The National Securities Clearing Corporation (NSCC) has enhanced its index system to process the latest index share products to be traded on the American Stock Exchange (Amex) - Select Sector SPDRs. Each Select Sector SPDR represents an interest in a portfolio of stocks intended to track the price performance and dividend yield of one of nine Select Sector Indices of the Standard and Poor's 500 Composite Stock Index (S&P500). SPDRs and Select Sector SPDRs are trademarks of the McGraw-Hill Companies, Inc. The nine Select Sector SPDRs are identified as follows:

The Amex will begin trading Select Sector SPDRs on December 22, 1998, pending Securities and Exchange Commission approval. Like DIAMONDS on the Dow Jones Industrial Average, SPDRs on the S&P 500 and MidCap SPDRs on the S&P MidCap 400, Select Sector SPDRs will trade on the Amex like a share of stock. Trading hours will be from 9:30 a.m. to 4:00 P.M. In addition, like DIAMONDS, SPDRs and MidCap SPDRs, Select Sector SPDRs may be created or redeemed through the enhanced index receipt process. In preparation for creation and redemption activity, NSCC has added the nine Select Sector SPDRs portfolios to the Portfolio Composition File (PCF), which also contains the portfolios for the DIAMONDS, SPDR and MidCap SPDR.

To minimize the impact of the new Select Sector SPDRs processing on participants, NSCC will maintain the creation and redemption procedures and reporting structure (files and reports) established for prior Index Shares. To create new shares of any of the Select Sector SPDRs, participants will deliver the appropriate number of underlying shares to the Transfer Agent through either NSCC's Continuous Net Settlement system (CNS), or if a security is CNS ineligible, through the Balance Order Accounting system, in exchange for the specified number of index shares. Select Sector SPDRs will be created and redeemed in multiples of 50,000 index shares.(1) The Transfer Agent and Custodian for the Select Sector SPDRs Trust is State Street Bank & Trust (SSB&T).

In order to create Select Sector SPDRs, an NSCC Participant who has entered into a standardized Participant Agreement with the Transfer Agent and Distributor places a creation order with the Distributor who notifies the Transfer Agent to instruct NSCC to process the order. (The Distributor for Select Sector SPDRs is ALPS Mutual Funds Services, Inc.) In order to redeem index shares, an NSCC Participant places a redemption order with the Transfer Agent who instructs NSCC to process the order. Once NSCC receives a creation or redemption instruction, it bursts the instruction into the component stocks and reports the shares of each of the underlying stocks and the corresponding quantity of index shares to be settled. Processing of these shares will occur within the normal three business day settlement time frame.

NSCC's clearance and settlement services for Select Sector SPDRs index shares are described on the following pages.

TRADE DATE - 1

PORTFOLIO COMPOSITION FILE

The daily Portfolio Composition File (PCF) continues to be made available to member firms each evening around 8:00 p.m. (all times are eastern time). The file contains data relevant to the creation and redemption of all of the nine Select Sector SPDRs, as well as DIAMONDS, SPDRs and MidCap SPDRs for the next trading day.

The PCF is available in print image or machine readable output (MRO) format only. It is not available for New York print. The AutoRoute numbers are:

The PCF fee remains at $125 per month.

The PCF contains the following information for each of the nine Select Sector SPDRs (a sample copy of the PCF for the Industrial Select Sector SPDRs is provided in Exhibit 1):

Section A

For the particular Select Sector SPDR fund, various money amounts are provided in connection with the previous day's creation/redemption activity. The five cash amounts, with explanations, are as follows:

(1) Total Cash Amount Per Creation Unit- The actual total cash amount, in dollars per Creation Unit, required to effect creation or redemption requests made on Trade- Date Minus- One (T-1). Published separately prior to the opening on Trade Date by Market Data Vendors.

(2) Estimated Cash Amount per Creation Unit - accumulated dividends less expenses through and including T-1, on a per-Creation Unit basis. This value will also include a cash-in lieu amount for shares of any component stock, priced at the close on T-1 which may be excluded from the Creation Unit effective on Trade Date (T) (e.g., due to a prolonged trading halt or other unusual circumstance). Published separately prior to the opening on Trade Date by Market Data Vendors.

(3) Estimated Cash Amount per Index Receipt - (i.e., Net Accumulated Dividend) -- accumulated dividends less expenses through and including T-1, on a per Select Sector SPDR basis. This value does not include cash amounts delivered in lieu of shares excluded from the daily Creation Unit Portfolio. Published separately prior to the opening on Trade Date by Market Data Vendors.

(4) NAV per Creation Unit - closing Net Asset Value of the particular Select Sector SPDR Fund per Creation Unit outstanding on T-1. (Not published by Market Data Vendors).

(5) NAV per Index Receipt - closing Net Asset Value of the particular Select SPDR Fund per Select SPDR unit outstanding on T-1. Published separately prior to the opening on Trade Date by Market Data Vendors.

Section B

For each of the nine Select Sector SPDR Funds, the report also contains the creation/redemption unit's underlying component stocks and their associated quantities. Clearing firms should be aware that, under certain conditions such as a prolonged trading halt or other unusual market condition in one or more underlying stocks, the file may contain less than the usual number of components for a Select Sector SPDR. Additional information provided in the file is documented in Exhibit 1.

Broker-dealers who want to create or redeem index shares must enter into a standardized Participant Agreement with the respective Transfer Agent and Distributor. As indicated earlier, the Transfer Agent advises NSCC of creation and redemption activity in the form of a locked-in trade(s) on Trade Date. Clearing firms do not submit any index receipt creation or redemption instructions to NSCC directly. Copies of the Participant Agreement can be obtained from the Transfer Agent or Distributor.

NSCC will record the creation and redemption instructions for Select Sector SPDRs, SPDRs, MidCap SPDRs and DIAMONDS on the Index Receipt Detail Report (please refer to Exhibit 2) which is available early the morning of T+1. It is available by transmission only in the following media types:

The Index Receipt Detail Report contains the following information:

Creation and Redemption Instructions

The index receipt creation and redemption instructions are reported and netted by trade date into a "net index receipt" unit before bursting into the underlying component stocks. NSCC assigns a unique CUSIP and symbol which identifies each product's instruction for reporting purposes only.

Total Cash Amount

Each Transfer Agent or Trustee reports a total cash amount, which may be different from the estimated cash amount reported on the previous day's Portfolio Composition File. A separate cash component is provided for each index product.

For creations, the Transfer Agent or Trustee is credited and the clearing firm debited the total cash amount. For redemptions, the Custodian or Trustee is debited and the clearing firm is credited the total cash amount. For a comprehensive description of the estimated and total cash amounts, please refer to the Portfolio Composition File description above..

Transaction Fee

The Transfer Agent or Trustee reports a transaction fee, which will be charged against the clearing firm for creations and redemptions. The transaction fee schedule may be obtained from the Transfer Agent or Trustee directly.

Net Index Receipt Instructions

NSCC will net each clearing firm's creations and redemptions in a particular index share. The Index Receipt Detail Report will indicate a net index receipt unit position per index product. Netting all index receipt creations and redemptions into one net position enables a clearing firm to be either a net buyer or seller of the portfolio components. NSCC will not net one index share creation unit against any other product's creation unit.

Total Debit/Credit

This is the net money to be settled. It is the combination of the total cash amount and the transaction fee. The net amount appears on clearing firms' Settlement Statement with the unique code: Code 54 - Index Receipt Money Settlement. This code is used for all index shares.

Net Index Receipt Instructions Burst into Components

The net Select Sector SPDRs unit position will be burst into the component stocks for proper settlement. As a result of netting the unit instructions prior to the bursting routine, firms will have only one position to settle for each of the securities that comprise the particular Select Sector SPDR portfolio. The Index Receipt Detail Report will also include the component stocks to be settled. The total shares settled for each component will be determined by the share quantity of the component on the daily Portfolio Composition File multiplied by the net unit position.

Select Sector SPDRs Component Trade Settlement

The proportionate shares that represent the stocks in the net unit positions will settle in NSCC's CNS system or in rare instances as individual receive and deliver items in the Balance Order Accounting system. The settlement value of each Select Sector SPDRs component will be the trade date's closing price, truncated at the second decimal place. All the component shares will be reported on the Consolidated Trade Summary (CTS) in the gross buy or sell totals per security as well as part of the clearing firms' overall net position for each security.

In addition, all component share trades will be identified on the CTS by the unique Market of Execution code (AB) created for Amex index products. In fact, subtotals by items, shares and money are also displayed on the summary page of the CNS and Non-CNS CTS for this Market of Execution. The Market of Execution code is defined in field position 25 and 26 of the CTS machine readable output file, AutoRoute No. 02040354 and position 26 and 27 of the Y2K CTS MRO, AutoRoute No. 02042354.

Issuance of Index Receipts

In exchange for the component shares, Select Sector SPDRs will be created or redeemed in blocks of 50,000 receipts. The total contract value of the Select Sector SPDRs created/redeemed will equal the aggregate of the value of the number of proportionate shares in the portfolio (after netting) as multiplied by the trade date's truncated closing price, plus the cash amount.

Questions regarding NSCC's procedures for clearing and settling Select Sector SPDRs should be directed to NSCC Participant Services at (212) 412-8432 or the undersigned at (212) 412-8674.

Edward M. O'Shaughnessy
Vice President, Product Development

Footnotes:
(1) Since the Select Sector SPDRs product is structured as a mutual fund the index receipt agent is referred to as a Transfer Agent and Custodian. For DIAMONDS, SPDRs and MidCap SPDRs, which are structured as unit investment trusts (UITs), the index receipt agent is referred to as a Trustee.

DOWNLOAD:
Exhibit 1: NSCC Domestic Portfolio, and Exhibit 2: Domestic Index Intruction Detail Report
(in Adobe PDF format; requires Adobe PDF Reader software to view, which is available for free from the Adobe Web site.)