Please read this information in conjunction
with the summary terms on the front cover of this document.
Additional Terms:
|
If
the terms described herein are inconsistent with those described in the accompanying product supplement or prospectus, the
terms described herein shall control.
|
Denominations:
|
$1,000
and integral multiples thereof
|
Interest:
|
None
|
Underlying index publisher:
|
MS & Co. or any successor thereof
|
Bull or bear notes:
|
Bull
notes
|
Call right:
|
The notes are not subject to an issuer discretionary call right.
|
Market disruption event:
|
The following provision supersedes in its entirety “Description
of Equity-Linked Notes—General Terms of the Notes—market disruption event” in the accompanying product supplement:
“Market disruption event” means the occurrence or
existence of any of the following events with respect to any ETF included in the underlying index, as determined by the calculation
agent in its sole discretion:
(i) (a) the occurrence or existence of a suspension, absence or
material limitation of trading of the ETF on the primary market for the ETF for more than two hours of trading or during the one-half
hour period preceding the close of the principal trading session in such market; or
(b) a breakdown or failure in the price and trade reporting systems
of the primary market for the ETF as a result of which the reported trading prices for the ETF during the last one-half hour preceding
the close of the principal trading session in such market are materially inaccurate; or the suspension, absence or material limitation
of trading on the primary market for trading in futures or options contracts related to the ETF, if available, during the one-half
hour period preceding the close of the principal trading session in the applicable market; or
(c) the suspension, material limitation or absence of trading
on any major U.S. securities market for trading in futures or options contracts related to, if applicable, the ETF underlying index
or the ETF 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; and
(ii) a determination by the calculation agent in its sole discretion
that any event described in clause (a), (b) or (c) 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 notes.
For the purpose of determining whether a market disruption event
exists at any time, if trading in an ETF included in the underlying index is materially suspended or materially limited at that
time, then the relevant percentage contribution of that ETF to the value of the underlying index shall be based on a comparison
of (x) the portion of the value of the underlying index attributable to that ETF relative to (y) the overall value of the underlying
index, in each case immediately before the suspension or limitation.
For the purpose of determining whether a market disruption event
has occurred: (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 ETF or in futures or options contract related to the ETF underlying index or the ETF will not constitute a market
disruption event, (3) a suspension of trading in futures or options contracts on the ETF underlying index or the ETF by the primary
securities market trading in such contracts 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 (c) a disparity in bid and ask quotes relating to such contracts
will constitute a suspension, absence or material limitation of trading in futures or options contracts related to the ETF underlying
index or the ETF 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 related to the ETF underlying index or the ETF are traded will not include
any time when such securities market is itself closed for trading under ordinary circumstances.
|
Relevant exchange:
|
The following provision supersedes in its entirety “Description
of Equity-Linked Notes—General Terms of the Notes—relevant exchange” in the accompanying product supplement:
The primary exchange(s) or market(s) of trading
for any ETF then-included in the underlying index, or any successor index.
|
Postponement of determination date:
|
If a market disruption event with respect to the underlying index occurs on any scheduled determination date, or if any scheduled determination date is not an index business day, the index closing value for such day shall be determined on the immediately succeeding index business day on which no market disruption event shall have occurred with respect to the underlying index;
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M
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Jump Notes with Auto-Callable Feature due June 30, 2026
Based on the Value of the Morgan Stanley MAP Trend Index
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provided
that the index closing value of the underlying index for any scheduled determination date will not be determined on a date later than the fifth scheduled index business day after such scheduled determination date, and if such date is not an index business day or if there is a market disruption event on such date, the calculation agent shall determine the index closing value of the underlying index on such date in accordance with the formula for calculating the underlying index last in effect prior to the commencement of the market disruption event (or prior to the non-index business day), without rebalancing or substitution, 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, limitation or non-Index business day) on such date of each ETF most recently constituting the underlying index.
|
Postponement of maturity date and early redemption dates:
|
If any determination date is postponed due to a non-index business day or certain market disruption events so that it falls less than two business days prior to the relevant scheduled early redemption date or maturity date, as applicable, the early redemption date or maturity date, as applicable, will be postponed to the second business day following that determination date as postponed, and no adjustment will be made to any early redemption payment or the payment at maturity made on such postponed date.
|
Discontinuance of the underlying index:
|
The following provision supersedes in its entirety “Description
of Equity-Linked Notes—Discontinuance of Any Underlying Index or Basket Index; Alteration of Method of Calculation”
in the accompanying product supplement:
If the underlying index publisher discontinues publication of
the underlying index and such underlying index publisher or another entity publishes a successor or substitute index that MS &
Co., as the calculation agent, determines, in its sole discretion, to be comparable to the discontinued underlying index (such
index being referred to herein as a “successor index”), then any subsequent index closing value 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 is to be determined, and, to the extent the index closing value of such successor index differs from the
index closing value of the underlying index at the time of such substitution, proportionate adjustments will be made by the calculation
agent to the initial index value and redemption threshold levels.
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 Trust Company,
New York, New York (“DTC”), as holder of such notes, within three business days of such selection. We expect that such
notice will be made available to you, as a beneficial owner of the relevant notes, in accordance with the standard rules and procedures
of DTC and its direct and indirect participants.
If the underlying index publisher discontinues publication of
the underlying index and the calculation agent determines, in its sole discretion, that no successor index is available, then,
on the date of such determination, the calculation agent will determine, in good faith and in a commercially reasonable manner,
an alternative payment amount, which will equal its estimate of the value, if any, of the investors’ forgone opportunity
to receive any subsequent payments on the notes, determined by reference to the calculation agent’s pricing models, inputs,
assumptions about future market conditions including, without limitation, the volatility of the MAP Trend Index and its components
and current and expected interest rates. The alternative payment amount, if any, will be paid at maturity.
|
Equity-linked notes:
|
All references to “equity-linked notes” or related terms in the accompanying product supplement for equity-linked notes shall be deemed to refer to jump notes with auto-callable feature when read in conjunction with this document.
|
Trustee:
|
The Bank of New York Mellon
|
Calculation agent:
|
MS & Co.
|
Issuer notice to registered note holders, the trustee and the depositary:
|
In the event that the maturity date is postponed
due to postponement of the final determination date, the issuer shall give notice of such postponement and, once it has been determined,
of the date to which the maturity date has been rescheduled (i) to each registered holder of the notes by mailing notice of such
postponement by first class mail, postage prepaid, to such registered holder’s last address as it shall appear upon the registry
books, (ii) to the trustee by facsimile, confirmed by mailing such notice to the trustee by first class mail, postage prepaid,
at its New York office and (iii) to The Depository Trust Company (the “depositary”) by telephone or facsimile, confirmed
by mailing such notice to the depositary by first class mail, postage prepaid. Any notice that is mailed to a registered holder
of the notes in the manner herein provided shall be conclusively presumed to have been duly given to such registered holder, whether
or not such registered holder receives the notice. The issuer shall give such notice as promptly as possible, and in no case later
than (i) with respect to notice of postponement of the maturity date, the business day immediately preceding the scheduled maturity
date, and (ii) with respect to notice of the date to which the maturity date has been rescheduled, the business day immediately
following the actual final determination date for determining the final index value.
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M
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Jump Notes with Auto-Callable Feature due June 30, 2026
Based on the Value of the Morgan Stanley MAP Trend Index
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In the event that the notes are subject to
early redemption, the issuer shall, (i) on the business day following the applicable determination date, give notice of the early
redemption and the early redemption payment, including specifying the payment date of the amount due upon the early redemption,
(x) to each registered holder of the notes by mailing notice of such early redemption by first class mail, postage prepaid, to
such registered holder’s last address as it shall appear upon the registry books, (y) to the trustee by facsimile confirmed
by mailing such notice to the trustee by first class mail, postage prepaid, at its New York office and (z) to the depositary by
telephone or facsimile confirmed by mailing such notice to the depositary by first class mail, postage prepaid and (ii) on or prior
to the early redemption date, deliver the aggregate cash amount due with respect to the notes to the trustee for delivery to the
depositary, as holder of the notes. Any notice that is mailed to a registered holder of the notes in the manner herein provided
shall be conclusively presumed to have been duly given to such registered holder, whether or not such registered holder receives
the notice. This notice shall be given by the issuer or, at the issuer’s request, by the trustee in the name and at the expense
of the issuer, with any such request to be accompanied by a copy of the notice to be given.
The issuer shall, or shall cause the calculation
agent to, (i) provide written notice to the trustee at its New York office, on which notice the trustee may conclusively rely,
and to the depositary of the payment at maturity on or prior to 10:30 a.m. (New York City time) on the business day preceding the
maturity date and (ii) deliver the aggregate cash amount due with respect to the notes to the trustee for delivery to the depositary,
as holder of the notes, on the maturity date.
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M
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F
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Jump Notes with Auto-Callable Feature due June 30, 2026
Based on the Value of the Morgan Stanley MAP Trend Index
Additional Information About the Notes
Additional Information:
|
Minimum ticketing size:
|
$1,000 / 1 note
|
Tax considerations:
|
In the opinion of our counsel, Davis Polk & Wardwell LLP,
the notes should be treated as “contingent payment debt instruments” for U.S. federal income tax purposes, as described
in the section of the accompanying product supplement called “United States Federal Taxation—Tax Consequences to U.S.
Holders.” Under this treatment, if you are a U.S. taxable investor, you generally will be subject to annual income tax based
on the “comparable yield” (as defined in the accompanying product supplement) of the notes, adjusted upward or downward
to reflect the difference, if any, between the actual and projected amount of the payments on the notes. Although it is not clear
how the comparable yield should be determined for notes that may be automatically redeemed before maturity, our counsel has advised
that it is reasonable to determine the comparable yield based on the stated maturity date. The comparable yield will be determined
on the pricing date and may be significantly higher or lower than the comparable yield if the notes were priced on the date hereof.
The comparable yield and the projected payment schedule (or information about how to obtain them) will be provided in the final
pricing supplement. In addition, any gain recognized by U.S. taxable investors on the sale or exchange, or at maturity, of the
notes generally will be treated as ordinary income.
You should read the discussion under “United States Federal
Taxation” in the accompanying product supplement concerning the U.S. federal income tax consequences of an investment in
the notes.
|
|
The comparable yield and the projected payment schedule will
not be provided for any purpose other than the determination of U.S. Holders’ accruals of interest income and adjustments
thereto in respect of the notes for U.S. federal income tax purposes, and we make no representation regarding the actual amount
of the payments that will be made on the notes.
If you are a non-U.S. investor, please also read the section of
the accompanying product supplement called “United States Federal Taxation—Tax Consequences to Non-U.S. Holders.”
As discussed in the accompanying product supplement, Section 871(m)
of the Internal Revenue Code of 1986, as amended (the “Code”), and Treasury regulations promulgated thereunder (“Section
871(m)”) generally impose a 30% (or a lower applicable treaty rate) withholding tax on dividend equivalents paid or deemed
paid to Non-U.S. Holders with respect to certain financial instruments linked to U.S. equities or indices that include U.S. equities
(each, an “Underlying Security”). Subject to certain exceptions, Section 871(m) generally applies to securities that
substantially replicate the economic performance of one or more Underlying Securities, as determined based on tests set forth in
the applicable Treasury regulations (a “Specified Security”). However, pursuant to an Internal Revenue Service (“IRS”)
notice, Section 871(m) will not apply to securities issued before January 1, 2021 that do not have a delta of one with respect
to any Underlying Security. Based on the terms of the notes and current market conditions, we expect that the notes will not have
a delta of one with respect to any Underlying Security on the pricing date. However, we will provide an updated determination in
the final pricing supplement. Assuming that the notes do not have a delta of one with respect to any Underlying Security, our counsel
is of the opinion that the notes should not be Specified Securities and, therefore, should not be subject to Section 871(m). Our
determination is not binding on the IRS, and the IRS may disagree with this determination. Section 871(m) is complex and its application
may depend on your particular circumstances, including whether you enter into other transactions with respect to an Underlying
Security.
If withholding is required, we will not be required to pay any additional amounts with respect to the amounts so withheld.
You should consult your tax adviser regarding the potential application of Section 871(m) to the notes.
In addition, as discussed in the accompanying product supplement,
withholding rules commonly referred to as “FATCA” apply to certain financial instruments (including the notes) with
respect to payments of amounts treated as interest and to any payment of gross proceeds of a disposition (including retirement)
of such an instrument. However, recently proposed regulations (the preamble to which specifies that taxpayers are permitted to
rely on them pending finalization) eliminate the withholding requirement on payments of gross proceeds of a taxable disposition.
|
|
You should consult your tax adviser regarding all aspects of the U.S. federal income tax consequences of an investment in the notes, as well as any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction. Moreover, neither this document nor the accompanying product supplement addresses the consequences to taxpayers subject to special tax accounting rules under Section 451(b) of the Code.
|
|
The discussion in the preceding paragraphs under “Tax considerations” and the discussion contained in the section entitled “United States Federal Taxation” in the accompanying product supplement, insofar as they purport to describe provisions of U.S. federal income tax laws or legal conclusions with respect thereto, constitute the full opinion of Davis Polk & Wardwell LLP regarding the material U.S. federal tax consequences of an investment in the notes.
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M
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LLC
Jump Notes with Auto-Callable Feature due June 30, 2026
Based on the Value of the Morgan Stanley MAP Trend Index
Use of proceeds and hedging:
|
The proceeds from the sale of the notes will be used by us for
general corporate purposes. We will receive, in aggregate, $1,000 per note issued, because, when we enter into hedging transactions
in order to meet our obligations under the notes, our hedging counterparty will reimburse the cost of the agent’s commissions.
The costs of the notes borne by you and described beginning on page 3 above comprise the agent’s commissions and the cost
of issuing, structuring and hedging the notes.
On or prior to the pricing date, we expect to hedge our anticipated
exposure in connection with the notes by entering into hedging transactions with our affiliates and/or third party dealers. We
expect our hedging counterparties to take positions in the component ETFs of the underlying index, in options contracts on the
component ETFs, or in any other available securities or instruments that they may wish to use in connection with such hedging.
Such purchase activity could increase the value of the underlying index on the pricing date, and, therefore (i) the values at or
above which the underlying index must close on the determination dates so that the notes are redeemed prior to maturity for the
early redemption payment and (ii) the value above which the underlying index must close on the final determination date, if the
notes are not redeemed prior to maturity, so that you would receive at maturity a payment that exceeds the stated principal amount
of the notes. In addition, through our affiliates, we are likely to modify our hedge position throughout the term of the notes,
including on the determination date, by purchasing and selling the component ETFs or positions in any other available securities
or instruments that we may wish to use in connection with such hedging activities. As a result, these entities may be unwinding
or adjusting hedge positions during the term of the notes, and the hedging strategy may involve greater and more frequent dynamic
adjustments to the hedge as the determination date approaches. We cannot give any assurance that our hedging activities will not
affect the value of the underlying index, and, therefore, adversely affect the value of the notes or the payment you will receive
at maturity. For further information on our use of proceeds and hedging, see “Use of Proceeds and Hedging” in the accompanying
product supplement.
|
Benefit plan investor considerations:
|
Each fiduciary of a pension, profit-sharing or other employee
benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) (a “Plan”),
should consider the fiduciary standards of ERISA in the context of the Plan’s particular circumstances before authorizing
an investment in the notes. Accordingly, among other factors, the fiduciary should consider whether the investment would satisfy
the prudence and diversification requirements of ERISA and would be consistent with the documents and instruments governing the
Plan.
In addition, we and certain of our affiliates, including MS &
Co., may each be considered a “party in interest” within the meaning of ERISA, or a “disqualified person”
within the meaning of the Internal Revenue Code of 1986, as amended (the “Code”), with respect to many Plans, as well
as many individual retirement accounts and Keogh plans (such accounts and plans, together with other plans, accounts and arrangements
subject to Section 4975 of the Code, also “Plans”). ERISA Section 406 and Code Section 4975 generally prohibit transactions
between Plans and parties in interest or disqualified persons. Prohibited transactions within the meaning of ERISA or the Code
would likely arise, for example, if the notes are acquired by or with the assets of a Plan with respect to which MS & Co. or
any of its affiliates is a service provider or other party in interest, unless the notes are acquired pursuant to an exemption
from the “prohibited transaction” rules. A violation of these “prohibited transaction” rules could result
in an excise tax or other liabilities under ERISA and/or Section 4975 of the Code for those persons, unless exemptive relief is
available under an applicable statutory or administrative exemption.
The U.S. Department of Labor has issued five prohibited transaction
class exemptions (“PTCEs”) that may provide exemptive relief for direct or indirect prohibited transactions resulting
from the purchase or holding of the notes. Those class exemptions are PTCE 96-23 (for certain transactions determined by in-house
asset managers), PTCE 95-60 (for certain transactions involving insurance company general accounts), PTCE 91-38 (for certain transactions
involving bank collective investment funds), PTCE 90-1 (for certain transactions involving insurance company separate accounts)
and PTCE 84-14 (for certain transactions determined by independent qualified professional asset managers). In addition, ERISA Section
408(b)(17) and Code Section 4975(d)(20) provide an exemption for the purchase and sale of securities and the related lending transactions,
provided that neither the issuer of the securities nor any of its affiliates has or exercises any discretionary authority or control
or renders any investment advice with respect to the assets of the Plan involved in the transaction and provided further that the
Plan pays no more, and receives no less, than “adequate consideration” in connection with the transaction (the so-called
“service provider” exemption). There can be no assurance that any of these class or statutory exemptions will be available
with respect to transactions involving the notes.
Because we may be considered a party in interest with respect
to many Plans, the notes may not be purchased, held or disposed of by any Plan, any entity whose underlying assets include “plan
assets” by reason of any Plan’s investment in the entity (a “Plan Asset Entity”) or any person investing
“plan assets” of any Plan, unless such purchase, holding or disposition is eligible for exemptive relief, including
relief available under PTCEs 96-23, 95-60, 91-38, 90-1, 84-14 or the service provider exemption or such purchase, holding or disposition
is otherwise not prohibited. Any purchaser, including any fiduciary purchasing on behalf of a Plan, transferee or holder of the
notes will be deemed to have represented, in its corporate and its fiduciary capacity, by its purchase and holding of the notes
that either (a) it is not a Plan or a Plan Asset Entity and is not purchasing such notes on behalf of or with “plan assets”
of any Plan or with any assets of a governmental, non-U.S. or church plan that is subject to any federal, state, local or non-U.S.
law that is substantially similar to the provisions of Section 406 of ERISA or Section 4975 of the Code
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M
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Jump Notes with Auto-Callable Feature due June 30, 2026
Based on the Value of the Morgan Stanley MAP Trend Index
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(“Similar Law”) or (b) its purchase, holding and disposition
of these notes will not constitute or result in a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975
of the Code or violate any Similar Law.
Due to the complexity of these rules and the penalties that may
be imposed upon persons involved in non-exempt prohibited transactions, it is particularly important that fiduciaries or other
persons considering purchasing the notes on behalf of or with “plan assets” of any Plan consult with their counsel
regarding the availability of exemptive relief.
Each purchaser and holder of the notes has exclusive responsibility
for ensuring that its purchase, holding and disposition of the notes do not violate the prohibited transaction rules of ERISA or
the Code or any Similar Law. The sale of any notes to any Plan or plan subject to Similar Law is in no respect a representation
by us or any of our affiliates or representatives that such an investment meets all relevant legal requirements with respect to
investments by plans generally or any particular plan, or that such an investment is appropriate for plans generally or any particular
plan. In this regard, neither this discussion nor anything provided in this document is or is intended to be investment advice
directed at any potential Plan purchaser or at Plan purchasers generally and such purchasers of these notes should consult and
rely on their own counsel and advisers as to whether an investment in these notes is suitable.
However, individual retirement accounts, individual retirement
annuities and Keogh plans, as well as employee benefit plans that permit participants to direct the investment of their accounts,
will not be permitted to purchase or hold the notes if the account, plan or annuity is for the benefit of an employee of Morgan
Stanley or Morgan Stanley Wealth Management or a family member and the employee receives any compensation (such as, for example,
an addition to bonus) based on the purchase of the notes by the account, plan or annuity.
|
Additional considerations:
|
Client accounts over which Morgan Stanley, Morgan Stanley Wealth Management or any of their respective subsidiaries have investment discretion are not permitted to purchase the notes, either directly or indirectly.
|
Supplemental information regarding plan of distribution; conflicts of interest:
|
Selected dealers, which may include our affiliates, and their
financial advisors will collectively receive from the agent a fixed sales commission of $ for each note they sell.
MS & Co. is an affiliate 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 notes. When MS & Co. prices this offering of notes, it will determine the economic terms of the notes,
including the early redemption payment amounts and the redemption threshold levels, such that for each note the estimated value
on the pricing date will be no lower than the minimum level described in “Investment Summary” beginning 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. See “Plan of
Distribution (Conflicts of Interest)” and “Use of Proceeds and Hedging” in the accompanying product supplement.
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Contact:
|
Morgan Stanley clients may contact their local Morgan Stanley branch office or our principal executive offices at 1585 Broadway, New York, New York 10036 (telephone number (866) 477-4776). All other clients may contact their local brokerage representative. Third-party distributors may contact Morgan Stanley Structured Investment Sales at (800) 233-1087.
|
Where you can find more information:
|
Morgan Stanley and MSFL have filed a registration statement (including
a prospectus, as supplemented by the product supplement for Equity-Linked Notes) with the Securities and Exchange Commission, or
SEC, for the offering to which this communication relates. You should read the prospectus in that registration statement, the product
supplement for Equity-Linked Notes and any other documents relating to this offering that Morgan Stanley and MSFL have filed with
the SEC for more complete information about Morgan Stanley, MSFL and this offering. You may get these documents without cost by
visiting EDGAR on the SEC web site at
.
www.sec.gov. Alternatively, Morgan Stanley, MSFL, any underwriter
or any dealer participating in the offering will arrange to send you the prospectus and the product supplement for Equity-Linked
Notes if you so request by calling toll-free 800-584-6837.
You may access these documents on the SEC web site at
.
www.sec.gov
as follows:
Product
Supplement for Equity-Linked Notes dated November 16, 2017
Prospectus
dated November 16, 2017
Terms used but not defined in this document are defined in the
product supplement for Equity-Linked Notes or in the prospectus.
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M
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Jump Notes with Auto-Callable Feature due June 30, 2026
Based on the Value of the Morgan Stanley MAP Trend Index
Annex A—Morgan Stanley MAP Trend Index
Overview
The Morgan Stanley MAP Trend Index (the “
Index
”)
has been developed by and is calculated, published and maintained by Morgan Stanley & Co. LLC. MAP stands for “Multi-Asset
Portfolio.” The Index was established by Morgan Stanley on March 7, 2017 and employs a rules-based quantitative strategy
(the “
Index Methodology
”) that combines a risk-weighted approach to portfolio construction with a momentum-based,
or trend-following, asset allocation methodology to construct a notional portfolio. In addition, the strategy imposes an
overall volatility-targeting feature upon the resulting portfolio. The goal of the Index is to maximize returns for a given
level of risk based upon recent trends in the underlying assets. The investment assumption underlying the allocation strategy is
two-fold: that historical volatility of the underlying assets can be used to risk-weight a portfolio, and that past trends are
likely to continue to be a good indicator of the future performance of that portfolio. The Index therefore seeks to capture returns
by taking risk-weighted positions indicated by such trends. As the portfolio is risk-weighted based upon a pre-set allocation as
modified by recent volatility, increased volatility in an underlying asset will result in reduced exposure to that asset, potentially
at a time when that asset then increases in value; at the same time, lower volatility will result in higher exposure, potentially
at a time when the asset starts to decline in value. In addition, as a trend-following, momentum-based index, the Index will
tend to perform well when prices on the relevant ETFs are steadily trending either up or down. On the other hand, the Index will
likely perform poorly when prices on the relevant ETFs do not move in a consistent manner, and, in particular, when they experience
sharp reversals, in which case the Index will likely allocate to ETFs that trended upward, but that are now declining. In addition,
sharp, correlated reversals in the equity markets as a whole will also have an adverse effect on the level of the Index, as any
diversification benefits inherent in investing in a variety of ETFs will be lost.
The components of the Index consist of (i)
20 U.S.-listed exchange traded funds (“
ETFs
”), representing U.S. and non-U.S. equities, fixed income securities,
commodities and real estate, and (ii) the Morgan Stanley Two Year Treasury Index (collectively, the “
Index Components
”).
The notional portfolio constructed by the Index Methodology of Index Components is referred to as the “
Asset Portfolio
.”
The Asset Portfolio will consist of long-only positions in each Index Component, and each Index Component except for the Morgan
Stanley Two Year Treasury Index is subject to a maximum exposure cap. The actual number of ETFs represented in the Asset Portfolio
will be determined according to the Index Methodology but will likely be less than 20 at any one time and, if all the ETFs are
trending down, could be only the Morgan Stanley Two Year Treasury Index. The targeted volatility for the Index is 5% (the “
Volatility
Target
”).
The Index is calculated on an excess return
basis, and therefore the level is determined by the weighted return of the Asset Portfolio reduced by the return on an equivalent
cash investment receiving the 3-month LIBOR. The Index performance is further reduced by a servicing cost of 0.85% per annum calculated
on a daily basis.
Calculation of Pre-Signal Base Allocation
for each ETF
The Index is rebalanced each Strategy Business
Day (the “
Daily Rebalancing
”). Upon each Daily Rebalancing for the Index, the Index Methodology uses the pre-assigned
Risk Budget assigned to each ETF which remains static throughout the life of the Index and is set forth in the table below. Based
upon those pre-set Risk Budgets, the Index Methodology determines the base allocation of each ETF in the Asset Portfolio by analyzing
the volatility for each ETF and the historical correlation among the components. The base allocation of ETFs will be proportional
to each ETFs’ Risk Budget and the inverse of each ETF’s volatility and scaled based upon the volatility of the other
ETFs to 100% exposure.
1
Assuming that two ETFs have the same Risk
1
Look-back period for volatility for the pre-signal allocation is approximately one year.
M
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Jump Notes with Auto-Callable Feature due June 30, 2026
Based on the Value of the Morgan Stanley MAP Trend Index
Budget, this initial weighting scheme allocates
more to less volatile assets and less to more volatile assets.
2
While the Risk Budget is used to determine proportions
for the pre-signal base allocations, those pre-signal base allocations can be higher or lower than the original Risk Budget; however,
after the entirety of the Index calculation is complete, no ETF’s exposure will exceed its maximum exposure cap as listed
in the table below.
Determining the Trend Signal for each
ETF
The Index Methodology then calculates a
signal based on the upward or downward trend of each ETF (the “
Trend Signal
”). The Index calculates each Trend
Signal by observing two moving averages, one short-term and one long-term, over different look-back periods for each respective
ETF.
3
These moving averages are calculated using a formula that considers the entirety of the look-back period but
gives more weight to the recent data points than the data points further in the past. For some of the less liquid ETFs, a signal-smoothing
moving average is incorporated that creates a weighted average of the Trend Signal using the prior two or three days of signal
data in order to try to avoid unrepresentative signals due to that relative illiquidity.
4
A Trend Signal that converges
toward one indicates an upward trend and a Trend Signal that converges toward zero indicates a downward trend.
The Index compares each ETF’s short-term
and long-term moving averages against its spot horizon to determine the Trend Signal. The Trend Signal will be 0 if the spot horizon
is below both the short-term and long-term moving averages, 0.5 if the spot horizon is between the short-term and long-term moving
averages or 1 if the spot horizon is above the short-term and long-term moving averages. An ETF’s spot horizon value is not
always its most recent price and, in the equity and alternatives asset classes, the date for determining the spot horizon is a
date 4 Strategy Business Days before the short-term horizon date, which is typically the Strategy Business Day prior to the Rebalancing
Date. The result of this is that the Index, in the equity and alternatives asset classes, will allocate more exposure to ETFs that
are trending down in the short-term and less to ETFs that are trending up in the short-term in an effort to capitalize on possible
countertrends or overreactions in the market. However, if a short-term downward trend persists and the ETF steadily declines, the
Trend Signal in these asset classes will remain at 1 and therefore the Index will be fully exposed to the decline. The Trend Signal
will remain at 1 until the ETF begins trending up and the short-term horizon exceeds the spot horizon or continues declining such
that the spot horizon is below the long-term horizon. Even if the spot horizon falls below the long-term horizon, the Trend Signal
will be 0.5 and the Index will not fully divest its position until the spot horizon of the ETF is down compared to both the long-term
horizon and the short-term horizon.
Scaling of Allocation of ETFs According
to Trend Signal
Once the Trend Signal is calculated for
each ETF, the previously determined base allocations are scaled by the Trend Signal by allocating more upward-trending securities
to the Asset Portfolio subject to each ETFs’
2
Volatility is a market standard statistical measure of the magnitude and frequency of price changes of a financial asset over a period of time, used to express the riskiness of the asset. Note, however, that volatility does not identify the direction of the asset’s price movement.
3
The look-back period for each moving average is asset-class dependent. Equity ETFs have a short term period of 1 day, a long term period of 200 days and a spot horizon of 5 days. Fixed Income ETFs have a short term period of 5 days, a long term period of 20 days and a spot horizon of 1 day. Alternative ETFs have a short term period of 5 days, a long term period of 200 days and a spot horizon of 5 days.
4
As classified in the table below, Other Equity ETFs have a signal smoothing period of 2 days. Core Fixed Income ETFs have a signal smoothing period of 2 days while Other Fixed Income ETFs have a signal smoothing period of 3 days.
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maximum exposure cap as outlined in the
table below. The magnitude of each position taken by the Index following the Trend Signal adjustment is then scaled to the
Volatility Target based on a pro-rata volatility-scaling that seeks to achieve a balanced level of volatility in the
Index’s exposure to each of the ETFs. The volatility of the Index is calculated by estimating the volatility of
each ETF adjusted for correlations over a period of approximately 30 and 60 days. The higher volatility of the two time
periods is used to scale the Index’s exposure to the ETFs. ETFs with a Trend Signal of 0 on a Rebalancing Day will not
be allocated any exposure and therefore will not be a part of the Asset Portfolio on that day. Any unused exposure is
allocated to the Morgan Stanley Two Year Treasury Index. Because the Index is limited to 125% leverage it may not be possible
to achieve the Volatility Target of 5% during periods of very low volatility. Moreover, the volatility of the Index may
exceed the 5% Volatility Target in times of extreme volatility due to trading limits on the ETFs. The daily trading limit for
each ETF is one-third of the maximum exposure cap. Once the composition of the Asset Portfolio is determined, the Index value
is equivalent to the sum of each Index Component’s market price less the 3-month LIBOR excess return cost and the 0.85%
servicing cost.
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Morgan Stanley MAP Trend Index – Summary
The procedure for determining the composition
of the Asset Portfolio is summarized in the graphic and bullets below:
|
•
|
Base allocations depend
on each ETF’s liquidity and are proportional to the Risk Budget and the inverse of each ETF’s relative historical
realized volatility scaled to 100%.
|
|
•
|
All things being equal,
this weighting scheme allocates more to less volatile assets and less to more volatile assets.
|
|
•
|
For each ETF, compute one
short-term and one long-term moving average.
|
|
•
|
Compare the short-term
and long-term moving averages versus the ETF spot price, a Trend Signal of 100% indicates an upward trend and a Trend Signal 0%
indicates a downward trend.
5
If applicable, the Trend Signal is smoothed over a few days for the less liquid ETFs.
|
|
•
|
Scale the base allocations
by the Trend Signal for each ETF.
|
|
•
|
The maximum exposure caps
on each Rebalancing Date for each Index Component are specified in the table below.
|
|
•
|
Estimate the volatility
of the portfolio and scale the allocations to target a 5% volatility. Because the ETFs are subject to a maximum exposure cap and
the Index is limited to 125% leverage, it may not be possible to achieve the Volatility Target of 5% during periods of very low
volatility.
|
|
•
|
Allocate any unused exposure
into Morgan Stanley Two Year Treasury Index.
|
|
•
|
The level of the Index
is calculated on an excess return basis and is determined by the weighted return of the Asset Portfolio
reduced
by the
return on an equivalent cash investment receiving the 3-month LIBOR and a servicing cost of 0.85% per annum.
|
5
Note that because the spot horizon period is longer than the short-term horizon period for ETFs in the equity and alternative asset classes of the index, an actual upward trend in an ETF may result in a Trend Signal less than 1 and therefore the Index may divest itself of these ETFs despite recent positive movement.
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Index Components
The potential Index Components included in the Index and the
maximum asset weightings on each Rebalancing Date for each Index Component are specified in the table below.
Equities
|
Ticker
|
Maximum Exposure Cap
|
Risk Budget*
|
Core
|
|
|
|
SPDR S&P 500
|
SPY
|
25%
|
11%
|
PowerShares QQQ ETF
|
QQQ
|
25%
|
11%
|
iShares Russell 2000
|
IWM
|
25%
|
11%
|
iShares MSCI EAFE
|
EFA
|
5%
|
2%
|
iShares MSCI Emerging Markets
|
EEM
|
5%
|
2%
|
Others
|
|
|
|
iShares Edge MSCI Minimum Volatlity USA
|
USMV
|
5%
|
2%
|
iShares Nasdaq Biotechnology
|
IBB
|
5%
|
2%
|
iShares Select Dividend
|
DVY
|
3%
|
1%
|
Fixed Income
|
|
|
|
Core
|
|
|
|
iShares 20+ Year Treasury Bond
|
TLT
|
25%
|
11%
|
iShares 7-10 Year Treasury Bond
|
IEF
|
25%
|
11%
|
iShares iBoxx High Yield Corporate Bond
|
HYG
|
25%
|
11%
|
iShares iBoxx Investment Grade Corporate Bond
|
LQD
|
5%
|
2%
|
iShares Core US Aggregate Bond
|
AGG
|
5%
|
2%
|
Others
|
|
|
|
iShares TIPS Bond
|
TIP
|
5%
|
2%
|
iShares JPMorgan USD Emerging Markets Bond
|
EMB
|
5%
|
2%
|
iShares US Preferred Stock
|
PFF
|
3%
|
1%
|
Alternatives
|
|
|
|
SPDR Gold Shares
|
GLD
|
10%
|
4%
|
United States Oil
|
USO
|
10%
|
4%
|
Vanguard REIT ETF
|
VNQ
|
10%
|
4%
|
The PowerShares DB US Dollar Index Bullish Fund
|
UUP
|
10%
|
4%
|
Risk-Off
|
|
|
|
Morgan Stanley Two Year Treasury Index
|
N/A
|
100%
|
N/A
|
*
Rounded to the nearest percentage
The ETFs make periodic filings with the Securities and Exchange
Commission (“SEC”). Information provided to or filed with the SEC by each ETF pursuant to the securities laws can
be located through the SEC’s website at
www.sec.gov
. In addition, information may
be obtained from other sources including, but not limited to, press releases, newspaper articles and other publicly disseminated
documents.
Neither the issuer nor the agent makes any representation that such publicly available documents or any other publicly
available information regarding the ETFs is accurate or complete.
The Morgan Stanley Two Year Treasury Index has been developed
by Morgan Stanley & Co. LLC (the “Sponsor'') and will be calculated and rebalanced by Morgan Stanley & Co. LLC (acting
in such capacity as the ''Calculation Agent''). The Morgan Stanley Two Year Treasury Index is a rules-based index that
seeks to capture the yield from US Treasury notes with a maturity of between two years and two years and three months by notionally
purchasing futures contracts on US Treasury notes. The Morgan Stanley Two Year Treasury Index is published on Bloomberg under
the ticker symbol MSUST2TR <Index>.
The Morgan Stanley Two Year Treasury Index, including its name,
methodology and levels (the “Index Information”) is the exclusive property of the Sponsor. Unless specifically agreed
by the Sponsor, no third party is authorized to use
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the Index Information in any way. The Sponsor and its affiliates disclaim any
responsibility for any unauthorised use of the Index Information by any third party intending to promote,
sponsor, endorse, market, offer, sell, distribute or reference the Index Information or any product, service or contract relating
or linked to or otherwise referencing the Index Information.
iShares
®
is a registered mark of BlackRock Institutional
Trust Company, N.A. (“BTC”). The Index is not sponsored, endorsed, sold, or promoted by BTC. BTC makes no representations
or warranties to the owners of any investment linked to the underlying index or any member of the public regarding the advisability
of investing in any investment linked to the underlying index. BTC has no obligation or liability in connection with the operation,
marketing, trading or sale of any investment linked to the underlying index.
“S&P
®
”, “S&P 500
®
”
and “SPDR
®
” are trademarks of Standard & Poor’s Financial Services LLC (“S&P”).
The Index is not sponsored, endorsed, sold, or promoted by S&P or the SPDR
®
Gold Trust (together, the “Trusts”).
S&P and the Trusts make no representations or warranties to the owners of any investment linked to the underlying index or
any member of the public regarding the advisability of investing in any investment linked to the underlying index. S&P and
the Trusts have no obligation or liability in connection with the operation, marketing, trading or sale of any investment linked
to the underlying index.
“PowerShares
®
” is a registered trademark
of Invesco PowerShares Capital Management LLC (“Invesco PowerShares”). The Index is not sponsored, endorsed, sold,
or promoted by Invesco PowerShares. Invesco PowerShares makes no representations or warranties to the owners of any investment
linked to the underlying index or any member of the public regarding the advisability of investing in any investment linked to
the underlying index. Invesco PowerShares has no obligation or liability in connection with the operation, marketing, trading or
sale of any investment linked to the underlying index.
“Vanguard
®
”
is a registered mark of The Vanguard Group, Inc. (“Vanguard”). The Index is not sponsored, endorsed, sold,
or promoted by Vanguard. Vanguard makes no representations or warranties to the owners of any investment linked to the
underlying index or any member of the public regarding the advisability of investing in any investment linked to the underlying
index. Vanguard has no obligation or liability in connection with the operation, marketing, trading or sale of any investment
linked to the underlying index.
Adjustments, Disruptions and Errors
Definitions
“
Rules
” means the description
produced by Morgan Stanley that provides an overview of the methodology of the Strategy.
“
Strategy
” means the Morgan Stanley
MAP Trend Strategy.
“
Strategy Business Day
”
means a day that is not a public holiday in the New York Stock Exchange calendar or the Chicago Board of Trade calendar.
“
Strategy Calculation Agent
” is
Morgan Stanley & Co. LLC.
“
Strategy Level
” means the calculation
of the level of the Strategy.
“
Strategy Live Date
” is March 7,
2017
“
Strategy Sponsor
” is Morgan Stanley
& Co. International plc.
Overview
The Strategy is calculated on the basis
of algorithmic formulas and therefore no discretion can be exercised by the Strategy Sponsor or the Strategy Calculation Agent
in the calculation of the Strategy. However, on occasion, there may be situations requiring adjustments to the Strategy that are
outside the scheduled adjustments and rebalances. Such adjustments might be made by Strategy Sponsor or the Strategy Calculation
Agent by having recourse to discretionary decisions. Any discretion will be used in a commercially reasonable manner and exclusively
in order to ensure that the Strategy continues to reflect, as closely as possible, the value of the Strategy components in the
sole determination of the Strategy Sponsor.
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Adjustment Events
The Strategy Calculation Agent will determine
whether a circumstance relating to any Index Component has a dilutive, concentrative or other effect on the theoretical value of
such Index Component and, if so, will (1) make the corresponding adjustment, if any, to the Units or closing prices for such Index
Component and/or any of the other provisions hereof as the Strategy Calculation Agent determines appropriate to account for that
dilutive, concentrative or other effect; and (2) determine the effective date of that adjustment. As a result of the foregoing
adjustments, the total number of Index Components may, on a given Strategy Business Day, increase or decrease.
Disruption Events
Each of the following is a “
Disruption
Event
”:
|
·
|
A
Material Change in the Index Components’ Methodology
occurs if the Strategy Sponsor determines that there has
been a material change to the Index Components or other related indices and including hours of continuous market trading and publication
of bid and ask prices or the de-listing of any of the Index Components;
|
|
·
|
An
Underlying Strategy Disruption
occurs if any dependencies needed to calculate the Trend Signal are (i) not calculated
and announced by the Strategy Sponsor (regardless of whether the dependencies are calculated by a successor sponsor or not); (ii)
replaced by a successor Strategy using the same or substantially the same methodology; or (iii) cancelled permanently;
|
|
·
|
A
Termination of Data License
occurs if the Strategy Sponsor
determines there has been a termination, revocation or suspension of any third-party license agreement or permission pursuant to
which data are supplied to compile or calculate the Strategy
|
|
·
|
A
Price Source Disruption
occurs if the Strategy Sponsor or
the Strategy Calculation Agent determines that any of the source data required to calculate the Strategy are not available. This
may include the published level of an ETF or data provided by a third party vendor. A Price Source Disruption may also include
any permanent cancellation or prolonged suspension of any Index Component.
|
|
·
|
A
Change in Law
occurs if there has been a change in applicable
law or regulation that prevents the Strategy Sponsor and/or the Strategy Calculation Agent from calculating, publishing or hedging
the Strategy.
|
|
·
|
A
Hedging Disruption
occurs if the Strategy Sponsor determines
that Morgan Stanley or any of its affiliates would be unable after using commercially reasonable efforts to:
|
|
o
|
acquire, establish, re-establish, substitute, maintain, unwind or dispose of any transactions or instruments deemed necessary
to hedge its position in relation to any relevant transactions relating to or calculated by reference to the Strategy; or
|
|
o
|
realize, recover or remit the proceeds of any such transactions or instruments;
|
|
·
|
A
Force Majeure Event
occurs if the Strategy Sponsor determines
that an event or circumstance has occurred that is beyond the reasonable control of the Strategy Sponsor and, as a result of which,
the Strategy Sponsor or the Strategy Calculation Agent is unable to calculate, publish or take any other necessary action in relation
to the Strategy. Such event or circumstance may include (without limitation) a systems failure, fire, building evacuation, natural
or man-made disaster, act of state, armed conflict, act of terrorism, riot or labor disruption.
|
Potential Actions
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In the event that the Strategy
Sponsor determines that a Disruption Event has occurred, the Strategy Sponsor may in its discretion:
|
·
|
substitute the relevant ETF with a replacement instrument, provided
that such replacement is similarly representative of the existing Index Component;
|
|
·
|
make such determinations or adjustments to the terms of the Strategy
Methodology or the Index Components as it deems necessary including sourcing data from alternative providers;
|
|
·
|
defer, or direct the Strategy Calculation Agent to defer, the availability
of the Strategy until the next Strategy Business Day on which there is no Disruption Event;
|
|
·
|
reallocate all or a portion of the Strategy exposure to cash or cash
equivalents; or
|
|
·
|
instruct the Strategy Calculation Agent to cease to calculate and make
available the Strategy permanently.
|
Index Component Adjustments
Any adjustments
required for Index Components will be made in accordance with the standard exchange methodology. Examples of adjustments include
change of units, close price determination or change in expiration schedule or first delivery dates.
Increased Costs
If at any time following the
Strategy Live Date, due to the adoption of or any change in any applicable law or regulation or any event outside of its control,
the Strategy Sponsor determines in good faith that a party would incur an increased cost in effecting transactions in the Index
Components to reflect the notional exposure to the Strategy performance, the Strategy Sponsor retains the right to make any adjustments
to the strategy methodology so that the Strategy performance takes account of such increased costs.
Adjustment Procedures, Notification
and Consultation Process
If any modification or adjustment
is made to the calculation of the Strategy under the Rules, the Strategy Sponsor will make such modifications or adjustments based
on market conditions and other relevant factors, as in the judgment of the Strategy Sponsor, are necessary to ensure that the Strategy
continues to reflect, as closely as possible, the underlying economic interest it is designed to represent.
Wherever practicable, any adjustments
to the calculation of the Strategy, other than a pre-determined rebalancing, will be announced to the relevant interested parties
or investors. Such announcement will be made in a timely fashion and, when reasonably possible, prior to the date in which the
changes are due to become effective.
If the Strategy Sponsor determines
in its discretion that a consultation with the relevant interested parties or investors is appropriate, it will inform them of
the procedures applicable to the consultation.
Errors
The Strategy Sponsor reserves the
right to make adjustments to the Strategy Level to correct any erroneous calculation or publication of the Strategy Level.
The Strategy Sponsor will determine whether such error requires a change in the composition or calculation of the Strategy
and, if so, the procedures outlined above will apply.