Securities Subsidiary

Securities subsidiary is a company that is controlled by a large bank or financial holding company and conducts operations as a standalone legal entity. Depending on its operating license, a security subsidiary can offer a narrow set of services to the full range of brokerage services. Each subsidiary must maintain minimum capital in its jurisdiction in order to operate.

Securities subsidiaries were created when the Federal Reserve Board allowed securities firms owned by banks to begin dealing in commercial paper and municipal fixed-income securities on a limited basis. As capital markets evolved, they were permitted to expand their operations into underwriting stocks and corporate bonds in 1990. Their underwriting was initially limited to 5% of bank revenue and was later raised to 25% before the restrictions were completely abolished in 1999.

Morgan Stanley's main subsidiaries that deal in securities operate under Morgan Stanley Smith Barney LLC, Morgan Stanley & Co. International plc (MSIP) and Morgan Stanley MUFG Securities Co. Ltd. (MSMS). Each entity is registered and regulated by authorities in their geographic locales. In the U.S., the securities subsidiary is subject to minimum net capital requirements of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). MSIP must meet capital requirements of U.K.'s Prudential Regulation Authority (PRA) and MSMS must hold capital in excess of thresholds set by Japan's Financial Services Agency (FSA). Wherever the securities subsidiaries are located, minimum capital requirements apply. Since the parent company controls each of the subsidiaries and therefore is able to move capital in and out of them, the parent company may be subject to covenants in certain debt agreements that restrict its ability to withdraw capital from subsidiaries.