Morgan Stanley Finance LLC Issues $535 Million in Annual Observation Restriking Securities Linked to S&P 500 Futures

Structure and Mechanics of the Five-Year Securities

The structured notes represent a complex investment vehicle designed for investors seeking tailored economic exposure to S&P 500 futures performance over a five-year period. Each security has a stated principal amount of $1,000 and was issued at the same price. The filing discloses that the securities feature annual observation dates occurring on July 24 of each year from 2027 through 2031, with specific adjustments to the investment's value calculated based on index performance during each 12-month observation period. Unlike traditional fixed-income securities, these notes pay no interest and instead provide potential returns entirely through the compounding of annual performance adjustments.

The annual restriking mechanism is the defining characteristic of these securities. Rather than measuring performance from a single initial level to a final level at maturity, the securities reset the reference level each year. The filing states that the adjusted target payout will be adjusted on each annual observation date based on that year's performance-based payout adjustment, which reflects index performance over that specific annual period. This structure means that positive and negative performance compounds annually, and the maximum allowable gain and buffer protection are recalculated each year based on the prior year's adjusted target payout, potentially creating scenarios where both upside potential and downside protection diminish significantly if the index declines during any observation period.

Participation Rate, Caps, and Buffer Protections

Investors receive a 115% participation rate on positive annual index returns, meaning that for each percentage point of positive index performance in a given year, holders benefit from 1.15 percentage points of that gain. However, this upside is subject to an annual cap on returns. The filing discloses that for the first annual observation period, the maximum annual return amount per security is $230, equivalent to 23% of the initial $1,000 principal. For subsequent observation periods, the maximum annual return amount is recalculated as 23% of the adjusted target payout from the prior observation date. This structure ensures that even strong index performance in any given year cannot exceed the annual maximum, and that maximum can shrink if the securities' adjusted target payout declines due to prior-year losses.

The securities include a buffer mechanism designed to provide partial downside protection in years of moderate index losses. According to the filing, if the annual index return is negative but not less than -15%, the performance-based payout adjustment is $0, meaning no loss is incurred in that year. However, if losses exceed -15% in any annual period, the buffer mechanism ceases to provide protection and investors absorb all losses beyond the buffer threshold, calculated as 15% of the adjusted target payout. For the first observation period, this buffer amount is $150 per security. In subsequent years, the buffer is recalculated at 15% of the prior year's adjusted target payout, potentially declining significantly if the securities' value depreciates.

Principal-at-Risk Structure and Credit Considerations

The filing explicitly warns investors that these are principal-at-risk securities, meaning the adjusted target payout at maturity could be substantially less than the original $1,000 stated principal amount. The document states that "the adjusted target payout will initially be equal to the stated principal amount of $1,000, and will be subject to adjustment (upward or downward)" based on annual performance. Investors could receive substantially less than their original investment if the index performs poorly during one or more observation periods, particularly if losses exceed the 15% buffer in any year. The compounding nature of the annual adjustments means that losses in early years reduce the base against which subsequent year performance is measured, amplifying the impact of continued or new losses.

While the securities are fully and unconditionally guaranteed by Morgan Stanley, investors must consider Morgan Stanley's credit risk. The filing emphasizes that "all payments are subject to our credit risk" and that "if we default on our obligations, you could lose some or all of your investment." The securities are unsecured obligations of Morgan Stanley Finance LLC and are not secured by any underlying reference assets or collateral. The guarantee from Morgan Stanley does not eliminate counterparty risk; it merely replaces the credit risk of Morgan Stanley Finance LLC with that of Morgan Stanley itself. Additionally, the filing specifies that these securities are not deposits, are not insured by the Federal Deposit Insurance Corporation, and are not obligations of any bank.

Comparison to Point-to-Point Performance

A significant consideration highlighted in the filing is that the payment at maturity may be substantially less than it would have been under a simpler point-to-point calculation. The disclosure states: "Because of the annual restriking of the initial level, the compounding of the annual performance-based payout adjustments, as reflected in the adjusted target payout, and the annual resetting of the maximum annual return amount and the buffer amount, the payment at maturity may be less, and may be significantly less, than it would have been had it been calculated using the simple, point-to-point performance of the index over the term of the securities." This warning acknowledges a scenario in which an index that returns to its initial level after five years would result in a lower return than if the same index performance were measured from initial level to final level without annual restriking and adjustment.

For example, if the S&P 500 Futures Excess Return Index experiences substantial gains in the first year, followed by substantial losses in the second year that nearly wipe out prior gains, an investor in these securities would benefit from the first year's gains being locked in through the adjusted target payout adjustment, but would then face renewed buffer and cap calculations based on the reduced adjusted target payout after the second year's losses. The net result could be materially different from a simple point-to-point comparison over the five-year period, particularly in volatile or mean-reverting market environments.

Pricing and Issue Details

The securities were priced at $1,000 per security with an aggregate principal amount of $535 million, representing 535,000 individual securities. The pricing date was July 24, 2026, and the original issue date was July 29, 2026. The strike level, which establishes the reference point for the first annual observation period, was set at 592.71, representing the S&P 500 Futures Excess Return Index closing level on the strike date. The estimated value of each security on the pricing date was $960.90, suggesting that the market value of these structured notes was discounted relative to the issue price, reflecting the complexity and risks embedded in the annual restriking structure.

According to the filing, Morgan Stanley & Co. LLC, an affiliate of Morgan Stanley Finance LLC and a wholly owned subsidiary of Morgan Stanley, acts as the agent for the offering. The commission structure indicates that Morgan Stanley & Co. purchased all securities from the issuer at $990 per security and expected to resell them to an unaffiliated dealer at the same price for further distribution to fee-based advisory accounts at the $1,000 public price. The filing discloses that total agent commissions and fees aggregate $5,350 on the $535 million offering, with proceeds to the issuer of $529,650 after commission deductions. The securities will be sold exclusively to investors in fee-based advisory accounts, narrowing the investor base to institutional and high-net-worth clients utilizing advisory relationship structures.

Target Investor Profile and Use Cases

The filing characterizes these securities as appropriate for investors "who seek a return based on the performance of the underlier, determined as set forth herein, and who are willing to risk their principal and forgo current income and returns beyond the applicable maximum annual return amount in exchange for the tailored economic exposure to the underlier provided by the securities." This language suggests that the product is marketed to sophisticated investors with specific risk tolerances and return objectives. Such investors would be willing to accept the loss of interest income, the capping of upside returns, and the annual restriking mechanics in exchange for structured index participation tailored to particular market views or risk management strategies.

The restriction to fee-based advisory accounts reflects regulatory considerations around suitability and investor protection. Fee-based advisors are expected to conduct thorough due diligence on structured products and recommend them only when aligned with client objectives and risk tolerance. The investment vehicle is not listed on any securities exchange, meaning these securities trade in the over-the-counter market and may have limited liquidity. Investors considering early redemption or secondary market sale would need to negotiate directly with market participants or consult their advisory firms for exit strategies.

Underlying Index and Performance Measurement

The securities track the S&P 500 Futures Excess Return Index, not the spot S&P 500 equity index. The filing does not disclose detailed methodology or calculation rules for this futures-based index, referring readers to the accompanying index supplement for such information. The index return for each annual observation period is calculated as (final level – initial level) / initial level, where the final level is the index closing level on each annual observation date and the initial level is the closing level on the observation date beginning that period. For the first observation period, the initial level is the strike level of 592.71.

The use of a futures-based excess return index introduces additional complexity and potential basis risk beyond that of a spot equity index. Excess return indices typically reflect price appreciation without dividends and may incorporate rebalancing or other methodological adjustments specific to the futures market. Investors should understand that performance of this specific index may diverge from the performance of the standard S&P 500 equity index with which many investors are more familiar, and the filing does not disclose the historical tracking differences or potential divergences between these two related but distinct indices.

Registration and Regulatory Status

The securities are issued pursuant to Morgan Stanley Finance LLC's Series A Global Medium-Term Notes program and are registered under SEC Registration Statement Nos. 333-293641 and 333-293641-01. The pricing supplement was filed pursuant to Rule 424(b)(2) under the Securities Act of 1933. The filing includes the standard SEC disclaimer that regulatory approval of the securities or the accompanying documentation has not been granted and that any representation to the contrary would constitute a criminal offense.

The securities have been assigned CUSIP No. 61781GK83 and ISIN US61781GK833 for identification and settlement purposes. The final maturity date is July 29, 2031, subject to postponement for non-trading days and certain market disruption events that might affect the determination of final index levels or the payment date. The filing does not disclose specific definitions or frequencies of market disruption events, referring readers to the accompanying product supplement for additional terms and conditions applicable to the securities.

Risks and Loss Scenarios

The filing repeatedly emphasizes that investors could lose some or all of their initial investment. Loss scenarios include situations where the index declines by more than 15% in any annual observation period (causing the loss to exceed the buffer and reduce the adjusted target payout), situations where multiple years of losses compound to reduce the adjusted target payout to zero or near-zero, and situations where the index performance appears positive on a cumulative basis but is negative after the annual restriking adjustments are factored in. The filing warns that the payment at maturity may be significantly less than a simple point-to-point calculation would suggest, which could occur even if the index ultimately appreciates over the five-year holding period.

Investors must also consider illiquidity risk, as the securities are not exchange-listed and may be difficult to sell in secondary markets. If an investor needs to exit the position before maturity, market conditions at that time could force a sale at a significant discount to estimated or intrinsic value. Additionally, rising interest rates, changing implied volatility, or shifts in market risk premiums could cause secondary market prices to fall even if index performance has been positive, because the structured product's value incorporates optionality and other derivative characteristics that are sensitive to financial market conditions beyond index performance alone.

Disclosure of Estimated Value and Pricing Considerations

The filing discloses an estimated value of $960.90 per security as of the pricing date, representing a discount of approximately $39.10 or 3.91% to the $1,000 issue price. This estimated value reflects the present value of expected future payments from the securities, incorporating assumptions about index volatility, interest rates, and market risk premiums. The discount to par suggests that the structured product incorporates costs associated with the derivative features embedded in the annual restriking mechanism, as well as compensation for Morgan Stanley's credit risk and the issuer's expected hedging costs.

The filing does not disclose the specific valuation methodology, volatility assumptions, or interest rate assumptions used to derive the estimated value figure. Investors should recognize that this estimated value is as of the pricing date and may differ substantially from secondary market prices at any subsequent time. The estimated value does not constitute a guarantee of future prices or returns and is provided for informational purposes only to highlight the difference between the $1,000 offering price and the economic value of the embedded derivatives and other structural features.