Federal Register / Vol. 62, No. 186 / Thursday, September 25, 1997 / Notices 50419

4 15 U.S.C. 78q–1(b)(3)(F).

5 Id.

6Supra note 3.

7 15 U.S.C. 78s(b)(2).

8 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2The Commission has modified the text of the

summaries prepared by OCC.

margined like OCC’s existing foreign

currency and cross-rate foreign currency

option contracts. Accordingly, OCC has

determined that no changes to its bylaws or rules are necessary to

accommodate these new contracts.

OCC believes the proposed rule

change is consistent with the

requirements of Section 17A(b)(3)(F) of

the Act 4 and the rules and regulations

thereunder because it promotes

efficiencies in the clearance and

settlement of securities transactions.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

OCC does not believe that the

proposed rule change would impose any

burden on competition.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Members, Participants or Others

Written comments were not and are

not intended to be solicited with respect

to the proposed rule change, and none

were received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Section 17A(b)(3)(F) of the Act 5

requires that the rules of a clearing

agency be designed to assure the

safeguarding of securities and funds

which are in the custody and control of

the clearing agency or for which it is

responsible. OCC’s proposal will allow

the clearance and settlement of flexibly

structured option contracts where the

peso is either the trading currency or the

underlying currency by using existing

OCC systems, rules, and procedures

already in place for flexibly structured

foreign currency options and for crossrate foreign currency options. Due to the

similarity of these option contracts to

the option contracts currently cleared

and settled in OCC’s existing system,

OCC should be able to implement the

clearance and settlement of such

options safely and in a manner

consistent with its obligations under

Section 17A. Thus, the Commission is

approving OCC’s proposal, subject to

the Commission’s approval of the

proposed rule change contained in File

No. SR–PHLX–97–22.6

The Commission finds good cause for

approving the proposed rule change

prior to the thirtieth day after the

publication of notice of the filing.

Approving prior to the thirtieth day

after publication of notice will allow

OCC to issue, clear, and settle flexibly

structured options and cross-rate foreign

currency options on the Mexican peso

as soon as the Commission approves

PHLX’s trading of such options.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. 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

Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filing also will be available for

inspection and copying at the principal

office of OCC. All submissions should

refer to File No. SR–OCC–97–10 and

should be submitted by October 16,

1997.

It Is Therefore Ordered, pursuant to

Section 19(b)(2) of the Act,7 that the

proposed rule change (File No. SR–

OCC–97–10) be and hereby is approved,

subject to the Commission’s final

approval of the proposed rule change

contained in File No. SR–PHLX–97–22.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.8

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–25375 Filed 9–24–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39094; File No. SR–OCC–

97–06]

Self-Regulatory Organizations, The

Options Clearing Corporation; Notice

of Filing and Order Granting

Accelerated Approval of a Proposed

Rule Change to Issue, Clear, and Settle

Packaged Spread Options

September 19, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

May 15, 1997, The Options Clearing

Corporation (‘‘OCC’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) and on July 1, 1997,

amended the proposed rule change as

described in Items I and II below, which

Items have been prepared primarily by

OCC. The Commission is publishing

this notice and order to solicit

comments from interested persons and

to grant accelerated approval,

conditioned as described below, of the

proposed rule change.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The purpose of the proposed rule

change is to amend OCC’s by-laws and

rules to permit OCC to issue, clear, and

settle packaged spread options, which

have been proposed for trading by the

Chicago Board Options Exchange

(‘‘CBOE’’).

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

OCC 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 IV below. OCC has prepared

summaries, set forth in sections (A), (B),

and (C) below, of the most significant

aspects of such statements.2

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Description of Packaged Spreads

The purpose of the proposed rule

change is to amend OCC’s by-laws and

rules to permit OCC to issue, clear, and
50420 Federal Register / Vol. 62, No. 186 / Thursday, September 25, 1997 / Notices

3For a description of CBOE’s proposal, refer to

Securities Exchange Release Nos. 38214 (January

28, 1997), 62 FR 5266 [File No. SR–CBOE–96–76]

(notice of filing of proposed rule change relating to

the listing and trading of packaged vertical spread

options) and 38213 (January 28, 1997), 62 FR 5265

[File No. SR–CBOE–96–75] (notice of filing of

proposed rule change relating to the listing and

trading of packaged butterfly spread options).

4The text of OCC’s proposed rule changes is

included in OCC’s filing which is available for

inspection and copying at the Commission’s Public

Reference Room or through OCC.

settle packaged spread options, which

have been proposed for trading by the

CBOE.3 A packaged spread option is a

cash-settled option that upon exercise

calls for the payment by the assigned

writer (i.e, seller) to the exercising

holder (i.e., buyer) of an amount equal

to the net exercise settlement values of

all of the component options in a

specified spread position (‘‘exercise

settlement amount’’). A spread position

is the position resulting from the

purchase and sale of more than one

option of the same type (i.e., put or call)

on the same underlying interest. A

packaged spread option permits an

investor to create the entire spread

position in a single transaction thereby

avoiding the difficulty of simultaneous

executions and potentially reducing

transaction costs.

The proposed packaged spread

options will be European-style, cash

settled index options which will

synthetically create a butterfly spread or

a vertical spread position. A butterfly

spread strategy is a neutral strategy

where the holder of the spread typically

seeks to profit from a market in which

the underlying interest does not

significantly rise or decline in value. A

packaged butterfly spread option is a

single security that replicates the

behavior of a butterfly spread strategy

by combining four options of the same

type on the same underlying interest

with the same expiration date. Two of

the options have the same exercise

price, the third option has an exercise

price above the exercise price of the first

two by a stated amount (‘‘spread

interval’’), and the fourth has an

exercise price below the first two by the

same spread interval. Because a

butterfly spread strategy has precisely

the same settlement value whether it

consists of all puts or all calls, packaged

butterfly spreads will not be identified

as either puts or calls except that, as

noted below, they will be counted as

calls for purposes of determining the

number of calls issued by OCC and

registered under the Securities Act of

1933 (‘‘Securities Act’’) and the Act.

A packaged vertical spread option is

a single security that upon exercise calls

for the payment of an exercise

settlement amount equal to the net

exercise settlement amounts of the

component options in a vertical spread

position. A vertical spread position

consists of a combination of two options

of the same type at different exercise

prices expiring on the same date. The

difference between the exercise prices is

the vertical spread interval. The holder

of a vertical call spread is long the call

having the lower exercise price and is

short the call having the higher exercise

price. The holder of a vertical put

spread is long the put having the higher

exercise price and short the put having

the lower exercise price. The holder of

a vertical spread option typically seeks

to profit from an increase (i.e., in the

case of a vertical call spread) or decrease

(i.e., in the case of a vertical put spread)

in the value of the underlying index,

with the maximum potential gain in

either case being the amount of the

vertical spread interval times the

multiplier for the index.

2. Organization of Proposed Rule

Change

The proposed rule change consists of

four sections: (i) amendments to OCC’s

existing by-laws; (ii) a new Article XXVI

of the by-laws applicable only to

packaged spread options, (iii)

amendments to OCC’s existing rules;

and (iv) a new Chapter XXVII of the

rules applicable only to packaged

spread options.

3. Proposed Amendments to Existing

By-Laws

The proposed rule changes will

amend certain defined terms in Article

I of the by-laws to indicate how those

terms will apply to packaged spread

options. The definitions of the terms

‘‘call’’ and ‘‘put’’ will be amended to

state that for purposes of determining

the number of calls and puts registered

under the Securities Act and the Act a

packaged vertical call spread option will

be deemed to be a single call option, a

packaged butterfly spread options will

be deemed to be a single call option,

and a packaged vertical put spread

option will be deemed to be a single put

option. Otherwise, for purposes of

OCC’s by-laws and rules, packaged

vertical call spread options, packaged

vertical put spread options, and

packaged butterfly spread option will be

separate ‘‘types’’ of options.

Accordingly, the proposed rule change

will amend the term ‘‘type of option’’

set forth in article I, Section I.T. (4) to

include packaged butterfly spread

options, packaged vertical call spread

options, and packaged vertical put

spread options as distinct types of

options.

OCC also proposes to amend the

definition of ‘‘cleared security’’ set forth

in Article I, Section I.C.(5). According to

OCC, the change is intended merely to

eliminate unnecessary words and has no

specific relationship to packaged spread

options although a packaged spread

option will be defined as an ‘‘option

contract’’ and therefore is within OCC’s

definition of ‘‘cleared security.’’

The amendments in Sections 6 and 7

of Article VI regarding the issuance of

securities and the reporting of matched

trades, respectively, are intended merely

to adapt those sections to apply to

packaged spread options. Similarly, the

changes in Interpretations and Policies

.01 of OCC’s rules following Article VI,

Section 9, are intended merely to make

clear that the general rights and

obligations of holders and writers of

packaged spread options will be set

forth in new Article XXVI of OCC’s bylaws and not in Article VI, Section 9.

Article VI, Section 10 will be amended

to identify the terms of packaged spread

options that must be determined by the

exchange on which these options trade

prior to opening of trading in a series of

packaged spread options. Additionally,

Article VI, Section 18(b)(2) will be

amended to use more general language

that can apply to packaged spread

options as well as other non-stock

option products without referencing the

particular chapter of OCC’s rules that

applies to each.

4. Proposed New By-laws

The proposed rule change will adopt

Article XXVI of the by-laws which will

pertain only to packaged spread options.

Section 1 will define additional terms

and will supplement existing defined

terms in Article I with respect to

packaged spread options. Most of these

are self-explanatory and do not require

discussion.4 The term ‘‘base exercise

price’’ will be used for packaged spread

options rather than simply ‘‘exercise

price’’ to avoid confusion between the

exercise price of the packaged spread

option itself and the exercise prices of

the component positions in puts and

calls that the packaged spread options

are designed to replicate. For packaged

butterfly spread options, the ‘‘base

exercise price’’ will be the exercise price

of the two options that have the same

exercise price in the spread. For

packaged vertical call spread options,

the base exercise price will be the lower

exercise price of the spread. For

packaged vertical put spread options, it

will be the higher exercise price of the

spread. Except as described above,

packaged spread options will otherwise
Federal Register / Vol. 62, No. 186 / Thursday, September 25, 1997 / Notices 50421

5 15 U.S.C. 78q–1

6 15 U.S.C. 78q–1(b)(3)(F). 7Supra note 3.

be subject to the provisions governing

index options found in Article XVII of

OCC’s Rules and Chapter XVIII of OCC’s

by-laws.

Article XXVI, Section 2 regarding the

general rights and obligations of holders

and writers of packaged spread options

is similar to corresponding provisions in

other Articles. Provisions in Sections 3,

4, and 5 relating to adjustments,

unavailability or inaccuracy of index

values, and time for determination of

index values merely incorporate

corresponding provisions of Article

XVII of the index option by-laws.

5. Proposed Amendments to Existing

Rules

Provisions in existing Rules 207 and

401 regarding records and reporting of

matched trades, respectively, will be

modified in order to accommodate the

unique attributes of packaged spread

options. Rule 602, which sets forth the

margin requirements for non-equity

options does not require substantive

modification in order to provide for the

margining of packaged spread options.

The existing margin rules calculate

margin for an account that contains

options in a spread position based upon

the net risk of that position.

Consequently, the margin requirement

for a short position in packaged spread

options and the margin credit, if any, for

a long position will be precisely the

same as if margin was calculated based

upon the corresponding spread position

consisting of separate European-style

puts or calls. Accordingly, the margin

rule will apply to packaged spreads

without modification except that

Interpretations and Policies .06 to Rule

602 will be modified to make clear that

packaged spreads will never be treated

as ‘‘unpaired’’ because short and long

option positions are synthetically paired

within the packaged spread option

itself.

6. Proposed New Rules

OCC proposes to add Chapter XXVII

to its rules which will relate only to

packaged spread options. Rule 2701 sets

forth that OCC will not accept escrow

deposits in lieu of margin on packaged

spread options. Rules 2702 and 2703 set

forth the exercise and assignment

procedures for packaged spread options.

These procedures essentially parallel

the procedures in OCC Rules 805 and

1802–1804 that are applicable to

European-style index options. OCC will

follow its usual expiration date exercise

procedures in identifying to clearing

members those options that are in the

money by at least $1 and will afford the

clearing member an opportunity to

negate an exercise if it chooses to do so.

As is the case with most other options,

Interpretations and Policies .01 to

proposed Rule 2702 states that these

procedures are for administrative

convenience only and are not intended

to override a clearing member’s

agreement with its customers as to

whether an option will be exercised.

Rule 2704 will provide that the exercise

settlement date will ordinarily be the

business day following the expiration

date as is the case for index options.

Rule 2705 will specify that the

exercise settlement amount for a

packaged spread option will be the

settlement value of the synthetically

created spread position as calculated by

OCC utilizing a settlement value

furnished to OCC by the exchange on

which the packaged spread option is

traded. Rule 2706 is needed to integrate

the packaged spread rules with those in

Chapter XI relating to clearing member

suspensions. It is parallel to similar

provisions in other product-specific

chapters of the OCC’s rules.

OCC believes that the proposed rule

change is consistent with the purposes

and requirements of Section 17A of the

Act5 because it applies to packaged

spread options the same procedures and

safeguards that have been and are

successfully employed by OCC for other

options products. OCC believes that

these procedures have proven effective

in promoting the prompt and accurate

clearance and settlement of securities

transactions and to safeguard funds and

securities in its custody or control for

which it is responsible.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

OCC does not believe that the

proposed rule change will have any

material adverse impact on competition.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants or Others

Written comments were not and are

not intended to be solicited with respect

to the proposed rule change, and none

have been received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Section 17A(b)(3)(F) 6 of the Act

requires that the rules of a clearing

agency be designed to assure the

safeguarding of securities and funds

which are in the custody or control of

the clearing agency or for which it is

responsible and to promote the prompt

and accurate clearance and settlement of

securities transactions. OCC’s proposal

will allow OCC to clear and settle

packaged spread options using existing

OCC systems, rules, and procedures.

Thus, due to the similarity of packaged

spreads to other option products

currently cleared and settled by OCC,

OCC should be able to implement the

clearance and settlement of packaged

spread options safely and in a manner

consistent with its safeguarding

obligations under Section 17A. In

addition, the packaging of a strategy that

synthetically creates two option

positions (as with vertical spread

options) and four option positions (as

with the packaged butterfly spread

options) into one security should reduce

the number of transactions processed

because a clearing member will only

have to enter into one transaction and

because OCC will only have to process

one transaction rather than multiple

transactions to achieve the same option

strategy. In this way, the Commission

believes that the proposal is consistent

with OCC’s obligation under Section

17A to promote the prompt and accurate

clearance and settlement of securities

transactions.

The Commission finds good cause for

approving the proposed rule change

prior to the thirtieth day after

publication of notice of the filing

because accelerated approval will allow

OCC to coordinate the issuance,

clearance, and settlement of packaged

spread options with the CBOE’s listing

of packaged spread options. The

Commission believes that because OCC

will be applying procedures which have

proved to be efficient and safe in the

past, accelerated approval is justified.

Furthermore, no negative comments

were received upon publication of the

notice of filing of the CBOE’s proposed

rule changes, and the Commission does

not expect to receive any adverse

comments on the present proposed rule

change.7 However, the Commission’s

approval of OCC’s proposed rule change

is subject to the Commission’s approval

of CBOE’s proposed rule changes.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submission

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington D.C. 20549. Copies of the

submissions, all subsequent

amendments, all written statements

with respect to the proposed rule
50422 Federal Register / Vol. 62, No. 186 / Thursday, September 25, 1997 / Notices

8 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See Letter from Michael D. Pierson, Senior

Attorney, Regulatory Policy, PCX to James T.

McHale, Special Counsel, Division of Market

Regulation (‘‘Division’’), SEC, dated July 29, 1997

(‘‘Amendment No. 1’’). Amendment No. 1, among

other issues, addressed maintenance standards and

revised the Exchange’s limitation of liability rule,

PCX Rule 7.13.

4See Securities Exchange Act Release No. 38884

(July 29, 1997), 62 FR 42150 (August 5, 1997).

5See Letter from Michael D. Pierson, Senior

Attorney, Regulatory Policy, PCX to Marianne H.

Duffy, Special Counsel, Division, SEC, dated

September 17, 1997 (‘‘Amendment No. 2’’).

Amendment No. 2 proposed an additional

maintenance standard regarding options eligibility

of the Index components.

6The 50 stocks comprising the Index are: BMC

Software Inc. (BMCS), Parametric Technology Corp.

(PMTC), Diamond Offshore Drilling, Inc. (DO),

Ascend Communications Inc. (ASND), Cabletron

Systems (CS), Altera Corp. (ALTR), Ciena Corp.

(CIEN), Linear Technology Inc. (LLTC), Paychex

Inc. (PAYX), Compuware Corp. (CPWR), XILINX

Inc. (XLNX), Maxim Integrated Products (MXIM),

Health Management Assoc. (HMA), McAfee

Associates Inc. (MCAF), Sterling Commerce Inc.

(SE), Iomega Corp. (IOM), Robert Half Intl. Inc.

(RHI), ATMEL Corp. (ATML), Bed Bath & Beyond

Inc. (BBBY), American Power Conversion (APCC),

Planet Hollywood Intl. Inc. (PHII), Synopsys Inc.

(SNPS), Reading and Bates Corp. (RB), Viking Office

Prods. Inc. (VKNG), Micron Electronics Inc. (MUEI),

Cambridge Technology Partners (CAPT), Blyth

Industries Inc. (BTH), Jabil Circuit Inc. (JBIL),

Novellus Systems Inc. (NVLS), Dollar Tree Stores

Inc. (DLTR), Jones Medical Inds. Inc. (JMED),

Pairgain Technologies Inc. (PAIR), Rexall Sundown

Inc. (RXSD), CDW Computer Centers Inc. (CDWC),

Titanium Metals Corp. (TIMT), Remedy Corp.

(RMDY), Aspect Telecommunications (ASPT), Delta

& Pine Land Co. (DLP), Telco Communications Grp.

Inc. (TCGX), APAC Teleservices Inc. (APAC),

Learning Tree Intl. Inc. (LTRE), Visio Corp. (VSIO),

Catalina Marketing Corp. (POS), Nautica Enterprises

Inc. (NAUT), Boston Technology Inc. (BSN), ETEC

Systems Inc. (ETEC), Mentor Corp. (MNTR), Gentex

Corp. (GNTX), Veritas Software Co. (VRTS), and Bio

Technology General Corp. (BTGS).

7The term I/B/E/S refers to the Institutional

Broker’s Estimate System, a source of analysts’

earnings expectation data that is obtained from over

7,000 analysts working for approximately 750

research organizations.

8 In the future, should the Index include non-U.S.

registered securities, such securities will not in the

aggregate comprise more than 10% of the Index

weight and will not represent more than 3 Index

components. Prior to reaching these limits, PCX

will notify the Commission to determine if a new

filing under Rule 19b–4 is required.

9The industry groupings and their Index weight

are as follows: apparel (0.76%); auto parts (0.63%);

biotechnology (0.56%); catalog/specialty

distribution (2.55%); computer communications

(5.66%); computer local area networks (4.52%);

computer software (20.45%); contract drilling

(6.29%); discount stores (1.14%); diversified

commercial services (8.37%); electronic data

processing peripherals (2.55%); electronic data

processing services (4.06%); electrical products

(1.82%); electronic data processing (1.53%);

electronic production equipment (3.18%); farming/

seeds/milling (0.86%); hospital/nursing

management (2.88%); medical specialties (0.64%);

other metals/minerals (0.91%); other

pharmaceuticals (2.15%); other speciality stores

(1.89%); other telephone/communications (0.84%);

packaged goods/cosmetics (1.35%); restaurants

(1.79%); semiconductors (16.99%); and

telecommunications equipment (5.63%). The

industry groupings are based upon the

classifications used by FactSet Research Systems,

Inc., an electronic market data provider of

information that is available by subscription in the

securities industry.

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, N.W.,

Washington, D.C. 20549. Copies of such

filings will also be available for

inspection and copying at the principal

office of OCC. All submissions should

refer to the file number SR–OCC–97–06

and should be submitted by October 16,

1997.

It Is Therefore Ordered, pursuant to

Section 19(b)(2) of the Act, that the

proposed rule change (File No. SR–

OCC–97–06) be and hereby is approved

on an accelerated basis.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.8

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–25446 Filed 9–24–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39087; File No. SR–PCX–

97–29]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Amendment No. 1 Thereto and Notice

of Filing and Order Granting

Accelerated Approval of Amendment

No. 2 Thereto by the Pacific Exchange,

Inc. Relating to the Listing and Trading

of Options on the Morgan Stanley

Emerging Growth Index

September 17, 1997.

I. Introduction

On July 8, 1997, the Pacific Exchange,

Inc. (‘‘PCX’’ or ‘‘Exchange’’) submitted

to the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’),

pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a

proposed rule change to list and trade

options on the Morgan Stanley

Emerging Growth Index (‘‘Index’’). On

July 29, 1997, the Exchange submitted

an amendment to the proposal.3 Notice

of the proposed rule change and

Amendment No. 1 appeared in the

Federal Register on August 5, 1997.4 No

comment letters were received

concerning the proposed rule change.

On September 17, 1997, the Exchange

submitted Amendment No. 2.5 This

order approves the PCX’s proposal, as

amended.

II. Description of the Proposal

The purpose of the proposed rule

change is to permit the Exchange to list

and trade European-style, cash-settled

options on the Index, a market

capitalization-weighted, broad-based

index developed by Morgan Stanley &

Co. Incorporated (‘‘Morgan Stanley’’)

comprised of the common stocks of 50

domestic emerging growth securities

representing 26 different industry

groups.

A. Design of the Index

The Index is comprised of 50

representative stocks 6 traded on the

New York Stock Exchange, Incorporated

(‘‘NYSE’’), the American Stock

Exchange, Incorporated (‘‘Amex’’) and

through the facilities of the National

Association of Securities Dealers,

Incorporated (‘‘NASD’’) automated

quotation system and are reported

national market system securities.

The Index was designed by Morgan

Stanley to reflect the emerging growth

equity market. The component

securities were selected for their market

capitalization, price per share, longterm

debt as a percentage of total capital,

mean estimated longterm (three year)

earnings per share growth rate, net sales

and return on average total equity.

Specifically, stocks were selected based

on whether they are ‘‘emerging’’ stocks

(in general, having current sales figures

of between $25 million and $2 billion

annually) and ‘‘growth’’ stocks (in

general, having a high mean I/B/E/S 7

anticipated earnings growth rate). A

primary consideration in determining

‘‘growth’’ is whether a stock’s expected

growth rate is significantly higher than

that of other stocks. In addition,

currently all of the issues are traded in

the United States and there are no

foreign issues or American Depositary

Receipts (‘‘ADRs’’) included in the

Index.8

The Exchange represents that the

Index currently is representative of the

domestic emerging growth stock market

as a whole, and therefore, believes it is

a broad-based index. In support of this,

the PCX notes that the Index is

comprised of companies in 26 different

industry groups, which range from

apparel (.76%) to auto parts (.63%) to

restaurants (1.79%).9 Although