Mr. James M. McNeil
Chief Examiner
Financial Regulatory Services Dept.
The Nasdaq-Amex Market Group
86 Trinity Place
New York, New York 10006-1872

Dear Mr. McNeil:

This is in response to your letter of January 28, 1999, concerning the treatment of nine Select Sector SPDRs® Funds (the "Funds") under the Board's Regulation T. The American Stock Exchange began trading the Funds in the last quarter of 1998.

We understand that the nine Funds represent nine mutually exclusive subsets (known as "sectors") of the stocks that comprise the Standard & Poor's 500 Composite Stock Index. The Funds generally are structured and will trade in a manner similar to SPDRs® (Standard & Poor's Depositary Receipts) and DIAMONDS^SM. ¹ This includes a feature whereby the Funds will be exchangeable or convertible within 90 calendar days without restriction other than the payment of money into the stocks that comprise the sectors corresponding to the specific Funds held in the account.

Like SPDRs and DIAMONDs, the Funds represent units of beneficial interest in a trust. However, the trusts used for SPDRs and DIAMONDs are unit investment trusts, while the trust used for the Funds is an open-end investment company. This distinction is not material under the definition of margin security in section 220.2 of Regulation T, which includes "any security issued by either an open-end investment company or unit investment trust" registered under section 8 of the Investment Company Act of 1940.

This confirms that the margin treatment of the Funds under Regulation T will be the same as that for SPDRs and DIAMONDs. Specifically, the Funds are equity securities that qualify as margin securities under section 220.2 of Regulation T. Under the Supplement to Regulation T (section 220.12), the Funds are subject to a 50 percent initial margin when purchased by a customer and 150 percent initial margin when a customer establishes a short position in the Funds. Further, a customer who sells short individual stocks or a subset of stocks represented in the S&P 500 Index will be subject to a 100 percent initial margin for the short sale if the account contains sufficient Funds to yield at least the number of shares of stock sold short upon redemption. Finally, a short sale of the Funds will be subject to a 100 percent initial margin if the account contains a portfolio of stocks comprising the S&P 500 Index in sufficient quantity to yield at least the number of Funds sold short upon creation.

Sincerely,

(Signed) Scott Holz

Scott Holz

1. The margin treatment of SPDRs and DIAMONDs was addressed in earlier correspondence from Board staff dated January 8, 1998 and February 1, 1993. Return to text