[Federal Register Volume 69, Number 229 (Tuesday, November 30, 2004)]
[Notices]
[Pages 69644-69649]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3382]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50719; File No. SR-Amex-2004-55]


Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change and Amendment No. 1 Thereto Relating to the Listing and 
Trading of Notes Linked to the Performance of the CBOE S&P 500 BuyWrite 
Index\SM\

November 22, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 19, 2004, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change, as described in items I and 
II below, which items have been prepared by the Exchange. On November 
4, 2004, the Exchange submitted an amendment to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons and is approving 
the proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Jeffrey P. Burns, Associate General Counsel, 
Amex, to Florence E. Harmon, Senior Special Counsel, Division of 
Market Regulation, Commission, dated November 3, 2004 (''Amendment 
No. 1''). Amendment No. 1 reflects certain changes regarding issuer 
redemptions of the Notes beginning in June 2007.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade notes, under Section 107A 
of the Amex Company Guide (``Company Guide''), the performance of which 
is linked to the Chicago Board Options Exchange (``CBOE'') S&P 500 
BuyWrite Index(\sm\) (``BXM Index'' or ``Index''). The text of the 
proposed rule change is available at the principal offices of the Amex 
and from the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Amex included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
item III below. The Amex has prepared summaries, set forth in sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Under section 107A of the Company Guide, the Exchange may approve 
for listing and trading securities which cannot be readily categorized 
under the listing criteria for common and preferred stocks, bonds, 
debentures, or warrants.\4\ The Amex proposes to list for trading under 
section 107A of the Company Guide notes linked to the performance of 
the BXM Index (``Notes''). The BXM Index is determined, calculated, and 
maintained solely by the CBOE.\5\
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    \4\ See Securities Exchange Act Release No. 27753 (March 1, 
1990), 55 FR 8626 (March 8, 1990) (order approving File No. SR-Amex-
89-29).
    \5\ If the BXM Index is discontinued or suspended, the 
calculation agent, in its sole discretion, may substitute the BXM 
Index with an index substantially similar to the discontinued or 
suspended BXM Index (the ``Successor Index''). The Successor Index 
may be calculated and/or published by the CBOE or any other third 
party. If the calculation agent is unable to identify a Successor 
Index, then the Maturity Valuation Date will be accelerated to the 
last scheduled trading day prior to the expiration of the call 
option positions of the BXM Index (``Roll Date''). The calculation 
agent will accordingly determine the Entitlement Value on such date. 
Under certain circumstances, the calculation agent or an affiliate 
will calculate the Index value until a Successor Index is 
substituted. This may occur if adequate notice of the Index's 
discontinuance or suspension is not provided to the calculation 
agent. The calculation agent will then undertake to identify and 
designate, in its sole discretion, a Successor Index prior to the 
Roll Date that falls at least one (1) month following the 
discontinuance or suspension of the BXM Index. If the calculation 
agent is unable to identify a Successor Index five (5) days prior to 
the Roll Date that falls at least one (1) month following such 
discontinuance or suspension, the Maturity Valuation Date will be 
accelerated to the last scheduled trading day prior to the Roll Date 
following such discontinuance or suspension. In calculating the 
Index value, the calculation agent or affiliate will use the current 
method employed prior to the discontinuance or suspension. The 
Exchange agrees to delist the Notes (or seek Commission approval 
pursuant to Rule 19b-4 to list and trade a Note that reflects the 
Successor Index) in the event that CBOE stops calculating and 
disseminating the value of the BXM Index. Telephone conference 
between Jeffrey P. Burns, Associate General Counsel, Amex, and 
Florence Harmon, Senior Special Counsel, Commission, on November 19, 
2004.
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    Morgan Stanley will issue the Notes under the name ``Strategic 
Total Return Securities.'' \6\
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    \6\ Morgan Stanley and Standard & Poor's (``S&P''), a division 
of the McGraw-Hill Companies, Inc., have entered into a non-
exclusive license agreement providing for the use of the BXM Index 
by Morgan Stanley in connection with certain securities, including 
the Notes. S&P is not responsible for and will not participate in 
the issuance and creation of the Notes.
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    The Notes will conform to the initial listing guidelines under 
section 107A \7\ and continued listing guidelines under sections 1001-
1003 \8\ of the Company Guide. The Notes are a series of medium-term 
debt securities of Morgan Stanley that provide for a cash payment at 
maturity, or upon earlier exchange at the holder's option or the 
earlier redemption of the issue, based on the performance of the BXM 
Index adjusted by the Adjustment Amount.\9\ The principal amount of 
each Note is expected to be $10. The Notes will not have a minimum 
principal amount that will be repaid and, accordingly,

[[Page 69645]]

payment on the Notes prior to or at maturity may be less than the 
original issue price of the Notes. In fact, the value of the BXM Index 
must increase for the investor to receive at least the $10 principal 
amount per security at maturity or upon exchange or redemption. If the 
value of the BXM Index decreases or does not increase sufficiently, the 
investor will receive less, and possibly significantly less, than the 
$10 principal amount per security. The Notes will have a term of at 
least one (1) but no more than ten years.\10\
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    \7\ The initial listing standards for the Notes require: (1) A 
minimum public distribution of one million units; (2) a minimum of 
400 shareholders; (3) a market value of at least $4 million; and (4) 
a term of at least one year. In addition, the listing guidelines 
provide that the issuer has assets in excess of $100 million, 
stockholder's equity of at least $10 million, and pre-tax income of 
at least $750,000 in the last fiscal year or in two of the three 
prior fiscal years. In the case of an issuer that is unable to 
satisfy the earning criteria stated in Section 101 of the Company 
Guide, the Exchange pursuant to Section 107A of the Company Guide 
will require the issuer to have the following: (1) Assets in excess 
of $200 million and stockholders' equity of at least $10 million; or 
(2) assets in excess of $100 million and stockholders' equity of at 
least $20 million.
    \8\ The Exchange's continued listing guidelines are set forth in 
Sections 1001 through 1003 of Part 10 to the Exchange's Company 
Guide. Section 1002(b) of the Company Guide states that the Exchange 
will consider removing from listing any security where, in the 
opinion of the Exchange, it appears that the extent of public 
distribution or aggregate market value has become so reduced to make 
further dealings on the Exchange inadvisable. With respect to 
continued listing guidelines for distribution of the Notes, the 
Exchange will rely, in part, on the guidelines for bonds in Section 
1003(b)(iv). Section 1003(b)(iv)(A) provides that the Exchange will 
normally consider suspending dealings in, or removing from the list, 
a security if the aggregate market value or the principal amount of 
bonds publicly held is less than $400,000.
    \9\ The Adjustment Amount will equal the sum of the monthly 
adjustments. Each monthly adjustment will equal 0.168% (equivalent 
to approximately 2% per year) multiplied by the Net Entitlement 
Value on the trading day prior to the trading day the monthly SPX 
call option expires. SPX options generally expire on the third 
Friday on the month. See infra for a description of how the monthly 
rolling or successive SPX call options are taken into account in the 
BXM Index.
    \10\ The term of the Notes is expected to be five years and will 
be disclosed in the pricing supplement.
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    On a quarterly basis during the first ten (10) calendar days of 
March, June, September, and December, beginning in March 2005, holders 
of the Notes will have the right to exchange the Notes for a cash 
amount equal to the Net Entitlement Value on the valuation date for 
such exchange date. The minimum exchange amount is 10,000 Notes. 
Commencing in June 2007, Morgan Stanley will have the right to redeem 
the Notes for the Net Entitlement Value, upon at least ten (10) 
calendar days' but no more than thirty (30) calendar days' notice to 
holders, on any quarterly exchange date. The Notes will mature on 
December 17, 2009.\11\
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    \11\ See infra discussion of Net Entitlement Value.
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    The ``Net Entitlement Value'' as of any trading day equals (i) the 
``Initial Net Entitlement Value'' multiplied by the ``BXM Index 
Performance'' on that trading day, minus (ii) the ``Adjustment Amount'' 
as of that trading day. The Initial Net Entitlement Value is equal to 
$9.88 (e.g., 1.20% less than the original issue price of the Notes). 
The BXM Index Performance on any trading day is equal to the ``Index 
Value'' on that trading day divided by the ``Initial Index Value.'' The 
Index Value on any trading day is the closing value of the BXM Index on 
that trading day. The Initial Index Value is the closing value of the 
BXM Index on the date Morgan Stanley prices the Notes for initial sale 
to the public. The Adjustment Amount, by which the investor's return is 
also reduced, will equal approximately 2.00% per year.\12\ For purposes 
of determining the amount payable in respect of any early redemption or 
at maturity of the Notes, the Net Entitlement Value will be determined 
on the fifth scheduled trading day immediately prior to the early 
redemption date, or the maturity date, as applicable. For the purposes 
of determining the amount payable with respect to any exchange of the 
Notes, the Net Entitlement Value will be determined on the last trading 
day of the exchange period for that exchange.
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    \12\ See supra note 9 (discussing the Adjustment Amount).
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    The Net Entitlement Value that a holder of a Note will receive upon 
exchange, early redemption, or at maturity will depend on the relation 
of the Index Value (the ``Final Index Value'') to the Initial Index 
Value of the BXM Index and will always be 1.20% less than the original 
issue price and include the Adjustment Amount. If there is a ``market 
disruption event'' \13\ when determining the Final Index Value, the 
Final Index Value will be determined on the next available trading day 
during which no ``market disruption event'' occurs. Thus, the Net 
Entitlement Value per Note will equal:
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    \13\ A ``market disruption event'' is defined as (i) the 
occurrence of or existence of a suspension, absence or material 
limitation of trading of stocks then constituting 20% or more of the 
value of the S&P 500 Index on the Relevant Exchanges for such 
securities for the same period of trading longer than two hours or 
during the one-half hour period preceding the close of the principal 
trading session on such Relevant Exchange; (ii) 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 stocks 
then constituting 20% or more of the value of the S&P 500 Index 
during the last one-half hour preceding the close of the principal 
trading session on such Relevant Exchange are materially inaccurate; 
(iii) 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 the BXM Index or the 
S&P 500 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, and (iv) a determination by the calculation 
agent that any event described in clauses (i)-(iii) above materially 
interfered with the ability of Morgan Stanley or any of its 
affiliates to unwind or adjust all or a material portion of the 
hedge position with respect to the Notes.
[GRAPHIC] [TIFF OMITTED] TN30NO04.074

    The Notes are cash-settled in U.S. dollars and do not give the 
holder any right to receive any of the component securities, dividend 
payments, or any other ownership right or interest in the securities 
comprising the BXM Index. The Notes are designed for investors who want 
to participate in the exposure to the S&P 500 Index (the ``S&P 500'') 
that the BXM Index provides while limiting downside risk, and who are 
willing to forego principal protection and market interest payments on 
the Notes during their term.
    The Commission has previously approved the listing on the Amex of 
securities with structures similar to that of the proposed Notes.\14\
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    \14\ See Securities Exchange Act Release Nos. 49548 (April 9, 
2004), 69 FR 20089 (April 15, 2004) (approving the listing and 
trading of non-principal protected notes linked to the Select 
Utility Index); 45639 (March 25, 2002), 67 FR 15258 (March 29, 2002) 
(approving the listing and trading of non-principal protected notes 
linked to the Oil and Natural Gas Index); 45305 (January 17, 2002), 
67 FR 3753 (January 25, 2002) (approving the listing and trading of 
non-principal protected notes linked to the Biotech-Pharmaceutical 
Index); 45160 (December 17, 2001), 66 FR 66485 (December 26, 2001) 
(approving the listing and trading of non-principal protected notes 
linked to the Balanced Strategy Index); 44483 (June 27, 2001), 66 FR 
35677 (July 6, 2001) (approving the listing and trading of non-
principal protected notes linked to the Institutional Holdings 
Index); 44437 (June 18, 2001), 66 FR 33585 (June 22, 2001) 
(approving the listing and trading of non-principal protected notes 
linked to the Industrial 15 Index); and 44342 (May 23, 2001), 66 FR 
29613 (May 31, 2001) (approving the listing and trading of non-
principal protected notes linked to the Select Ten Index).
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Description of the Index

    The BXM Index is a benchmark index designed to measure the 
performance of a hypothetical ``buy-write'' \15\ strategy on the S&P 
500. Developed by the CBOE in cooperation with S&P, the Index was 
initially announced in April 2002.\16\ The

[[Page 69646]]

CBOE developed the BXM Index in response to several factors, including 
the repeated requests by options portfolio managers that the CBOE 
provide an objective benchmark for evaluating the performance of buy-
write strategies, one of the most popular option trading strategies. 
Further, the CBOE developed the BXM Index to provide investors with a 
relatively straightforward indicator of the risk-reducing character of 
options which otherwise may seem complicated and inordinately risky.
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    \15\ A ``buy-write'' is a conservative options strategy in which 
an investor buys a stock or portfolio and writes call options on the 
stock or portfolio. This strategy is also known as a ``covered 
call'' strategy. A buy-write strategy provides option premium income 
to cushion decreases in the value of an equity portfolio, but will 
underperform stocks in a rising market. A buy-write strategy tends 
to lessen overall volatility in a portfolio.
    \16\ The BXM Index consists of a long position in the component 
securities of the S&P 500 and options on the S&P 500 (e.g., 
``writing'' the near-term S&P 500 Index covered call option, 
generally on the third Friday of each month). The Commission has 
approved the listing of numerous securities linked to the 
performance of the S&P 500 as well as options on the S&P 500. See, 
e.g., Securities Exchange Act Release Nos. 48486 (September 11, 
2003), 68 FR 54758 (September 18, 2003) (approving the listing and 
trading of CSFB Contingent Principal Protected Notes on the S&P 
500); 48152 (July 10, 2003), 68 FR 42435 (July 17, 2003) (approving 
the listing and trading of UBS Partial Principal Protected Notes 
linked to the S&P 500); 47983 (June 4, 2003), 68 FR 35032 (June 11, 
2003) (approving the listing and trading of CSFB Accelerated Return 
Notes linked to the S&P 500); 47911 (May 22, 2003), 68 FR 32558 (May 
30, 2003) (approving the listing and trading of notes (Wachovia 
TEES) linked to the S&P 500); and 19907 (June 24, 1983), 48 FR 30814 
(July 5, 1983) (approving the listing and trading of options on the 
S&P 500). In addition, the Commission previously approved the 
listing and trading of a packaged buy-write option strategy known as 
``BOUNDS.'' See Securities Exchange Act Release No. 36710 (January 
11, 1996), 61 FR 1791 (January 23, 1996).
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    The BXM Index is a passive total return index based on (1) buying a 
portfolio consisting of the component stocks of the S&P 500, and (2) 
``writing'' (or selling) near-term S&P 500 call options (SPX), 
generally on the third Friday of each month. This strategy consists of 
a hypothetical portfolio consisting of a ``long'' position indexed to 
the S&P 500 on which are deemed sold a succession of one-month, at-the-
money call options on the S&P 500 (SPX) listed on the CBOE. Dividends 
paid on the component stocks underlying the S&P 500 and the dollar 
value of option premium deemed received from the sold call options are 
functionally ``re-invested'' in the covered S&P 500 portfolio.
    The value of the BXM Index on any given date will equal: the value 
of the BXM Index on the previous day, multiplied by the daily rate of 
return\17\ on the covered S&P 500 portfolio on that date. Thus, the 
daily change in the BXM Index reflects the daily changes in value of 
the covered S&P 500 portfolio, which consists of the S&P 500 (including 
dividends) and the component S&P 500 option (SPX). The daily closing 
price of the BXM Index is calculated and disseminated by the CBOE on 
its Web site at http://www.cboe.com and via the Options Pricing and 
Reporting Authority (``OPRA'') at the end of each trading day.\18\ The 
value of the S&P 500 Index is disseminated at least once every fifteen 
(15) seconds throughout the trading day. The Exchange believes that the 
dissemination of the S&P 500, along with the ability of investors to 
obtain S&P 500 call option pricing provides sufficient transparency 
regarding the BXM Index.\19\ In addition, as indicated above, the value 
of the BXM Index is calculated once every trading day, thereby 
providing investors with a daily value of such ``hypothetical'' buy-
write options strategy on the S&P 500.
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    \17\ The daily rate of return on the covered S&P 500 portfolio 
is based on (a) the change in the closing value of the stocks in the 
S&P 500 portfolio, (b) the value of ordinary cash dividends on the 
stocks underlying the S&P 500, and (c) the change in the market 
price of the call option. The daily rate of return will also include 
the value of ordinary cash dividends distributed on the stocks 
underlying the S&P 500 that are trading ``ex-dividend'' on that date 
(that is, when transactions in the stock on an organized securities 
exchange or trading system no longer carry the right to receive that 
dividend or distribution) as measured from the close in trading on 
the previous day.
    \18\ The Commission, in connection with Bond Index Term Notes 
and the Merrill Lynch EuroFund Market Index Target Term Securities, 
has previously approved the listing and trading of products where 
the dissemination of the value of the underlying index occurred once 
per trading day. See Securities Exchange Act Release Nos. 41334 
(April 27, 1999), 64 FR 23883 (May 4, 1999) (approving the listing 
and trading of Bond Indexed Term Notes); and 40367 (August 26, 
1998), 63 FR 47052 (September 3, 1998) (approving the listing and 
trading of Merrill Lynch EuroFund Market Index Target Term 
Securities).
    \19\ Call options on the S&P 500 (SPX) are traded on the CBOE, 
and both last sale and quotation information for the call options 
are disseminated in real time through OPRA. The value of the BXM can 
be readily approximated as a function of observable market prices 
throughout the trading day. In particular, such a calculation would 
require information on the current price of the S&P 500 index and 
specific nearest-to-expiration call and put options on that index. 
These components trade in highly liquid markets, and real-time 
prices are available continuously throughout the trading day from a 
number of sources including Bloomberg and CBOE. The ``Indicative 
Value'' (as discussed below) may be a more accurate indicator of the 
valuation of the Notes because it reflects the fees associated with 
the Notes (e.g., on the initial principal amount and the Adjustment 
Amount); however, the ``Indicative Value'' is also not adjusted 
intraday. Telephone conference between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Florence E. Harmon, Senior Special 
Counsel, Commission, on November 22, 2004.
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    The BXM Index value will be calculated and disseminated by the CBOE 
once every trading day after the close. The daily change in the BXM 
Index reflects the daily changes in the S&P 500 and related options 
positions. The Exchange states that Morgan Stanley represents that it 
will seek to arrange to have the BXM Index calculated and disseminated 
on a daily basis through a third party if the CBOE ceases to calculate 
and disseminate the Index.\20\ If, however, Morgan Stanley is unable to 
arrange the calculation and dissemination of the BXM Index as indicated 
above, the Exchange will delist the Notes.\21\
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    \20\ Prior to such change in the manner in which the BXM Index 
is calculated, the Exchange will file a proposed rule change 
pursuant to Rule 19b-4, which must be approved by the Commission 
prior to continued listing and trading in the Notes. Telephone 
conference between Jeffrey P. Burns, Associate General Counsel, 
Amex, and Florence E. Harmon, Senior Special Counsel, Commission, on 
November 22, 2004.
    \21\ See supra note 5.
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    In order to provide an updated value of the Net Entitlement Value 
for use by investors, the Exchange will disseminate over the 
Consolidated Tape Association's Network B, a daily indicative Net 
Entitlement Value equal to the Net Entitlement Value on the previous 
trading day multiplied by the percentage change in the BXM Index, 
adjusted on a monthly basis on each Roll Date by the Adjustment Amount 
(the ``Indicative Value''). The Indicative Value will be calculated by 
the Amex after the close of trading and after the CBOE calculates the 
BXM Index for use by investors the next trading day. It is designed to 
provide investors with a daily reference value of the adjusted Index. 
The Indicative Value may not reflect the precise value of the current 
Net Entitlement Value or amount payable upon repurchase or maturity. 
Therefore, the Indicative Value disseminated by the Amex during trading 
hours should not be viewed as a real time update of the BXM Index, 
which is calculated only once a day. While the Indicative Value that 
will be disseminated by the Amex is expected to be close to the current 
BXM Index value, the values of the Indicative Value and the BXM Index 
will diverge due to the application of the Adjustment Amount.
    From June 30, 1988 through September 30, 2004, the annualized 
returns for the BXM Index and the S&P 500 were 11.53% and 11.98%, 
respectively, with a total deviation of the returns during the same 
time period of 39.62%. As the chart in attached Exhibit A of the 
Exchange's Form 19b-4 indicates, the BXM Index will closely track the 
S&P 500 except in those cases where the market is significantly rising 
or decreasing. In the case of a fast rising market, the BXM Index will 
trail the S&P 500 due to the limited upside potential of the Index 
because of the ``buy-write'' strategy. Due to the cushioning effect of 
the ``buy-write'' strategy, the BXM Index has in the past exhibited 
negative returns that are less than the S&P 500 during a down market. 
The Exchange expects the BXM Index to continue to display these 
characteristics.
    The call options included in the value of the BXM Index have 
successive terms of approximately one month. Each day that an option 
expires, which day is referred to as a ``roll'' date, that option's 
value at expiration is taken into account in the value of the BXM 
Index. At expiration, the call option is settled

[[Page 69647]]

against the ``Special Opening Quotation,'' a special calculation of the 
S&P 500. The final settlement price of the call option at expiration is 
equal to the difference between the Special Opening Quotation and the 
strike price of the expired call option, or zero, whichever is greater, 
and is removed from the value of the BXM Index. Subsequent to the 
settlement of the expired call option, a new, ``short'' or sold at-the-
money call option is included in the value of the BXM Index.\22\ The 
initial value of the new call option is calculated by the CBOE and is 
based on the volume-weighted average of all the transaction prices of 
the new call option during a designated time period on the day the 
strike price is determined.\23\
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    \22\ Like the expired call option, the new call option will 
expire approximately one month after the date of sale.
    \23\ For this purpose, the CBOE excludes from the calculation 
those call options identified as having been executed as part of a 
spread (i.e., a position taken in two or more options in order to 
profit through changes in the relative prices of those options).
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    As of October 18, 2004, the market capitalization of the securities 
included in the S&P 500 Index ranged from a high of $351.4 billion to a 
low of $373 million. The average daily trading volume for these same 
securities for the last six (6) months ranged from a high of 63.8 
million shares to a low of 140,500 shares.
    The Exchange represents that it prohibits the initial and/or 
continued listing of any security that is not in compliance with Rule 
10A-3 under the Act.\24\
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    \24\ See Rule 10A-3(c)(1).
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    Because the Notes are expected to be issued in $10 denominations, 
the Exchange's existing equity floor trading rules will apply to the 
trading of the Notes. First, pursuant to Amex Rule 411, the Exchange 
will impose a duty of due diligence on its members and member firms to 
learn the essential facts relating to every customer prior to trading 
the Notes.\25\ Second, the Notes will be subject to the equity margin 
rules of the Exchange.\26\ Third, the Exchange will, prior to trading 
the Notes, distribute a circular to the membership providing guidance 
with regard to member firm compliance responsibilities (including 
suitability recommendations) when handling transactions in the Notes 
and highlighting the special risks and characteristics of the Notes. 
For example, the information circular will disclose that the Notes are 
suitable for investors pursuing a ``buy and hold'' strategy because the 
Notes are most appropriate for investors who want to be hedged against 
a full decline in the S&P 500 and are willing to forego full 
appreciation of the S&P 500.\27\ With respect to suitability 
recommendations and risks, the Exchange will require members, member 
organizations and employees thereof recommending a transaction in the 
Notes: (1) To determine that such transaction is suitable for the 
customer, and (2) to have a reasonable basis for believing that the 
customer can evaluate the special characteristics of, and is able to 
bear the financial risks of such transaction. In addition, Morgan 
Stanley will deliver a prospectus in connection with its sales of the 
Notes.
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    \25\ Amex Rule 411 requires that every member, member firm or 
member corporation use due diligence to learn the essential facts, 
relative to every customer and to every order or account accepted.
    \26\ See Amex Rule 462 and Section 107B of the Company Guide.
    \27\ Telephone conference between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Florence E, Harmon, Senior Special 
Counsel, Commission, on November 22, 2004.
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    The Exchange represents that its surveillance procedures are 
adequate to properly monitor the trading of the Notes. Specifically, 
the Amex will rely on its existing surveillance procedures governing 
equities and options that include additional monitoring on key pricing 
dates, which have been deemed adequate under the Act. In addition, the 
Exchange also has a general policy, which prohibits the distribution of 
material, non-public information by its employees.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6 of the Act \28\ in general and furthers the objectives 
of section 6(b)(5) \29\ in particular in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, protect investors 
and the public interest.
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    \28\ 15 U.S.C. 78f.
    \29\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange did not solicit or receive any written comments on the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-Amex-2004-55 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to SR-Amex-2004-55. This file number 
should be included on the subject line if e-mail is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room, 450 Fifth Street, NW., Washington, 
DC 20549. Copies of the filing also will be available for inspection 
and copying at the principal office of the Amex. All comments received 
will be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to SR-Amex-2004-55 and should be submitted on or before 
December 21, 2004.

[[Page 69648]]

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    Amex has asked the Commission to approve the proposal on an 
accelerated basis to accommodate the timetable for listing the Notes. 
After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange, and, in particular, with the requirements of section 6(b)(5) 
of the Act.\30\ The Commission finds that this proposal is similar to 
several approved instruments currently listed and traded on the 
Amex.\31\ Accordingly, the Commission finds that the listing and 
trading of the Notes based on the BXM Index is consistent with the Act 
and will promote just and equitable principles of trade, foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to and 
facilitating transactions in securities consistent with section 6(b)(5) 
of the Act.\32\
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    \30\ 15 U.S.C. 78f(b)(5).
    \31\ See, e.g., Securities Exchange Act Release Nos. 48486 
(September 11, 2003), 68 FR 54758 (September 18, 2003) (approving 
the listing and trading of CSFB Contingent Principal Protected Notes 
on the S&P 500); 48152 (July 10, 2003), 68 FR 42435 (July 17, 2003) 
(approving the listing and trading of UBS Partial Principal 
Protected Notes linked to the S&P 500); 47983 (June 4, 2003), 68 FR 
35032 (June 11, 2003) (approving the listing and trading of CSFB 
Accelerated Return Notes linked to S&P 500); 47911 (May 22, 2003), 
68 FR 32558 (May 30, 2003) (approving the listing and trading of 
notes (Wachovia TEES) linked to the S&P 500); 45160 (December 17, 
2001), 66 FR 66485 (December 26, 2001) (approving the listing and 
trading of non-principal protected notes linked to the Balanced 
Strategy Index); 44483 (June 27, 2001), 66 FR 35677 (July 6, 2001) 
(approving the listing and trading of non-principal protected notes 
linked to the Institutional Holdings Index); 44437 (June 18, 2001), 
66 FR 33585 (June 22, 2001) (approving the listing and trading of 
non-principal protected notes linked to the Industrial 15 Index); 
44342 (May 23, 2001), 66 FR 29613 (May 31, 2001) (approving the 
listing and trading of non-principal protected notes linked to the 
Select Ten Index); and 36710 (January 11, 1996), 61 FR 1791 (January 
23, 1996) (approving the listing and trading of BOUNDS).
    \32\ 15 U.S.C. 78f(b)(5). In approving the proposed rule, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
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    The Notes will provide investors who are willing to forego market 
interest payments during the term of the Notes with a means to gain 
exposure to the Index, subject to the Adjustment Amount. The Commission 
notes that the Notes will not have a minimum principal investment 
amount that will be repaid, and payment on the Notes prior to or at 
maturity may be less than the original issue price of the Notes.
    As described more fully above, at maturity or upon earlier exchange 
or redemption during a designated period, the holder of a Note will 
receive an amount based upon the value of the BXM Index. The Commission 
notes that the Notes will be redeemable at the option of a holder 
thereof during a designated month each year, commencing in 2005, 
subject to certain minimum exchange amounts in the case of partial 
redemptions. The issuer, Morgan Stanley, will also be able to redeem 
the Notes on a quarterly basis beginning in June 2007.
    The entitlement value of the Notes at maturity or upon earlier 
exchange or redemption will depend on the relation of the Final Index 
Value and Initial Index Value of the BXM Index, reduced by an 
Adjustment Amount. The Commission notes that the Initial Index Value 
will equal the closing value of the BXM Index on the date Morgan 
Stanley prices the Notes for initial sale to the public. The Initial 
Net Entitlement Value will be equal to $9.88 (e.g., 1.20% less than the 
original issue price of the Notes). The BXM Index Performance on any 
trading day will be equal to the ``Index Value'' on that trading day 
divided by the ``Initial Index Value.'' The Index Value on any trading 
day will be the closing value of the BXM Index on that trading day. The 
Adjustment Amount, by which the investor's return is also reduced, will 
equal approximately 2.00% per year. For purposes of determining the 
amount payable in respect of any exchange or upon early redemption or 
at maturity of the Notes, the Net Entitlement Value will be determined 
on the fifth scheduled trading day immediately prior to the early 
redemption date, or the maturity date, as applicable. The Net 
Entitlement Value will be determined on the last trading day of that 
exchange period for any investor exchange of the Notes. The Net 
Entitlement Value that a holder of a Note will receive upon exchange, 
early redemption, or at maturity will depend on the relation of the 
Final Index Value to the Initial Index Value of the BXM Index and will 
always be 1.20% less than the original issue price and include the 
Adjustment Amount. In the case of a ``market disruption event'' \33\ 
when determining the Final Index Value, the Final Index Value will be 
determined on the next available trading day during which no market 
disruption event occurs.
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    \33\ See supra note 13 (defining ``market disruption event'').
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    The Commission notes that the Adjustment Amount will reduce a 
holder's participation in the BXM Index and will accordingly reduce the 
entitlement value upon maturity or earlier exchange or issuer 
redemption. Given the effect of the initial index value calculation 
combined with the Adjustment Amount, the Commission notes that if the 
BXM Index decreases or does not increase significantly, a holder would 
likely receive less than the initial $10 principal per note over the 
course of the term of the Notes.
    The Commission notes the Exchange's rules that address the special 
concerns attendant to the trading of hybrid securities will be 
applicable to the Notes. Moreover, the Commission notes that the 
Exchange will distribute a circular to its membership calling attention 
to the specific risks associated with the Notes. The Commission also 
notes that Morgan Stanley will deliver a prospectus in connection with 
the initial sales of the Notes.
    The Commission notes that the BXM Index is determined, calculated 
and maintained solely by the CBOE. As of October 18, 2004, the market 
capitalization of the securities included in the S&P 500 Index ranged 
from a high of $351.4 billion to a low of $373 million. The average 
daily trading volume for these same securities for the last six (6) 
months ranged from a high of 63.8 million shares to a low of 140,500 
shares.
    Given the large trading volume and capitalization of the 
compositions of the stocks underlying the S&P 500 Index, the Commission 
believes that the listing and trading of the Notes that are linked to 
the BXM Index should not unduly impact the market for the underlying 
securities comprising the S&P 500 Index or raise manipulative 
concerns.\34\
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    \34\ The issuer, Morgan Stanley, disclosed in the prospectus 
that the original issue price of the notes includes commissions and 
Morgan Stanley's costs of hedging its obligations under the Notes. 
The inclusion of these costs in the initial offering price of the 
Notes will likely adversely affect the secondary market price of the 
Notes. The Commission expects such hedging activity to be conducted 
in accordance with applicable regulatory requirements.
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    In addition, the Exchange's equity margin and trading rules will 
apply to the Notes.
    Furthermore, the Commission notes that the Notes are dependant upon 
the individual credit of the issuer, Morgan Stanley. To some extent, 
this credit risk is minimized by the Exchange's listing standards in 
Section 107A of the Company Guide that provide that only issuers 
satisfying substantial asset and equity requirements may issue 
securities such as the Notes. In addition, the Amex's listing standards 
require that the Notes have a market value of at least

[[Page 69649]]

$4 million.\35\ In any event, financial information regarding Morgan 
Stanley, in addition to the information on the component stocks 
comprising the Index, will be publicly available.\36\
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    \35\ Section 107A(c) of the Company Guide.
    \36\ The Commission notes that the component stocks that 
comprise the Index are reporting companies under the Act, and the 
Notes will be registered under Section 12 of the Act.
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    Finally, the Commission notes that the value of the Index will be 
calculated and disseminated by the CBOE once every trading day after 
the close of trading. In addition, the Commission notes that the value 
of the S&P 500 Index will be disseminated at least once every fifteen 
seconds throughout the trading day and that investors are able to 
obtain call option pricing on the S&P 500 Index. Further, the 
Indicative Value, which will be calculated by the Amex after the close 
of trading and after the CBOE calculates the BXM Index for use by 
investors the next trading day, is designed to provide investors with a 
daily reference value of the adjusted Index. The Commission notes that 
Morgan Stanley has agreed to arrange to have the BXM Index calculated 
and disseminated on a daily basis through a third party in the event 
that the CBOE discontinues calculating and disseminating the Index. In 
such event, the Exchange agrees to obtain Commission approval, pursuant 
to filing the appropriate Form 19b-4, prior to the substitution of 
CBOE. Further, the Commission notes that the Exchange has agreed to 
undertake to delist the Notes in the event that CBOE ceases to 
calculate and disseminate the Index and Morgan Stanley is unable to 
arrange to have the BXM Index calculated and widely disseminated 
through a third party.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of the 
notice of filing thereof in the Federal Register. The Exchange has 
requested accelerated approval because this product is similar to 
several other instruments currently listed and traded on the Amex.\37\ 
The Commission believes that the Notes will provide investors with an 
additional investment choice and that accelerated approval of the 
proposal will allow investors to begin trading the Notes promptly. 
Additionally, the Notes will be listed pursuant to Amex's hybrid 
security listing standards as described above. Based on the above, the 
Commission believes that there is good cause, consistent with Sections 
6(b)(5) and 19(b)(2) of the Act \38\ to approve the proposal on an 
accelerated basis.
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    \37\ See supra note 31.
    \38\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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V. Conclusion

    Is it therefore ordered, pursuant to section 19(b)(2) of the 
Act,\39\ that the proposed rule change (SR-Amex-2004-55) is hereby 
approved on an accelerated basis.
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    \39\ 15 U.S.C. 78o-3(b)(6) and 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\40\
Margaret H. McFarland,
Deputy Secretary.
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    \40\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E4-3382 Filed 11-29-04; 8:45 am]
BILLING CODE 8010-01-P