[Federal Register Volume 70, Number 60 (Wednesday, March 30, 2005)]
[Notices]
[Pages 16315-16321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1392]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51426; File No. SR-Amex-2005-022]


Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Relating to the Listing and Trading of Notes Linked to the 
Performance of the CBOE S&P 500 BuyWrite IndexSM

March 23, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, as amended (the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on February 11, 2005, 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. 
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.
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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, the performance of 
which is linked to the S&P 500 BuyWrite IndexSM (``BXM 
Index'' or ``Index''). The text of the proposed rule change is 
available on the Amex's Web site

[[Page 16316]]

[http://www.amex.com], at the principal offices of the Amex, and at the 
Commission's Public Reference Room.

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 Amex Company Guide (``Company Guide''), 
the Exchange may approve for listing and trading securities that cannot 
be readily categorized under the listing criteria for common and 
preferred stocks, bonds, debentures, or warrants.\3\ The Amex proposes 
to list for trading under Section 107A of the Company Guide notes 
linked to the performance of the BXM Index (the ``Notes''). The BXM 
Index is determined, calculated, and maintained solely by the Chicago 
Board of Options Exchange (``CBOE'').\4\ Morgan Stanley will issue the 
Notes under the name ``8% Targeted Income Strategic Total Return 
Securities.'' \5\
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    \3\ See Securities Exchange Act Release No. 27753 (Mar. 1, 
1990), 55 FR 8626 (Mar. 8, 1990) (order approving File No. SR-Amex-
89-29).
    \4\ 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 (the ``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 
Richard Holley III, Attorney, Division of Market Regulation 
(``Division''), Commission, on February 18, 2005.
    \5\ 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 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 \6\ and continued listing guidelines under Sections 1001-
1003 \7\ 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,\8\ 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, 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.\10\ The Notes will have a term of at least one (1) but no 
more than ten (10) years.\11\
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    \6\ 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 which is unable to 
satisfy the earning criteria stated in Section 101 of the Company 
Guide, the Exchange 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.
    \7\ 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.
    \8\ Telephone conference between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Richard Holley III, Attorney, Division, 
Commission, on February 18, 2005.
    \9\ The Adjustment Amount on any trading day will equal $0.00274 
each day multiplied by the number of calendar days since the 
immediately preceding trading day, and this will reduce the Net 
Entitlement Amount by $1.00 each year per Note. Telephone conference 
between Jeffrey P. Burns, Associate General Counsel, Amex, and 
Florence Harmon, Senior Special Counsel, Division, Commission, on 
March 23, 2005.
    \10\ Telephone conference between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Richard Holley III, Attorney, Division, 
Commission, on February 18, 2005.
    \11\ The term of the Notes is expected to be five years and will 
be disclosed in the pricing supplement.
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    Commencing on March 30, 2005, holders of the notes will receive 
interim payments on a monthly basis at the rate of $0.0667 per note (8% 
on the principal amount per year or $0.80 per Note per year). In 
addition, beginning in June 2005 and ending in December 2009, on a 
quarterly basis during the first ten (10) calendar days of March, June, 
September, and December, 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 and any accrued interim 
payments from and including the last payment date to and including the 
applicable valuation date for such exchange date. The minimum exchange 
amount is 10,000 Notes.\12\ Commencing in September 2007, or earlier if 
the Net Entitlement Value is below $2.00, 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 March 30, 2010.\13\
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    \12\ There will be no minimum exchange amount during a ``credit 
exchange event,'' which is defined in the prospectus as the period 
during which Morgan Stanley's senior debt is downgraded below A-by 
Standard & Poor's Rating Services or below A3 by Moody's Investors 
Service, Inc. Telephone conference between Jeffrey P. Burns, 
Associate General Counsel, Amex, and Richard Holley III, Attorney, 
Division, Commission, on February 18, 2005.
    \13\ Telephone conference between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, on March 23, 2005.
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    The ``Net Entitlement Value'' on any trading day (other than the 
day the

[[Page 16317]]

Notes are initially sold to the public) equals (i) the ``Net 
Entitlement Value'' on the previous trading day 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 (i.e., 1.20 percent 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 ``Index Value'' 
on the previous trading day (the ``Previous 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 be equal to approximately $1.00 or 10 percent per 
Note per year.\14\ For purposes of determining the amount payable in 
respect of any exchange by the investor or upon early redemption of the 
Notes by Morgan Stanley,\15\ the Net Entitlement Value will be 
determined on the last trading day immediately prior to the exchange 
date or early redemption date, as applicable. For the purposes of 
calculating the Net Entitlement Value payable on the maturity date, 
however, the ``Maturity Valuation Date'' will be the third scheduled 
trading day immediately prior to the maturity date, unless there is a 
market disruption event on that date.
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    \14\ Telephone conference between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, on March 23, 2005. See also supra note 9 
(discussing the Adjustment Amount).
    \15\ Beginning in September 2007, Morgan Stanley may redeem the 
Notes for mandatory exchange on the fifth trading day after any 
exchange date. Telephone conference between Jeffrey P. Burns, 
Associate General Counsel, Amex, and Florence Harmon, Senior Special 
Counsel, Division, Commission, on March 23, 2005.
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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 current Index Value to the previous trading day's Index Value of 
the BXM Index and will always be 1.20 percent less than the original 
issue price and include the Adjustment Amount.\16\ If there is a 
``market disruption event'' \17\ when determining the Index Value, the 
Index Value will be determined on the next available trading day during 
which no ``market disruption event'' occurs. Thus, the Net Entitlement 
Value (on any trading day other than the day the Notes are initially 
priced for sale to the public) per Note will equal:
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    \16\ Telephone conference between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, on March 23, 2005.
    \17\ 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] TN30MR05.000

    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 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.\18\
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    \18\ See Securities Exchange Act Release Nos. 50719 (Nov. 22, 
2004), 69 FR 69644 (Nov. 30, 2004) (approving the listing and 
trading of non-principal protected notes linked to the BXM Index) 
(File No. SR-Amex-2004-55); 49548 (Apr. 9, 2004), 69 FR 20089 (Apr. 
15, 2004) (approving the listing and trading of non-principal 
protected notes linked to the Select Utility Index) (File No. SR-
Amex-2004-02); 45639 (Mar. 25, 2002), 67 FR 15258 (Mar. 29, 2002) 
(approving the listing and trading of non-principal protected notes 
linked to the Oil and Natural Gas Index) (File No. SR-Amex-2002-18); 
45305 (Jan. 17, 2002), 67 FR 3753 (Jan. 25, 2002) (approving the 
listing and trading of non-principal protected notes linked to the 
Biotech-Pharmaceutical Index) (File No. SR-Amex-2001-108); 45160 
(Dec. 17, 2001), 66 FR 66485 (Dec. 26, 2001) (approving the listing 
and trading of non-principal protected notes linked to the Balanced 
Strategy Index) (File No. SR-Amex-2001-91); 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) (File No. SR-Amex-2001-40); 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) (File 
No. SR-Amex-2001-39); 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) (File No. SR-Amex-2001-28).
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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'' \19\ strategy on the S&P 
500. Developed by the CBOE in cooperation with S&P, the Index was 
initially announced in April 2002.\20\ The

[[Page 16318]]

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 that otherwise may seem complicated and inordinately risky.
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    \19\ 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.
    \20\ 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 (Sept. 11, 2003), 
68 FR 54758 (Sept. 18, 2003) (approving the listing and trading of 
CSFB Contingent Principal Protected Notes on the S&P 500) (File No. 
SR-Amex-2003-74); 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) (File No. SR-Amex-2003-62); 
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) (File No. SR-Amex-2003-45); 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) (File No. SR-Amex-2003-46); 
and 19907 (June 24, 1983), 48 FR 30814 (July 5, 1983) (approving the 
listing and trading of options on the S&P 500) (File No. SR-CBOE-83-
8). 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 (Jan. 11, 1996), 61 FR 
1791 (Jan. 23, 1996) (File No. SR-Amex-94-56).
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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 \21\ 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.\22\ The 
value of the S&P 500 Index is widely disseminated at least once every 
fifteen (15) seconds throughout the trading day. The Exchange believes 
that the intraday dissemination of the S&P 500, along with the ability 
of investors to obtain real time, intraday S&P 500 call option pricing, 
provides sufficient transparency regarding the BXM Index.\23\ 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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    \21\ 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.
    \22\ The Commission, in connection with the Strategic Total 
Return Securities, the 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. 50719 (Nov. 22, 2004), 69 
FR 69644 (Nov. 30, 2004) (approving the listing and trading of non-
principal protected notes linked to the BXM Index) (File No. SR-
Amex-2004-55); 41334 (Apr. 27, 1999), 64 FR 23883 (May 4, 1999) 
(approving the listing and trading or Bond Indexed Term Notes) (File 
No. SR-Amex-99-03); and 40367 (Aug. 26, 1998), 63 FR 47052 (Sept. 3, 
1998) (approving the listing and trading of Merrill Lynch EuroFund 
Market Index Target Term Securities) (File No. SR-Amex-98-24).
    \23\ 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 Richard Holley III, Attorney, Division, 
Commission, on February 18, 2005.
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    The CBOE has represented that 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 has represented 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.\24\ 
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.\25\
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    \24\ 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 Richard Holley III, Attorney, Division, Commission, on 
February 18, 2005.
    \25\ See supra note 4 (regarding discontinuation of the 
calculation and dissemination of the Notes).
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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.\26\
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    \26\ The Indicative Value will not reflect the interest payments 
on the Notes. Telephone conference between Jeffrey P. Burns, 
Associate General Counsel, Amex, and Florence Harmon, Senior Special 
Counsel, Division, Commission, on March 23, 2005.
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    From June 30, 1988 through January 31, 2005, the annualized returns 
for the BXM Index and the S&P 500 were 11.94 percent and 11.71 percent, 
respectively, with a total deviation of the returns during the same 
time period of 21.33 percent. As the chart in Exhibit A to 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

[[Page 16319]]

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 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.\27\ 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.\28\
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    \27\ Like the expired call option, the new call option will 
expire approximately one month after the date of sale.
    \28\ 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 February 9, 2005, the market capitalization of the securities 
included in the S&P 500 Index ranged from a high of $382 billion to a 
low of $566 million. The average daily trading volume for these same 
securities for the last six (6) months ranged from a high of 16.9 
million shares to a low of 350,830 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.\29\
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    \29\ 17 CFR 240.10A-3.
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    Because the Notes are expected to be issued in $10 denominations, 
the Amex'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.\30\ Second, the Notes will be subject to the equity margin 
rules of the Exchange.\31\ 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. 
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.\32\ In addition, Morgan Stanley will deliver a prospectus 
in connection with its sales of the Notes.
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    \30\ 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.
    \31\ See Amex Rule 462 and Section 107B of the Company Guide.
    \32\ See Amex Rule 411.
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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,\33\ 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.
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    \33\ Telephone conference between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, on March 23, 2005.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act \34\ in general and furthers the objectives 
of Section 6(b)(5) \35\ 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.
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    \34\ 15 U.S.C. 78f.
    \35\ 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 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 at http://www.sec.gov/rules/sro.shtml; or
     Send an E-mail to [email protected]. Please include 
SR-Amex-2005-022 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 File No. SR-Amex-2005-022. 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 at 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. Copies of such 
filing also will be available on the Exchange's Web site at http://www.amex.com and for inspection and copying at the principal office of 
the Exchange. 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 File No. SR-Amex-
2005-022 and should be submitted on or before April 20, 2005.

[[Page 16320]]

IV. Commission's Findings and Order Granting Accelerated Approval of 
the 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.\36\ The Commission finds that this proposal is similar to 
several approved instruments currently listed and traded on the 
Amex.\37\ 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.\38\
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    \36\ 15 U.S.C. 78f(b)(5).
    \37\ See, e.g., Securities Exchange Act Release Nos. 48486 
(Sept. 11, 2003), 68 FR 54758 (Sept. 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 (Dec. 17, 2001), 
66 FR 66485 (Dec. 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 (Jan. 11, 1996), 61 FR 1791 (Jan. 23, 1996) 
(approving the listing and trading of BOUNDS).
    \38\ 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 requirements of Section 107A of the Company Guide were designed 
to address the concerns attendant to the trading of hybrid securities, 
like the Notes. For example, Section 107A of the Company Guide provides 
that only issuers satisfying substantial asset and equity requirements 
may issue securities such as the Notes. In addition, the Exchange's 
``Other Securities'' listing standards further require that the Notes 
have a market value of at least $4 million.\39\ In any event, financial 
information regarding Morgan Stanley, in addition to the information on 
the component stocks, which are reporting companies under the Act, and 
the Notes, which will be registered under Section 12 of the Act, will 
be available.
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    \39\ See Company Guide Section 107A(c).
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    In approving the product, the Commission recognizes that the 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. 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 compromising the S&P 500 Index or 
raise manipulative concerns.\40\ Moreover, the issuers of the 
underlying securities comprising the S&P 500 Index are subject to 
reporting requirements under the Act, and all of the component stocks 
are either listed or traded on, or traded through the facilities of, 
U.S. securities markets.
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    \40\ The issuer, Morgan Stanley, disclosed in the prospectus 
that the original issue price of the Notes includes commissions (and 
the secondary market prices are likely to exclude commissions) and 
Morgan Stanley's costs of hedging its obligations under the Notes. 
These costs could increase the initial value of the Notes, thus 
affecting the payment investors receive at maturity. Additionally, 
the issuer discloses in the prospectus that the hedging activities 
of its affiliates, including selling call options on the S&P 500, 
could affect the value of these call option during the half hour 
period in which their value is determined for purposes of inclusion 
in the BXM Index. Such hedging activity must, of course, be 
conducted in accordance with applicable regulatory requirements.
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    The Commission also believes that any concerns that a broker-
dealer, such as Morgan Stanley, or a subsidiary providing a hedge for 
the issuer, will incur undue position exposure are minimized by the 
size of the Notes issuance in relation to the net worth of Morgan 
Stanley.\41\
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    \41\ See Securities Exchange Act Release Nos. 44913 (Oct. 9, 
2001), 66 FR 52469 (Oct. 15, 2001) (order approving the listing and 
trading of notes whose return is based on the performance of the 
Nasdaq-100 Index) (File No. SR-NASD-2001-73); 44483 (June 27, 2001), 
66 FR 35677 (July 6, 2001) (order approving the listing and trading 
of notes whose return is based on a portfolio of 20 securities 
selected from the Amex Institutional Index) (File No. SR-Amex-2001-
40); and 3774 (Sept. 27, 1996), 61 FR 52480 (Oct. 7, 1996) (order 
approving the listing and trading of notes whose return is based on 
a weighted portfolio of healthcare/biotechnology industry 
securities) (File No. SR-Amex-96-27).
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    Finally, the Commission notes that the value of the Index will be 
calculated and disseminated by CBOE once every trading day after the 
close of trading. However, the Commission notes that the value of the 
S&P 500 Index will be widely disseminated at least once every fifteen 
seconds throughout the trading day and that investors are able to 
obtain real-time call option pricing on the S&P 500 Index during the 
trading day. 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 30th 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.\42\ 
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 existing 
hybrid security listing standards as described above. Therefore, the 
Commission finds good cause, consistent with Section 19(b)(2) of the 
Act,\43\ to approve the proposal on an accelerated basis.
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    \42\ See supra notes 13 (citing previous approvals of securities 
with structures similar to that of the proposed Notes); and 15 
(citing previous approvals of securities linked to the performance 
of the S&P 500 as well as options on the S&P 500).
    \43\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\44\ that the proposed rule change (SR-Amex-2005-

[[Page 16321]]

022) is hereby approved on an accelerated basis.
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    \44\ 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.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-1392 Filed 3-29-05; 8:45 am]
BILLING CODE 8010-01-P