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 IndexSM

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, 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. 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.

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. 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.

Morgan Stanley will issue the Notes under the name “Strategic Total Return Securities.”

The Notes will conform to the initial listing guidelines under section 107A and continued listing guidelines under sections 1001-1003 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. 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. The Notes will have a term of at least one (1) but no more than ten years.

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.

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. 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.

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” 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:

Image Not Available

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.

Description of the Index

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

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 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. 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. 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.

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. 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.

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 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. 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.

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.

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. Second, the Notes will be subject to the equity margin rules of the Exchange. 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. 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.

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 in general and furthers the objectives of section 6(b)(5) 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.

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 rule-comments@sec.gov. 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.

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. The Commission finds that this proposal is similar to several approved instruments currently listed and traded on the Amex. 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.

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” 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.

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.

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 $4 million. In any event, financial information regarding Morgan Stanley, in addition to the information on the component stocks comprising the Index, will be publicly available.

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. 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 to approve the proposal on an accelerated basis.

V. Conclusion

Is it therefore ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (SR-Amex-2004-55) is hereby approved on an accelerated basis.