothetical
initial index value for such index
With respect to the RTY Index: 600, which is 50% of the hypothetical
initial index value for such index
|
|
Final Index Value
|
Payment at Maturity
|
SPX Index
|
RTY Index
|
Example 1:
|
1,200 (
at or above
the barrier level)
|
950 (
at or above
the barrier level)
|
The stated principal amount
plus
any accrued and unpaid interest
|
Example 2:
|
1,100 (
at or above
the barrier level)
|
480 (
below
the barrier level)
|
($1,000 x index performance factor of the
worst performing index) + any accrued and unpaid interest
= $1,000 x (480 / 1,200) + any accrued and
unpaid interest
= $400
plus
any accrued and
unpaid interest
|
Example 3:
|
800 (
below
the barrier level)
|
1,000 (
at or above
the barrier level)
|
[$1,000 x (800 / 2,000)]
+
any accrued
and unpaid interest
= $400
plus
any accrued and
unpaid interest
|
Example 4:
|
600 (
below
the barrier level)
|
480 (
below
the barrier level)
|
[$1,000 x (600 / 2,000)]
+
any accrued
and unpaid interest
= $300
plus
any accrued and
unpaid interest
|
Example 5:
|
800 (
below
the barrier level)
|
360 (
below
the barrier level)
|
[$1,000 x (360 / 1,200)]
+
any accrued
and unpaid interest
= $300
plus
any accrued and
unpaid interest
|
Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
In example 1, the final index values of both the SPX Index and
RTY Index are at or above their respective barrier levels. Therefore, investors receive at maturity the stated principal
amount of the securities plus any accrued and unpaid interest.
In examples 2 and 3, the final index value of one index is at
or above its barrier level but the final index value of the other index is below its barrier level. Therefore, investors
are exposed to the downside performance of the worst performing index at maturity and receive at maturity an amount equal to (i)
the stated principal amount
times
the index performance factor of the worst performing index
plus
(ii) any accrued
and unpaid interest.
Similarly, in examples 4 and 5, the final index value of each
index is below its respective barrier level, and investors receive at maturity an amount equal to the stated principal amount
times
the index performance factor of the worst performing index. In example 4, the SPX Index has declined 70% from its
initial index value to its final index value, while the RTY Index has declined 60% from its initial index value to its final index
value. Therefore, the payment at maturity equals (i) the stated principal amount
times
the index performance
factor of the SPX Index, which is the worst performing index in this example,
plus
(ii) any accrued and unpaid interest. In
example 5, the SPX Index has declined 60% from its initial index value, while the RTY Index has declined 70% from its initial index
value to its final index value. Therefore, the payment at maturity equals (i) the stated principal amount
times
the index performance factor of the RTY Index, which is the worst performing index in this example,
plus
(ii) any accrued
and unpaid interest.
If the final index value of EITHER index is below its respective
barrier level, you will be exposed to the downside performance of the worst performing index at maturity, and your payment at maturity
will be less than $500 per security and could be zero.
Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
Historical Information
The CMS Reference Index
The following graph sets forth the historical difference between
the 30-Year ICE Swap Rate and the 2-Year ICE Swap Rate for the period from January 1, 2001 to November 30, 2016 (the “historical
period”). The historical difference between the 30-Year ICE Swap Rate and the 2-Year ICE Swap Rate should not
be taken as an indication of the future performance of the CMS reference index. The graph below does not reflect the
return the securities would have yielded during the period presented because it does not take into account the index closing values
or the leverage factor. We cannot give you any assurance that the level of the CMS reference index will be positive
on any CMS reference determination date. We obtained the information in the graph below, without independent verification,
from Bloomberg Financial Markets (“USSW30 Curncy” and “USSW2 Curncy”), which closely parallel but are not
necessarily exactly the same as the Reuters Page price sources used to determine the level of the CMS reference index.
* The bold line in the graph indicates
the CMS reference index strike of 0.00%.
The historical performance shown above is not indicative of future
performance. The CMS reference index level may be negative on one or more specific CMS reference determination dates
during the floating interest rate period even if the level of the CMS reference index is generally positive and, moreover, the
level of the CMS reference index has in the past been, and may in the future be, negative.
If the level of the CMS reference index is negative on any
CMS reference determination date during the floating interest rate period, you will not receive any interest for the related interest
payment period. Moreover, even if the level of the CMS reference index is positive on any such CMS reference determination
date, if the index closing value of either index is less than the index reference level for such index on any day during the interest
payment period, you will not receive any interest with respect to such day, and if the index closing value of either index remains
below the index reference level for such index for each day in the applicable interest payment period, you will receive no interest
for that interest payment period.
Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
The S&P 500
®
Index
The following table sets forth the published high and low closing
values, as well as end-of-quarter closing values, of the SPX Index for each quarter for the period from January 1, 2011 through
November 30, 2016. The related graph sets forth the daily closing values of the SPX Index for the period from January
1, 2006 through November 30, 2016. The index closing value of the SPX Index on November 30, 2016 was 2,198.81. The
historical index closing values should not be taken as an indication of future performance, and we cannot give you any assurance
that the index closing value of the SPX Index will be higher than its index reference level on any index determination date during
the floating interest rate period in which you are paid the floating interest rate. The graph below does not reflect
the return the securities would have yielded during the period presented because it does not take into account the RTY Index, the
CMS reference index level or the leverage factor. We obtained the information in the table and graph below from Bloomberg
Financial Markets, without independent verification.
S&P 500
®
Index
|
High
|
Low
|
Period End
|
2011
|
|
|
|
First Quarter
|
1,343.01
|
1,256.88
|
1,325.83
|
Second Quarter
|
1,363.61
|
1,265.42
|
1,320.64
|
Third Quarter
|
1,353.22
|
1,119.46
|
1,131.42
|
Fourth Quarter
|
1,285.09
|
1,099.23
|
1,257.60
|
2012
|
|
|
|
First Quarter
|
1,416.51
|
1,277.06
|
1,408.47
|
Second Quarter
|
1,419.04
|
1,278.04
|
1,362.16
|
Third Quarter
|
1,465.77
|
1,334.76
|
1,440.67
|
Fourth Quarter
|
1,461.40
|
1,353.33
|
1,426.19
|
2013
|
|
|
|
First Quarter
|
1,569.19
|
1,457.15
|
1,569.19
|
Second Quarter
|
1,669.16
|
1,541.61
|
1,606.28
|
Third Quarter
|
1,725.52
|
1,614.08
|
1,681.55
|
Fourth Quarter
|
1,848.36
|
1,655.45
|
1,848.36
|
2014
|
|
|
|
First Quarter
|
1,878.04
|
1,741.89
|
1,872.34
|
Second Quarter
|
1,962.87
|
1,815.69
|
1,960.23
|
Third Quarter
|
2,011.36
|
1,909.57
|
1,972.29
|
Fourth Quarter
|
2,090.57
|
1,946.16
|
2,058.90
|
2015
|
|
|
|
First Quarter
|
2,117.39
|
1,992.67
|
2,067.89
|
Second Quarter
|
2,130.82
|
2,057.64
|
2,063.11
|
Third Quarter
|
2,128.28
|
1,867.61
|
1,920.03
|
Fourth Quarter
|
2,109.79
|
1,923.82
|
2,043.94
|
2016
|
|
|
|
First Quarter
|
2,063.95
|
1,829.08
|
2,059.74
|
Second Quarter
|
2,119.12
|
2,000.54
|
2,098.86
|
Third Quarter
|
2,190.15
|
2,088.55
|
2,168.27
|
Fourth Quarter (through November 30, 2016)
|
2,213.35
|
2,085.18
|
2,198.81
|
* The green solid line in the graph indicates
the hypothetical barrier level of the SPX Index, and the red solid line indicates the hypothetical index reference level of the
SPX Index, in each case assuming the index closing value of the SPX Index on November 30, 2016 were its initial index value.
Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
The Russell 2000
®
Index
The following table sets forth the published high and low closing
values, as well as end-of-quarter closing values, of the RTY Index for each quarter for the period from January 1, 2011 through
November 30, 2016. The related graph sets forth the daily closing values of the RTY Index for the period from January
1, 2006 through November 30, 2016. The index closing value of the RTY Index on November 30, 2016 was 1,322.339. The
historical index closing values should not be taken as an indication of future performance, and we cannot give you any assurance
that the index closing value of the RTY Index will be higher than its index reference level on any index determination date during
the floating interest rate period in which you are paid the floating interest rate. The graph below does not reflect
the return the securities would have yielded during the period presented because it does not take into account the SPX Index, the
CMS reference index level or the leverage factor. We obtained the information in the table and graph below from Bloomberg
Financial Markets, without independent verification.
Russell 2000
®
Index
|
High
|
Low
|
Period End
|
2011
|
|
|
|
First Quarter
|
843.55
|
773.18
|
843.55
|
Second Quarter
|
865.29
|
777.20
|
827.43
|
Third Quarter
|
858.11
|
643.42
|
644.16
|
Fourth Quarter
|
765.43
|
609.49
|
740.92
|
2012
|
|
|
|
First Quarter
|
846.13
|
747.28
|
830.30
|
Second Quarter
|
840.63
|
737.24
|
798.49
|
Third Quarter
|
864.70
|
767.75
|
837.45
|
Fourth Quarter
|
852.49
|
769.48
|
849.35
|
2013
|
|
|
|
First Quarter
|
953.07
|
872.60
|
951.54
|
Second Quarter
|
999.99
|
901.51
|
977.48
|
Third Quarter
|
1,078.41
|
989.47
|
1,073.79
|
Fourth Quarter
|
1,163.64
|
1,043.46
|
1,163.64
|
2014
|
|
|
|
First Quarter
|
1,208.651
|
1,093.594
|
1,173.038
|
Second Quarter
|
1,192.964
|
1,095.986
|
1,192.964
|
Third Quarter
|
1,208.150
|
1,101.676
|
1,101.676
|
Fourth Quarter
|
1,219.109
|
1,085.409
|
1,209.969
|
2015
|
|
|
|
First Quarter
|
1,266.373
|
1,154.709
|
1,252.772
|
Second Quarter
|
1,295.799
|
1,215.417
|
1,253.947
|
Third Quarter
|
1,273.328
|
1,083.907
|
1,100.688
|
Fourth Quarter
|
1,204.159
|
1,097.552
|
1,135.889
|
2016
|
|
|
|
First Quarter
|
1,114.028
|
953.715
|
1,114.028
|
Second Quarter
|
1,188.954
|
1,089.646
|
1,151.923
|
Third Quarter
|
1,263.438
|
1,139.453
|
1,251.646
|
Fourth Quarter (through November 30, 2016)
|
1,347.203
|
1,156.885
|
1,322.339
|
* The green solid line in the graph indicates
the hypothetical barrier level of the RTY Index, and the red solid line indicates the hypothetical index reference level of the
RTY Index, in each case assuming the index closing value of the RTY Index on November 30, 2016 were its initial index value.
Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
Risk Factors
The securities involve risks not associated with an investment
in ordinary floating rate securities. An investment in the Leveraged CMS Curve Securities Payments on the Securities
Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index entails significant
risks not associated with similar investments in a conventional debt security, including, but not limited to, fluctuations in 30CMS
and 2CMS, fluctuations in the indices, and other events that are difficult to predict and beyond our 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, index 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.
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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 index value of either index is less than its barrier level, you will be fully
exposed to the decline in the closing value of the worst performing index, as compared to its initial index value, 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 closing value of the worst performing index. Under this scenario,
the value of any such payment will be less than 50% of the stated principal amount and could be zero. You may lose up
to your entire initial investment in the securities.
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You Are Exposed To The Price Risk Of Both Indices.
Your return on the securities
is not linked to a basket consisting of both indices. Rather, it will be contingent upon the independent performance
of each index. Unlike an instrument with a return linked to a basket of underlying assets in which risk is mitigated
and diversified among all the components of the basket, you will be exposed to the risks related to both indices. Poor
performance by either index over the term of the securities may negatively affect your return and will not be offset or mitigated
by any positive performance by the other index. With respect to each interest payment period during the floating interest
rate period, if, on any day, the index closing value of either index is determined to be less than the index reference level for
such index, you will not receive any interest with respect to such day. In addition, if either index has declined to
below its respective barrier level as of the final determination date, you will be fully exposed to the decline in the worst performing
index over the term of the securities on a 1 to 1 basis, even if the other index has appreciated or not declined as much. Under
this scenario, the value of any such payment will be less than 50% of the stated principal amount and could be zero. Accordingly,
your investment is subject to the price risk of both indices.
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Because The Securities Are Linked To The Performance Of The Worst Performing Index, You Are
Exposed To Greater Risks Of Receiving No Interest Payments During The Floating Interest Rate Period And Sustaining A Significant
Loss On Your Investment Than If The Securities Were Linked To Just One Index.
The risk that you will not receive
any interest during the floating interest rate period, or that you will suffer a significant loss on your investment, is greater
if you invest in the securities as opposed to substantially similar securities that are linked to the performance of just one index. With
two indices, it is more likely that either index will close below its index reference level on any day during the floating interest
rate period, or its barrier level on the final determination date, than if the securities were linked to only one index. Therefore,
it is more likely that you will not receive any interest during the floating interest rate period and that you will suffer a significant
loss on your investment.
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Investors Will Not Participate In Any Appreciation In The Value Of Either Index.
Investors
will not participate in any appreciation in the value of either index from the initial index value for such index, and the return
on the securities will be limited to the monthly interest payments that are paid with respect to each interest payment period during
the fixed interest rate period and the floating interest rate period, if any.
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If There Are No Accrual Days In Any Interest Payment Period During The Floating Interest Rate
Period, We Will Not Pay Any Interest On The Securities For That Interest Payment Period And The Market Value Of The Securities
May Decrease Significantly.
It is possible that the level of the CMS reference index will be less than the CMS reference
index strike or that the index closing value of either index will be less than the index reference level for such index for so
many days during any monthly interest payment period during the floating interest rate period that the interest payment for that
monthly interest payment period will be less than the amount that would be paid on an ordinary debt security and may be zero. In
addition, to the extent that the level of the CMS reference index is less than the CMS reference index strike on the applicable
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Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
CMS reference determination date
or
that the index closing value of either index is less than the index reference level for such index on any number of days
during the interest rate period, the market value of the securities may decrease and you may receive substantially less than 100%
of the issue price if you wish to sell your securities at such time.
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The Index Closing Value Of Each Index For Any Day From And Including The Third Index Business
Day Prior To The Interest Payment Date Of An Interest Payment Period During The Floating Interest Rate Period Will Be The Index
Closing Value For Such Index For Such Third Day.
Because the index closing value of each index for any day from
and including the third index business day prior to the interest payment date of an interest payment period during the floating
interest rate period will be the index closing value for such index on such third day, if the index closing value for such index
for that index business day is less than its respective index reference level, you will not receive any interest in respect of
any days on or after that third index business day to but excluding the interest payment date even if the index closing value for
such index as actually calculated on any of those days were to be greater than or equal to its respective index reference
level.
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The Amount Of Interest Payable On The Securities In Any Month Is Capped.
The
interest rate on the securities for each monthly interest payment period during the floating interest rate period is capped for
that month at the maximum interest rate of 10.00% per annum, and, due to the leverage factor, you will not get the benefit of any
increase in the CMS reference index level above a level of 0.50%. Therefore, the maximum monthly interest payment you
can receive during the floating interest rate period will be approximately $8.22 for each $1,000 stated principal amount of securities
(assuming that the interest payment period contains 30 calendar days and the relevant year contains 365 calendar days; the actual
monthly interest payments will depend on the actual number of calendar days in the relevant interest payment period and year). Accordingly,
you could receive less than 10.00% per annum interest for any given full year in the floating interest rate period even when the
CMS reference index level increases substantially in a monthly interest payment period during that year if the CMS reference index
level in the other months in that year does not also increase substantially, or if the index closing value of either index is not
at or above its respective index reference level on any day during the interest payment period so that you do not accrue interest
with respect to such day, as you will not receive the full benefit of the increase in the CMS reference index level in the outperforming
month due to the interest rate cap.
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The Initial Index Value, The Index Reference Level And The Barrier Level Of Each Index Will
Not Be Set Until December 27, 2016.
Because the initial index value of each index is its respective index closing
value on December 27, 2016, and because the index reference level for each index is 70% of the initial index value of such index
and the barrier level for each index is 50% of the initial index value of such index, you may not know the initial index value
or the index reference level or the barrier level for each index for a period of time after the pricing date.
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The Historical Performance Of 30CMS, 2CMS And The Indices Are Not An Indication Of Their Future
Performance.
The historical performance of 30CMS, 2CMS and the indices should not be taken as indications of their
future performance during the term of the securities. Changes in the levels of 30CMS, 2CMS and the indices will affect
the trading price of the securities, but it is impossible to predict whether such levels will rise or fall. There can
be no assurance that the CMS reference index level will be positive and the index closing value of each index will be equal to
or greater than its respective index reference level on any CMS reference determination date during the floating interest rate
period. In addition, there can be no assurance that the index closing value of each index on the final determination
date will be greater than or equal to its respective barrier level.
Furthermore, the historical performance of each
of the CMS reference index and the indices does not reflect the return the securities would have yielded, because each does not
take into account the other’s performance, the leverage factor or the maximum interest rate.
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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 interest payment dates and at maturity and therefore investors are subject
to our credit risk. 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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Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
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As A Finance Subsidiary, MSFL Has No Independent Operations And Will
Have No Independent Assets.
As a finance subsidiary, MSFL has no independent operations beyond the issuance and
administration of its securities and will have no independent assets available for distributions to holders of MSFL securities
if they make claims in respect of such securities in a bankruptcy, resolution or similar proceeding. Accordingly, any
recoveries by such holders will be limited to those available under the related guarantee by Morgan Stanley and that guarantee
will rank
pari passu
with all other unsecured, unsubordinated obligations of Morgan Stanley. Holders will have
recourse only to a single claim against Morgan Stanley and its assets under the guarantee. Holders of securities issued
by MSFL should accordingly assume that in any such proceedings they would not have any priority over and should be treated
pari
passu
with the claims of other unsecured, unsubordinated creditors of Morgan Stanley, including holders of Morgan Stanley-issued
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) changes in the level of 30CMS and 2CMS, (ii) changes in the index closing values of
the indices, (iii) volatility of 30CMS and 2CMS, (iv) volatility of the indices, (v) changes in interest and yield rates, (vi)
geopolitical conditions and economic, financial, political and regulatory or judicial events that affect the securities underlying
the indices, or equity markets generally, and that may affect the indices, (vii) any actual or anticipated changes in our credit
ratings or credit spreads and (viii) 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 CMS reference index is less than the CMS reference index strike or the index closing value of either
index is less than its respective index reference level during the floating interest rate period, especially if the index closing
value of either index is near its respective barrier level, the market value of the securities is expected to decrease and you
may receive substantially less than 100% of the issue price if you 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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Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
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The Price You Pay For The Securities May Be Higher Than The Prices Paid By Other Investors.
The
agent proposes to offer the securities from time to time for sale to investors in one or more negotiated transactions, or otherwise,
at market prices prevailing at the time of sale, at prices related to then-prevailing prices, at negotiated prices, or otherwise. Accordingly,
there is a risk that the price you pay for the securities will be higher than the prices paid by other investors based on the date
and time you make your purchase, from whom you purchase the securities (e.g., directly from the agent or through a broker or dealer),
any related transaction cost (e.g., any brokerage commission), whether you hold your securities in a brokerage account, a fiduciary
or fee-based account or another type of account and other market factors.
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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 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 Morgan Stanley And An Affiliate of
MSFL, 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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Our 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.
One or more of our affiliates may, at
present or in the future, publish research reports with respect to movements in interest rates generally or each of the components
making up the CMS reference index specifically, or with respect to the indices. This research is modified from time
to time without notice to you 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, our affiliates
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 Morgan Stanley And An Affiliate Of MSFL, Will
Make Determinations With Respect To The Securities.
Any of these determinations made by the calculation agent may
adversely affect the payout to investors. Moreover, certain determinations made by the calculation agent may require
it to exercise discretion and make subjective judgments, such as with respect to the CMS reference index, the index closing values,
the occurrence or non-occurrence of market disruption events and the selection of a successor index or calculation of the index
closing value of an index in the event of a market disruption event or discontinuance of such index. These potentially
subjective determinations may adversely affect the payout to you on the securities, if any. For further information
regarding these types of determinations, see “Annex A—Market Disruption Event,” “—Discontinuance
of an Index; Alteration of Method of Calculation” and the related definitions.
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The Securities Are Linked To The Russell 2000
®
Index And Are Subject To Risks Associated With Small-Capitalization Companies.
As the RTY Index is one of the indices,
and the RTY Index consists of stocks issued by companies with relatively small market capitalization, the securities are linked
to the value of small-capitalization companies. These companies often have greater stock price volatility, lower trading
volume and less liquidity than large-capitalization companies and therefore the RTY Index may be more volatile than indices that
consist of stocks issued by large-capitalization companies. Stock prices of small-capitalization companies are also
more vulnerable than those of large-capitalization companies to adverse business and economic developments, and the stocks of small-capitalization
companies may be thinly traded. In addition, small capitalization companies are typically less well-established and
less stable financially than large-capitalization companies and may depend on a small number of key personnel, making them more
vulnerable to loss of personnel. Such companies tend to have smaller revenues, less diverse product lines, smaller shares
of their product or service markets, fewer financial resources and less competitive strengths than large-capitalization companies
and are more susceptible to adverse developments related to their products.
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Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
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Adjustments To The Indices Could Adversely Affect The Value Of The Securities.
The
underlying index publisher for each index can add, delete or substitute the stocks underlying such index, and can make other methodological
changes required by certain events relating to the underlying stocks, such as stock dividends, stock splits, spin-offs, rights
offerings and extraordinary dividends, that could change the value of such index. Any of these actions could adversely
affect the value of the securities. Each underlying index publisher may also discontinue or suspend calculation or publication
of such index at any time. In these circumstances, the calculation agent will have the sole discretion to substitute
a successor index that is comparable to the discontinued index. The calculation agent could have an economic interest
that is different than that of investors in the securities insofar as, for example, the calculation agent is permitted to consider
indices that are calculated and published by the calculation agent or any of its affiliates. If the calculation agent
determines that there is no appropriate successor index, on any day on which the index closing value of an index is to be determined,
the index closing value for such day will be based on the stocks underlying the discontinued index at the time of such discontinuance,
without rebalancing or substitution, computed by the calculation agent, in accordance with the formula for calculating the index
closing value for such index last in effect prior to the discontinuance of such index.
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You Have No Shareholder Rights.
As an investor in the securities, you will
not have voting rights, rights to receive dividends or other distributions or any other rights with respect to the stocks that
underlie the indices.
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Investing In The Securities Is Not Equivalent To Investing In The Indices Or The Stocks Underlying
The Indices.
Investing in the securities is not equivalent to investing in the indices or their component stocks.
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Hedging And Trading Activity By Our Affiliates Could Potentially Adversely Affect The Value
Of The Indices.
One or more of our affiliates expect to carry out hedging activities related to the securities (and
possibly to other instruments linked to the indices or their component stocks), including trading in the stocks underlying the
indices as well as in other instruments related to the indices. As a result, we may be unwinding or adjusting hedge
positions during the floating interest rate period, and our hedging strategy may involve greater and more frequent dynamic adjustments
to our hedge as we approach the final determination date. Some of our affiliates also trade in the stocks underlying
the indices and other financial instruments related to the indices on a regular basis as part of their general broker-dealer and
other businesses. Any of these hedging or trading activities could potentially decrease the index closing value of an
index, thus increasing the risk that the index closing value of such index will be less than its respective index reference level
on any day during the floating interest rate period or less than its respective barrier level on the final determination date.
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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 “other income” or similar provision, and will
not be required to pay any additional amounts with respect to amounts withheld.
Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk 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. 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.
Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
Principal at Risk Securities
Use of Proceeds and Hedging
The proceeds from the sale of the securities will be used by
us 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 December 30, 2016, which will be the scheduled business day following the date of
the pricing of the securities. Under Rule 15c6-1 of the Exchange Act, trades in the secondary market generally are required
to settle in three business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers
who wish to trade securities on the date of pricing or on or prior to the third business day prior to the original issue date will
be required to specify alternative settlement arrangements to prevent a failed settlement.
The securities will be offered from time to time in one or more
negotiated transactions at varying prices to be determined at the time of each sale, which may be at market prices prevailing,
at prices related to such prevailing prices or at negotiated prices;
provided
, however, that such price will not be less
than $970 per security and will not be more than $1,000 per security.
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 an affilitate of MSFL and a wholly owned subsidiary
of Morgan Stanley, and it and other affiliates 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.
Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
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.
Morgan Stanley Finance LLC
Fixed to Floating Rate Securities due 2036
Leveraged CMS Curve Securities
Payments on the Securities Based on the Worst Performing of the S&P 500
®
Index and the Russell 2000
®
Index
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
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. 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. 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 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
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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 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. It is also possible in light of this uncertainty that an applicable withholding agent will treat
gross proceeds of a disposition (including upon retirement) of the securities after 2018 as being 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.
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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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Annex A
The S&P 500
®
Index
The S&P 500
®
Index, which is calculated, maintained and published by S&P Dow Jones Indices LLC (“S&P”), consists of stocks
of 500 component companies selected to provide a performance benchmark for the U.S. equity markets. The calculation
of the S&P 500
®
Index is based on the relative value of the float adjusted aggregate market capitalization of
the 500 component companies as of a particular time as compared to the aggregate average market capitalization of 500 similar companies
during the base period of the years 1941 through 1943.
For additional information
about the S&P 500
®
Index, see the information set forth under “S&P 500
®
Index”
in the accompanying index supplement.
License Agreement between S&P and Morgan Stanley
“Standard & Poor’s
®
,” “S&P
®
,”
“S&P 500
®
,” “Standard & Poor’s 500” and “500” are trademarks of
Standard & Poor’s Financial Services LLC and have been licensed for use by S&P Dow Jones Indices LLC and Morgan Stanley. For
more information, see “S&P 500
®
Index—License Agreement between S&P and Morgan Stanley”
in the accompanying index supplement.
The Russell 2000
®
Index
The Russell 2000
®
Index is an index calculated, published and disseminated by Russell Investments, and measures the composite price performance of
stocks of 2,000 companies incorporated in the U.S. and its territories. All 2,000 stocks are traded on a major U.S.
exchange and are the 2,000 smallest securities that form the Russell 3000
®
Index. The Russell 3000
®
Index is composed of the 3,000 largest U.S. companies as determined by market capitalization and represents approximately 98% of
the U.S. equity market. The Russell 2000
®
Index consists of the smallest 2,000 companies included in
the Russell 3000
®
Index and represents a small portion of the total market capitalization of the Russell 3000
®
Index. The Russell 2000
®
Index is designed to track the performance of the small capitalization segment
of the U.S. equity market. For additional information about the Russell 2000
®
Index, see the information
set forth under “Russell 2000
®
Index” in the accompanying index supplement.
License Agreement between Russell Investments and Morgan Stanley
The “Russell 2000
®
Index” is a trademark
of Russell Investments and has been licensed for use by Morgan Stanley. For more information, see “Russell 2000
®
Index—License Agreement between Russell Investments and Morgan Stanley” in the accompanying index supplement.
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Market Disruption Event
With respect to each index, market disruption event means:
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(i)
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the occurrence or existence of any of:
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(a) a suspension, absence or material
limitation of trading of securities then constituting 20 percent or more of the value of such index (or a successor index) on the
relevant exchange(s) for such securities for more than two hours of trading or during the one-half hour period preceding the close
of the principal trading session on such relevant exchange(s), or
(b) a breakdown or failure in the
price and trade reporting systems of any relevant exchange as a result of which the reported trading prices for securities then
constituting 20 percent or more of the value of such index (or a successor index) during the last one-half hour preceding the close
of the principal trading session on such relevant exchange(s) are materially inaccurate, or
(c) the suspension, material limitation
or absence of trading on any major U.S. securities market for trading in futures or options contracts or exchange-traded funds
related to such index (or a successor index) for more than two hours of trading or during the one-half hour period preceding the
close of the principal trading session on such market, in each case, as determined by the calculation agent in its sole discretion;
and
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(ii)
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a determination by the calculation agent in its sole discretion that any event described in clause (i) above materially interfered
with our ability or the ability of any of our affiliates to unwind or adjust all or a material portion of the hedge position with
respect to the securities.
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For the purpose of determining whether a market disruption event
exists at any time with respect to an index, if trading in a security included in such index is materially suspended or materially
limited at that time, then the relevant percentage contribution of that security to the value of such index shall be based on a
comparison of (x) the portion of the value of such index attributable to that security relative to (y) the overall value of such
index, in each case immediately before that suspension or limitation.
For the purpose of determining whether a market disruption event
exists at any time with respect to an index: (1) a limitation on the hours or number of days of trading will not constitute a market
disruption event if it results from an announced change in the regular business hours of the relevant exchange or market, (2) a
decision to permanently discontinue trading in the relevant futures or options contract or exchange-traded fund will not constitute
a market disruption event, (3) a suspension of trading in futures or options contracts or exchange-traded funds on such index by
the primary securities market trading in such contracts or funds by reason of (a) a price change exceeding limits set by such securities
exchange or market, (b) an imbalance of orders relating to such contracts or funds or (c) a disparity in bid and ask quotes relating
to such contracts or funds will constitute a suspension, absence or material limitation of trading in futures or options contracts
or exchange-traded funds related to such index and (4) a “suspension, absence or material limitation of trading” on
any relevant exchange or on the primary market on which futures or options contracts or exchange-traded funds related to such index
are traded will not include any time when such securities market is itself closed for trading under ordinary circumstances.
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Discontinuance of an Index; Alteration of Method
of Calculation
If any underlying index publisher discontinues publication of
an index and such underlying index publisher or another entity (including MS & Co.) publishes a successor or substitute index
that the calculation agent determines, in its sole discretion, to be comparable to the discontinued index (such index being referred
to herein as the “successor index”), then any subsequent index closing value for the discontinued index will be determined
by reference to the published value of such successor index at the regular weekday close of trading on any index business day that
the index closing value for such index is to be determined, and, to the extent the index closing value of the successor index differs
from the index closing value of the relevant index at the time of such substitution, proportionate adjustments will be made by
the calculation agent to the initial index value, index reference level and barrier level for such index.
Upon any selection by the calculation agent of a successor index,
the calculation agent will cause written notice thereof to be furnished to the trustee, to us and to the depositary, as holder
of the securities, within three business days of such selection. We expect that such notice will be made available to
you, as a beneficial owner of the securities, in accordance with the standard rules and procedures of the depositary and its direct
and indirect participants.
If any underlying index publisher discontinues publication of
an index or a successor index prior to, and such discontinuance is continuing on, any date on which the index closing value for
such index is to be determined and the calculation agent determines, in its sole discretion, that no successor index is available
at such time, then the calculation agent will determine the index closing value for such index for such date. The index
closing value of such index or such successor index will be computed by the calculation agent in accordance with the formula for
and method of calculating such index last in effect prior to such discontinuance, using the closing price (or, if trading in the
relevant securities has been materially suspended or materially limited, its good faith estimate of the closing price that would
have prevailed but for such suspension or limitation) at the close of the principal trading session of the relevant exchange on
such date of each security most recently constituting such index without any rebalancing or substitution of such securities following
such discontinuance. Notwithstanding these alternative arrangements, discontinuance of the publication of an index may
adversely affect the value of the securities.
If at any time, the method
of calculating any index or any successor index, or the value thereof, is changed in a material respect, or if any index or any
successor index is in any other way modified so that such index does not, in the opinion of the calculation agent, fairly represent
the value of such index had such changes or modifications not been made, then, from and after such time, the calculation agent
will, at the close of business in New York City on each date on which the index closing value for such index is to be determined,
make such calculations and adjustments as, in the good faith judgment of the calculation agent, may be necessary in order to arrive
at a value of a stock index comparable to such index or such successor index, as the case may be, as if such changes or modifications
had not been made, and the calculation agent will calculate the index closing value with reference to such index or such successor
index, as adjusted. Accordingly, if the method of calculating any index or any successor index is modified so that the
value of such index is a fraction of what it would have been if it had not been modified (e.g., due to a split in such index),
then the calculation agent will adjust such index in order to arrive at a value of such index or such successor index as if it
had not been modified (e.g., as if such split had not occurred).
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